Good morning, and welcome to Arthur J. Gallagher & Co.'s First Quarter 2014 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. .

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws.

These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call, and which are also described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today..

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

Thank you, Brenda. And good morning, everyone, and welcome to our first quarter conference call. Doug and I and Walt Bay are in New York. We have others in the room in Itasca so we'll be ready for questions. .

We realize that this was very short notice, so those of you that had to clear some items from your calendar to get on the call today, we really do appreciate it. Thanks very much for making it. .

You'll have seen from the press releases that we issued this morning that we intend to finance this acquisition partially with an equity offering, and we've been advised that we cannot discuss the proposed equity offering at this time. And therefore, we'll not be answering any questions with respect to the offering.

Having said that, I've been advised that I can, of course, talk about the acquisition to some degree and I do also want to get into our quarterly results. But let me just say that we are really, really excited about the announced transaction. This, we believe, is a coup for our company. This is an asset that is very well known in the marketplace.

It's an asset in a business with people that are very similar to what we're used to around the globe. Think about this as really extending kind of our U.S. regions. It's 2 regions that are about similar in size, New Zealand being one, Australia the other, to what our typical regions are, the 5 here in the United States. .

We've got a solid leader in Stephen Lockwood that we're very excited about. This builds out New Zealand in a way that we probably couldn't have accomplished this over the next decade, same is true with Australia. And there's a very nice operation in London that we think will be a great fit for us as well..

We -- the sales culture is solid with this acquisition. This is a firm that is focused on its customers, number one; clearly focused on their people, number two; and they sell right into the middle market, just very similar to what we do here in the United States.

We've known, in Australia and New Zealand, our people that are there have known these organizations for years, very, very excited about the fact that they chose to join us. Interesting, this was not an auction. This was 2 firms that selected each other, and I think a large part of that was really around the whole cultural fit.

So we're extremely excited to welcome the people in Australia, New Zealand and London to our growing company.

And as I say every quarter when it relates to mergers and acquisitions, this one in particular had tremendous amounts of choice and they chose to join Gallagher, as did the other people who joined us in the quarter that I want to welcome as well. .

Our journey continues. The Brokerage segment had revenues of $567 million, up 24%; EBITDA at 110 plus was up 34%; EPS in the Brokerage segment was up 32% at $0.29.

Risk Management had a solid quarter with revenue at $160 million, up 7%; EBITDAC at $26 million, up 8%; and our margin increased in our -- in the Risk Management segment 50 basis points, putting us just slightly over our 16% target, and we had nice margin improvement in the Brokerage business as well..

Let me discuss the rate environment a little bit. Our property/casualty carriers here in the United States continue to showed discipline around underwriting. They're clear that they're account underwriting, and I think that's good. I mean, what -- a good account that has had great losses and that deserves a rate decrease will get one.

But those accounts that need increases, and believe me, our underwriting partners can get as granular as an account, they are expecting to receive those increases. And I've said many times that this is an environment that I think is excellent for both our clients and us. We see this environment continuing. .

As our customers' businesses are also improving at this time, which you've got when you got a market that's asking for increases there and abouts, we can use our expertise to help clients deal with that. So you've got businesses improving on our client side.

We're not seeing a huge amount of increase in FTE hiring, but quarter-over-quarter for the last number of quarters, we are seeing positive signs in sales and payroll.

And so even with a small rate increase, our professionals and our capabilities allow us to show our clients' alternatives in program design and placement strategies that help us prove our value to clients every single day. .

I'm incredibly proud of our team. We continue to follow a strategy that's focused on 4 things that I've mentioned to you many times. We're focused on organic growth, we want to continue and we have a very solid pipeline of additional mergers and acquisitions. We're focused on margin improvement and continued development of our quality capabilities.

And lastly, we focus and work very hard, day in and day out, on our culture..

And I'd like to spend a bit of time on the culture. First and foremost, every single day, we get up and we focus on clients. We want to keep what we have and aggressively sell new business. Gallagher is a sales machine. Secondly, we focus on our people. This really is our product. These are the folks that day in and day out prove our value.

They interact with and care for our clients in a way that is professional and yet very, very personal. When we eliminate barriers both inside our company and outside of our company to provide our clients with Gallagher's best and to help them grow and develop their business, we become true business partners.

When we provide an environment of professionalism and professional growth, we attract and retain the best people in our industry. I truly feel blessed and believe that I am privileged to work with the best professionals in the insurance industry..

Now one last comment on culture. During the first quarter, we received word that we would once again, be recognized as one of the world's most ethical companies. This is a big deal. This is a really big deal. There were literally over 1,000 companies that applied for this designation and we were one of just over 100 that received it.

This is the third time we've received this recognition and believe me, this is not a shoe-in. We are really, really proud of this. .

And to my colleagues, I say thank you and congratulations. To our customers, carriers and other stakeholders, I say we will always be committed to the highest standards of moral and ethical behavior. We're excited about our first quarter. We're very excited to welcome our Wesfarmers new teammates.

And with that, I'll turn it over to Doug to talk about the financial results. .

Thanks, Pat, and good morning, everyone. Thanks for jumping on to this. It's terrific to have a great start to the year with a great quarter and obviously, we've been busy on the M&A front. And so I'm going to clip my comments a little shorter on the press release today so that we can spend some more time on Wesfarmers and the overall transaction. .

First of all, in the face of the press release, a couple of things. There's nothing on the face that I would say is unexpected. You see the normal adjustments for bookings, our integration costs, workforce termination and acquisition-related adjustments.

But overall, on the adjusted basis, the Brokerage business had an excellent quarter, being up 34% EBITDA and 32% in EPS. .

In the Risk Management segment, a nice quarter, solid, organic growth. And in this, recall that we picked up a claim portfolio transfer with a large insurance carrier that recognized our capabilities. That's coming through our accounts nicely. That is excluded from organic growth.

