Arthur J. Gallagher & Co. Q1 2008 Earnings Call Transcript

| About: Arthur J.Gallagher (AJG)

Arthur J. Gallagher & Co. (NYSE:AJG)

Q1 FY08 Earnings Call

April 24, 2008, 9:00 AM ET

Executives

Patrick J. Gallagher. Jr. - Chairman, President and CEO

Douglas K. Howell - Corporate VP and CFO

Richard J. McKenna - Corporate VP; President - Risk Management Operations

Analysts

Robert Glasspiegel - Langen McAlenney

Keith Walsh - Citigroup

Jay Gelb - Lehman Brothers

Nicholas Prendergast - Signal Hill Capital Group

Mark Dwelle - Ferris, Baker Watts, Inc.

Operator

Good morning, ladies and gentlemen and welcome Arthur J. Gallagher & Company First Quarter 2008 Conference Call. At this time, all participants have been placed on a listen-only mode. Your line lines will open for questions following the presentation. As a reminder, today's call is being recorded. If you have any objection, you may disconnect at this time.

Some of the comments made during this conference call, including answers given is response to questions may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject the certain risks and uncertainties describe in the company's report filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today.

It is now my pleasure to hand the floor to your host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Sir the floor is yours.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Thank you very much. Good morning every one and thank you very much for joining us for our first quarter conference call. I am joined this morning Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

I'll make a few comments on the quarter by segment. Doug will have some comments and we will move rather quickly to questions and answers and get to what the things that are you interested in. So let me start with the brokerage segment. Revenue up 11%, EBITDA up 13%, pretax profit up 10%, earnings-per-share up 24%, 1% of that growth was organic. I am pleased with that result. As you know as our first quarter is difficult to compare in many years we don't have a start that's as strong as that.

We are also as you all know trading in a very, very competitive market. Given any kind of competition on an account, rates are falling anywhere between 15% and 35% or 40%. In particular, our property/casualty retail business is fighting a very strong market headwind. If rates continue to slide at this pace, it will be tough to grow organically in 2008. But let's remember this is good for our customers. Our brokerage results were helped by a strong quarter for our wholesaling in MGA business. Both the U.S and the U.K contributed to that growth, risk placement services, our U.S wholesale operation had strong results that were aided nicely by our performance bonuses from our MGA activities.

Our benefits brokerage and consulting business continue to post strong revenue gains. Our real bright spot for company continues to be our merger and acquisition activity. 11 deals, $31 million in revenue purchased and literally a pipeline with more opportunities than I have ever seen in our history. Remember many of these are small, what we call tuck-in acquisitions that are really as close to organic hiring as you can get. The merger and acquisition activity really is a key strategy for our growth and I really, really like our position. Think about this. We believe that there are 25,000 agencies and brokerage firms across America. We believe that most of those better than 50%, probably better than 70% are run by Baby Boomers; they are my age or slightly older.

Ultimately, these people have to do something to capitalize their life's work, they just have to do something and we offer a very, very unique culture. We've been at this for twenty years. We are good at it we believe we are very, very good choice. Our culture is entrepreneurial. We are very sales driven. We are team oriented; niche focused and at the end of the day we are brokerage, run by brokers. We are also not asking these people to come aboard and cut a whole bunch of cost. What we are trying to do is be additive, one plus one can equal five. In essence can we grow faster together than either of us could grow alone?

As I said its working, we've got a 20 year history of doing acquisition successfully. The fun thing is that whenever we are talking to a potential partner, we always offer to give them the list of our recent and not so recent deals and we simple say call them, just call them and talk to them. These are smart, great business people who will tell you exactly the good, the bad and the ugly. Our pipeline has never been stronger and when get people calling those passed merger partners, in essence we have merger partners selling others and joining us. We have five people dedicated full time to recruiting pricing and closing deals and I think it's a very exciting strategy and something we're good at.

