Arthur J. Gallagher & Co. (AJG) 24 Oct 192019 Q3 Earnings call transcript

Good afternoon and welcome to Arthur J. Gallagher & Co.'s Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. And 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. Commission. subject or risks reports described the and are on uncertainties filed statements Securities call this in Exchange forward-looking to and certain discussed with These the company's discussed Actual today, obligation results update statements. these materially may from to and company undertakes differ the no those

company's as please materials for the the refer section earnings and other call to the addition, other Investor information of discussed on non-GAAP the In as measures regarding in Relations reconciliations this of well website. these measures, release

It & now introduce begin. Patrick Gallagher, is pleasure my J. of may Gallagher, to CEO and Arthur Chairman, you Co. President J. Gallagher Mr.

Officer Thank you, heads of well operating our With for earnings as divisions. Devin. us our call. afternoon. Financial Good me today for Howell, as joining quarter Doug XXXX you the third is Thank Chief our

me Let had start we saying just quarter. another excellent by

management completed the and in of XX% Our a we and organic risk by with annualized terrific of revenues, quarter Adjusted just estimated in all XX EBITDAC growth. combined segments margin expansion about $XX XX revenues, points X.X% million team. delivered brokerage mergers basis growth

drive Doug value. are going to to the four spend Today key components and our strategy time focused of our I on shareholder

geography, comment give organic I'll Organic the review First some pricing environment growth, and insight on by you exposures. regarding

through mergers going and Second, acquisitions.

culture. productivity hit Doug remarks this unique will maintaining and our quality. and Third, topic after fourth, my

Organic, with start the me Okay. let segment. To brokerage

to is contributed of Organic globally all organic quarter result. our XXXX. that Third pleased similar through this our very of the to X.X% which in six I'm all performance first months was divisions

X%. where strong the PC retail domestic For example, our another had quarter organic about of operations

posting XX% brokerage our in domestic organic. includes wholesale This operations. set X.X% Our about an quarter open operations excellent over

than our another up X% a by Zealand had more of brokerage really posting showing organic retail Australia And the production also operations internationally then base UK and X%, organic and operations the quarter with up quarter to Canada combined about of XX%, X% New team. about X.X%. post benefits this strong Our strong

been hearing me WSIA from at it's strategic Let across the to nearly during areas our from of conferences move carrier continue all the and to whether Rates leaders global sessions. message, consistent recent rate our our a We've planning increase environment. the partners market. or the CIAB

internal own points PC we data rate bit stronger with which internal increasing a up also PC environment about Our pricing saw an to mid-year survey. in is what pricing than our global X%

with overall what is we in pricing line incremental not around Let only the I'll are wholesale domestic workers compensation, second rate relative U.S., strength X% the down me retail showing pricing our operations, break up Within start brokerage the operations seeing. X%. in our core. approaching to

more pricing X% and the Moving finally but lines. increase. New increases UK UK, we over many seeing what about XX% a X% X% lower approaching operations to with UK is higher been previous had Canada, In and touch than retail than is up up Zealand a to pricing still around property to pricing wholesale across over quarter our years, X% two point second the in the substantial is Australia, digits double pricing than is around up

be survey, XXXX they said in two XX% asking their increasing next growth benefits client exposure from third specifically working benchmarking said of payrolls surveyed exposure our the to renewals. as producers revenue exposure where client's the May, or quarter. XX% over grew on is similar Moving that stronger to their of related the XXXX their the than employers Over years. more seeing with consistent payroll October, X,XXX were And begin This during believe results they would exposures, these early questions units. than respondents our and and XX% we units customer’s more

move higher. best environment leveraging insurance, benefits to the around advice vast look production in excels I delivering our our talented which when and So This of PC consulting management staff array the capabilities. exposures an continue risk and world, by and by rates resources