So as you look at the organic growth for the Risk Management segment, it reported 6%, but there's about $2.5 million that came from that book transfer. We refer to that as an acquisition. That would have fueled organic growth. You look at that element of this by another 1.5 points. .

When I look at -- when I flip to the second page and I look at the organic growth, I want to make a couple of comments on base commissions and fees. A couple of things, in the 3.3% organic on just the base commissions and fees, the U.S. business was around that 3%, probably a little bit above it. Our international was slightly below it.

If you look at wholesale versus retail, retail outperformed wholesale a little bit, but by and large, all of it in that solid 3%-plus range. .

Also noteworthy, because this is seasonally our smallest quarter, I encourage you to take a look at our investor supplement that we post on the website and when you go back over the last 20 quarters, you'll see that in each of the last 5 years, our first quarter organic growth rate lags what you see in the next 3 quarters.

So I think in every single case, our first quarter organic growth, and this is natural. In our environment, our people press pretty hard to push towards getting accounts up and running by the end of the year, just the way the natural tendency is.

And so because we're seasonal, I don't know if it was the chicken or the egg, we just have a pattern of reporting slightly less, maybe 1 point less of organic growth in the first quarter than we do in subsequent quarters. So I don't see -- things, certainly, can change going forward, but I see that as a pattern that's noteworthy of looking at it. .

As I look through it, we didn't have a lot of nonrecurring wins. We did have one market that lost its rating right in the middle of a renewal that may have put a slight damper -- maybe 20 basis points in terms of organic, but by and large, nothing stands out in terms of organic on that. .

When you look at rates and exposure, we're still less than 1% coming from rate and exposure. This is an environment where just new business is outpacing loss business. And I would say that that's consistent with what we've been saying for the last, really, 8 or 9 quarters. .

Staying on Page 2, but moving down onto supplementals and contingents, a tremendous quarter. And really, I think that when you look at the supplemental and contingent line, this is an industry -- indicator of, really, the health of the insurance industry. I think it shows the continued growth that Gallagher has.

We're growing with our good -- with our carrier partners and the book of business that we're growing is profitable, so I think that this is nice recognition of the work that Gallagher is doing in order to grow our business with our -- with the insurance carriers. .

When we move down to the compensation ratio on Brokerage, you'll see that we improved there. This is good discipline on harvesting some of our productivity gains. So you're seeing an improvement in the compensation ratio there, so that's good work to the team.

And nothing stands out on the operating expense ratio, translates on the top of Page 3 into nice margin expansion for the Brokerage segment.

Obviously, the roll-in of Giles and Bollinger did help that a little bit, but probably 1/2 of that growth was related to them coming in at just naturally higher margins and the other was just the fact that we improved margins on our -- on the rest of our book of business, so up -- being up 150 basis points probably split between acquisition roll-in and just natural expansion.

Obviously, we'll get back to acquisitions in a bit. .

I want to move to Risk Management. We talk about the book transfer. Good solid organic growth, coming both domestically and international there. I had an opportunity to spend time down in Australia, obviously, over the last couple of weeks.

And I just have to tell you, what's going on in our Australia operations down there and bringing self-insurance in and -- to the work cover schemes into commercial carriers down there continues to be a nice, nice win for Gallagher. And I think that will be a nice complementary aspect of what we're doing with the Wesfarmers group..

The comp ratio, nothing stands out. It's up a little bit, but you see that sometimes in our first quarter because of the way we give raises. The operating expense ratio continues to show that we get better as we do things. But overall, to be up over 16%, I'm on the next page now, it's a nice recovery.

If you recall in the fourth quarter, we were slightly below 16% because we got hit by a couple employee-related severe medical claims. It's nice to see this unit rebound and be well up over their 16-point target for the quarter..

Turning to Corporate segment. Corporate segment had a solid, solid quarter in clean energy. You'll note in there that we executed a transaction that triggered about a $14 million after-tax gain. What that is, is that we have -- we purchased back portions of plants that we had previously sold off at a substantial discount.

We did sell because our growth and appetite for tax credits is growing. Our partner that was in those plants, a tremendous part of their appetite for tax credits was decreasing because of their tax position, so we saw this as an excellent opportunity to take those portions of plants back.

Of course, the interplay with that is when you get a chance, you go through our supplement and you look at what's happened with our outlook for the rest of the year.

You'll see not only has it gone up by this $14 million gain, but because we now have these plants and the continued rollout of the plant, we've actually upped our guidance and outlook for the Corporate segment clean energy investment. So a really solid quarter and good work to the team there..

I think also a noteworthy item is our income tax rate in the Brokerage and Risk Management segments continues to migrate lower that on a standalone basis, and that's because of the mix of our international business in lower taxed jurisdictions.

So you'll see that our tax rate, when you do the math, came down a couple of points in the quarter but that's through economic difference between earnings in foreign jurisdictions at a lower tax rate than in the U.S. So that's -- as we continue to expand internationally, that's good work..

All right. So I'm going to leave the press release now and let me jump into the acquisition of Wesfarmers. First and foremost, we think this is, in fact, a tremendous fit for us. Two really, really, nice units there in New Zealand and Australia, and a nice little bolt-on piece in the U.K.

All of them are running nice margins and it's an accretive deal for us.

We're excited about that and we think that the opportunity to join forces with them, the spread of mix of business is nice medium, medium-sized accounts, feels a lot like us, good 20 to 30 branches in Australia, 20 to 30 branches in New Zealand, while next to no market share in Australia. We've got a nice market share in New Zealand.

But in both places, we see an opportunity for a relationship together as being able to grow that business. .

We know that business down there. We have a nice organization run down there on the Brokerage side that's got $30 million to $50 million of revenue in Australia. So we do understand that business, but the fact is that we're not going to trip up over one another.

