Q1 2020 Earnings Call

[music].

Good afternoon, and welcome to the Arthur J. Gallagher and company's first quarter 2020 or use conference call participants had been placed 20 listen only mode. Your lines will be open for questions. Following the presentation.

Today's call is being recorded if you had meet objections you may disconnect at this time.

The comments made during this conference call include answers, giving sponsored questions may constitute forward looking statements within the meaning of the securities laws. These forward looking statements are subject to risks and uncertainty that could cause actual results to differ materially we refer to the cautionary statements in risk factors contained in the company's 10-K, 10-Q and 8-K filings.

For more detailed on as forward looking statements. In addition for reconciliations of the non D.A.B. measures discussed on this call as well and other information regarding these measures. Please refer to the earnings release in other materials and Investor Relations section of the company's looks like.

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

Thank you very much good afternoon, everyone and thank you for joining us for our first quarter 2020 earnings call.

Also on the call today, as Doug Howell, our Chief financial Officer, as well as the heads up our operating divisions.

What we get into our first quarter results. Let me acknowledged goes directly affected by Colbert 19, including goes on the front lines of the global data.

We are in all of their dedication encourage.

Good Gallagher, our priority is to health and safety of our colleagues were very fortunate that less than 50 of our 34000 associates have contracted the virus nearly all of whom who fully recovered it would be that are still sell coronary and we wish you a speedy recovery.

I'm incredibly proud of how all of our associates have performed over the past six weeks.

In March we mobilized our business continuity plans around the globe and were up and running working from home in a few days.

We are working remotely without missing a stop.

This is the pay off of our relentless efforts over the past decade to standardize work streamlined processes and operate using common systems.

All of our colleagues are productive to at home they have the right tools and systems in order to deliver the highest quality service to our clients and that includes more than 5000 associates that are based in our service centers.

And every day, we see countless examples of our employees unselfishly, giving back from providing first responders with protective equipment to sending meals to senior citizens to distributing masks to the less fortunate.

I'm proud, but not surprised with the level of dedication support and professionalism from all of our colleagues around the world.

Like every single one of you from the bottom of my heart.

Now moving to our first quarter financial performance or combined brokerage and risk management segments. Here are some highlights we had a terrific revenue growth quarter total reported revenue growth of 4% and adjusted revenue growth of 9%, which includes 3% reduction due to covert.

Included in that is organic growth of 3.3%, but again, we had nearly 3% of an unfavorable impact due to cope with my team. This would have been another quarter like our fourth quarter last year.

And even with around 2% adverse impact of colder than a chain, we posted a net earnings margin of 20.1% and more impressive adjusted EBITDAC margin of 32.2%.

And we completed eight acquisitions this quarter with estimated annualized revenues of $124 million.

As you can probably tell from my tone I am pleased with our quarter.

But that is the past while I wish we would have had some time to celebrate we're now so on three objectives first.

We see it becoming even more difficult.

Now is the time, our producers combined with our capabilities can really shy.

We have solutions, we have ideas <unk> tools, and we have data that very few other brokers couldn't bring to the customer.

Our data would say that 90% of the time, we're competing with a smaller broker that does not have anywhere near I level of capabilities I like our when chances even better in this environment second.

Hello plans to ensure our employees can return to the work place safely we got them home safely. So now it is about a measured and conservative return to the workplace process.

We have proven we can work remotely so we won't be hurrying large numbers of our folks back into our offices. So we know it's safe.

And third, but well I am encouraged by the resiliency about business, thus far and April must balance that early information with the reality of deteriorating economic conditions. Accordingly, we've already developed than we are already implementing measures to adjust our expense base staged contemplated manner.

As we see economic deterioration develop we can implement further adjustments to our costs structure dugald dive deeper into this looks like we can lower expense space $50 million to $75 million per quarter nearly immediately.

I do want to go back into some financial highlights by segments.

First to the brokerage segment organic table on page four of the earnings release.

First quarter organic was 3.1% all in which includes 3.2% reduction due to the estimated impact of cold in 19.

So you can see we had a terrific organic growth well meant a month or quarter through March.

Data capabilities allow us to monitor premium changes client retention, new business production renewal premium changes audit premiums endorsements and the other rating exposure metrics daily.

During the first quarter, excluding covert adjustments, we saw a new business lost business and changes that exposure units similar to what we saw throughout 2019.

As for pricing when I roll it all together globally, the P.C. pricing environment.

We're still up around 5% and casually lines up 10% in property lines and the loan exception to that is workers compensation here in the U.S., but even cops on inflection this quarter, we've been seeing rate decreases each quarter in 2018, and 19, but first quarter of 2020.

Showed it is flat to a small increase.

That is what we saw in the first quarter, let me address what we're seeing busbar here in April.

First you're not seeing a meaningful changing explosions it's early.

Certainly early in this crisis, but we are just not seen the impact yeah.

Also retention is up a bit and new business is still as strong as it was in the in the first quarter.

Second we're not seeing a dramatic change in pricing from what we saw in the first quarter, perhaps up a little bit not dramatically.

And I remember all that is what we're seeing through today.

So what do we see going forward.

Property and casualty exposure you know, it's will certainly decrease muttering per how long is anyone's guess well what we do know is the concentration of our business by industry.

Accordingly, we looked at our April even rules and stratified by industry into higher moderate and lower impact from coven.

Interestingly it came out that 20 per cent of our revenues are in higher impact industries.

20% lower impact industries, and 60% in moderate impact industries.

Then we looked at rate increases versus exposure unit declines.

Casually lines rate increases were about equal to declines in exposure units in a high impact industries and read it rate increases were actually more than declines in exposure units for both the moderate and lower impact industries.

Property lines, regardless of high and modern low impact rate increases offset exposure units declines like 10% and only in workers compensation did we see a net to decrease down 6% in high impact down, 3% moderate and actually up 4%.

Low impact industries.

Finally, we look at our employee benefits business April information isn't showing a big decreasing covered lives.

Because a large portion of that health and welfare business as January affected dates we must make an estimate as to how many covered lives will be under the employers plans throughout the rest of the year.

There will be <unk> decreases, but that could be mitigated in part by employers extending benefits for lows periods under Cobra et cetera, and we just don't know yet how soon or when the unemployed employs will return to work.