These are difficult times, but the silver lining is our opportunity to convince partners to join us. The new partners expand our talent pool, they expand our geographical footprint and they bring us great new clients that strengthen our niches. I want to welcome all of our new partners and thank them for joining Gallagher. As you all know they did have choice. I was very pleased to complete our Gallagher re-transactions at the beginning of this year. This was actually a series of three transactions: one in the U.S, one on the U.K and one in Singapore.

It's never easy to exit a business, but we know that it was the right decision. We can now focus our sales on competing in areas where we have real strengths. We'll continue to put our efforts and investments in places that we know we can win. And we are continuing to invest in our business. We continue to believe this is a great business, think about it. People have to buy insurance every single year. They need us. So as the second quarter gets underway, we're looking forward to the 160 or so interns who will join us, starting in June.

Let me turn to the risk management segment. I'm disappointed in our start in the first quarter in this segment. We had okay revenue growth of 9%, but our cost structure get ahead of us a little bit in the quarter. We build a little bit of excess capacity in the field that we will absorb as claim counts rise. Quarterly comparisons in the risk management segment are tough. You have to remember, when claims come in the door, we have the people to handle them. So we are constantly trying to maintain the right balance between how much capacity and how much work. And we'll also point something out. In the first quarter we were off our pre-tax target of 15% by $3.6 million, so we still feel if we can maintain the top-line momentum, we can control expense and we should have a growth here.

As I said, this is one tough trading environment. But frankly, I've told our team I expect this to even get tougher. Rates are going to continue to fall, we are in the fourth year of a soft a market and really who knows how long these rate cuts can continue. I believe we are going into our or are in a recession, as our clients start to cut back in sales and payrolls fall will be faced with lower premiums, based on exposure units. Of course the recession will also strain our benefits in our risk management business.

So we are pleased to have the first quarter behind us. We just emphasize that this is a very, very difficult and competitive operating environment, but our acquisition pipeline is a bright light which is really robust. Doug?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Thanks Pat and good morning every one. Today I have six comments. First, a comment about funding our acquisitions. As you can see, during the last couple of quarters, we have been favoring acquisitions over stock repurchases in terms of allocating our free cash. We expect to again favor acquisition over share repurchases though out 2008.

Further, because there are opportunities, we might return to using stock in more of our deals. Second, some of you have asked from time to time about our IT platform and its ability to handle our growth. We are nearly finished with a year long project to re-platform our datacenter, our global network and our corporate IT infrastructure. These new platforms make us industrial strength and they can easily

handle all of our new applications that I have discussed before. Such as our up and running new financial and human resource applications and the rollout of our new document management systems.

In addition, this new platform supports fast and stable workflows with our offshore service centers. In nut shell, these new systems can now easily handle nearly unlimited organic business and hundreds and hundreds of new branch locations. So my third point, a quick update on our headcount reduction and expense savings initiatives that we announced at the end of January.

In addition to the reductions associated with a sale of our reinsurance operations through mid April we are down about 70 people, nearly all from attrition. Dollar wise, we didn't see much savings in the first quarter, because most of the heavy activity came later in the quarter, given that we implemented this initiative in late January and there were replacement hirers pending in the pipeline of that time, we are satisfied with these early efforts and we remained focused on reducing our back-office headcount by about 400 people over the course of 2008.

On the expense front, we rolled out our new perquisite and out-of-pocket travel and entertainment expense programs in our retail P&C, our wholesale and our corporate units affected March 31st and we expect our retail benefit brokerage and our risk management units to be done by the end of the second quarter. My fourth point relates to our financial services segment. Remember that all of our Section 29 credits, credit projects cease to operate on December 31st 2007. And most of the post production matters have been wound down over the last couple of months. Over the next couple of months, we will settle up on the final cash and dissolve the partnerships.

We did not expect these wrap-up matters to have significant financial impact. So other than these wind down activities, you can see there is not much going on in our financial services segment and that continues to evolve into our corporate segment.