As nicely the range. today, Organic fourth in sit see quarter our mid-X% here I I

mergers talk the XX tuck-in million quarter a warm us In million. $XXX the growing first of partners brokerage of Brokerage than to October family I mergers me of I that annualized our add of annualized revenue. million our a revenues have completed to months. merger professionals. joining our with M&A of and already $XX year about very team acquisitions announced very nine Adding an annualized acquisition let The busy brokerage has would of with number all welcome had Next, thank growth. XX the for that, revenue in should and we like estimated completing we extend during more $XX to additional new

This term about XX top either report on pipeline M&A of our with is sheets $XXX upon shows million revenue of that or being associated prepared. agreed

will clear opportunities around close, it's I ultimately world, While look our very transactions these pipeline the tuck-in that not as the robust. all of merger remain in

I Next, like to segment. Management Risk move to would our

results are broad-based growth our type, including client by international is with operations. U.S. commercial, large experiencing clients. carrier and in markets, Third sector, insurance The also similar organic X.X% quarter and public was both alternative growth we

with competition. the from product like Gallagher set the app investments by industry Our mobile in to expertise winning and combined products our award continue apart Bassett innovative GBGO

fourth forward, growth in Looking quarter. digit mid-single the see organic we

of to I'd management of that and to the us will very capabilities mergers Gallagher Bassett warm the acquisitions, These terms revenue adding incremental provide our a million. In acquisitions acquisitions benefit quarter, about Europe, new completed clients our Australia, welcome professionals. annualized $XX like extend services and with we U.S. in and risk in this UK, three

a that is us our to team it right advantage on as that a together to competitive highly unique is a focused retain partners, competitive that's the I'd the Lastly, environment thing. on people as culture culture in from a our true talent. our A very for promotes clients Gallagher's relationships serve like It and culture others culture. touch helps coming merger with basis that distinguishes doing carrier and attract us best a the

Gallagher. Nowadays, our we're purpose. stakeholders believe, hearing long-valued a new Ultimately, our to mission of value culture we statement. nothing in We've to all is company defined our lot if clients, we about carrier our and as of provide and be to strong true advantage. employees care our insurance shareholders be competitive has our our partners, will Autumn rewarded. line, will and continue take with build relationships always been culture a This

months. Doug. stop quarter a to and and turn over Okay, it nine great I'll Doug? first now

from XXXX and by the good in fourth in out the Pat, to very well like afternoon outstanding does on us make comments here I'll walk conclude a you post outstanding and I'll the commentary earnings for website some few position comments we CFO close our another release. through I'd then with thanking Thanks M&A. really team cash I'll Today quarter. to on and It the everyone. start quarter. the document

earnings segment Okay, page the the five of the let's release Brokerage to bottom of margin. to go

the on of marks For focusing constantly basis run productivity. quarter XXnd XX truly of quarter, Brokerage X.X% segment and delivered and straight a we're our adjusted we growth expansion, That's and margin expansion. margin illustration this excellent points raising on terrific how quality the organic result an amazing

growth about Looking if of basis is XX expansion, points X% forward, to range. would we in organic see the low-to-mid expect margin

to earnings Risk six of Management to margins. segment the release the flip page Let's

the really the work great XX upper but margin, we our of above targets. of by posted During well the end quarter points EBITDAC that's team adjusted

fourth the in range. also see like would XX% more to XX.X% a which towards that to full year expect wouldn't to that finish target we perhaps end of XX.X%, So the in our quarter, off XX% nicely higher year

commentary CFO the to document can at move now find our website. Let's that we

we that to IR September page quarter comments. day, came during turn close, Let's two. few to estimates a all the provided in other of third nearly Relative very lines our

did summer. planned related Stackhouse and Both are mergers mostly aerospace budget. we efforts, integration on this as moving the our First, and to along

