Patrick Gallagher - Chairman, President & CEO Doug Howell - CFO.

Elyse Greenspan - Wells Fargo Securities Kai Pan - Morgan Stanley Josh Shanker - Deutsche Bank Adam Klauber - William Blair & Company Mark Hughes - SunTrust Robinson Humphrey Charles Sebaski - BMO Capital Markets Quentin McMillan - KBW.

Welcome to the Arthur J Gallagher & Co's Second Quarter 2016 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 the conference call including answers given in response to questions may constitute forward-looking statements within the meanings of the Securities laws.

These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call 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.

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

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

Thank you, Donna. Good morning, everyone. Thank you for joining us for our second quarter 2016 earnings call. With me this morning is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

Today, we're going to touch on four key components of our strategy to drive shareholder growth, organic growth, merger growth, improving our quality and productivity which Doug will spend most of his time on, and fourth, maintaining our unique culture. We have excelled on all four, year-to-date. First, let me talk about organic growth.

In our brokerage segment, after a terrific first quarter of 4.8% organic growth, we posted 2.2%. But that was marked by the loss of a large account that we discussed at our June investor meeting. Excluding the large account, we would have been closer to 2.5%.

So for the first half, brokerage organic was 3.6% which in retrospect is darn good based on how I felt coming into the year, especially in this environment. Looking towards the second half of the year, I see our organic somewhere between our second quarter and year-to-date numbers. So I see an improvement going forward.

Let me break down our organic around the world. I'm extremely pleased, every single division posted positive organic growth in the quarter. Our sales culture is alive and well. Domestically, in the United States, we saw about 3% organic growth.

Rate and exposure had little over 1 point of negative impact on our domestic PC renewal result in the second quarter. Most of that was property which for us is proportionally higher in our second quarter. Domestic casualty line's pricing remained similar to last year, where we're seeing a slight downward pressure.

We're seeing a modest growth in exposure units overall. This remains an environment where our production teams can grow and outperform. Our domestic employed benefit consulting business also posted about 3% organic and is seeing a tremendous amount of new business opportunities.

Our teams are showing new prospects in our vast array of services, tools and insight that they need to navigate a tight multi-generational labor market, rising healthcare costs and increasing regulatory complexities related to the ACA. Our smaller competitors are falling behind each and every day.

This business typically grows more in the second half of the year and it seems to me that will be the case again this year. Let me move to our international brokerage operations. Since our last call, I've spent a significant amount of time in Australia, Canada, New Zealand and the UK. These teams are doing great. In fact, they're on a roll.

After just 24 months of being part of the Gallagher family, I'm really pleased with how well we're working together, how our sales plans are becoming integrated and how our culture is thriving.

All together, ex the one large account, our international operations posted about 2% organic growth in the second quarter, even with rates and exposures that are softer internationally that we see here domestically. I'm pleased that our teams are growing through those headwinds and the results are solid.

As a side note, it was really interesting been in the UK and Europe during Brexit. Remember, we don't have much business at all for mainland Europe. Insurance has been flowing in and out of London for over 300 years, long before the EU was formed.

So other than a possible recession hitting the UK and the other EU countries and your guess about that is about as good as mine, I don't see it as a worrisome event for us in the near term. Longer term, I think we, in the industry, will successfully navigate any potential changes to the European insurance landscape.

Next, let me move to merger and acquisition growth. Over the past two years, we've returned to our focus on smaller tuck-in mergers. The average size for the 13 acquisitions this quarter was $3 million of revenue and an average of 7 times EBITDAC.

So we're still finding really good opportunities at fair prices in the competitive merger environment, year-to-date 21 acquisitions which should add about $70 million of annualized revenue. We see a stronger second half of the year for acquisitions. Our pipeline is outstanding.

There are a lot of really talented, independent, family-owned sales and consulting professionals out there. They have excellent relationships with their clients. They have strong sales skills. They have a very strong entrepreneurial bent. They create value by joining Gallagher, where they have full access to our capabilities, expertise and resources.