Going forward, this segment will continue to manage down, to manage down to handle the handful of remaining investment, house our interest expense and absorb about $4 million to $6 million of direct administrative cost associated with managing these investments and corporate overhead allocations. My third point is simply a repeat of what I said in January, but it's an important as you are preparing your cash flow models.

At December 31st 2007, we have deferred tax assets associated with our Section 29 tax credit projects, totaling approximately $218 million. This asset will be realized by paying less cash taxes in the future. So when you do your future cash flow models, compute what you think we will pay in taxes than reduce your estimate by about $30 million to $40 million for each of the next five to six years. That way your models will reflect a reasonable estimate of the effective monetization of this deferred tax assets.

Also, remember that the monetization of deferred tax assets is not impact of our effective tax rate. Accordingly, like we said in the press release, expect our company-wide tax rates to be in the 39% to 41% range in 2008 and later years. My 6th and last point is that really just a few housekeeping like items. Remember that our first quarter is seasonally our smallest quarter. Note that we intend on filing our 10-Q early next week and hopefully it's helpful that we post a downloadable five year quarterly spread on our website that can help me to see the long return trends and the seasonality as you build your models.

Okay Pat, those are my comments. Back to you.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Also, I think we are ready for questions and answers. Questions any way.

Question And Answer

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Bob Glasspiegel with Langen McAlenney. Please go ahead.

Robert Glasspiegel - Langen McAlenney

Good morning

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Hey Bob.

Robert Glasspiegel - Langen McAlenney

Pat good to talk to you. On the acquisition analysis guidance that you have given, Doug it sounds like you are saying share counts should trend up over the year that stock used for acquisitions were exceed buyback, is that a fair summation?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Really, what I'm saying is that our pipeline is very full right now. We will use as much cash as we have and then to the extent that we have more opportunity in cash, then we probably favor using some of the... some stock in those deals as we get later in the year.

Robert Glasspiegel - Langen McAlenney

Okay, so no guidance guiding on share count, just some sore [ph] factors?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

I don't know about exactly when the opportunities will arise and how will be timing of our cash flows, but I am telling you that there were favoring acquisitions and that if we need to use the stock to typically with the rest of our deals.

Robert Glasspiegel - Langen McAlenney

Okay, I think you've answered this question, but I just want to be double sure. I'm interpreting quickly, when you are using stock instead of cash, it's being driven by you are out of cash to do it, not the PE is, I mean this is in ahead of the statement about why the earnings are high and the PE is higher and stock is more advantageous. I guess sort of different way, how do you value the cost of equity in doing an acquisition, versus cash?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Way you said it first is correct. We view this is as a way to fund our acquisitions and this is not a signal of where do we think the stock is fairly valued, overvalued or undervalued.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

I think it's undervalued.

Robert Glasspiegel - Langen McAlenney

That is big surprise. Thanks Pat.

Operator

Thank you. Our next question is coming from David Small with Bear Stearns. Please go ahead.

Unidentified Analyst

Hey Pat. This is actually Sal [ph] on behalf of David Small.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Hey Sal.

Unidentified Analyst

How is it going?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Good

Unidentified Analyst

Quick question for you. At the beginning of the call, you mentioned how the acquisition pipeline is very strong. This differs somewhat from what we heard yesterday from HRH, as they said that they are seeing quality shops take themselves of the market, as these shops are unable to maximize their value in current rate environment. Are you not seeing this trend, and if not, at what point in the pricing cycle do you believe that you will start to see this trend and how far are we from that point?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Well that's... those are, those are a series of questions that are difficult. Let me start with where we are coming from in terms of our pipeline. Our pipeline is, as I said it's never been this robust. It's as strong as it's ever been. In terms of Letter of Intent being prepared, firms are coming in to see us, we have seen absolutely no fall off, whatsoever, I will say that we are also not seeing huge declines in valuations and at some point that may occur and people may be coming after market, but from our activity, we see strong, strong opportunities. Talking to more people today and at very serious levels than we've ever had in our history. When we that fall off?