There's going to be very little integration that goes on down in Australia and New Zealand, other than maybe trying to system share, rent share with some of our locations and with the Gallagher Bassett operations that are already 1,000 folks strong down in Australia. So we will be able to pick up some back office efficiency.

The critical mass that we get out of that business down there really allows us to save some money. .

The other thing, too, is it presents a ripe opportunity for us to continue the bolt-on acquisitions down there. We are seeing lots of brokers that have an interest in joining Gallagher. We picked up a nice new merger partner in New Zealand, coincidentally, last week.

The Gallagher story sells well down there, and I think now having the Crombie Lockwood and the OAMPS folks on-board to tell a combined story, I think we've got a good place. .

In terms of the organization itself, Wesfarmers did a great job of making this a well-controlled and financially-disciplined organization. I think that, that fits well with what we are trying to do on the financial side, the budget and planning side, obviously, the control side.

So we found a -- that the hard work that Wesfarmers put in to make this a part of a public company should be great for us when it comes to transition on that. .

In terms of what it also does for us in terms of market relations, Pat may make some comments on that.

The fact is we're getting bigger with our carriers down there and this will really put us in a position to be in good shape with them and then I'll let you talk a little bit more about the trading relationships with London, wholesale operations, et cetera. .

So overall, on the financial side, one of the things to think about, let me go back and make sure that -- we filed an acquisition set of slides on the Internet on our website. If you have a chance to take a look at those, I really would encourage you to read through the points in there, obviously.

But there's a couple of things that I'd like you to look at. Page 8 of that, most notably is the valuation. And if you don't have it in front of you, if you look at this deal, we're paying USD 933 million for it. It'll come with net assets of about $45 million, $46 million, so it will be an $887 million U.S. transaction.

We think with synergies, this business will be at somewhere around 80 -- excuse me, $98 million to $99 million of EBITDAC. So that puts it out on a multiple, for us, of about 9.0. .

There's also an important footnote on Page 8 that I'd like you to make sure you take a look at because of -- if you look at the tax rate in Australia being $0.30 -- 30%, we intend to, in some part, repatriate those earnings to the U.S., not in all, but some parts of that.

And as a result of that, we think that the effective tax rate for the organization could be south of 20%. We did this for illustrative purposes on Page 8. And if you take that into consideration, it brings our multiple down to about 7.8x EBITDAC. So we believe that's a very, very fair multiple.

It's a great sale for Wesfarmers and it's a great buy for us. It really is a win-win situation, a lot to do because of the synergies that we can get and then also because of the tax rates that -- differential that we can bring to bear. .

The other thing, elsewhere in the document back on Page 10, we give you a computation of accretion on this deal, under the hypothetical amount of shares that we would use in a mix of using cash on hand, 2.25x debt in the structure and the remainder in share issuances.

It shows, and you can look at this, whether you want to use, integration, non-integration, reported versus adjusted, but it's anywhere from $0.09 to $0.17 accretive. .

And there's also an important footnote on Page 10. Those numbers do not factor in the additional tax benefit that we will get by being able to keep more of our credit, which could produce additional accretion of $0.07 to $0.10 per share.

So on a bid/ask spread difference, you could have it anywhere from $0.09 all the way up to maybe as much as $0.27 accretive on this deal, depending on how you choose to look at it. We believe the ability to have a lesser tax rate is important for Gallagher, but just even on just a standalone basis, it looks like it's nicely accretive there..

I think those are my comments, financially. I think that in this deck, maybe we'll flip through a few more pages.

Pat, why don't we move back to some more strategic rationale for doing the deal, and then we'll open it up for Q&A, right?.

I think when you take a look at this opportunity, the issue for us in Australia has been we've got a great team, we did an acquisition there, a number of years ago, SPA in Perth. We've been building out that, we've been looking at bolt-on acquisitions, but we really haven't had scale.

And so now this gives us tremendous scale in Australia, New Zealand and we'll be one of the larger brokers in the region. As Doug commented, it will clearly allow us to do more bolt-on acquisitions. So I think there's tremendous opportunities for growth in Australasia, in general.

And I think that the combined organization will be very attractive to potential partners. This will also, I think, give us a very good platform in that region to look at Asia Pacific from a more close location than trying to do it from London or the United States. .

Again, the firm that we're buying does very similar work to what we do here in the United States. There's a lot of small- and middle-market of clients that fit nicely in with us. There are good cross-selling opportunities. We're very strong as -- in the Risk Management side.

Gallagher Bassett Services in Australia is a very strong -- one of -- it is the strongest TPA and one of the few that's licensed to do adjusting across all states. And that will give Gallagher Bassett a lift with some hopeful, really good cross-selling.

As I said, their sales culture is very strong and I think that will also give us opportunities to build out more of their London operation as well as our operation. .

So all in all, a great deal. I think that the Wesfarmers folks, as Doug said, were extremely disciplined. We are getting an organization that comes to us very buttoned down. They were in the process of getting ready to potentially do an IPO when the idea of combining our firms was brought to them.

So this is a firm that we feel very, very good about in terms of control, growth, cross sell, people, culture, sales opportunities. Well, you know me, I could continue to go on. So with that, I'll just turn it over for questions and answers. .

Brenda, you want to open this up?.

[Operator Instructions] And our next question -- our first question comes from the line of Sarah DeWitt with Barclays. .

I wanted to ask some questions on the Wesmark [ph] acquisition.

Could you give us a little background on the Australian market and the environment there? How competitive is that market? What's pricing doing?.

Yes. And Sarah, it's Wesfarmers. .

I'm sorry. .

No worries. But I figure they're probably listening in, we've got to get their name right. The market is a little bit squishier there than it is here in the United States. The economy was booming in that area from natural resources, in particular, we got some real benefits of that as we did the SPA transaction in Perth. That has slowed a bit.

China is kind of pulling their horns a bit in terms of their continued appetite for natural resources. But the economy is still probably a little bit more robust than we see here in the United States, and the market is probably just a tad softer there than it is here.

