Good morning and welcome to Arthur J. Gallagher & Company's Third Quarter 2015 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened to questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call, and which are also described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today. It is now my pleasure to introduce Mr. J. Patrick Gallagher, Chairman, President and Chief Executive Officer of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

Thank you very much. Good morning, everyone. Thanks for joining us on the third quarter call. This morning, as is the norm, I am joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. I'm very pleased with our quarter. When you look at all operations, all-in, adjusted revenues are up 9%, adjusted EBITDAC is up 11%, all-in organic growth was 4.1% and total company-adjusted EPS is up 15%. Our Brokerage results were strong again, adjusted revenues up 10%, 3% of which were organic, adjusted EBITDAC is up 10% and our margins expanded by about 10 basis points. Risk Management had an outstanding quarter. Revenues were up 9%, all of which is organic. Adjusted EBITDAC is up 15% and margins improved by 90 basis points. And our clean energy investments had a terrific quarter. All in all, just a great quarter, which I think is a testament to our strong sales culture. We work very hard to serve our clients and to aggressively pursue new ones every single day. Mergers and acquisitions continues to be a key strategy for us. In the quarter, we completed five mergers, all in the Brokerage segment. Our first nine months, we've done nearly 30 acquisitions, with about $180 million of new revenues, and our pipeline remains very strong. As I do every quarter, I want to thank all of our new partners for joining us and extend a very warm welcome to our growing family. Our late-2013 and mid-2014 larger acquisitions are integrating very well. In the last few months, I've had a chance to visit many of our new branches in New Jersey, Canada, Australia, New Zealand and the U.K., and I thought I would comment on those today. First, let me start with New Jersey.…

Thanks, Pat, and good morning, everyone. Like you said, the third quarter was another strong quarter for Gallagher, so it's nice to have three of them behind us this year. Let's start with the first page, the Brokerage segment adjusted EPS was $0.57. As for foreign currency, you'll see about $0.02 this quarter and we expect that amount again in the fourth quarter, but very low impact in 2016 assuming today's exchange rates. But foreign currency still seems to be the biggest modeling challenge. So, to control for the impact of foreign currency, I think you should go back and first reduce your 2014 fourth quarter total reported revenues by about $25 million. That will get you to about $770 million last year fourth quarter. Then apply your organic growth pick to that number. Next, add rollover revenues from M&A that we show on page 15 of our Investor Supplement, plus your pick for new M&A in the fourth quarter and assume most of those close in December. If you follow this approach, in that order, that should help you refine your models. As for integration, Pat spent a lot of time today going over the status of each of our integration efforts around the world and our expected cost to complete in 2016. In total, we're seeing that add up to about $0.08 or so of integration costs in the fourth quarter of 2015, then down to about $0.06 in the first quarter of 2016, $0.05 in Q2, $0.03 in Q3 and in Q4 of 2016, and by then we should be done. Turning to page three to the Brokerage segment organic revenue growth. First, note that all of our larger international mergers are now fully reflected in our organic computations. In total, they posted about 2.5% organic growth.…

Thank you. Manny, I think we're ready for questions now and hopefully, some answers.

Ladies and gentlemen, we'll now be conducting a question-and-answer session. Our first question is from Elyse Greenspan of Wells Fargo. Please go ahead.

Hi. Good morning.

Good morning.

First question, I was hoping in terms of the Brokerage organic growth, was there any seasonality when we look at the 3% kind of number overall, just to kind of set expectations for the fourth quarter? Anything that impacted that seasonally or any one-timer is in that number?

No. That would've been reflected already in that. So our international deals, our international operations, they do have slightly lower seasonality in the third quarter, but nothing that would impact it dramatically.

Okay. And then just to make sure, when you gave the organic growth numbers, that was just for the acquisitions, right, in the Brokerage segment? How was the organic growth for the U.S. overall and also internationally just on an overall basis?

The U.S. organic was just a tad below 3%, international is just a touch above 3%, so not too terribly far off either way.

Okay. And then I noticed the integration costs, I think they were a bit higher than you had pointed to this quarter; is that because some charges were pushed up and you kind of – some of the integration is getting done sooner than you had previously expected?