That's a good question, as I said the motivation for selling is multifold. These people recognized that in our likelihood capital gains, taxes are going to change. These are smart buyers who also realize that given the competitiveness of the market, it's likely that their revenue base without some assistance and some other opportunities to grow might begin to slip, chances are, contingents are probably at all time highs and the outlook for the future is cloudy. So I think that now it is actually a very good for sellers to be contemplating this, what we have to do and what you can be assured we are doing is maintain our disciple.

The rules for us are very clear and very simple. We do not buy turnaround projects. That's not what we are in the business for doing. We are buying successful entrepreneurs, who are good in our business, who love this business and want to stay in the business and we are not interested in helping people retire or frankly financial institutions exit. That's not the business we are in. We will not dilute. So even for the platform agency that really is a terrific location, we are not going to dilute. So basically we follow those rules. We find strong entrepreneurs and there are plenty of them who want to join us.

Unidentified Analyst

Great thanks and just on a different note, the MGA/MGU performance income is up around 66% year-over-year, can you provide some additional details into that and the margin impact?

Unidentified Company Representative

Well first all, most of that goes directly to the bottom-line, but as know, if you are running an MGA or MGU, all of your profitability comes from profit share of commissions. That means you are basically getting a subsistence living from the under-writing company to do the under-writing for them, where you cover your cost. But where you make your money is when you've done a good of under-writing form and we've had very, very strong results from the MGAs and MGUs.

Unidentified Analyst

Great, thanks.

Operator

Thank you. Our next question is coming from of Keith Walsh of Citi. Please go ahead

Keith Walsh - Citigroup

Hey, good morning everybody.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Good morning Keith.

Keith Walsh - Citigroup

Pat you guys seem to have a real disciple around, your M&A strategy average deal size has been between $3 million and $5 million of revenues, whereas some of your competitors have really gone up market with some of the deals they've done and I just want that if you can give us broad comments about some of the challenges and may be integrating some larger deals on why you choose to stick in that and then I have got a follow up?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Well Keith thank you for the comment. I mean part of our discipline around that is if there are more opportunities at that level. But the integration issue is clearly a part of whole desire to stay in the net huge deals. I mean would we look at a deal that was $25 million in revenue, sure. Have we look at deals that were $100 million revenue, not really and would we look at deals that are bigger than that, not likely.

We've got a mantra that there is no reason to make a big mistake. And you can get your hands around the culture and the people of a smaller deal much more easily than you can a large deal. So number one there is more opportunities, because there is more of them, but number two, we do favor them.

Now, as I said from time to time, there are a little bit bigger agencies that become available and we will take a very serious look at those. Those are very successful entrepreneurs that have built some of those companies. But by-and-large you will see us stick to sweet spot, $3 million to $5 million to $10 million right in there; we can do those all day long, your follow-up.

Keith Walsh - Citigroup

Yeah and just... if you can just talk broadly again about valuing a business in the soft market, I mean you're looking at a business and maybe it's got $3 million of revenues. Do you factor in that it could potentially shrink when you are doing your valuation and then how do you think about supplementals that they generate as well?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Absolutely, we do factor and we got to look at these... that's another reason that some of the small ones are easier. You an actually get your hands on their accounts. Often times, most times, in a firm that's $3 million to $5 million, the top 20 accounts are all the pre-tax, adding contingents or supplementals to that. So you have to factor in the industry that there in, that the accounts they have and what's going on the marketplace around those accounts and also what's interesting to us, the smaller guys out there, have actually been showing some growth, that's they tend to be niche focused and they tend to do very well, even in the soft market.

Keith Walsh - Citigroup

Great. Thank you.