But all in all, a very good sales environment and one that we think that over time is -- again, the underwriting discipline that we're seeing in the United States is something that we believe we'll see globally. .

Okay.

And what is their organic growth been?.

In the low-single digits. I would say that it's been on pace with Gallagher's. There's a couple of noteworthy -- I mean, New Zealand has been on fire and has been all the way through the -- even in the global recession. The U.K. has been steady.

Australia has been steady, but I would say that the growth excitement that we're seeing in New Zealand, we think that could be infectious inside of Australia. Steve Lockwood and his team down there are doing a tremendous job in order to make those 2 organizations feel a lot the same.

So I think that there's good opportunity for them to be a part of us and continue that growth. .

Sarah, I was down there last week and had a chance to interact with our Corporate group that has -- we got about 20 -- about $30 million of revenue down there.

I'm going to tell you that the excitement about the opportunity to really push organic growth from our troops, the brand strength that this brings to them, they've been fighting above their weight class and get -- believe me, I understand what that's like, because when I started off selling, nobody knew who Gallagher was.

So they've been trying to tell a story down there that Gallagher's different, we're unique, we've got these capabilities. They've been very good at using our niche approach. We sent our niche leader on the college and university side down there, about 5 years ago.

We've got a very nice book of business in that area now, with I think about 7 universities that are now clients. But they look across our construction capabilities, our not-for-profit capabilities, our higher education and public sector capabilities and these people are chomping at the bit.

So I think that they've had decent low-single digit organic, but as we come around to planning time, I'll be expecting better than that. .

Okay, great. And then the numbers question.

What are you assume to be after-tax earnings of Wesfarmers on your accretion analysis on Page 10?.

The after-tax earnings in dollar amounts or do you want it in -- well, let's see if I can get that for you. .

Dollar amount would be great. .

Well, basically, you take the adjusted EBITDAC and you take it times 70%, and that would basically be the after-tax assumption on this business. And then, of course, you've got to label in the additional shares in order to complete [ph] the addition.

So there's -- in the grid on Page 10, it is assumed at 30% tax rate, all right? The footnote adds the additional accretion if you give credit to the fact that you're going to shelter about $12 million worth of cash flows that would've normally gone in tax payments, will be kept. Did we lose you? We heard a beep. .

No. No, that makes sense.

So what are you assuming for interest and depreciation then?.

Interest and depreciation, let me see if I can dig that out. I'll come back to the group on that. We -- I don't want to bog it down right now. .

And our next question comes from the line of Paul Newsome with Sandler O'Neill. .

I wanted to just revisit the organic growth in the quarter. I know you gave us a little bit of background, but it does look like sequentially, it was decelerated a bit.

Do you -- is that the right way to look at it? And could you maybe talk about whether or not you are indeed seeing at least the market environment decelerating a little bit in the first quarter versus the fourth?.

No, Paul, we're not seeing a deceleration in the first quarter. I -- as I said, I continue to be impressed with the discipline that underwriters are bringing to the marketplace. I've never seen a market like this in my career. This is my fourth cycle and to actually have about 3 years now going into our third year with disciplines.

Having said that, any account that is of any size that has got a good clean record that deserves to get a decrease when we market it, that's -- they are account underwriting. So I think the market is disciplined.

As Doug commented earlier, we have less than 1% of our growth is coming from market or from market rates or from the improvement in our clients' businesses, which is good because that means our people are doing a good job in the field of exactly what they should do, which is helping our clients get the best deal they can get.

I wouldn't get all hung up on organic growth in the first quarter.

Doug commented on the fact that over the last 20 quarters spread that you could see on our website, first quarter tends to be sequentially our smallest quarter, and frankly, it -- I think we pushed so hard to finish the year and we had such a dynamic year in 2013 that it doesn't surprise me that we'd be a little short to our norm.

So I'm not feeling like our sales process or our sales efforts have decreased, and I'm not feeling like the market has fallen out from under us. .

Knock on wood. And then an entirely separate question, maybe a little bit more on the synergies for Wesfarmers. You've talked about already the possible sales and cross-selling synergies.

Is the $13 million/$12 million that you're talking there purely a cost estimate? Or is there some actual revenue synergies in there? And any additional details would be great. .

Yes. Paul, thanks. Great question, actually. Of the $12 million U.S. synergies, $13 million actually that we expect, frankly, most of that comes from rent savings, systems, consumables, largely just expendables that would -- we would have going on. There is very little revenue uplift in those numbers.

We have intentionally not put that in there, but we believe the ability to trade with ourselves, the ability to get enhanced compensation from the carriers could be significant on and above that number. So we feel that synergies we put in there are, basically, all cost saves. There's not a lot of even headcount save in there.

Just illustratively, just not having a separate location in London produces lots of value, for instance, in rent. Now, the ability to just share some of the computer systems with Gallagher Bassett, the back office servers and everything, that's where it is. But the revenue uplift, we see that as a spot.

If it holds true on what we saw with Bollinger, Heath, Giles and now Oval, that our ability to get more bites at the apple, so to speak, just to -- just providing more services between the capital providers and the customers, we have opportunities for a substantial revenue uplift. So that's -- hopefully, that's it. Let me answer Sarah's question.

The interest was about $11 million, depreciation was about $5 million in the calculation of our -- in terms of doing our accretion calculations. .

Paul, I want to hit on your questions as well. I think Doug did a good job on that, but we really believe that our acquisition process is about finding ways to make 1 plus 1 equal 5, and this one should equal 7. .

[Operator Instructions] And our next question comes from the line of Brian DiRubbio [ph] with Typso Capital [ph]. .

Two questions for you.

First off on the Risk Management side, Pat, are you seeing any improvement in actual claims rates or claims being filed in that business? Or is that still sort of as it has been over the last year or so?.