All that said I must caution again that this is very early we're in uncharted territory. So these views are susceptible to significant and perhaps material changes going forward.

When I look forward longer term to the rate environment, we do see rates continuing to increase I.

I do not see this as an up 50 per cent environment like we saw in 2002 and 2003 post 911 industry was coming off a 15 year south market when that happened.

We haven't been in a soft markets rather we've been in a stable rate environment for nearly a doctorate up to three or four hertz sent down to three 4% and most recently in a slightly more fair market is rates were up even a bit more.

I also don't see this like 2004 2011 when rates were soft even before cold-blood losses were deteriorating now this crisis could further.

<unk> could cause further lost deterioration, causing underwriters to need even more rate.

I wouldn't call it a hard market, but I would call it becoming a more difficult rates in conditions market.

So for us that means in the short term a decrease in our again it grows studio declining exposure, it's perhaps offset a bit by an increasing rate environment. It's very hard to predict we're prepared to the possibility that organic.

May go flat or even a bit negative for a couple of course, but I see that reverting to organic growth levels like we saw in 2009 team during 2021.

Next let me talk about our revenue growth through mergers and acquisitions.

Had a nice start to the year completing eight brokerage acquisitions during the core capsicum, where he was the largest one of the group and it's revenues were previously consolidated and our financial results.

Because the other seven acquisitions completing the quarter.

Estimate they will add another 25 to 30 million of Manualize rather than.

I'd like to thank all of our new partners for joining us and they extend a very warm welcome to our growing Gallagher family professionals.

Looking forward are in turn on merger and acquisition pipeline report shows around $200 million of revenue associated with over 30 term sheets either agreed upon are being prepared.

A bit tough to get through due diligence in this environment. So I'd call. It a bit of a law, but don't be confused we are still having a lot of conversations with those and see how we can be better together in fact, we're even having some success <unk> merger partners that we're close to signing a deal with us.

Some might call that a nice joint venture as a step to full ownership.

We've also seen competition slow down a bit which might rationalize valuation multiples, regardless at a minimum more consideration will need to be put on an urn out.

Bottom line, we're open for business and bite any broker anywhere around the globe you take a look at what Gallagher could offers a merger park.

Tough times, and we have a ton of resources to help smaller brokers continue to succeed.

Next I'd like to move to a risk management segments.

First quarter or Ghana quotes was a solid 4.1% and results for even stronger for the first two and a half months or the core but since mid March we are seeing signs and dramatically higher unemployment and a reduction in our clients overall business activity. However, it's important to break down this business is a bit differently than we do with.

Brokerage segment.

Risk management business sensitive firstly to the nature of the service. We provide then second lead to the type of entity and then to the industry. So it isn't simply about the headline number of closed businesses, nor the employment levels. Let me give you some more color.

So highly specialized liability in consultation of services, Hi, civility claims and captive reassuring and many governmental entities, we haven't seen a big fall off in our claim volumes underline that some industries are up somewhere down but overall about flat.

Looking forward, we would expect these types of claims to hold up while doing a short lived down economic environment.

That's about 70% of our Robbins.

Then cost plus contracts about 20% of our revenues.

We are actually seeing 80% of those clients willing to pay for access staffing as they are either seeing it be shape recovery or have chosen to keep in place establish their experience teams that have the ability to consistently drive exceptional claim outcomes.

Then there's our high frequency low severity claims about 50 per cent of our claims by count, but only about 10% of our revenues and our lowest margin services those are being hit the hardest 50% or more.

<unk> I wish management operation years ago shifted a large portion of our workforce to work from home and.

And often use temporary and contract labor to staff peak loads for much of the volume sensitive and low margin services.

Accordingly, while revenues might decrease over the coming quarters.

We can adjust our expense base to absorb most of the loss relevance or playbook, because even stronger today than what we used during the financial crisis. So we should be able to execute and still maintain their ability to deliver the very best claim outcomes for our clients.

And finally, I always wrap up with comments on our bedrock culture.

I have to say I didn't think it could get much stronger, but it is really thriving in this environment.

On the phone every day with our leaders around the world.

Genuine sense of energy about beating this virus in emerging in better shape than ever before the sense of duty and advocacy for our clients employees underwriting partners in shareholders 'cause served as our accomplish for over nine years and will continue to do so for many years to calm.

And I can end without complimenting everyone a gallagher for being awarded are night straight world's most ethical award.

Good times, and perhaps even more so in bad times culture, and ethics guiding organization and our commitment to both of these are 92 years from serve as well in today's challengers, Okay. I'll stop now and turns already done Doug.

Thanks, Bad and good afternoon, everyone I to extend my sincere appreciation to first responders and that was on the front line.

And also my thanks for 34000 colleagues.

Advocate your own personal challenge is presented by the pandemic, Yeah, we're up and running a few days delivering timely advice and start restaurant clients that just simply amazing. So thank you.

Today I walk you through the covert 19 impact table on page two of the earnings release, and how that impacts organic and margins on pages four to seven.

I'll draw sorry expense savings initiatives applied some thoughts on our capital equipment and I'll finish with a few short comments and S.P.F.L. commentary document.

Okay, turning to the table on page two of their earnings release.

Table capture all of the covert matters.

In our numbers.

They are they all fully head are reporting gap numbers, and we did not a jock any of them out or we show our nine gap adjusted numbers.

C.N.N. covert didn't have much impact on net earnings.

But there are four moving out to amass that have a notable impact on revenues any back.

<unk>.

Dries, how it impacts revenues and just as a reminder, about accounting standard six I was sex that drives our revenue accounting.

We adopted that in 2000, I recall, what it requires us to estimate annualized ultimate Robin is for contracts and policies with effective days prior to closing the bucks.

Even after it was analyze robin it was are dependent on future events.

We must make her about that.

And as most of you know there are a lot of insurance policy that have volume like adjustments that can occur in the air after the policy effective.

Lines like workers compensation endpoint group medical plans casually line that have a jumper premiums based on safe picture miles driven or my are.

They're just examples and then you have experience rated contract. So there's a lot so on and so forth.

And the path historical patterns.

Drove those estimates and changes in volumes would emerge slowly as our client businesses naturally evolved.