Operator

Thank you. Our next question is coming from [indiscernible] with Stifel Nicolas. Please go ahead.

Unidentified Analyst

Good morning.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Good morning.

Unidentified Analyst

Taking [ph] 1% organic growth in brokerage, can you just breakdown between the retail and wholesale segments for that?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

I don't have that.

Unidentified Analyst

Okay, and the supplementals today had impacted all the organic growth in rate in the year-over-year basis?

Unidentified Company Representative

Yes, there is a slight fueling of the organic growth as a result of supplemental commissions, but it's not more than a point.

Unidentified Analyst

Okay, fine. And other than supplementals. Do you have any successes in pushing for higher commissions in either retail or wholesale?

Unidentified Company Representative

Yes, and in fact we allow our production team production people to negotiate their deals at the under-writing test [ph] deal by deal, and as you know by-and-large our production forces on a revenue formula. So at every opportunity you are asking me, local under-writer to give consideration to additional commissions and where there is room in deal, they are getting them.

Unidentified Analyst

Okay, and then first and lastly. As far as wholesale, the M&A pipeline give unusual pressures in that segment. You've seen interest sale [ph] at lower prices?

Unidentified Company Representative

No and we're being very, very cautious about straight open market wholesale. But you'll see our activity in the wholesale arena be primarily MGAs/MGUs.

Unidentified Analyst

All right. Thank you very much.

Unidentified Company Representative

Thank you.

Operator

Thank you. Our next question is coming from Bryan [ph] [indiscernible]. Please go ahead.

Unidentified Analyst

Good morning guys.

Unidentified Company Representative

Good morning Bryan [ph].

Unidentified Analyst

How are you?

Unidentified Company Representative

Good. How are you?

Unidentified Analyst

Okay. Just a couple of housekeeping questions. At the end of the quarter, if you get about a $185 million in cash on the balance sheet that was yours, but you still opted to attend the revolver. Just give me a sense as you are thinking about your decision to keep. What kind of cash would you want to keep in the bank or how much you wanted towards the revolver and why we hope hold them all this cash, when you can use it to make the acquisitions.

Unidentified Company Representative

Bryan, first of all, the nature of the cash and the balance sheet, a big piece of that number is international and we are domestic acquisitions. So rather than bringing that back to the U.S, we leave it internationally and over there because of the tax situation there. So I involve a lot of that, the $185 million, well technically free cash flow as to use as we would like. It really relates to our customer funds, it's not technically in a premium trust account. So we tend to keep that cash as if we are in a premium trust account. And so we don't use our customer's cash in order to fund the acquisitions.

Unidentified Analyst

It's a good thing. I think they appreciate that.

Unidentified Company Representative

I know, we could technically, but it's not that we have ever done, now [ph] just doing it.

Unidentified Analyst

No problem, Doug IT system, you mentioned that you are sort of getting up and running on all the various systems you have been implementing over the last few years. There has been added cost due to those system upgrades. Where do we stand in terms of the cost... added cost of those and we can see any database [ph] in the second half of this year, as we go online.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

I guess that before our improvement initiatives have caused us probably a margin point, each year for the last couple of years and that's the way it's running here in 2008 also. We expect that with our headcount control initiatives and with our offshore initiatives that we will begin to see payback on that towards the end of the year.

Unidentified Analyst

Great thanks guys.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Thanks, Bryan [ph].

Operator

[Operator Instructions].

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Also I think we are at end of the questions and answers period here.

Operator

We do have one final question would you like to take it?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Sure, I would be glad to.

Operator

Our final question is coming from Jay Gelb with Lehman Brothers. Please go ahead.