Ask the question again, Brian.

Do I see any -- are you asking me if I'm seeing any increase because of economic improvement?.

Yes, in the number of claims that are being filed through Gallagher Bassett. .

Yes, but it's -- yes, but if I'm your [indiscernible].

Of the U.S. domestic organic growth, 1 point, 1.5 of that comes from volume. Another 1.5 to 2 points to 3 points comes from just rate increase, so to speak, in terms of our -- the fees that we charge. .

Got you.

And I guess my second question, I don't know if you can answer this is, could you maybe give us some sense of why this particular mix of debt and equity to purchase Wesfarmers?.

Yes, I can -- listen, I think that the [indiscernible] is we look at our acquisition strategy over the course of the year. We always run into the complexities of the signing debt versus equity to a particular transaction.

Generally, what we do, as you'll recall, at the end of the year, we typically say, when you look at our -- all of our acquisitions as a portfolio, we end up doing about, let's say, 25% in free cash, 25% in debt and about 50% in equity issue, right? Now on our smaller deals, some we do for 75% stock and 25% cash; some we do for 100% cash.

International deals tend to be down mostly in cash versus direct equity just because of the listing issues and the professional investor rules that are so at the end of a year, we typically balance the books and stay as a portfolio.

And these assumptions here, we basically assigned a 17% of this business [ph] price would come from free cash flows, reflecting that there's other cash flows that will be used in other transactions and then 2.25% -- 2.25x EBITDA in terms of debt and the rest in equity rates.

So in this case, the dilution calculations were assumed, some free cash, some a normal regular level of debt at 2.25 and the rest in equity. .

We have one other question coming from the line of Mark Hughes with SunTrust. .

Could you give us an update on the benefits segment in the U.S., any impact from health exchanges, just how you see that playing out as you sit here today?.

Yes, Mark, I think that -- this is Pat, and Doug can get to the numbers. But we've been very clear on what we believe our strategy around the exchange programs are. And yes, we're seeing very good benefit from the new law to our consulting opportunities across the United States.

I've been very, very verbal in the fact that I think the law is probably a tragedy for America, but it's great for Gallagher, so I guess I got to like it.

But the complexity of the law and the amount of change that goes into that complexity continues to ratchet out of Washington literally every week, and it's very difficult to stay on top of, and so our clients really, really need the help.

Part of that help is having them sort -- helping them sort through whether an exchange solution is appropriate or not. And we don't have one exchange. We're not -- we have helped create a private insurance exchange, but we're not married to just one program or one product.

As consultants and brokers, we believe that our role would be to help our clients choose, if they want a solution that includes an exchange, which exchange they will use. And we do not see that as being a huge revenue uplift for us. We see that as being part of our normal day in and day out activity that we're responsible for.

And I think that really, if you step back, what's happening with our benefits folks, it's not just about health insurance. What's going on with this law, and I think it is helping clients focus on this is that they got to decide how they want to treat their people, and that's their total rewards.

What's going to happen? How am I going to figure out retaining and attracting the people I need to run my business? So for instance, very little in the way of clients saying to us, "Forget it, throw my people to the wolves. We're just not -- we're out.

We'll pay the penalty, they can figure it out, go to an exchange, buy it from the government." There's virtually none of that. As you're reading articles about people that have gone on to the government exchanges in the various states, as well as the federal government one, you'll see stories about sticker shock, about deductible sticker shock.

Well, our clients, they're not going to do that with their folks.

So the employers are staying very, very involved in this, but they're looking at it on a holistic basis that's says, "How am I going to keep my folks?" So there will be those that want a defined contribution approach as opposed to a defined benefit, and we'll help those people sort through which exchanges are their best answer.

And yes, we're seeing a lot of activity around that. I don't want to make it sound like -- there's a lot of interest. I believe every employer in America will consider defined contribution and exchanges. That doesn't mean that I believe 50% are going to move in that direction.

I just think it'll be one of many solutions that will be reviewed as they decide how they want to take care of their people.

Doug, you want to talk about the numbers at all?.

Of course, I do. The benefits business continues -- I mean, this is a well-run business inside of Gallagher. I think it's got a tremendous amount of expertise in it. As you know, at Gallagher, we don't have our benefit folks report up through the regular property/casualty reporting lines like you see a lot of other brokers might be doing.

We believe this is a separate, technical expertise unit that needs to -- many times, they sell to a different customer also.

And so the fact that we "siloed" this, which seems to be a negative word sometimes, we siloed this 20 years ago, and it's grown from a business that was basically doing $8 million of EBITDA to a business that's well into the $100 millions at this point of EBITDA. So we like the business, the margins are good on it.

It's not easy out there, but it's also a consolidating business. A lot of the smaller guys have a hard time competing in this, so we see lots of opportunity for this, both domestically and internationally.

Even though when you look in countries like the U.K., Australia, New Zealand, Canada, where there's socialized medicine, there's still lots of employee benefit-related products to be sold and a lot of consulting that goes along with those decisions that human resource leaders need to make.

So this is a business that is hitting on all cylinders inside of Gallagher. .

And as Doug mentioned, very strong help on the acquisition side. What we're finding is that people that are joining us really need our resources. .

Our next question comes from the line of Ian Gutterman with Balyasny. .

I just had a few clarifications, I guess. Pat, first, just to address the organic again, if I can. The -- I appreciate your point about Q1 being weaker, and you can see that in the historical numbers. But last year's Q1 was up 5%, and this year's Q1 is only up 3%. So it looks like at least year-over-year that it got a little tougher.

Is there anything you could attribute that to?.

We wrote less business as a percentage this quarter than we did last year. And I'm not trying to be flippant, but I don't get jazzed up about 1 point here or there on a quarter. I see our pipeline, we use the salesforce.com, I see our new business, we're writing millions of dollars of new business a week.