It's not today's environment, our customers businesses have been dramatically altered in a few short weeks that's the reality.

We need to make our best out them up after that what will happen in the future for those pre April 1st contract.

<unk>, but we still must do it.

For those that closely followed the P.N.C. sacked or perhaps another way to think about it we must estimate future adverse now on that on the revenues we've balked when the contract was first up backup.

Definitely got estimate change today versus having to develop over the next few quarters.

<unk> to do it as we look at a ton of our internal data, we compare it to industry and economic data, we slice it by industry group type of coverage.

Air that consumer spending patterns et cetera from that we can make some informed estimates.

So you'll see in the impact table on page two.

That about $15 million relates to P.N.C. policies those are audits cancellation mid term adjustments et cetera.

How about 18 million or related relates to group medical insurance policy possible reduce monthly covered lives.

And then there's 8 million related to volume and loss ratio sensitive contingent contracts.

That totals till about 81 or excuse me 41 million, but really that's only about a 2.5 per cent impact on our first quarter revenues.

And also don't forget if we overshot the impact at what <unk>. It will reverse back into our revenues as new information becomes available.

He under shot we would have to take further adverse development.

Next you also see there are some variable compensation offsets on that revenue impact and also a reserve for bad debts for policies written but for which we might not clock.

We have much bad dad, historically, but given some of the moratoriums on cancellations and all sort of this might go out during that more <unk>. This might go out of business during that moratorium, we can't chase down collection from an empty wallet.

<unk> tune noncash items, neither impacts are even act.

A future decline and economic conditions does impact the value of our intangible asset for acquired customer less.

45 million dollar adjustment, but on at 2.2 billion dollar asset. That's just the two per cent tweak, which makes sense given a life customer less can be 510 years or even more.

Second on the other hand, a short term decline and economic conditions as a much greater impact on the amount of Earnouts for recent acquisitions.

Say about 87 million inappropriate segment in 4 million and a risk management segment on a 530 million dollar balance sheet liability that just 6%.

Excuse me, that's just 16% of the current estimate.

A much bigger percentage impact, but again measure the measurement period as much shorter than the recoverability duration under intangible customer less.

So once you digest the impact of covert on page two you can better navigate the tables on pages for three seven here. The punch lives for punch lines from that was tables Ah for the first quarter.

Brokerage organic is shown at 3.1%, but covert related <unk> hurt that increase by 320 basis points have we not re estimation our revenues organic would've been a lot like fourth quarter 2019.

Brokerage out that even act margin shows that 120 basis points down a covert them back hurts that by 220 basis point.

Risk management organic growth is shown at 4.1%, but covered related reoptimize hurt that increase by 60 basis points. So that ended up about what we saw in the fourth quarter 2000, a 19.

The rest management adjusted either that margin was down 40 based on the basis points almost all due to kind of it.

So what the <unk>, but the but understand the table, let's go back a page three of the earnings relays as Pat mentioned, starting in mid March we we dove into adjusting our expense base, where following the play book from 2008 and 2009 financial crisis.

Even though we are over five times bigger today, we have considerably more consolidated information systems and resources. So we have actually more lovers, we can quickly Paul.

Where implementing the changes to reduce our expand space by $50 million to $75 million per quarter that will come from reduced travel in the entertainment an advertising it expensive 20 to 25 million readers technology consulting and other professional fees up 10 to 20 million readers temporary laboring attrition 10 to 15.

A million.

Lower utilization of health and welfare benefits 10 to 15 million.

We've made great strides in April and any further expense actions will be based on how we see revenues develop over the coming months.

Let's stay on page two three for a second you'll see the last few sentences address are strong liquidity possession. Today, we have approximately 1.1 billion of liquidity considering the available cash on hand up nearly 300 million and we have access to another 800 million on a revolving credit facility that doesn't expire until June.

2024, so we're in a very <unk> shape save shape on that one.

Either.

Over the next two years, we only have 175 million of upcoming got maturities 100 million in two and 2020 and 75 million and 21, so there's no issues there either.

[noise], leaving their earnings release, let's go to the C.F.L. commentary document post on our website, it's fairly straightforward inconsistent with what we've provided before three quick items that now I page to foreign exchange the strong U.S. dollars driving at 10 to 20 million dollar quarterly impact on our brokerage revenue, but only a quite still bought a penny.

Drag on E.P.S.

On page three clean energy posted 52 million of net earnings this quarter, but we're seeing a decline and electricity demand, but due to last rack economic activity and then also in a tag along AMPAC and lower natural gas prices, leading utilities that favor Nat gas overcoat.

The way it brought down our Oh, you're asked them about that and now expect 70 to 90 million of net earnings for the four year.

Also on page three the corporate line came in better than we forecast it back in January almost all that due to a favorable F.X. adjustment.

So okay. Those are my comment weren't solid financial position way out quickly achievable plans in place to adjust our expense base. So we're in strong position to whether or not whether the economic and operational challenges created by the pandemic. So back to you Pat.

Thanks, Doug I think with that shall I will go to some questions.

[noise]. Thank you.

Calls now open for questions. If you have a question. Please pick up your hands and press star one on your telephone at this time, if you're on speakerphone. Please disable that function crimes <unk> optimum sound fine may remove yourself from the Q. at any point by pressing starts again.

Star one for questions.

Our first question is from Mike Germs from <unk> <unk>.

Hey.

<unk>.

Eating.

First question.

You talked about that being prepared for the possibility that organic you know pick up flat to even a bit negative for a couple of quarters, which I I think makes sense to most investors given the backdrop and I just wanted to to clarify that that is that inclusive of the gallacher Basset segment, which I I believe you're living.

To maybe having a more of of an organic growth impact versus brokerage and and you know and I guess should we be thinking then you know that you know earnings then and margins then given the C.F.L. commentary. Then we're also go would go a bit negative if that that scenario plays out.

Well good Mike is we would probably be really clear that we we don't know him. We put language in the proposal marks to make sure we understood with that could be material, but you know I'll be the Plano optimist, Yes, we think that you know depending on what happens is new states. We didn't open up an economic activity, we'll see how deep and how long this.

Recession goes it could additionally impact just to the point it as we said of of lack the down core a number of course I do think you're right, but it'd be a gallon of Boston numbers, which he also included in those discussions.