I've said for 30 years, pick your partners that have a culture similar to Gallagher and look out. One plus one together does make three, four and five. I'd like to thank all of our new partners for joining us. I extend a very warm welcome to our growing Gallagher family of professionals.

So to wrap up my comments on the brokerage segment, halfway through the year, we've posted 10% total revenue growth, of which 3.6% is organic. Adjusted EBITDAC growth of 13%. Adjusted EBITDAC margin expansion of 60 basis points. Integration costs are starting to wind down.

We have an excellent M&A pipeline and fair multiples, truly excellent results through the first half. Next, I'd like to move to our risk management segment which is primarily Gallagher Bassett. Risk management had a more challenging organic quarter. But I'm really pleased that we proactively managed expenses and exceeded our 17% margin target.

Second quarter organic was challenged for three reasons. First, as we discussed at our Investor Day, we're seeing a bit of a lull in new business inception dates. Second, we experienced fewer new claims in the final two months of the quarter within the U.S.

Third, we recently learned that we're not likely to earn a large performance bonus award from our participation in an Australian work cover program, where we're one of five providers. For the fiscal year ended June 30, the program paid performance fees using 20 different criteria and several of the metrics had a big stretch.

Unfortunately, we fell short. You'll see in the organic table on page 6 of the earnings release that we earned nothing here in the second quarter in 2016. We believe the other providers fell short too, but let me be clear, I'm disappointed. Going forward, we will return to positive organic growth in the third and fourth quarter.

Our client value proposition of delivering superior claim outcomes is stronger than ever. In fact, we've recently renewed a big program in Australia and had two nice new business wins, one in Australia, one in the UK. Our domestic new business pipeline is solid. Let me move to clean energy. Once again, we had a great quarter.

The corporate segment earnings came in above the midpoint of the guidance range we previously provided. We're well on our way to delivering nearly 15% growth in annual after-tax earnings. Lastly, on our culture, over the past three months, as I said, I have visited the UK, Canada, Australia and New Zealand.

I could tell you that our unique Gallagher culture is thriving and strong across our entire global footprint. This includes the over 300 promising college students globally learning about the greatest business on earth in our internship program. We're just wrapping up the 51st year of the Gallagher summer intern program.

We believe the two-month program is an important investment in our future, as we like growing our own. So we've delivered an excellent first half of the year. The fundamentals of our business remain strong. We think the second half will even be a bit stronger. Over to you, Doug..

All right. Thanks, Pat. Good morning, everyone. Today, I'll do some earnings release housekeeping, spend some time on our quality productivity and margins. I'll hit on integration, highlight some clean energy items and then wrap up with some comments on cash and capital management. Okay, to the housekeeping.

You'll see that we made changes to our earnings release. We did so, because in May, the SEC published new guidance on the presentation of non-GAAP measures and we believe we've now gone the additional mile in the spirit of new guidance.

It makes the tables a little busy, but the punchline here is that we have not removed any of our previous disclosures as we strive to remain as transparent as possible. Also please recall that many of my forward-looking comments today, can be found on the document called, CFO commentary that we posted on our Investor Relations website. All right.

Let me turn to margins which are a nice indicator, in my opinion, of our quality and productivity. Brokerage adjusted EBITDAC margins are up 57 basis points. Then risk management margin came in above our 17% adjusted margin target. Year-to-date, our margins have expanded in both brokerage by 60 basis points and risk management by 33 basis points.

That's really terrific work by the team out there. Within the brokerage segment, margin expansion came mostly from our international operations. Recall that we believe there is an opportunity to expand margins in our Australia and UK retail businesses over the next couple years.

We've made good progress on that this last quarter, as our margin improvement initiatives have kicked in. Let me give you a couple examples. First, we've moved all of our transactional accounting out of London into Glasgow.

Once we clean it up in Glasgow, we then ship the work into our offshore centers of excellence which is really following the blueprint that we built here in the U.S.A over the last 10 years which allows us, when we bring new entities on, to move faster than ever before.