The pipeline is solid, and I'm very, very comfortable that the sales coach [ph] will be good. So as you're looking through our numbers and you're trying to find systemically something that's changed, what I'm telling you is nothing did. .

Perfect, that's what I wanted to know.

Was there any weather -- that was the only other thing I was wondering, was there any weather slowdown?.

Yes, all of us in the North couldn't get out of our house, nor did we want to. .

Exactly. Okay... .

Let me amplify that, that when we looked down through this that we just -- it's solid across all fronts, and it's just the natural pullback that happened in the first quarter a little bit. .

Got it. And then, Doug, on the contingents, there was -- you addressed that, but there was a big pickup.

Obviously, some of that is the environment, but is also some of that just the acquisitions? And as you've grown that, that we should expect -- I guess what I'm trying to ask, because I know Q1 is always a high quarter, but as I look out for the rest of the year, is sort of the year-over-year increase in Q1 a reasonable benchmark for the rest of the year?.

I think that we put on the back of the release, I believe we have a table and it allows you to kind of do a site tick quarter-by-quarter. Let me see here. .

Yes, I got it now. Okay. .

Yes. So I would encourage you to use that table to help you get your head around it. It's below the balance sheet that -- but I wouldn't say you would have such an [indiscernible]. The other thing, Bollinger and jobs did have contingent commissions that were coming in, in the first quarter that fueled that.

Now we take that out in organic, but overall, these are solid numbers. And I think that where we are in the cycle in this firmy [ph] market -- or the steady market cycle, this is good indication that there's value-add here. As you know, we talk about our base commissions and fees and we break out supplementals and contingents.

There's always a little geography in some of those. And 1 year, a carrier might decide to have us work on a supplemental and another year to have us work on a contingent. But there's nothing that I saw in these numbers in the first quarter that would tell me that there's a major shift one way or another, but it does impact how we classify revenues.

If somebody chooses to pay us a little bit more on a supplemental and a little bit on a base commission and fee, that can affect the organic. If they choose to move us over to a contingent, it can impact the organic that we tend to use as highlight organic on this.

But by and large, there's nothing out of whack in this, one way or another, other than the fact that we continue to show our value to the carriers. .

Got it. And then my last one on the energy side, stripping out the $14 million, obviously, but when I look at the projections, the Q2 through Q4, some of the quarters changed. But in aggregate, it doesn't look like it's changed a lot from the prior quarter's projection.

But Q1, the $7 million sort of core positive versus, I think, you're projecting a loss. Can you just give us any color sort of given that the change in demand, the ownership and everything, is there a reason all of the benefit from that sort of comes in Q1 and the rest of the year steady? Or I'm just trying to think about what the right way to... .

Well, I think that the real question is, are you looking at the projection of clean energy or corporate? Let me just ask that to clarify your question. .

I meant clean energy. And obviously I did this very quickly this morning. But I'm looking at the clean energy line in the corporate tab. .

Yes, all right. Let me grab that, and I'll be able to speak to that actively.

Actually, I think in the clean energy line, last -- when we made our estimate at the end of last year on the clean energy line, we were looking for somewhere around -- a range of somewhere around $73 million, if you split the low and the high end of the range, so $73 million.

And kind of the midpoint of the range now is somewhere around $94 million or $95 million right after tax. So $73 million, there's actually like a $22 million delta there between old and new, of which $14 million of it came from the gain. So we have actually improved our overall outlook on that by about $7 million for the rest of the year. .

Right. And it just seemed to me that whole $7 million showed up in Q1, right? The original Q1 was minus $2 million to minus $5 million and you hit at $21 million. So you beat it by $23 million to $28 million, $14 million of that being the tax.

See what I'm saying?.

Yes -- no, I know what you're saying. Yes. Because of recognizing the gain in the first quarter, remember what happens on this is that we have a proportional recognition based on pretax earning, so we actually accelerated the recognition of credits in the first quarter to shelter the gain that we took in the first quarter.

Page 15, if you pull out this -- Page 15 in the supplement, this quarter versus last year, we show how the difference in the emergence of credits recognized were versus credits produced and, yes, you do see that -- it's basically because you take a gain in the first quarter of $20 million, you got to put up taxes of $6 million or $7 million, so you pull credit into the first quarter to cover that for the accounting, and then you pull it down.

So I don't make the rules, I just follow them. And so -- but you're right, that's the way to look at it. .

Okay, got it. That's all I have. .

Sorry for the long-winded answer, but that's the answer. .

We have our next question from the line of Paul Sarran with Mesirow. .

Your pro forma accretion estimates for Wesfarmers assume 13 million to 13.5 million shares issued, but the offering is for 19 million.

Is there something specific that those incremental shares or the funds from those incremental shares are pegged for?.

That's something that's better served for our conversation when we talk about the secondary offering, and I'm just -- I just can't answer that question right now. .

Okay.

When does that conversation take place?.

We're currently taking advisement right now on when to -- we've made the announcement that -- of a secondary and we're working on that right now. .

Okay. So then, just a question specific to the Wesfarmers deal. There's some mention of premium funding business included in what you acquired.

How much of the revenue and EBITDAC did that contribute?.

Two questions. One of the things that I just want to make sure that we wrap up, I think -- well, I can't really comment on it because of the -- on the equity issue.

And even if you take the entire 19 million shares that you mentioned that we discussed in our press release this morning and you run it through this accretion calculation, it still comes up to be $0.03 accretive plus the tax. And so even if all of the shares were assigned to this deal 100%, it's still an accretive deal.

I probably should have answered that way first just by the pure math.

And then what was the second part of your question?.

The question as a funding business. .

Oh, the premium funding business. First and foremost, for those of you that aren't aware, Gallagher does -- through its 3 primary trading partners in the U.S., we do a lot of premium funding business. In the U.S., carriers are much willing -- much more willing to offer installment billing terms than you see in New Zealand and in Australia.