A little bit more hog hit, but we'll just have to see how deep this thing goes.

Yeah, Mike on margins just so you know even if we end up in a flat environment for a couple of quarters, what they expect saves that we are saying, we should easily old even act margins Ah Ah historical levels and actually can probably increase in them.

Okay. So that I guess I'll use that as my follow up dog. So.

I'm 30 million at the charges spread over the next three quarters, typically think up and and.

The payback ratio and pay that gracious seems to be very large 50 to 75 per quarter. So it sounds like a lot of these expensive <unk>, we should we be care for our models not to.

Not to kind of roll them over into future years, because lot lots of this but some of these things are just going to be temporary that's right. I think that you. That's what goes through the Troughing revenues and then I think you have to think about us more in 2021 in 22, if we go back to organic growth kind of where we were in.

19, you would probably seem margins I'll like you saw in 19, maybe out 50 basis points for the year, Yeah, Let's say that we get back to five per cent organic growth in 2021 by by some Hooker crux you would see probably our margins up.

You know 100 basis points are where they were in 2019.

So we can fill all this year and then I think when you get back to normal business hopefully in 2021 at 22, you would see it like the trends you saw going from 2018 to 2000, a 19 and then so just start with 2019 and pick 2021, that's probably how you should be looking at it and then in 20, we just hope we can.

<unk>.

[laughter]. Thank you very much machine has all the best Yeah. Thank you Mike.

Mm.

And our next question is coming from Greg computers arrangement games.

We should question.

[noise] Hey, how can we go back to your comments, where you segmented out the 20% higher impact 60%.

In the middle and 20% lower impact.

How you came up with that I, you know I characterize as I think about your business.

For example, take the aerospace business I I don't hear a lot of rate in aerospace and I get I would characterize that as a higher impact.

Business and so you seem to imply that you're going and getting enough raped also exposure, but maybe you can give us more color.

Yeah sure first of all what we did drag you say Oh right. Let's we we can now segment or a book of businesses you said in the in the quite <unk> into quite detail chunks. So we sat down and said what are the industry is out there that we think are going to be really hard hit.

And those are the ones. They would we would then lump into the into the higher impact. So our hotel business for instance, we could get we could get very granular about how much of our business over an entire 5.6 to 6 billion dollar loving. Your business is is hotels and it's less than 100 million Bucks. That's an example.

So we took all those those businesses that we and we just had the bucket. So it was our is is down and dirty.

Hotels restaurants, those went into the very high impact monitored impact some construction some transportation and then low impact would be things that would go on like.

Public any business any hospital business that type of thing.

So when we looked at that we then when we can also segment out we can look at what's happening to their rates and we can do that by account we can be it by geography, and we could we could do it by type.

Look the way said all right, let's take a look at the accounts they put in each of those buckets and again as we said throughout this whole thing it's very early information, but what is actually happen to those clients that we thought were in the the most impacted bucket.

Again with caution English and this is what's happened in the first Gordon early days of April So we said.

Nearly hotels are gonna show a lot more pain.

In the second and third quarter off of what happened to him and the first score, but nonetheless, what's happening to hotel weights, well guess, what they're not going down at the same time, so hotels, you're not going away. They are we being there they renewing their accounts and those that are we doing your accounts, you're paying higher property rates. There <unk> no exposure dreams are down.

Renewal, but what we're saying in our prepared remarks is that right now this bar.

Got a pretty nice offset.

Those rates are holding.

[noise] God in <unk>, Greg just to amplify that we've got 150 cent codes on a shape that counts for our revenue all of last year and it's up there is that kind of that 2060 20 distribution on it both in terms of most in terms of our last year as revenues and like Pat.

Eating and drinking places that's in the high impact one you've got you know stone clay glass and concrete concrete product manufacturers might be in the meet him and then you've got legal services that might be in the low. So you just pick out a sick out we can slice and dice are robin is exactly by that and then we can tell you buy the coverage across it too so not only do we wait it by.

The industry, but we also looked at the coverage lines to is it informed our possessions.

Got it due to the supplemental on contingents get affected by volumes as well, yeah, and some <unk> supplemental not so much that automatically adjust with the volumes and a quarter. So that's not an issue.

Are contingent.

Pure contingents you know you actually might have a left in pure contingents of Los ratios are down because of lack of lack of activity.

We do have contracts, where there is a double tread right. There's a volume expectation and then there's a a loss expectation and that's the one that's we look at it going forward and we could have a little softness and that's and we put up about I think that was about 8 million bucks of of.

Possible estimate reserved for that.

No I'm going to prove it to the balance sheet just two questions on that first of all given work the carrier. If we're doing in terms of rebates give backs delayed payments and noted that you're a premium m. fees receivable were up quite substantially from year round.

I'm wondering if there's anything in there and how you're looking in doubt from O. level concern response, there and then secondly, I just wanted to sort of go back on your intangible amortization charge.

You know I think dirty and access to 30 million people file for unemployment in the last six weeks I got to believe there's more potential risk.

And and mine off so customer less than than just snap or maybe you can ask them go there.

Let's talk about the balance sheet. The big difference between December in March that are reinsurance operations have a very heavy first quarter and that's what influences that it should not be looked at as a collectability issue.

Cash flows during April <unk> still strong.

So we are not having <unk> stability issues on that <unk>, that's not an indication that there's collectability on those receivables.

We only put up a bad debt reserve of 6 million Bucks something like that seven 8 million Bucks. This quarter. So if we're not seeing that at all and so you can't read through on the balance sheet.

So that's the reason why the balance sheets. The second part of your question was what.

Around intangible assets the the the the right off the customer less yeah.

The violence <unk> violence of what's going on in the economy seems like there's more risk to goodwill and you tangible might also never before but I. You know, we're just sitting on the outside looking in so you have better <unk>. Yeah. I can answer now first of all we're nowhere near any type of goodwill impairment on this as for the customer Alas.

Maybe on the surface that appears to be that way, but when you got we got businesses that are really retaining 90 to 90, 394% of their customers on an annual basis.

Just because there's a bunch of people that are <unk> I don't work doesn't necessarily mean that that businesses out of work if they don't come back immediately or you know don't come back in the next 234 months, maybe there could be but again, it's a non one thing as you know, it's a noncash charge, but we <unk>.