In there, there's $0.02 of a balance sheet clean-up item that we cleaned up that actually was a non-cash clean-up item that drove that number up just a little bit, but it had nothing to do with the current operations or the current activities. It just was a balance sheet receivable that didn't come in.

Okay. That's great. And then it was – you gave a great outlook in terms of the markets globally. In terms of Australia, would you say – it seems like overall – I know that's been a bit of a troubling market, but have things changed? Or it's more just kind of being consistent with what you've seen throughout the year?

It's been very consistent. It's a soft market, and that's downward pressure. It's the old soft market playbook.

Yes. Actually, it's consistent with the market when we bought the OAMPS acquisition down there. As a matter of fact, the Australian operations actually are coming in at their budget or slightly better, so the reality of it is, the market is a – it's been a known market for us there. It's nothing surprising to us. It's just the reality of the market.

And their economy is soft.

Okay. Thanks so much, and congrats on a great quarter.

Thanks, Elyse.

Thank you. The next question is from Ryan Tunis of Credit Suisse. Please go ahead. Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) Hey, thanks. Good morning.

Good morning, Ryan. Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) First question is just on Brokerage margins. I think this one's probably for Doug. But thinking back to last call, I think comparing it to the third quarter of last year when you guys did 26.8%, I think Doug called out some headwinds for why that would be difficult perhaps to repeat. I'm just wondering, from your perspective, what allowed you to deliver better than that this quarter? Were there maybe some expenses that got pushed to the fourth quarter or anything along those lines?

Actually, the team did a great job of just hitting their budget. We forecasted it to be flat. We mentioned that in our last call. The fact that we posted 3% all-in organic growth, that's about where we thought it would be, so there was nothing special in that. Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) Okay. That's helpful. And then just on wholesale, I guess another strong quarter there. What's driving that? And how should we think about the outlook there, I guess, over the next – in the near to medium term, given some of the pricing headwinds I think Pat called out in property?

Well, part of that, Ryan, we're the largest MGA in the country, and so our underwriting operations are doing very, very well. But, our open market broking folks are as well. So, it's – we're soft on the property placements and that's a big part of what they do, but we're doing a very good job of generating new business. We've had some nice acquisitions there that are performing well over the last couple of years and our MGAs are doing extremely well. Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) Thanks, guys.

Thanks, Ryan.

Thank you. Our next question is from Sean Dargan of Macquarie. Please go ahead. Sean Dargan - Macquarie Capital (USA), Inc. Thanks, good morning. Just following up on Elyse's question about Australia, in talking to some people down there, they've indicated that Steadfast and Austbrokers have been pretty aggressive in trying to pick off your producers. And I realize it's a slowing economy and a soft market, but to what degree has stepped-up competition among local players impacted your organic growth there?

Very little. I'd say at the very outset of the acquisition, we had a blip in some turnover and the turnover is very nicely under control now. So, we're not seeing an excessive turnover whatsoever. As I said, my trip down there was exciting because the team is young and pumped up, and they've got a lot of good things going and there are a lot of things that we're bringing to the table for them that – our strategies and capabilities that they weren't doing under the conglomerate, Wesfarmers. Not that Wesfarmers had anything wrong; it was just a piece of a conglomerate. This is the business we're in. So, we're not losing people by and large to our competitors down there and in fact, I think they're excited about the fact that we bring them a lot more capabilities. Sean Dargan - Macquarie Capital (USA), Inc. Okay. And then I believe you have about 30% market share in New Zealand with Crombie Lockwood; is there any room to expand that? Or is that about as deep as you can go there?

We think we can expand it. Now, it's a small country and we've got a big share. But, truthfully, we're underrepresented in the corporate marketplace there and we're not represented in the public sector clients there, and those are two things that we're very strong in the United States. So, we've got people traveling to New Zealand and Australia from the U.S. in our vertical niche capabilities and we think we can expand that. Sean Dargan - Macquarie Capital (USA), Inc. Okay. Thanks. And then just one last question about the clean energy strategy. I think some investors were more surprised to see the 15% annualized growth through 2017. And there's a steady drumbeat of articles in the press about natural gas killing off coal and I think some folks were concerned about the administration's clean air proposal. I'm just wondering if you can give us any color about what's driving the utilization of your plants?