We've discussed cost standardization Second, we're functions. layer nice IR office progress our into lower and nice few we already and service areas transformation of our positions centralization, a we of back XXX improve of project, office our our we quality automation back contracted most where have on a and by support line sight can at making day. our

to talent, acquire into efforts and In growth. more, sell hire support and us other drive savings will data that our these our all words, us redeploying sales more. and help and marketing and more We’re tools, help sales branding. processes production additional management systems Sales organic analytics,

are still finally or on some up our earn-outs interest. And models Neither for but page $X. picking two, by estimates and changes $X Please in estimated your are numbers make your still modeling from estimates sure note. non-controlling can move big earnings also

due interesting commentary both Relative international acquisition the to stay we higher, to document, IR within deals. corporate just the provided our September expense lines the range, page side. corporate CFO was in but of a touch to mostly expense a three to couple during Let’s estimates were smaller the day, flip

to finally And then clean energy.

midpoint the in the range, in quarter third a results above couple You'll great adjusted million the came of that quarter. see a dollars

Looking forward, is bit. bit million year, last just this lower be thus looking we were than another our Weather seeing strategy. October our fourth day. quarter fourth is hot up during a year IR as in we nearly quarter That outlet to for $XXX so far what stacking as not a moderated said, a investment it's

with line four in You'll Footnote court, year clean which very a resolved litigation, prevailed defending is a XXXX think making a but quarter. three items, a also we and opened on our production machines describes it of without tax The defense we this outcome, clean we merit, great see into XXXX moving had energy squabbled two patents terrific intend And quarter. new busy adjustment vigorously. lower we a energy progress great patent we're finally we really locations. Era five-year

the process great a numbers Well, really in that we partners an four, $XX job, less this that's substantial right million also clean that the see delivering columns. of four those on to XXXX, operators $X the of that we here make that use far possible that are In engineers we and row happen, that see benefits. to our energy also million machines earnings. on in have the currently truly Hats utility environmental is earnings affirmation and what shows for providing but are clearly we by page XXXX, you'll on page, can we them around moving are excellent earnings off producing can those commentary. $XX page it's million You we achieve of to think stay fourth than CFO from

in very These line still a September IR numbers early what we said our with month during are day. as

by deliver and that more early great years. and machines an production still returns but strategy power investment renewables here counteract are decade lot trends can we the we change, that a towards at an see natural couple these can looking a can natural It's a gas. You'll moving for ladder and lug,

two another years end on of production us. our over the quarter, sheet have ahead at the of At of carryovers we credit of balance least million and $XXX

So flows we're mid-to-late those well well into cash earned to the XXXXs. harvest hard positioned

let's about Finally, deeply sheet, $X.X XX, At pay very I our through million our of flow using to growing move end, year small be it any This M&A on strength round can the to about year I borrowing our of that free a at of stock. demonstrates to year a and using cash fund we flows. invest this a still clearly look plus great we mean had before dividend cash stock. over, balance M&A. cash When September and and only out happen to should end close cash the through our and think the if capacity of billion go we we'll available level amount where pipeline would business, our our $XXX in still

When XXXX, stock. any easily can we towards of $X.X do I like without M&A look looks billion that using out another

to Pat. comments, my Back an you, quarter excellent and are excellent those nine So months.

we're for Thank it Devin, questions you ready we you, Did some. Doug. open have if up?

[Operator comes Suisse. line Instructions] Please with Our question. with from your Zaremski you. question first of Mike the proceed Thank Credit

afternoon. good Hey,

Mike. afternoon, Good

question. First

north, a got I better know the market of like. out hard your mean financials looks can been move market us as that the to is I what and the that said we the So see and there's pluses on said there lot a you all hard you impact Pat no the a just, let's hardening minuses? that about terms market certain AJ you than help rates to will continue in go there's to maybe of P&C do harden. – hypothesize real market, back you X% it's understand what to guys way hard you've commentary views know commercial and of Gallagher's awhile just if had would and kind to to XXXX Since continued rates

sure. Thanks yes, the Mike, for question.