Very hard through hundreds and hundreds and hundreds of acquisitions. During this quarter and you know we do it every quarter anyway, and we just didn't see where there's massive fall off so when you come up with 40 something million across the board of all these acquisitions, that's a pretty small tweak like I sat us 2%.

Yeah, if it deteriorates further and we have prolong business outages sure there'll be some noncash write offs on this but it's it's kind of a no never mind.

Yeah. Thanks for your answers thanks, right next Greg.

Yeah.

Iron next question comes from.

The green, saying of loans pleased to see what's your question.

Hi, Bom Bom good evening.

Hi.

Oh Oh.

<unk> alright.

Yeah.

Oh modeled small amount.

Hi.

Right.

Okay.

<unk> Oh well.

Mm mm.

Mmm.

[noise] alright, so when they break this down and you were crackling gift a little better leave so let me see if I <unk> is there a disproportionate cost cutting opportunity betraying.

Gallagher bass said and heard the risk management segment and that brokerage segment.

Yeah, I think in a risk management segment, you're probably looking at 30 30, 25% to 30% of those savings.

Whereas that business itself as.

You know somewhere around 20 per cent of our told them. So there's a slight skew to that business, which would make sense because they're the ones that have the more volume sensitive <unk> immediate volumes sensitive type business than the brokerage business does so that's the first part of the question slightly skewed more towards that.

The margin question that you're asking as is that if we're successful and Ah shaving expense savings.

Took a level that we've planned before I, you would actually see increasing margins in both segments on a quarterly basis.

And you expect to be happy <unk> 75 million according to be kind of from 80 here Huh, Oh, So cute kid right.

Working on March.

Yeah, we might not get.

Yeah less inheritance made first tomorrow, we're gonna get much of it does quarter, but if I. If we can get 90% of this quarter, then we'll catch up in the third quarter.

Uh-huh.

<unk>.

Oh Man Oh man.

Basically mm mm.

Hi, <unk>, even if we can continue into economic slowdown you any.

He and he.

[laughter].

Oh man or I guess.

Okay.

Okay.

Hi to answer to that is for.

There shouldn't be none of that going forward customers adjust their exposure units for renewables beginning.

April 1st May 1st June 1st if they adjust down then there'd be no covert related type adjustment right, they're just going to buy less insurance right.

Contracts that were basically Red thing you know <unk>.

In January Yeah, we put all the bad we did all the work for aren't we booked what we thought was the revenue that we'd get over that you know the 12 months following that contract date.

Yeah, we had to re estimate what we think we're going to get from that was here in the last few weeks you know off the subsequent subsequent of that type of valuation of those revenues could there be further deterioration in that.

Yeah sure there could be f. the number of covered lives.

Decreases further than our estimates if we get more audits that come in afterwards, if there are more cancel late mid term cancellations you could have a further covert adjustment but.

Yeah, I hope they that we've got it all at this point, but we'll see you know and we'll tracked that for you and we'll show you how much it was.

I'm just one of my clarification your data outline you know maybe slightly down on that I'm.

Supplement, though like easily get fighting correct.

Yeah, that's right, let's make sure we understand that you know here, we are chugging along haven't good organic this quarter. If we have a dip next quarter, how we might have a little definite third quarter. Our our assumptions are by the fourth quarter that we would be back to a you know I I decent organic.

Level, and if that pushes into 2021, but I'm, saying I don't see as being negative.

For for at the most a couple corridors, even then I think I'd be a little bit surprised.

Okay. That's helpful things kind of color yeah, thanks to lose.

[noise] [noise] next question coming from <unk> Goldman Sachs.

He was your question.

Thank you could afternoon, everybody and thanks for taking minutes.

[noise] <unk> first question dug they think of me are prepared Caliente said that you'd expect either <unk> margins to be I've had historical levels, maybe slightly above.

<unk>, where are you telling a circle levels. What are we talking about here are we looking at last three years last decade give us maybe a sense of what it is you're you're thinking here.

So, let's let's go back to the margin calm it I think that that probably the better way for you to do it. It just assume we're gonna get $70 million to $75 million a rabbit now and if you just hold on revenue flat to last year for the second third quarter, you can't help but get margin expansion right.

Yeah, <unk> last year, so you're gonna get margin expansion, even a flat during a slightly down organic environment if that happens.

Yeah, well if it reverts in the fourth quarter or into next year, then you're going to be I think Mike asked a question about it earlier by the time you get the 2021, if weren't chugging out.

Organic like we were in 2019, we're going to put some of these costs back into the structure. So take your 2019 margin and grow what kind of what we did between 18 and 19 and 21 and you know kind of being so you're gonna get an increase in margin in a short term and then it's going to revert back a little bit more in.

Longer term.

I want to <unk> I want to make sure. It on clear on something there does everybody understand I don't know if I Miss about we think that we're gonna get $50 million to $75 million of expense savings each quarter going for it not revenues saving whatever the revenue. It is what it is for adjusting our expense basis down 50 to 75 million.

Of expense.

Right I hope I I don't I may have misspoke on that but.

I I think I understand that but if I look at the revenue base of 2019, that's like for over 4% of margin.

Brokerage and risk management.

Stake in your restaurant, we just got some static on line.

Sorry about that I I'd say, if I look at that $50 million to $75 million of quarterly expensive Hey look at the revenue base for 2019, that's over 4% margin.

Could be.

Okay.

Alright.

Okay, and then I guess my my second question is around capital, how you're thinking about it here.

I would think you have a lot of disruption in the stays maybe creating opportunity parameters may. Besides the fact that you can't really meet with anybody right now in this environment are you interested <unk>. It has your appetite for emanate increase here or would you say that maybe have a greater maybe as a precaution.

Canary measure are more interested in preserving capital and liquidity here.

No. This is Pat Ya, we we are really interested in the acquisitions. This is a time for people now to sit back and take a look at what the competitive landscape walls.

I'll do an awful lot of competitors out there with great stories and lots of money in the bank and now I think there'll be a time for people to look and really think who they won't be with.

And then we can get people to sort of think through the the acquisition of their life sure and where they want to have their people employed after the meals done we think we'll do very very well. So we are wide open for business and we are not trying to preserve capital when it comes back positions.