Second, as another example, in the UK, our retail team standardized core service related processes, such as endorsements, quoting and renewals across our 50 plus branches. In Australia, we've started consolidating our SME business from 25 plus branches into a few specialized centers that will focus on just small customers.

All of this work has driven down our back and middle office costs. As we apropos, we can capitalize on our scale. To me, what's even more exciting is, we've dramatically improved the quality of our services and our customer experience.

Every day our folks that work in the middle and back office, get up to be better, faster and wiser on how we spend money. Let me comment specifically also on integration. Recall that we did five large deals in late 2013 and early 2014. We're nearly finished with integration. I was in the UK a few weeks ago and the efforts to wrap this up are impressive.

I was in Canada in May, by the end of this year, we will have migrated nearly all of the six or seven business units onto the same agency management system we use here in the U.S.A. Second quarter integration costs were right on our forecast of $0.05 a share, about half of last year's amount.

You'll see in the CFO commentary sheet that we're anticipating about $0.06 to $0.07 total in the last half of 2016 in integration cost which is down dramatically from the $0.21, we spent in the last half of 2015. So our efforts are well on track to be done by early 2017. Let me turn to the risk management segment, Gallagher Bassett.

Over the last several years, we've been improving our service offering to deliver better claim outcomes. Much of the back-office improvement is very similar to what we have done in the brokerage segment.

But in addition, we have improved the tools our adjustors use, such as automating manual and high-volume processes that are really necessary to do a great job, but frankly, can bog our folks down. We've also shifted nearly 1,000 associates into work from home locations.

We've developed some specialized centers to focus on complex, specialized case management. These efforts have allowed us to improve our margins in the risk management segment over the last couple years and should allow us to post margins for the year in the neighborhood of 17.5% which is up from our previous target of 17%.

Shifting to the corporate segment, we landed $0.01 or so above the midpoint of our guidance that we provided during our investor meeting in June. Most of this was due to better clean energy earnings, because our plants ran ahead of plan in June, due to the hot weather that hit various parts of the country.

We're still forecasting between $110 million and $120 million of net earnings for the year. The first half was a little stronger, but the full year should be about where we estimated six months ago. It's also important to note that by the end of the year, we will have over $400 million of credits on our balance sheet.

Effectively, that's a $400 million receivable from the government that will help us reduce our cash taxes paid for many years. As for cash, we've got about $150 million of available cash on our balance sheet. We're making really good progress in our UK bank account consolidation efforts to unlock available cash that we've talked about before.

I think that we're down about 30% in the number of open bank accounts since the beginning of the year. As for stock, we used no net shares for M&A this quarter. We actually bought some shares back during the Brexit market sell-off. We'll use those shares on some future tax rate exchange mergers coming up this year.

So when you look back, we haven't used any net shares to do M&A in over a year. I think we can fund deals with cash and debt through year end. So, those are my comments. I think it was an excellent first half of the year. Back to you, Pat..

Thank you, Doug. Donna, we'll take some questions-and-answers now..

[Operator Instructions]. Our first question is coming from Elyse Greenspan of Wells Fargo. Please proceed with your question..

I was hoping to spend a little bit -- get a little bit more color on your organic growth outlook that you provided for the second half of the year, in the range I guess of 2.5% to 3.5% or so given the Q2 and half-year one levels.

How do you see that kind of shaking out, domestic and internationally? Then if the organic growth stays at that -- comes in at that level, do think that we could see the same degree of margin improvement in the brokerage business, that we saw in the first half of the year in the second half?.

Well, first of all, when we post the organic growth that we posted, overcoming a large lost account which is -- the good thing about large accounts is they're great when you write them. They can make your results lumpy especially when you lose them. So that's not a positive note.

So I think going forward, we don't have any of those that I know are under attack right now. So I think a return to a more normal 2.5% to 3.5% organic is in sight. As it relates to margin improvement, where we see that opportunity is again, as Doug mentioned in his comments, Australia and the UK.

The little caution I have there is that those markets are a bit softer than what we're seeing domestically..

In terms of margin, where do we see that? I think in that range. We've always said, it's tough to expand margins if organic isn't above 3%. If we're above 3%, we might get a little bit of margin expansion. If we're below, I think we'd be able to hold margin in..