Yes. Great question. First, I don't know why anybody was surprised. I've said that – essentially, if you go back a year ago, we said that 2016 – or 2015 would be a little bit of a flat year compared to the 2014, and then we'd have another step-up in 2016 and 2017. So that message has been very consistent for the last 15 months. The surge in activity, we actually talked about that also in our call that we get a lot of surge of activity in August and September as host utilities look at their capital budgets for next year, so that's when the robust activity occurs. Now, next – in your question, let's work backwards from the Clean Air Act. That really takes effect in 2022. If it goes in and it's graded into 2030, those – remember, our plants last produce tax credits in 2021. So, we don't see those as having a big issue, or that law having a big issue with respect to running our plants through 2021. Next, we – our plants are better, they're more efficient. Or excuse me, the host utilities where we put our plants are better, they're more efficient, they're earlier on in the dispatch curve. And so, as a result, they're less likely to be retired than the broader fleet. So, I don't think it's good to use historical trends to predict what will happen to our 20 different locations. There's about 600 different utility plants out there and we're operating about 20 of them, and they're better and less likely to retire. Second of all, the displacement of natural gas, you can go out to the Energy Information Administration web site and you can see that the displacement of coal to use natural gas, there was a surge in that over the last five years. But, even that official site doesn't predict that happening, certainly not between 2021. So, we think our plants are better-positioned. I think they're less likely – and frankly, we sit at the strategic table with our host utilities and we know in advance of what their plans are. And frankly, if they're going to retire a plant, we won't put in one of our clean energy plants. So we believe our plants will run through 2021. They're at better locations. They're not subjected to natural gas. They're better placed in the dispatch curve, better placed regionally in terms of coal versus natural gas utilization. So, I don't see the risk that these plants will be displaced the way the broader fleet might have been. Sean Dargan - Macquarie Capital (USA), Inc. Thank you.

Sure.

Thanks, Sean.

Thank you. The next question is from Adam Klauber of William Blair. Please go ahead.

Thanks. Good morning, guys.

Good morning, Adam.

A couple of different questions. On the share count, you've issued roughly – sorry, you've issued roughly 12 million shares. In the release, I think you identify 7 million due to acquisitions and earn-outs. What are the other 5 million for?

Let's see. I don't know where you got your 12 million from, but the difference in there year-to-date that excludes the secondary offering that we did in 2014 numbers. So, the 7 million of shares – I'd have to look to see where you're getting the 12 million number. Sorry, I don't know.

The 12 million, you started the year at, I believe, 164 million – 164.5 million, and I think you're at 176.5 million as far as...

Oh, I see what you're asking. It's the dribble-out shares that are in there when we did our ATM.

I'm sorry, what are those shares for – being used for?

Well, we use those for acquisitions throughout the year. Remember, we used the dribble-out in order to really buy the William Gallagher agency.

Okay.

So the 12 million shares, if you go back to year-to-date, those are the shares that went out to fund acquisitions this year. I don't believe we're going to use any here in the fourth quarter and our outlook for 2016 is not to use hardly any shares either.

Okay. And then as far as the William Gallagher deal, what's the earn-out on that deal?

We don't have an earn-out.

There's no earn-out.

No earn-out. Okay. And then as far as, you laid out the acquisition costs for this year and next year. In the press release, you have two different lines. You've got acquisition costs, but then you've got workforce or restructuring. Is the number you laid out...

That's workforce & lease terminations, yes.

Yes. Thank you. Is the number laid out, does that include the lease termination?

Yes, it does.

That does? Okay.

But lease termination related to other activities and lease termination primarily not related to the acquisition. If it's integration-related severance or lease termination, it goes in the acquisition integration line. If it's just other workforce and lease termination that we're doing as we downsize some of our locations just through natural – that's where we put it, in the workforce and lease termination line.

Okay. That's helpful. And then as far as operating cash flow related to working capital, do you think that will add to cash flow this year or take away from cash flow?

What was the question, Adam? Just say again. Sorry.

Sure. Operating cash flow related to working capital, do you think that's going to help operating cash flow or hurt operating cash flow this year?