<unk>, you get a little bit of difficult rate and conditions out there in the marketplace yarn and you sit there and say it would you rather do it alone or would you rather do it with US I know where I'd be a fire I own my own agency I'd be sitting there, saying how do I go to a a strategic that can actually deliver capabilities and resource.

I don't want help.

Me sell more business.

That's where I'd want to be right now and yeah, we're tightening our belts here on expenses, but we still have we're not cutting in to the meat of our capabilities were we can tighten our belt and get through this trough in the revenues. If I were if I were somebody selling I'd be thinking pretty hard about coming to Gallagher right now.

So I think and one of the more recent invested as you you had talked about.

Targeting ability and a half dollars worth of acquisitions in 2020, so is that so.

I achieve over on.

You could do you know less than we have the capacity to do that type of <unk> I. Just don't think it will present itself I think that there's there's a law going on right now getting people back out to do due diligence it'd be pretty hard for us to spend that amount of money between now and into the year.

Does that mean, we couldn't catch up in 2021. If this is a v. shape recovery, you know there'll be plenty of opportunities to buy and we might be a little short for a quarter or two but by 2021, you can see I was having you know a huge here.

Okay. Thank you so much sure. Thank you.

[noise] [noise] and our next question.

Mark Hughes centrist please.

Question.

Yeah. Thank you good afternoon, Hey, Mark Dugan.

I'm not sure whether you touched on this but the your cash flow expectations for this year. If you undertake all these measures that it sort of lays out as expected what does it do for a free cash.

Okay, let's see I don't know if I have a number right 40 on how much can generate but the the fact is if we have a little bit of a law and now I'm an a. right.

If we have expense cuts plus they 75 million a quarter for three quarters, there's another two and a quarter right and you know it we typically we're probably starting with 500 <unk> by 700 million even after paying the dividend. So you've got a lot of k. could have a billion dollars of access cash by the end yeah.

If a if if organic doesn't if it's flat for a couple of quarters are down just a little bit I don't know if I carried away you could have a substantial amount of cash on a balance sheet at the end of the year.

Any distinctions internationally when you look at the different markets you're in.

And he doing that it'll be better or worse.

[noise], we haven't really great quarter, or an R.U.K. operations that the organic was was very strong.

And the U.K. for that that business, there seems to be holding it very well early April returns on that don't show a lot of stress either so we're having a really terrific results in our U.K. operations, Canada I had a great quarter also I think that's really doing while in Canada or operations, there as as really come together in the last.

Few years and you know, we're we're running really nice upper 30 points a margin in it Australia New Zealand you know they were coming off some pretty hard market. There are some you know a raid environment there for awhile.

We'll see what happens with the fires are happening, but up there seems to be.

Good organic growth there and then on the U.S., we had terrific results to in in April I was surprised by our guys to be honest there saw a lot of business were look I look at the new business. She every day and there are they are gave us all out of new business out there still here in April.

Yeah, and I'd add to that too.

If you take a look it if you take a look at a place where were small well in the rest of the world very very strong starts in your Latin America.

Oh, our operations in in as you said, Canada <unk> with the global Global picture, which really really good so far.

But then the last question I I just wonder on the claims counts you talk about the kind of high frequency claims are down 50 per cent anything that jumps out attitude about you know things you might not have expected you know other.

Other types of claim that frequency is down.

And I'm curious any observations about you know worker's comp specifically, how how you see claims there.

<unk> you go you go dog and then ongoing good I I think.

I think we're surprised in a in a Gallagher basset unit about the strength of some of the industry's like especially like in in in the hospital swept soccer right now Yeah. It's claims are still coming in and you know we are starting to get more and more workers comp claims related to code. Also so are are are.

Customers are going to have one for Scott claims related at covert, but the kind of the recurring just manufacturing medical only type back to work in a day or so tight claims yeah. You don't have a lotta people working <unk> you just don't have a lot of those are rising so I.

To be honest is some very claims are still there the frequency is down but again. It was 10, it's 10% of our business and yeah. That's it's it's not all that that margin.

Sex, so we've got the ability adjust our head count on that.

We use a lot of temporary labor there, we use a lot of contract or contingent laver. So we have the ability to flex that that labor pool pretty easily on it.

I would add you won't blow Mark one thing I was surprised that is how quickly on that side of the clean inside it it'd be on the move I mean, as we saw unemployment request school up very quickly and the March those claims those claims came down very quickly as well.

Thank you people don't people getting out of work, we're not phone players which is interesting.

Thank you and I next question from calling you some of my resentment.

Evenings.

My ball.

Thanks to the Gulf, but I thought it was interesting in the seasonal commentary bit the expected. We average is <unk> acquisition pricing was was down.

Tick or to <unk> is that a reflection of what you perceive a is the acquisition market Wars that reflects you know just trying to be.

Disciplined in a difficult.

I think really when you look at it when you look at appalled when you're talking about doing seven deals a.

Mergers across 30 million of revenue you're talking about are nice bolt in acquisition, we didn't have any big larger ones in the quarter Capsicum was already in our numbers, but we didn't have a stackhouse polling for last year, we didn't have a jones brown up in Canada.

So it's the these nice talk in both on acquisitions, we're still doing nicely in the eighties.

So that's that's what you're saying there.

And then I guess do you have expectations when you're doing deals that you often see.

Drop offs and revenues <unk> I think it certainly puts a you know that the idea of growth in an acquisition has always been in one of those things that you know the seller believes are going to grow x., we believe they're going to grow at a percentage of x. and so we put you know you know part of the purchase price on an urn out I think.

Uncertain time.

There'll be considerably more sellers willing to take more on an urn out because I think they're going to want to grow out of this environment, where I want to help them grow nothing nothing would make me happy or for everybody to to to come in and hit the Earnouts. Yeah that means are growing while and we're all doing well then let let let me weigh in on that it's still consider earlier, if you're going to be.

Running a smaller brokerage right now who would you like to partner will I'd like to partner with the firm's going to help me make my own out.

No one rates are going up and everything is dandy, making my own out the way I did it all the time in the past might not be that difficult.

The sudden right now capabilities make a difference.

Yeah.

Did you hear your all see yeah due to politics for you too.

And next question comes from major shields, Okay be dumb.