In Australia and New Zealand, you said is still bit softer.

But you saw in the second quarter, would you say that represented sequential improvement from the first quarter?.

Yes. And very nice improvement from 2015, so those teams have really jelled incredibly nicely and developing strong sales cultures. We've always had a very, very strong sales culture in New Zealand. Australia is coming on great and the UK and Canada as well..

What was the wholesale organic growth in the second quarter?.

In the mid 2%s, domestically, remember, property is a headwind for our wholesale business in the second quarter..

Okay. And then in terms of -- I appreciate the disclosure you guys provide on the share count.

As you start to think about deal flow and expectations for 2017, how do you think about managing the share count once we get beyond the end of 2016?.

First and foremost, we have got a terrific deal pipeline, let's not forget that. Doing deals at less than 7x year-to-date, it really shows that we can still get some great merger partners at a fair price. Looking next year, I think, our cash is better by far next year compared to this year. Integration will be basically done.

So we won't have big drags on that. We spent a lot of money on CapEx this year that I don't see us spending next year. So I see next year as a much better cash year than even this year. So would we need to shares in M&A in 2017? Not at current paces, I don't see that as happening..

Our next question is coming from Kai Pan of Morgan Stanley. Please proceed with your question..

This is Chai Gohil in for Kai Pan. I just wanted to go back to margins again. So brokerage margins expanded. You mentioned, it was savings in BI and real estate was also part of it.

Doug, just wanted to get some color, if you expect margins to improve in the international operations? Lower integration cost, can it still expand in a sub 3% environment?.

I think there was two different things. I think overall, if you just look across the whole group, 3% organic growth is kind of the tipping point of margin expansion. But when you look at what we're doing to get better in the UK retail space and down in Australia in the retail space, there were some opportunities there.

It's going to take us another year to 18 months to harvest some of those. But every day, those folks are doing a great job. What I really am pleased about is not only are they expanding their individual margins -- remember, these are businesses that are still the 20% margin range. So we're not talking about businesses that aren't making money.

They're making terrific money. They're doing this at the same time that they're training their folks. They're adopting the Gallagher play book, when it comes to our sales culture. So they're working through just getting better in the back and mid office. At the same time, they're spending money in order to get better at selling.

So there's margin opportunity there. But remember, these are still business that are in the plus 20% margin range..

The second question I have is, in CFO commentary, you mentioned higher FX headwinds in the second half.

Is that coming from Brexit? Anything else that could potentially impact from Brexit? I know you guys mentioned less revenue impact, but any comments?.

Listen on FX, good point. On the CFO commentary, what we say is we've adjusted -- we see a little bit more headwind on the revenue lines from the decreased pound that sold-off during the Brexit. But we really haven't changed our guidance on the impact of EPS.

If you recall, Gallagher like many other global brokers have a lot of dollar-denominated revenues in the UK that is serviced with pound denominated expenses. So there is a little bit of a natural operating hedge there that mitigates some of the impact of the decreasing pound. So it's more of a revenue headline story than it is an EPS story.

Fortunately for us too is that we have so many M&A opportunities around the world that we don't need to repatriate our cash into the U.S. to have good uses for it. So even if there is a sell-off on the pound, there's some good opportunities for nice tuck-in mergers in the UK that we'll use our cash for..

That drives well into my final question.

In terms of the second-half pipeline for M&A, now that the international acquisitions have integrated well, what do you see in terms of potential for international tuck-in acquisitions in terms of your overall second-half pipeline? Is it a greater share? What are the valuation multiples you are seeing there?.

Well, first of all, the platforms are performing exactly as we had hoped. So the pipeline is built nicely in Australia, New Zealand, Canada and the UK for tuck-in acquisitions. By tuck-in acquisitions, I mean acquisitions under $10 million in revenue, people that fit our culture and at multiples that we think are fair.

So while there is competition and continuing growth in competition in the M&A space, especially from private equity, we're finding that the culture sells well, the pipeline is deep and the opportunities to expand continue to grow every single quarter..