So the premium funding activity is more part and parcel to the Brokerage. It's a real value-add that we bring to the customers. In terms of the revenues that get produced by it and the EBITDA, it's around $50 million, and the EBITDA is in the mid-teens or upper teens, depending on how you commute -- compute the interest carry cost.

If you assign a full third-party borrowing rate to that, obviously, it pushes your -- I hate to use EBITDA, but if you'd assume EBITDA after interest associated with the funding, then -- I'll use that term, then you're in the mid-single-digits.

If you assume a borrowing that might be more conducive to Gallagher or Wesfarmers, you improve that to nearly 20% or more. This business, as you know, all these receivables are collateralized by the right to cancel and get return premiums from the carriers. I believe nearly 100% of that business is that way.

The right to can is available in New Zealand and maybe 80% flat in Australia. We just don't have credit losses in this business. So we have -- Gallagher has substantial experience with this in the U.S. through our trading partners, and we like this business in Australia and New Zealand. So this will be a nice business for us down there. .

And our next question comes from the line of Ken Billingsley with Compass Point. .

I just wanted to clarify, I know you were just assuming that if all the shares from the recent offering were applied to the Wesfarmers deal, did you say it would be $0.03 before tax? Is that correct?.

$0.03 before the $0.07 to $0.10 of -- actually, it'd probably closer to $0.05 to $0.07 with the full 19 million shares in it. .

Maybe $0.05 to $0.07?.

Of additional tax, so you'd be somewhere between 3% without the tax benefit and another, let's say, 4% to 6% with the tax benefit. So you can get as much as $0.10 even on the full 19 million shares. .

And that assumes, obviously, that there are -- margins remain the same as they are currently, correct, with some synergy improvement as well?.

Correct. Right. Now remember, these are fiscal year '13 numbers ending June 30, '13. So as the result of making sure that we're tying back to audited financial statements, you've got a year in arrears look on this. And we see -- as we did our due diligence on these organizations through March 31, they continue to perform and grow.

And so through those numbers, it's not on a pattern with the historical one. .

Okay. The -- and to clarify from the shares that are outstanding, at least to be offered, obviously, even though the current offering, which could be up at nearly 22 million shares with the shoe, and I believe you have a 8 million share announcement that you just did, plus at the money offering.

Can you tell me about what's still outstanding potentially to be the issue?.

We issued next to nothing in the aftermarket offering. It would still sit out there and be live, but it's not something that during this process we would use, and the 8 million was allotted to do acquisitions going forward -- during that process. Obviously, during this process that -- we're not using shares. .

Okay, I understand. And then the other question I have is on the coal operations. The expense margin versus the revenues that are being generated, it seems that, that has improved.

Is there -- was there something that occurred this quarter that maybe was different for some prior quarters? Or is that a trend that we would expect to see continue, whether days in operation or number of plants opened?.

Well, listen, I've always cautioned everybody that to be able to look at the components of revenue and expense on the coal plants is very difficult to do because sometimes, you have revenues as we buy coal. Sometimes we buy it at $100 a ton and we resell it at $102 a ton. That's a different outcome than if we buy [indiscernible] a ton.

So I would caution you that the -- drawing any conclusions about the margin on that business on a pretax basis is very difficult to do and probably not productive because at the end of the day, it typically costs us X amount per ton in order to do it and we get Y amount of tax credits, and the differential is what comes into next -- into net earnings.

But also, you get the impact of consolidated versus unconsolidated plants. If we own less than 50% of it, generally, and we don't control it, then we wouldn't consolidate it and all we're doing is picking up the aftertax equity and earnings in it then the tax rate. So there's nothing different going on inside of the building.

It's just peculiar accounting that might be causing you to come to those observations. .

Last question is -- I believe your 4 largest acquisitions have occurred in the last 12 months or so, or will have. From a management operational standpoint, a lot of these acquired companies have better margins.

What is in place from your side to make sure that those margins don't slip and it's a lot of revenue to integrate in a short period of time?.

Our benefits operation, our wholesaling operation and program management company, as well as our Northeast region for our property/casualty retail business. And that's going extremely well. Oval will integrate nicely in the U.K. Giles is complete. Heath was very, very much integrated.

And so I feel like we're really not straight in the organization in any way in terms of getting these things integrated. Doug, you can touch on the margins. .

Yes, I think the nature of the book of business that we're buying just depends on the clients how do they serve.

In certain cases, when you look at a small specialty SME business that you see in New Zealand, that you see in certain aspects of New Jersey with Bollinger and you saw in the Giles transaction, they're serving smaller to smaller middle-market customers.

And the service load on those customers isn't as high as it is, let's say, when you get up into a more sophisticated risk management. Oval, for instance, it plays at a slightly upper end to lower higher end of the market in the U.K., and its margins aren't where Giles were, and rightfully so.

Those customers deserve a different level of service or require a different level of service because of the complexity of their programs. So in this case, it happened to be that we -- that in Australia and New Zealand, New Jersey and on the Giles transaction in the U.K., the margins are all plus or minus in the 30% range on their basis of reporting.

When you look at Oval, it's somewhere down in the lower 20s, and that's because they serve a different clientele there that requires more service.

And you see that inside of Gallagher depending on -- our Risk Management customers require different levels of service in Los Angeles, let's say, than maybe the small accounts that are in Orange County, for instance. I'm just making that up by illustration. So there's nothing necessarily.

How do we keep that from slipping? Is it because we continue to do what we're doing with those customers the way we've been doing it? Except for, truthfully, we can now spread some of the common costs across a larger platform. So really, all ships rise on that.

We see these businesses as being -- remember, Gallagher tried to not run -- or to buy poorly-run business. If they're not making money currently, we typically don't have much interest in having them join our family of organization.

So we like nicely run businesses with management that's proven how to make money, and we think that they will continue to be able to do it and even more so with our resources. .