<unk>.

Thanks to really quick question first it really sounds like other than any movie unit that things are going full bore isn't if you can comment on the produce a recruitment that is the company Matt.

Yeah, we are wide open produce recruitment and this is no matter what the day or the time is in terms of good good economy's bad economies, we're always looking for selling production town and that's no different now but.

We've talked about the acquisition process I think that there's going to be a little less competition or maybe it will be put it. This way we still one of the P. places upsizing capabilities and ever happy to pay our producers on what they actually produce what they binding what they bill and if I'm looking around at where I'm going to go am I gave you down the street to the Jones agency, where am I going to come.

Gallagher, who understands production from the standpoint, the we all broke are run by brokers.

Every single one of us consumption of professionals have been on the street and I think that resonates right now we get a lot of people that are interested in yeah really how does this work well now.

They'd dad capabilities, we lost to go out and pick on the smaller guys and say no no no you don't understand.

This is really something we can help you with.

That resonates in today's market. So I think the number one it's a great time for us to be recruiting and number two we're going to have lots of success with that.

[noise], yeah, no that that makes perfect sense.

Maybe that's the question for Doug we can see any impact in 2021 from the the expense.

In 2020.

So do you think we could have savings in 2021.

Versus what we put in this year and they got to carry over impact or that your question.

No. The other way in other words, obviously, you're studying us for a reason, which doesn't preclude responding to sort of the weird situation, but or the last I'm thinking in terms of investments are those that Philip it always get up and 21 I think you're asking our don't think we're going to have <unk> a setback.

In our progress a building a better franchise as a result of these expense cats I think that's really what you're asking we believe that most of these are immediately consumable type of expenses that if we're not traveling today I don't know how that's going to impact. This next year. So when travel comes but I don't think that's going to hurt us I think that some of our other belt tightening exercises that we're doing right.

I now have shown that really we can bring some of those work that we've been doing in in a house that would maybe we've been using external consultants for we actually can be using some things in doing some cost saving measures that we didn't realize that we had the opportunity to do by sharing across divisions kind of breaking down.

Some of those silos in terms of being better together internally how much is going to keep hurt us going back you know maybe a little bit on the technology investment, but we're cutting technology investments in non client facing type.

So are we going to refresh our our website. This year again, maybe now but if we do it next year, that's probably okay. We still want to make those investments, but that would be an example isn't gonna really hold us back from selling more insurance probably not.

Well, let me give you a bit of where I think well I think this is going to carry over the next year, which you should things I I've been seeing the last two months that I'm really excited about number one cross selling.

You heard me say 100 times that that's one of the things in the company them always harping on and this all the sudden has given a lot of like people are saying from the property casually side or the benefits wait a minute my customers really do need help so we're seeing those opportunities <unk>.

Also finding an opportunity to wipe out more of what we refer to as white space. We know that on average we're doing I'll make this up you know three or four lines of coverage per client when you're probably buying 10 to 12 wait a minute we're doing for really well for you and you need help on a we're picking up those accounts and and and the other thing is.

Trading with ourselves as we've been doing acquisitions of course, they all come with their London broker that they've done business with 100 years.

Explain to him why they should trade was launched in London and by and large we've done a good job of movie some of that does but today.

When you get a question is like this and you say guns.

This is really about making sure we do the right thing thing a client and we've got a better group of people you know London <unk> you been trading with no more excuses move that they're doing.

So there's there are benefits competing these bad times that that will in fact hold over 21 22.

No that's very helpful. Thank you so much.

Mm.

And once again as a reminder, if you have any questions. You May press start wondering you telephone keypad to <unk> place or something so the question cue.

Our next question is coming from <unk>.

We'll see what's your question.

Thanks, How's it going goes Hey, Ryan how are you.

I'm good so I just wouldn't talk a little bit about thinking about the mouse traps or you know even like in 19, when we were getting the mid single digit organic clearly to get there. There was there was quite a bit of new business soon as being written.

Well what was the new business volume, you know, which kinda been the annual pace of new business.

Right.

Go ahead right Yeah, no no I was just going to say in terms of on the revenue line.

Yeah, I remember signed up.

Two different numbers and there are some of it if you just talk about new business relating to one shot type opportunities like a bond or something like that you've got that and then you've got the other just what's the annual related to annual policies that you would expect to keep a client and keep renewing.

The way that really think about this is the delta between the new into lost and we've been getting probably about two or three points of left from rate in the past. So our new businesses been always outgrowing are lost business.

Call it by 3% and maybe it's more 4% not new and 2% because of radiation exposure, we're kind of toggling to a point really at the end of last year were almost all of that was of the two to three points for green range and exposure was really coming from rate.

From exposure, we had gone through the exposure growth period.

From 2025 to 2017, and we're kind of the other that kind of declined a little you know or flattened out a little bit and we're getting rate.

What could have happened as we come out of this well you can see another growth in exposure units it'll recover the from the contraction and I still believe that there is read out there that tens Dick when there's rate happening out there are you <unk> tend to get more looks at at new business.

And then at all so you got to make sure that you're secure and hold onto your renewal business. So what are we seeing <unk> next year I would say that maybe a new business in excess of lost business.

Because we compete 90% of time or somebody <unk> lots of us maybe you'll see that white now by a point at least in that spread.

Yeah run <unk> dug didn't give you the numbers in terms of spreading what have you. What we saw in the last couple of years, which has been really heartening.

That we we bifurcated our business you know try forget it into the small business kind of medium in them and then large risk management stuff and what we're finding is written in a lot more success last couple of years on a couch that we would consider just slightly bigger than the norm in the past. So we have been and those are not been coming.

From taken.

I'm, taking on our larger competitors.

Fine week, we compete against motion and we do find they do fine again starts to this day, just said 90% of the time, we're competing with somebody smaller and what we bought in the last two years, because we are taking their bigger counts.

We are the more successful to consider the bigger so that does add up to eight percentage of trailing book of business, which has grown nicely over the last couple of years.

So so then it's having to sit in your outlook for kind of flat to maybe slightly down.

You're assuming that you're still going to be able to generate more new business.

Then you lose.

<unk> listen here's the thing right right now and this is you know this is my calls every day.