is a there'd get not higher This you on firmer, into working people property been catastrophe losses, First exactly of our no when or It's all, on exposed you to there it getting is question places place about hard hit where are hard my stuff that end some right very those. market, line. it,

is last more stuff the money E&S effort to submissions done more a little more at get Some takes well. markets We're of more completed. to it and take as this getting minute, more costs it seeing effort casualty

is getting clients. to not any done. still job XXXX There mitigate are plenty this this deals XXXX, for our means. of is capacity, But by our And remember, is

number So across training are lower today we in they explain clients and out front instances one, get we're your your people can in that than many you this globe, show were our rates fact the XXXX. that to in in of

lot requested are good sense, very message that hear. a many run, is had jerk. not it's anybody a make but this wants not certainly being you've that – So a of instances knee People rates the in to a

they clients your with deductible why me And to trying company on reduction insurance you that when getting the consequences free notices And door again, z to lost is. the and out the the going month, and cancelled yet better go for to explain market and every possibly shut, Now, significant of XXXX. what to slam a out XXXX, renew not is been limits you've are right, And y, you're basis. x, ready going get to hard let cancellation got of a got drastic left compare increases they've that's them. back people

good not Frankly, for that's anybody.

four my decided change career going none your appliances in bit of like and to electric it's the or been out those current, and finding through little three I've a company Now home just work. of the

don't and see happening. I And that necessary. that need explained our by being so rate were for that's I do and for anybody professionals not is good see and disciplined

them price. We’re we find can help to cheaper cover doing a everything at

Okay.

a follow-up then. So as

mean, get of we are the for continue would the bottom fall Gallagher from just AJ improvement a points if couple maybe question will expect, So X% I to expect we territory, – organic kind up and more by get line? the to rates say it's we points. is, goldilocks if of of keep drifting you basis do XX organic the X%, into to get you investors

– of expansion than points. Yes. Doug. it’s continued if over see you would Yes, you more you think could Mike, I a time, that some basis period got X% margin see for XX

deals, Okay. there's sandbox. companies and It's I’ve have for M&A nice they're been trading some just that impact? these that out some maybe this of there's the Great. the Doug robust, another Does the lastly removes of And it larger IPO any IPOs interesting route. on multiples, making potential have but And week for to pipelines as that smaller one well. terms successful maybe been very if at find choose of some go companies in

or know not. dramatic don't difference a makes it I if

us being not folks ones a XX, Gallagher. to they to do I might we're will to The to people financial those think, XX year be folks better come that deliver sponsor and with together what IPO that's we they're with customers. value get that capabilities, The a really XX, to trying better that their attract in that to a that remember, see because Gallagher resources, want and trying go business. our a our their opportunity or to join want they know be of

a happen, us. lot So of see folks I it could it from but don't pulling away

you. Thank

Mike. Thanks,

Wells with Our Please of question? Greenspan your the next proceed Elyse question from comes line with Fargo.

Hi, thanks. evening. Good

Good evening.

had little a believe in a just a of bit organic Day Investor at in to, first a bit My you question over month ago, kind little the guys your I slowdown pointed you on, Obviously the tougher I said think had what comp. Doug, six know in the a guys that I was through growth year last you line quarter. months. first with printed third we seen of

the to relative outperform just might've in expectations? end few a business of the weeks some quarter? trying did sense of what to towards So your changed I’m those get

talking few did have bucks here. we I we're think good about that September, a million a

London good just really great, that doing at but you really if Canada. our it now, a particularly they're saw strong, killing places right So, operations UK were in look growth are and

Now, go But I through talked big seeing if month December. about, a left September we're some is Pat where where you that for us there. think as

we the have I of and and – over compare pretty to top the of difficult a did proud So grow was team that.

casualty, with Okay, we that's momentum helpful. sounds its property current then, exposure well level. And as as so XXXX, like in are think going what's least it as you on maintained being guys about optimistic of at terms pricing pretty growth, at

can kind kind guiding there? it be fourth you're any does quarter? to like X.X% the So initial that of for range in view that XXXX seem of Just

that's the Yes, to losses Surprised up, during that X%, think some remember have as in how this need reprice. we're seeing I could programs time, also XXXX. you that go

some carrier could that going decide to You have some on stuff. they're pull back

So to it's us look hard for in far the this repricing piece that's take always a advance. at