Aren't the multiples different in international market than in U.S.?.

Yes, they're a little higher in Canada, probably the same in the UK. Maybe slightly lower in New Zealand and Australia..

Our next question is coming from Josh Shanker of Deutsche Bank. Please proceed with your question..

It seems like a little bit -- you've might have gotten on my favorite hobby horse. It's almost like you're doing a share repurchase program. You intend maybe to issue some shares in the future, but you think your stock is cheap.

Can we talk about -- is that a new mentality for you to be preemptively buying back stock?.

No. We've said all along, for the last -- over a decade, that we've got three uses for stock -- or for our cash. The first is, we're going to buy brokers. That's what we're going to do. The second is, we're paying a very nice dividend to our shareholders. Thirdly, if there's extra cash, we use that to buy stock back.

That's not a change in philosophy over more than a decade..

In this case though, Josh, remember what we're trying to do. If we put out shares for tax-free exchanges so that there's a way for merger partners to exchange their stock for our stock, it creates a tax advantage for them. We'll use shares in acquisition -- shares when we do the acquisition.

Then we'll turn around and buy a like amount in the market to keep the number of shares outstanding flat. In the second quarter, we had some opportunities to maybe pre-buy some of that stock when we saw the sell-off after Brexit. So we picked up those shares.

We'll probably use those shares as we start closing some tax-free exchanges in the third and the fourth quarter..

Do you have a mental philosophy around what would be the trigger for you to do some pre-buying? I mean, look, your stocks -- you're storing up a lot of tax credits for the future with clean coal, even though you can't use them today, you know you'll use them in the future.

If you were to buy back stock right now because you see the stock is cheap, you know you're making acquisitions in the future.

So what's the trigger that you would pre-buy stock?.

Yes. I think you have to look at the debt ratio on that. As I think that we want to have a nice comfortable, say, debt ratio. So, for us to buy back the stock would mean we've have to lever up on debt. Then use that to buy shares and waiting for the tax credits to monetize into our financial statements from the balance sheet into our debt.

That's something -- we can look at that. But it's not something that's on our plan right now..

Okay. And then I listened to your commentary about why the negative growth in Gallagher Bassett for the quarter.

Going forward, is this an anomaly? Should we expect low -- the negative growth is not a common thing and we should probably resume a low single-digit growth for the foreseeable future?.

I don't think we've had a negative quarter at Gallagher Bassett in my memory..

Me too, I'm with you..

Yes. So from my chair, Josh, yes, you'll see us return to organic this quarter..

Our next question is coming from Adam Klauber of William Blair. Please proceed with your question..

Sorry, I missed some of the earlier comments, so sorry if these are repeats.

But how's the wholesale business doing now compared to, say, six, nine months ago?.

Our wholesale business is awesome. It is just awesome. To me, it's a corporate gem..

I would say, Adam, remember again, we said on the front, property can be a little weak in the second quarter with the property market right now. But wholesale still was nicely in the upper 2%s when it comes to organic growth this quarter. So it's performing well, even in the kind of seasonal property quarter that they have..

All the way back at my earlier comments, Adam, first of all, we started this thing from scratch about 15 years ago, from dead scratch de novo startup. Today, we're the largest MGA in the United States. We're one of the strongest open market brokerage operations.

When we started it, we had hoped that our own domestic PC branches would utilized RPS, but we also started it as a true wholesaler, open to our competitors throughout the United States. They've captured 50% of our go-forward wholesale business out of our retail branch network in the United States. That's because they perform..

And then on the benefit brokerage side, how are commission levels this year versus last year?.

The commission levels on the small accounts are a struggle. I think that we see that with the mandated loss ratios in the smaller area, that they're squeezed. But remember, our benefits business is a consulting business. Yes, we get commissions, but it's negotiated as a fee.

So if we're not receiving commissions on an account and we need a fee to do the work, we charge it as a fee. We're very, very successful at getting the remuneration we deserve in that business..

So is the benefit brokerage business, has that grown more or less than the average retail business?.