[Operator Instructions] And our next question comes from the line of Scott Heleniak with RBC Capital. .

Just wondering if you could touch on the -- you mentioned a potential for further bolt-on acquisitions in U.K. and Australia.

I'm just wondering if you could touch on that, just how many potential candidates, what kind of pool of properties is available? I know in the U.S., there's sort of 8,000 to 15,000 brokers, and I'm just wondering if you can give us some detail on that, what kind of opportunity there?.

Yes, Scott. Well, both the U.K. market and the Australian market and New Zealand market, are fragmented markets. There's not as much opportunity in those countries as we have in the United States because we have probably 30% of the gross-written premium in the world was written in the United States. And so I think that just gives you a huge leg up.

We've got 300 million people here, and in Australia, you got 25 million. So -- but nonetheless, the business is fragmented. I've said this before, if you look at it on a global basis, literally, if you looked at all insurance spend and you added Marsh and Gallagher and Willis together, we wouldn't have any market share.

So in a fragmented business that is a global business, the opportunities to do bolt-on acquisitions is just outstanding. And our pipeline in the United States is incredibly robust, and it's very strong in the U.K., and we'll see how we build it.

Now one of the nice things about the -- probably Lockwood in particular, is that they have been very, very good at doing acquisitions, and they're excited about the fact that we would like them to continue to do that.

So I think you're going to see that -- we'll probably always have, in terms of item count, more rolling into us in the United States than we do elsewhere, and we think the opportunities are terrific. And we said that when we did Heath 3 years ago in the U.K., that we needed a platform to be able to attract these firms.

And we've probably brought on another half a dozen to a dozen firms into our U.K. operation because we had the platform to do it. .

Yes. Let me pile on that. One other thing, too, is that we talk about the opportunities for acquisitions and consolidation. The other thing, too, to realize is that at a sizable organization that we are and with our culture, our internship program is developing young people on an annual basis of coming into this business.

One of the things that you're going to see is that just the number of retirements that are facing the insurance industry bodes well for young people coming into the business. Young people don't want to come in to a business when there's 1 or 2 people in an office.

They want to be a part of a large global organization where they see career opportunities to come in, learn the trade, be successful in what they're doing and then have career steps to go on up.

I believe that as this business consolidates, regardless of whether it's 30 acquisitions a year or 50 or 100, the fact that larger brokers will have a competitive advantage about hiring young talent that will eventually, for the person that chooses not to sell out their -- let's say, their family agency or their own agency, our ability just to sell through them will continue.

I think that is a wave that's going to come over the next 10 years. And the smaller ones that choose not to sellout will have a hard time recruiting and perpetuating their agency. And most of them, their kids don't necessarily want to come in and take over mom or dad's agency.

So that's a big advantage to us when it comes to our global size and then just sheer size in Australia and New Zealand and the U.K. .

I know you know the U.S. market, too, but I mean, it's amazing to me. When you look at the Business Insurance July article every year, they rank the top 100 agents and brokers in the United States, to beat #100, you got to do $22 million of total revenue. So if there are 18,000 of them, there's 17,900 smaller than $20 million. .

No, I definitely know it's fragmented here, I just was wondering out there, but that's definitely good detail. The only other question I had was just on the Oval Group, which was a pretty good size deal for you guys, too, over $100 million of revenue.

I'm just wondering if you could touch on that, just kind of talk about what you found most attractive about that property because that's obviously a big deal for you guys, too. .

Yes, we're very excited about that. It's almost kind of, in a sense, too bad that the Wesfarmers didn't hit when it hit because it kind of overwhelms what we're doing around the rest of the world. But Oval is a terrific, terrific fit for us.

As Doug mentioned in his comment about the margin, if you look at what we're doing in the U.K., Heath did have some corporate risk management business, by and large, was mostly what we refer to as SME, small and middle-market. And when we did Giles, it was very much the same. It was actually some very small and middle-market stuff.

What we like about Oval is that it fits really nicely right on top. It's very heavily driven by upper-middle-market corporate-type risks, a very solid team of people, very well-lead, and it just fits very nicely into what we're doing without a lot of overlap in terms of client direction and client targets.

So if you think about it as kind of like the slices of the pie, this one fits in really nicely, kind of completing the whole pie. .

Yes. And the management team that comes along with Oval, too, is tremendous. Peter Blanc and his team over there, I think, are excellent, excellent brokers. Now they like to sell insurance, and that fits well with us. .

And by the way, I might as -- I'd like to mention this while I've got the public on. These were properties -- Giles, Oval, Bollinger and now, Wesfarmers, these are properties that, frankly, our competition really, really wanted. So I couldn't be prouder of our team in landing these.

These are some ones that could have easily been picked up by our competitors, and we're very pleased that we were able to succeed. .

Thank you. And it seems we have no further questions at this time. I'd like to turn the floor back over for closing remarks. .

Well, I'll start, and I'll let Pat end. On the financial basis, I couldn't be more pleased with how we've performed. This is another quarter of excellent financial performance on all of our units.

Listen, I think that when you look at something on a quarter-by-quarter basis, the consistency of our results, the delivery of our performance, nothing's smooth in real business.

It's pretty smooth on an Excel spreadsheet, but it's not necessarily smooth when you actually do it, and our team continues to execute against the plan, well financially disciplined.

And I think as the CFO, our financial metrics are -- continue to improve quarter-by-quarter, and I think the team has done a tremendous job out there in order to deliver on those results. .

And I'd just add that when I look around the network and, as you all know, I have a chance to travel the network pretty extensively, the team is really, really turned on. We're focused on selling new business and keeping what we've got. The culture is solid, and I can say it on a global basis.

And as we finish up a great quarter in the first quarter, we're excited about the rest of 2014 and quite honestly, it's good to be us. Thanks for being on the call. .

This does conclude today's conference call. You may disconnect your lines at this time, and thank you for your participation..