I think that we're going to have a positive to cash flow on working capital because as we go through the integration and we consolidate massive amounts of – like for instance, we have over 400 different bank accounts related to the acquisitions that we did with Giles, Oval primarily. As we consolidate those bank accounts, we believe we'll be able to free up more cash. Right now, we have about $200 million of cash in the banks around the world that we can scrape together and use more efficiently once we go through the remaining pieces of our integration efforts. So that should improve working capital.

So should that be more 2016, or will – should that be more 2016?

Yes, I think we'll shake most of it out in 2016.

Okay, great. Thank you very much.

Thanks, Adam.

Thank you. The next question is from Paul Newsome with Sandler O'Neill. Please go ahead.

Good morning.

Good morning, Paul.

Congratulations on the quarter. Maybe just a little bit more about the types of deals that you're looking for prospectively and maybe in the context of, obviously, some areas have become more competitive in terms of looking for types of deals, are you ending up looking at things in different geographies than you were say a few months ago and such?

Well, if you recall, one of the things we were excited about as we came into 2015 is the fact that these moves that we made in New Zealand, Australia, Canada and the U.K. gave us credible platforms to be able to do bolt-on and tuck-in acquisitions. And we signaled that we would be back to doing our normal acquisitions and that's in fact what we've done. If you look at 29 transactions and about $180 million, you get an idea of kind of what our average revenue is on these deals. And I will tell you that the pipelines that have built in Australia, New Zealand, the U.K. and Canada are becoming more robust every single month. So it's absolutely working the way that we had hoped it would work. We're a credible buyer now in those geographies; which just one year ago, we really weren't. In the United States, we've got 30 years of activity that has continued to build our pipeline. We've got a very strong pipeline. As Doug mentioned, we think we'll close a good number of additional transactions in the fourth quarter and we see a continuation into 2016 of our typical tuck-in acquisitions. And these are anywhere from $2 million to $10 million that don't frankly demand the same level of multiple that some of the larger transactions that some of our competitors are doing, and that fits right in with the formula we've been doing for 30 years.

Okay, fantastic. Thanks.

Thank you. The next question is from Bob Glasspiegel of Janney Capital. Please go ahead.

Good morning, Arthur J. Gallagher.

Good morning, Bob Glasspiegel.

The old man can learn a few tricks here, change his ways. The U.K. settlement, I mean, it's good news we get dollars in upfront, but I'm a little confused about the incremental expenses that follow on that you highlighted in footnote three. Is that sort of rebuilding the organization and hiring?

No, Bob. What those are, those are incremental, really retention agreements that we needed to do to solidify our folks there and some additional head count that was required in order to work on this. These are incremental expenses and if you add it all up, it ends up being fairly close to what the settlement ended up being. So, those are just the ongoing costs and because you're doing them on a retention basis, you amortize those expenses over the future period of the retention, not against the gain. So you get the gain this quarter, and then you add up all the small little costs that go out through the mid-part of 2017, and they get pretty close to washing out between the two.

You're housing those in Corporate and I assume adjusting them out. Is there not any sort of business relationship between the retention bonuses you're paying and their production?

These – well, first and foremost, we put it in Corporate to keep it clean, to keep it matched up into the right – into the same line, so we can track it a little bit easier over time. Second of all, these are the incremental amounts that we would view as related to the defection of the management team, and not to the core basic business of running the brokerage operation...

So, there's no revenues associated with these?

...this is up in the business.

These are not production – these are not producers that you're paying these retention bonuses to? They're management, that they're sort of replacing the old team? Is that the way to think about it?

The lion's share is in the management ranks.

Okay. I got it. Great. Thanks a lot.

Thanks, Bob.

Thanks, Bob.

Thank you. The next question is from Dan Farrell with Piper Jaffray. Please go ahead.

Thanks. Good morning.

Good morning.

Pat, thanks for some of the commentary around the integration. It sounds like that's progressing well. I was wondering if you could just comment a little bit on where you think you stand on achieving some of the synergies that you thought you might be able to get from some of these deals? Thank you.