Honestly, it grew the same this quarter. In the front-end of the comments, we said it grew about 3% this quarter which is the same as our domestic retail. We also said in the commentary, it tends to grow a little better in the second half of year which is natural, as customers look at further year-end benefit planning..

Also, I'd point out that an awful lot of activity on the M&A side there, Adam. We've got really, really good M&A pipeline in the benefits business. For all the reasons you would imagine. The ACA is extremely complicated.

The brokers that have really nice accounts, 500 lives to 1,000 lives, right in our sweet spot, are lining up to join our enterprise for all kinds of reasons, a lot of which is just the ACA is too difficult to deal with..

Right, okay.

And then, sorry if you mentioned this also, how is growth in Canada going?.

Really good, very pleased. Organic -- it's a little softer market up there, so organic around 2%. But we had seven separate brands when we bought Noraxis. Those brands are all Gallagher now. I was up there in May for a better part of a week, had a chance to interact with a whole bunch of the team.

I will tell you that the interaction between those brands together and then their relations with their brethren in the United States and the UK is outstanding..

Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey. Please proceed with your question..

You had referred I think to a slowdown in claims activity within the risk management business.

Did I read that correctly? Was that in worker's comp? Was that somewhere else?.

Primarily, workers compensation in the United States which by the way is a good -- you can't sit and complain about slower claim growth, right? For our customers, that's a good thing. It can be an indicator that the economy is slowing a bit, because typically when you're putting on more shifts there is more claim activity.

But this is not unusual -- from time to time, Gallagher Bassett will see loss control works better, clients are working very hard to cut the number of claims, we're helping them do that..

It's interesting, because June was kind of the month that looked like a little bit of out of pattern number of new horizons. Went back and take a look and there are some times, we're just -- once every 22 months or something, you get a slow month. So I wouldn't consider it a trend necessarily, but it is something will keep an eye out in.

As July comes in and August comes in, we'll get together again and we do an investor event in September. We'll update you on it. But we've had these patterns before, where just some months, the claims just don't show up..

And then, Pat, I wonder if you could prognosticate the casualty pricing, flat to down.

How much longer do you think it remains flat here?.

I've got to tell you, I give a lot of credit to the management teams of our major insurance companies. It's softer, as I said earlier, in New Zealand and Australia, Canada and the UK, especially in our specialty business in London. Those markets are soft. But here in the United States, we're coming up five, six years of what I would call, flat.

When rates are down 1%, 2% or up 1%, 2%, in my experience, that's a flat market. In a typical hard market, rates are jumping 15%, 25%, 30%, 40%, 50%. In a typical soft market, they're dropping 12%, 15%, could be 16%, 17%. We're five or six years now, where that band is 1.5% to 2% up, to 1.5% to 2% down.

I know that's driven by the lack of investment returns in the investment market, but it's pretty darn good discipline by the underwriting community. We saw that again in the quarter, soft on the property side. I've said this in past quarters, I think our clients deserve that softness. They will pay a price when the wind blows.

It hasn't for a number of years. So the property market is soft, but casualty, rate and exposures contributed less than 1% negative to our results this quarter, domestically. That's pretty good..

By the way, that's a great environment..

That's a great environment for our clients. It's also a great environment for our producers. When rates are dropping 15% to 20%, anybody can throw a quote out there and catch it off guard, with a number that so low that lose your client.

Today, it's all around how creative can you be? How helpful can you be to your client in helping them deal with their risk management costs..

Our next question is coming from Charles Sebaski of BMO. Please proceed with your question..

I was hoping you could give a little more clarity on the work comp on the industry? I know you have -- it seems like frequency is down.

Any thoughts for what you guys are seeing internally on severity of comp claims? Is severity down as well? Not just for this quarter but in general this year?.

No. I think what's happening in comp which is interesting is that medical costs are escalating a level faster than the indemnity side. So what you've got is kind of a shift. Severity is remaining about the same. Return to work is really, really critical.

But it's all about the medical costs including pharma that is something that everybody's concerned about..