And That's the I for clean energy Okay. XXXX. the on helpful. color earnings giving appreciate then

million for typical. is bigger a range, there I end end versus lower how there than slightly year? guess higher we a and range about, a of which does the next range bit should is think seems guess, $XX towards the that falling higher So little why I

long pulled see doing still during the their utilities we still Well, are away, to them there's luck. we budgets, the it's get if a – can here last an ways month early

of so maybe typically X% production, for quarter, about the I’m a We quarter, quarter. EIA. second were So look find don't weather I'd a that this in statistics more just been to in than at displacement. they through to looking April provide sector off that’s declining power drop XX%, utilization But And and related the electric big of on you of a can down some at expect you the when range. the coal year had X% January, narrow we out this has also XXXX June

if look to and the between X% rate when line related making to $XX million happy of this $XX million million you about still But about. is the the million maybe at to don't the this to we But years dreamt $XX $XXX call million the a a those really bit year, in it, think the us XX more. plants would maybe million, I that production ago do numbers, ninth little in X% that $XX to to year, making, where or pullback darn the set investment that's, strategy, we was XX we're think have us really $XX idea $XX out million midpoint with the were

we're So that pretty proud of effort.

Okay, question. that's one helpful. And last quick

revenue September on page million I for IR you – that acquisition have $XXX one that deal from like smaller quarter, higher that's the flow the provided the five million the it’s into $XX announced at than a about driving that or that what either fourth compilation Your you in guys the quarter the of announced deals quarter? that some fourth that to-date was quarter fourth of just is in day. fourth

restate $XXX something revenues can You're our just right? million, the roll question? in the estimates for what at you quarter, in Elyse, at? you’re looking fourth looking Is that

Yes.

you at So day. the us that's $XX what million told higher had than IR

that it that – more fourth deals that of deal there were benefits that that just one you is big is announced quarter since since September. lot is on announced So then a much? Or the

think think then call also I the came better of that. some line QX different it on aerospace JLT, business, that in deal. so we than from the got And sight we right, rolling what in, that of QX its deals is think I we've half All of a closed

That's very Thank much. Okay. helpful. you

Elyse. Thanks

Elyse. Thanks

of with with from next proceed Please the Yaron Sachs, your comes question. question Kinar Our line Goldman

everybody. good Hi, afternoon

of brokerage – seasonally you Doug half thinking a there years or First come that and I strong adjusted bit result year quite the said as the seasonally because I second quarter is for is And increases third to even strong. question about year-over-year here. EBITDAC how in a in any strong the margin change the row up were a you the then, seems looking quite in driver quite EBITDAC three particularly a a salary has be in recall, business the seasonality around little had here? past bit that of weakness here? Is of compensation now increases at in. Any just actually where think I'm

on hiring did you your putting I think is put hiring that a kind really bit. control we a bit can kind by of people of you're month, clamps biggest team when and nice XXX the just the competition provided a a little answer brakes the little on job, the

the quarter. quarter, that's we the don't which into it the in Coming is year of of that most delivering we aggressive different didn't to in too than a the probably little get hiring, want on our end fourth typically do

a I the got of just So ahead think it team little bit.

do still there Okay. here? firming is there's issue think the opportunities, and And think markets would will you hiring maybe timing commence? a I just

We're always producers. out We're for doing there looking always that. Yes.

did the wouldn't scale of June I a July. XX,XXX, a of recall I through. in coming rift we that, the – think of rift, if you you're but do of that and really belt seeing tightening economies some call some XXX We did a and people

of So that's it. part

also get lifts, off-shore as grows. get results as results utilization you of of these But centers it's our of business you by in the just scale We're getting economies getting we're just good excellence. technology good with our

improvement, as Okay. organic above we'd points anything growth And of in basis I the X% and improvement that. XX of past margin points than growth little it about XX do in was more forward, look a you'd basis get we think margin with achieve. mind that should these X% said, – or

given – the that So exciting scale. economy acceleration of

things two team's at. year. really We'll we'll The terrific Here's a having hard. that look look

the we'll look looks bonus how quarter. So at the expense in fourth

X%, we'll XX points over margin we comfortable we're that, get feel think of if I expansion. still basis posting