Well, I feel really good about it. As Doug mentioned, we don't publish budgets and the like, but these enterprises are essentially on plan as we came into 2015. We knew that Australia was going to face a soft market, as was New Zealand, so we took that into account. Whenever you do significant large deals, I think the very first thing you're looking to is, are you going to renew that book of business and are you going to show some growth? Are there going to be opportunities for people the sell more as you rebrand? And there's good and bad about rebranding. I mean, I think that's change and people oftentimes have a difficult time with change. But, by and large, I'm incredibly positive. So, I'll give you an example. I was in Melbourne, Australia just a few weeks ago. We had our Australian branch managers there and it was a terrific meeting. You'd think that these people had had meetings like this all the time when they were under Wesfarmers and the fact is, they really hadn't and didn't have the tools we're brining. Just examples of cross-selling, you know, where we've been able to help each other opened new opportunities. We've got our public sector people down there a number of times this year. So, things like that are going very well and when I see all the enterprises, with the exception of Australia, showing organic growth in the very first operating year after the acquisition, I'm extremely pleased.

Yes, Dan, I think on the cost side too, the synergies are there. As I mentioned or as Pat mentioned that the Canadian operations are going to go under the same system that we're running here in the U.S., so that will be helpful. Also, I think in terms of just getting to where we – when we do a small tuck-in acquisition, probably six months to nine months into it, they're pretty well up and running into Gallagher. They've kind of integrated themselves into the operation. I think on these larger deals, it has taken us more like 18 months to get them fully into us, getting them trading with some of our folks in the U.S., understanding our capabilities, understanding what we can do to help them to sell more business, getting our niche leaders in their organization. That takes about 18 months or so. And we're at that point right now, and truthfully when you add them all up, the organic was 2.5% for all the large deals kind of pushed together. So I think that's pretty good.

And in my prepared remarks, Dan, I made a couple of comments on taking down data centers and migrating people to systems. That is where we see some synergies as well, getting numbers of key operating units from 200 down to 50, that's good work.

That's helpful. Thank you. And then, Doug, just a quick thing on cash balance, about $370 million at the end of the quarter. How much of that is usable cash, would you say?

About $200 million of that is usable. But, again, it's in a lot of bank accounts that I've got to pool together and consolidate in order to really get the efficiency. But that's okay; it's there; it's ours to use; it's just going to take me a little bit longer to pull it together.

Okay. All right. Great. Thank you very much.

Thanks, Dan.

Thank you. The next question is from Sarah DeWitt of JPMorgan. Please go ahead.

Hi, good morning.

Good morning.

A follow-up on the clean coal earnings. Is there a point at which you're utilizing all the clean coal credits, so the earnings there should level out at some point? Or how do you think about the earnings trajectory of those investments beyond 2017?

I would say they're flat through 2017. But, at that point, we'll be harvesting more cash out of them than probably the GAAP earnings. Right now, the GAAP earnings are slightly higher than the cash earnings on that, but that will flip in 2017 where the actual cash earnings are higher than the GAAP earnings. So at that point, I'll lay that all out and show it to you. But, I would say that we've still got ramp up in 2016 and 2017, and maybe there's a touch in 2018. But, I think that 2018, 2019, 2020, 2021 will be largely flat to 2017. But, cash will be – cash harvest will be bigger.

Okay. Great. Thank you.

Thanks, Sarah.

Thanks, Sarah.

Thank you. The next question is from Seth Canetto of KBW. Please go ahead.

Good morning.

Good morning, Seth.

I just had a question on the Risk Management. It seems like the higher Risk Management margin improvement, is that sustainable? And probably even more impressive than just the higher margin is the organic growth. How are you guys achieving such strong results in Risk Management? And are there any areas that are specifically driving strong double-digit organic growth there?

Well, I'll take the margin one and let Pat talk about the growth. The margin, we run that business – as we've been saying for the last couple years, we're making investments to better our service offering to our customers and that's really starting to take hold. Customers are seeing that the issue is not the service on the claims and the costs of the claims; it's really the claim outcome. And we're demonstrating that we can help them get their folks back to work, get them healthy much faster by using our proprietary methods, techniques and systems. So that's the reason why the business is doing well and that leads to the margin expansion on it. But, there is a heavy investment load going into that business to make sure that we're offering a competitive environment. We used to be at 16 points of margin for our targets. We've moved it up to 16.5% for this year. We'll go through the budget process this fall and we'll come to a conclusion with them about what's the margin target for 2016, what kind of investment level there is. But, right now, in that 16% to 17% margin range is comfortable for what we need to offer the clients.