Okay. And then you've made some comments about the discipline from the underwriter side. Just curious, you're take as well. There's been a lot of supposedly disruption with some of the larger carriers, really undergoing some underwriting review in the states.

Just curious if this is -- if you would call this disruption at all? If there has been any noticeable shift over this quarter or this year from some of these larger carriers? Or is that more press and us, on my side, talking about than you've actually seen on the ground?.

No, we've seen it on the ground. We've seen it -- I'm not going to mention any specific carriers by name at all. But no, we're seeing disruption. The good news is, there's plenty of market. So where there's disruption we're able to move business. But there are major companies that are undergoing underwriting reviews.

They're making the moves that they believe -- again, I give them credit. I think we're looking at domestic U.S. pretty darned disciplined senior management..

[Operator Instructions]. Our next question is coming from Quentin McMillan of KBW. Please proceed with your question..

I have a couple of quick numbers related questions.

So the $16 million of FX that you have in the back half, just to ask the dumb question I guess, fully offset on the expense side, right? So we should just anticipate that?.

Yes. If you look at the CFO commentary, it says almost no impact on EPS as a result of that..

And then two quick questions on the free cash flow. Doug, thanks. You said the integrations are basically done. Can you quantify that at all in terms of what the benefit will be? Then also, secondly, on the CapEx, obviously you are building the new office space.

Can you give us a little bit of an update on maybe what the 2016 CapEx might be? Then what 2017 could be to kind of be better than that?.

Yes, listen, let me just say it this way, I think that first of all, in integration -- for our integration teams out there that are listening, I know you have got a lot of hard work clout, but financially we're -- it's not going to cost us that much between now and the end of the year. So I'd like to say, it's all done.

But maybe towards -- maybe on our January call, we'll declare that. When it comes to CapEx, the spending that we've done on the home office build -- recall that we have an opportunity for a lot of tax credits that come through on that, that will improve future cash flow on it.

That's about $125 million to $150 million this year, that we won't have next year. Integration, we spent well over $100 million in 2015. We're running somewhere in that $50 million range right now, half, maybe less than that. So you're going to free up $200 million next year just in those two numbers alone. So I don't see a lot of big real estate moves.

We moved a big piece of our real estate in the UK this year. We won't have those costs. That's probably in that $150 million of building costs, there was $125 million in the U.S. and $25 million in the UK. So I just don't see a lot of those big cash needs coming in 2017. So that's a nice pot of money to have..

You would obviously had on the Investor Day, talking about the $750 million you had for free cash flow for acquisitions to fund everything.

Can that $200 million sort of be added onto that pot and that's what we can think about you have available in the coffers?.

I think, you need to think about $750 million again next year, because we just wouldn't borrow quite as much money next year at this point. So that $200 million -- if we have an extra $250 million, $200 million, we'll still be in the $750 million ability to buy companies next year -- funds available to buy companies..

Okay. If I could say just one -- I apologize if this was answered earlier, I missed the beginning of the call. But just on the negative 3% organic growth, you guys said it's going to bounce back to positive. Obviously that's been a very high growth business to you.

Is there any quantification in terms of maybe the size of the contract that slipped that potentially could be in the back half? Or is it going to be low single-digit or sort of low to mid, anything that we can get a little more clarity on?.

Actually, what's interesting is the account that we didn't pick up the performance bonus income has actually rehired us for the next five years. Actually, we've picked up a large piece of business that flows through that program.

So we didn't lose any account on the risk management, rather we just didn't hit a couple metrics that have clip metrics in it. We didn't get the performance bonus. But we'll be back after it in -- in this next fiscal year that ends in 2017..

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments..

Thanks, Donna. Yes, I've got a bit of a wrap up. Thank you again for being with us this morning. We appreciate it. Our teams are focused and energized.

We will continue to execute on the four components of our value creation, we will grow organically, we will grow through acquiring the best brokers, we will continue to improve our quality and productivity, and we will invest in our culture. I'm very pleased with the first half results of 2016.

I remain excited about the remainder of the year and beyond. So thank you all for being with us. We appreciate it..

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day..