This is our time this is difficult on our people working at home or a half of them are stir crazy bunch of men's kids, it's not easy they're still making calls will pick it up or news right now from clients. We haven't had a personal meeting will.

Going through what we have in terms of communication capabilities, what we have in terms of capabilities to help them through whether it's really cares after what they do what's going on in the market and did not getting at home from the smaller local Brooklyn, So I'm very pleased with the new businesses actually occurred over the last month.

Yeah, we we actually have it <unk>, it's held up comparative to January and February [noise].

I've been amazed and of course, she's done mentioning. These remarks are retention is a bit stronger because when we're in a normal environment that local broker.

Good markets just doesn't have the capability they could beat us from trying to <unk> <unk> <unk> business come down Oh, smudge and I need businesses up.

You know not what happens with exposure units bankruptcies and unemployment and all the rest of that <unk>, but I'm excited about me distance right now we're new business machine.

So I I M- my other one was just on I guess thinking about your your revenues what percent of your revenues were tied to some sort of headcount metric when they're living worker's comp employee benefits.

And also what percentage of the revenues are.

Maybe I don't know Nonrecurrings right question, but I'm thinking about like a construction project. So late to replace the construction project from last year, you need to write a new construction project, that's right that type of thing.

Our entire bond book is exactly what you're talking about you know <unk>. We we look at it every year in budget. The fact that the X.Y.Z. construction company, who does infrastructure work was going to be able to continue to do that work and of course deep projects you wouldn't come up night take those projects away and they'll drop no.

Presently the government is not withdrawing into those projects. So those that are doing hired infrastructure will probably continue right on with that.

But you you ask a question along the business all workers compensation is predicated as you know on payroll and by and large but you've got in our entire benefits book, which you know several billion dollars revenue, whose tied to employ headcounts.

Well, we we are subject to decrease of employees are decreasing payrolls.

How big is <unk>.

The bond book.

Yeah, I don't know I'd have to take a look at I got to see if I can take that out for your quick excellent.

Have l. <unk>.

<unk> My last one was just obviously on the I mean, a carrier calls is going to want to discussion and.

Business interruption and I I I'm, just curious and you know.

Oh hectic is in terms of talking to your clients are they want to claims coming and is there a lot of hand holding.

Or.

You know are you feeling a lot of the coverages are pretty easy to explain they kinda get it.

Well well well first of all you got first of all you're going to start with there's a there's a tremendous number of clients, who <unk> <unk> <unk>.

Chosen.

This is good some feedback.

There's a <unk> there's no clash of course that have chosen not to buy business interruption shall we take them and we've done a sad then there's different forms of business interruption throughout the marketplace and those ones will dictate whether or not the carriers Oh the coverage and we we represent our clients were going to sit with our clients and yes, there's a lot of activity in this regard.

Them through what they bought what's the limits, our blood and whether or not it looks as though they have coverage because there are some coverages in the market could clearly cover pandemic now there are many others that simply say there has to be a physical damage to the to the premises work too poor to be <unk> loss and.

It's been strong leadership from the insurance company solid, saying look we're gonna pay the claims that we know we have that are appropriate claims we're gonna pay and quickly.

Knocking amend our contract and we're going to have to help our clients, which is what we do go through that environment.

And they have a rifle claim we're gonna D. I mean, we came to meet your kids paid.

Hey, Hey, Ryan just a follow up I didn't take a couple of numbers out for yeah last year, we did a non recurring type business, which would probably include our bonds and everything about 1% of our total ravenous or if it all went that went away forever when our <unk>, our organic clashes 6% would have been.

Per cent workers cop in what we consider to be high impact areas is also about one per cents off 100 per cent of all those employees went away and stayed away and never came back for an entire year it costs us another point on organic.

That's perfect things going.

[noise] next right.

Yeah.

And our next question.

Yeah runs friend, who was who was your question.

Hi, Thanks.

I'm sure.

Hmm.

Right.

Okay.

Operation.

And yeah, yeah, it seems like.

<unk> by about 25.

[laughter] wondering apparently it should be thinking about.

On here mm mm.

And then I'm like.

Wow.

Yeah, I'll take that I think just couldn't be couldn't be more pleased with our capabilities. Those smokes had training and planning had it's actually.

Exercises of working from home, we need any any of those locations went down we could move that work to go home with their laptops, we have not seen any getting nation at all in the service for volleyball service centers and remember a service <unk>, India small nyquil teams and also in Las Vegas.

And the United States and those service any should continue to provide <unk>. The last two months not even a noticeable change.

Well, it's difficult pool, many of them as well to D. at home.

We don't see that changing at all and when you're in the future.

That's really been a remark of all these yeah. They since day, one day are trained and they rehearse to do all their work from home were up paperless environment. There the laptops come home with them every day, we have yeah, you'd get some brown outs air from time to time, where you have a little problem with electrical grid. So we've got experience with them being at.

Internet connectivity is required for them in order to have a job at his home Internet connectivity. So I'm really impressed with the the sturdiness of that operation that hasn't missed a beat.

Okay, that's great.

And.

I'm, saying on no exactly.

I <unk> Nike more <unk>, he pie, obviously I stallion.

Yeah.

<unk> okay.

So.

[noise] tag and pride dig that out for your hair five I get to the right that piece of paper I'm, a little short on it but I don't see it just proportionally in any one location versus the other so obviously I haven't saying proportional to our revenues by geography.

But I'll look at it if you have another question, but I'll take a look at it they've dug this out so.

Well that was yeah yeah.

I got it here I don't see it that's being disproportionately different bike country.

Other than the Gallagher massive matter that we talked about.

Okay. That's me [laughter]. Thank you very much.

Mostly they spend a nice night.

I think that's probably it two questions one and I just make a quick comment here will wrap it up again, thanks for joining the suspect eating we really appreciate would be in here.

Can see from our comments on focuses play now I'm a difficult evolving operating environment I'm confident we have to write platform people in strategy to manage true you cleaning bombing people benefit of all of our stake holders or employees. Our clients are carrying partners in our shareholders. Thanks for being with us.

All of our teenage.

Living in a great quarter again stay healthy everybody.

<unk> <unk> <unk> conference call you May disconnects you line at this time.

[laughter].

When they cut off.

Yeah.

[laughter].

[laughter].