And I think Doug made a comment in his prepared remarks that look to the fourth quarter to be closer to 16.5%. As far as the top line goes, I think we've just found a very solid new business. We're blessed to have a terrific organization in Australia. And in the U.K., they're contributing significantly. The United States is, of course, where we've been recognized as leaders in that industry for years and years and our pipeline of new business continues to build and we're hitting on all cylinders. Our renewals are sensational. We renew more than our revenue that is expiring. We typically renew in the area of 101% to 102% of revenue. That comes from claim count growth and the organic growth of our clients. That doesn't just come – that's not rate increases. But, when you've got that kind of a retention and you can put some good new business on, you start to see those types of numbers.

Thanks. And this is probably a question for Doug, but given the lower energy prices we're seeing, is there any impact to the utilization of the Chem-Mod products? And could there potentially be any hurdles there?

Well, like I mentioned a little bit ago, we believe that our – where we've locate our clean energy treatment facilities at host utilities, we think they're less likely to experience retirements, shutdowns, slowdowns relative to the broader industry trends that you read about. There's about 700 locations out there in the country. We're operating in about 20 of them, and even within those 20, we're not operating at all of their boilers. We're operating at their most optimal boilers that they intend to use. And if you know something about electricity, is there's a dispatch curve. The first things that get uses are nuke and solar, and then they move up the dispatch curve and then some of the last producing units can be natural gas units that are way out on the dispatch curve. So if a utility is operating at 50% to 75% or 90% of – or if there's a demand that's in the 50th to 75th percentile of demand, most of our plants are positioned where they'll first be turned on before they go to other sources. So we don't see – and by the way, it takes a long time to displace a plant that's burning coal with natural gas. You've got to get the pipes there. You've got to – and pretty well, most of that infrastructure and that development was done between 2008 and 2014. So that continued decrease in fuel costs by natural gas should not have a dramatic effect on us over the next five to six years.

All right. Great. And then I believe you guys mentioned earlier in the call that lower insurance rate and the softening market only impacted organic growth by less than one point in the quarter. So, I guess how do you guys think of the insurance brokerage organic growth, given the concerns in London specialty, Australia and New Zealand?

Well, I think that – go ahead, Doug.

I think those are baked into our numbers. The softening – I don't want to use softening. The weakening that we saw in those areas, softening in Australia, they're in our numbers for the third quarter. So I would expect that to be similar in the fourth quarter.

And I'll tell you, my prepared remarks, I said besides cat-exposed property, things are still flattish. If you go back and take a look at the hard market/soft market cycles that we've lived with since the 1960s, a soft market typically sees prices coming down 10%, 15% a year and that can go on for a decade. We're not seeing that. If there's an account that needs a rate increase, the market is still trying very hard to put forward a rate increase. By the same token, if our people come across a very nice account that hasn't been marketed for a while, has been very successful and has not burned the market and it deserves a 15% to 20% decrease, it's going to get it. I consider that to be a professional kind of deliberate flattish market. So if rates are down in one line or another – take workers' compensation, or directors and officers – if rates are down 3%, 4%, that's going to impact organic. But, it's 3%, 4%; we'll outsell that. If it's up 2% or 3%, I still say in that band of 5%, you're talking flat, and that's kind of how the market feels.

All right. Great. Thanks a lot for the answers.

Thanks, Seth.

Thank you. Our next question is from Charles Sebaski of BMO Capital Markets. Please go ahead.

Good morning. Thanks.

Good morning, Charles.

First question, just curious about not the clean coal, but exposure to energy. If I'm thinking about some of the larger recent acquisitions, Canada, Australia, New Zealand, what's the exposure to the energy infrastructure of those books of business? And what's your level of concern given the challenges the energy sector's gone on regarding your businesses there?

Well, I look to mention, first of all, in Australia, New Zealand and Canada we have about $15 million of total revenues related to energy-related clients. Now, I can't say what's the trickle-down effect of some of those, but it's a very small portion of our $2.5 billion worth of revenue. So our energy exposure in those countries that have large commodity-related economies is about $15 million. If you look here in the U.S., we might have $30 million but a lot of that, maybe half of that's in the benefits space even. So we're talking about having – they're still employing. We are – we do have nice practices in Houston and we will see a little bit there. In London, we trade generally through our specialty lines there, in energy, we might have $20 million of revenues. So as you can see, if you add all this up, we're somewhere in the $50 million to $70 million of direct energy-related revenues out of $2.5 billion of Brokerage and then $4.5 billion in total. So, I'd say in Gallagher Bassett, that's very little exposure to that. Remember, most of our business is in the SME and the mid-market area; those areas are pretty resilient to this type of change in the marketplace.