Okay.

commissions, commissions think, basically months. inadequate decrease to I way returns, the contingent should a XX raising industry if expect contingent question, is in one would may I address rates in if the Second over rational that next

of contingent commissions, contingent a flatten in could you numerically the from commissions. growth have Well little

and around hundreds call there us, of commission let's that loss business a ratio got out sensitive, you world of contracts sell we've it hundreds million the earnings. all that's annualized $XX If about think contingent

probably If for line commission back and it rate exposure some flattens get some fee the paid out, you base left. as left get and you'd that in

So we're suffer overall in on based too what loss terribly shouldn't ratio right seeing environment Organic all much now. in the

it. Got Thanks so much.

Yaron. Thanks,

question of the from with KBW. Please line proceed [Operator Meyer comes your Shields next with Instructions] Our question.

Great. can, questions Two and risk quarter up little quick the on that whether we into hitting casualty ask bit handling question if Yaron’s claims were about is want more I I within deteriorating a environment translating this to follow claims, liability more management.

course, D&O doubt. tort first particular of transportation, seeing seeing all, – Of in inflation our this misconduct like we We're business, book tort areas across are sexual no We're there's and path. that. seeing like places of inflation in

Our up of claims the both that and for liability numbers it's inflation. paid terms severity, Gallagher important amounts in at well as are liability in the book close. of being settlement It’s book Bassett, as clearly to

revenues. management it Okay. risk for be good sounds would like And that

realize of getting we're our number It and big should claims a don't Gallagher part what claims as partners of risk size to improve the own trading because the provider Bassett does. management of many that a trying be, to in we're marketplace handle the now

to better. actually select their So fact Gallagher the they to to be to results captives point management clients, and will risk we're to carriers, if trying Bassett,

outcome And claim we believe better general they're have we We market. the do will to a used that. can stand in to up than

reason story. listen as and up, our squeeze the feel of to start people a more to settlement as go the mean, costs to I yes, So,

predicting if accurate I question, surveys And of look I'm second actually past the Okay. pans of have how you guess interested growth how out. terms client back in been Excellent. in economy

Really, really good.

Washington, going because and deposit not you're when units to us you your going are tell is not the payrolls other economists this sitting bunch survey your a they're is C. on are planning of to have from fact sales on are are people These for now your sitting and that higher across going customers in And premium. exposure street. right people the insurance of Our a a be pie-in-the-sky D XXXX up,

So that’s you’ll to you the And loan a lowball. lowball free natural get tendency company. if a insurance from

really have the their no, to no, guys So ground. no, these ear

Okay. you. That's fantastic. Thank

Meyer. Thanks,

Thanks, Meyer.

Mark comes SunTrust. proceed question Hughes line Please final Our your with from question. of with

the would to afternoon, $X.X you of how you piece then the could cost would much year, you. borrowing? much imagine thank on free you how then on you be us and in that Good Doug, refresh had that what's billion you anticipated would Yes, your for just that capacity borrow be cash and capital next

cash, would be X%, or borrowing, something like what's that. free Half borrowing. half would of And X.XX% our cost

estimate done heretofore, just be to you've think then that is And contribution correct? revenue the CFO you million the clear, of all entirely commentary, deals I in your Is in $XX that inclusive in revenue for acquired October. including said the

yesterday, Through yes.

much. Through yesterday, okay. Great. Thank you very

Mark. Thanks

Thanks Mark. Any other stuff?

no There further at questions time. are this

has I'm accomplished make we're finish strong a to just year to and Great. this far to me team quick of up. let the for Then year. poised one it comment I us deliver what afternoon. so this extremely again believe proud wrap Thank you the being with

thanks with it. for everybody being us today. appreciate So We

today's conclude does This teleconference.

your at disconnect a this now lines your for may You wonderful day. participation you time. and have Thank