Excellent. Thank you. I guess the other one is on acquisitions and on your use of equity versus cash and debt. Do you look at that equally when you're contemplating offering shares for acquisitions? Is the – I guess the question is, is the hurdle higher if you need to issue equity versus some of the tuck-ins from cash flow or debt utilization?

Well, first of all, we always want to use cash first and equity second. That's just the way we do it. There are times, however, because of the structure of the transaction, if we want to do a tax-free exchange, where the seller will demand stock, and if that's the case, we'll do that. At this point, there isn't – we always think that equity is more precious. We've been in such a huge growth spurt over the last three years that we've needed to use equity, but I just don't see us needing to use that much equity based on our current pipeline of nice tuck-in acquisitions. If we're out there doing them at 7x and we're paying cash for them, we've got – as our – we'll have more capacity for debt. I just don't see us using a lot of equity going forward.

Okay. And what would you say the debt capacity is now relative to outstanding authorizations and plus your relative take on leverage?

I think that we would probably do another $200 million to $300 million of permanent debt at this point.

Excellent. Thank you very much for the answers.

All right.

Thanks.

Thanks, Chuck.

Thank you. The next question is from Kai Pan of Morgan Stanley. Please go ahead.

Good morning. Thank you.

Good morning.

So to follow up on Chuck's question on the acquisition and equity issuance, I just wondered what's your take on the use of free cash flow going forward, the balance between doing acquisitions, grow your business, as well as shareholder returns, including buybacks?

Well, right now, I think that we'll take – for any merger partner that would like to join us that has great relationships with their customers, wants to use our capabilities, wants to trade with our – in our niches, use our offshore centers of excellence, use our internship program – if they're willing to sell to us in that six to eight times range, I think we'd prefer to do that every day versus buying back shares. So, right now, we are in a – we think there's tremendous opportunities to still pick up partners that are committed to be in the business, they want to sell insurance and they want to do it as a part of a global organization that bring in capabilities, we'd much rather do that than we would buy shares at this point.

And we still have the strongest dividend payout.

Okay. But just in terms of EPS growth going forward, you believe it is, incrementally, it's more positive by acquiring this business, the earning contribution from it more than offset the diluting effects of share issuance?

I don't think that we're going to be issuing a lot of shares going forward, so I wouldn't think there's a dilutive impact going forward.

And Kai, we don't dilute ever on purpose.

Okay. All right. That's great to hear. A second question on the industry consolidation, just what's your take on that, is the potential impact of benefits to both your businesses, on the broker side as well as administrative side?

Well, you're referring to the carrier consolidation?

Yes.

Look, I think that on the benefit side, we've seen significant carrier consolidation that has changed that industry significantly over the last 20 years and continues to push us to be more consultants than brokers. We're not – we're no longer really going out to very many clients on the benefits side and talking about what the rate environment is this year. It's all around consulting about what their human capital needs are and how we're going to help them to maintain their employee base. And I think consolidation in the property casualty business is a long cry away from what we saw in benefits and I think you're going to see more of it. I think in this environment, this economic environment and this return environment, that's one way you're going to see growth.

Okay. Thank you so much.

Thanks, Kai.

Manny, I think that's about it. I think we're towards the end here. Why don't I just give a few wrap-up comments and we'll call it a day? At the outset of the call, I mentioned that I was pleased with our organic growth. All in, 4% – 4.1% is a very strong result. Over the past decade, we've invested heavily in our new business and retention strategies. We've brought in sales training and sales management. Our cross-selling efforts between our wholesale, PC and our benefits teams are at all-time highs. Our international and U.S. teams are working seamlessly on all types of new business. Our merger and acquisition pipeline is strong. So, it's safe to say that our aggressive sales culture is alive and well. We're pleased with the quarter and appreciate you being with us today. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation, and have a wonderful day.