Jay Gelb - Lehman Brothers

Good morning. I was hoping Pat, may be, you could reconcile the statements on the risk management segment where you anticipate claims counts could go up, but at the same time the country could be headed in a recession. My recollection was that a meaningful portion of the risk management segment was driven by economically sensitive sectors?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Jay that's a very good question and you are absolutely right on it. If you remember back to 2001, after 9/11 when we really had a slowdown in transportation and light [ph] claim counts dropped precipitously. In a normal recession, we don't see claim counts dropping off precipitously. They tend to go down slowly and right now we have such a strong new business pipeline that we are pretty confident that for at least the first half of this year, we will see claims counts grow.

Jay Gelb - Lehman Brothers

I remember you used to also give actually the claim count numbers. Can you... I don't know if you have those handy, or you give sort of the percentage change. What you saw in the first quarter?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

We are up 3% in claim count in the first quarter over last year.

Jay Gelb - Lehman Brothers

And what was that number for May, perhaps all of 2007?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Well, the claim counts through all of '07 were up about 5% and the total claim counts, I will ask Rich McKenna to speak up?

Richard J. McKenna - Corporate Vice President; President - Risk Management Operations

Yeah we brought in about 600,000 claims in the U.S market in '07 and that's about, that was a 5% increase over '06.

Jay Gelb - Lehman Brothers

Okay and then just so we can square our models a bit should... what should we anticipate the impact being on being on the sale of the reinsurance business going forward. My recollection was that was sort of a breakeven business and what could the impact beyond margins?

Unidentified Company Representative

We lost about $12 million pre-tax last year in that business.

Unidentified Company Representative

I think Jay the best thing to do is that we have closed out all the reinsurance operations, go to our [ph]... that the five year quarterly spread on the website. We pushed all of the reinsurance business out of the brokerage segment. It's in the one line and discontinued ops and in accordance of discontinued operation accounting. So you can get a run rate there. So if you look at the website and show [ph] it up at that... that spread sheet on our website, you can trigger models up to that. That's probably the safest way for me to answer the question.

Jay Gelb - Lehman Brothers

That's helpful. Thanks very much.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Thanks Jay.

Operator

Thank you Mr. Gallagher. We do have two more questions in through queue.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Sure, let's take them.

Operator

Okay. Our next question is coming from Nick Prendergast with Signal Hill. Please go ahead.

Nicholas Prendergast - Signal Hill Capital Group

Hi, good morning guys.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Hello Nick.

Nicholas Prendergast - Signal Hill Capital Group

I just had a question with regard to your risk management section. As far as looking in our model, you guys came in line with our revenues. The expenses were a little bit higher and I know you had mentioned that headcount is a pretty sensitive issue, given that you need to have the capacity in place and case claims through. I was just curious, have you guys actually hired more people in that segment?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Yes.

Nicholas Prendergast - Signal Hill Capital Group

Yes, you have, okay and I presumably... I have seen you hiring, because you expect to see increased claim activity throughout the year.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

There are worth about 27 people in that segment.

Nicholas Prendergast - Signal Hill Capital Group

Okay.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

And for the year, that's off of the December 31 and here's how we see. We tried to predict, as closer as we can the claims that will arise in the future. So when you write a new piece of business. Let's say you have got a piece of business that's going to give you 5,000 claims.

Nicholas Prendergast - Signal Hill Capital Group

Sure.

Unidentified Company Representative

Literally, try to predict when and where those claims are going to hit.

Nicholas Prendergast - Signal Hill Capital Group

Understood.

Unidentified Company Representative

And you better just in time higher rate, because you have claims coming in and they are not adjusted, you've got a big problem

Nicholas Prendergast - Signal Hill Capital Group

I see, okay well thank you for that little bit. Also, my other question with regard to your... the discontinued operations and I know that you guys give an income statement, a little breakout of what the components are, but was there anything that came as a surprise in any of those line of items to you guys?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

No,I don't think so. We gave our... when we did the deal in our early, when we announced the deal, we were pretty close to where we are and just a reminder and we still have the lease termination cost that will probably hit in the third quarter, which will probably be about $15 million, some of that cash, some of that non-cash.

Nicholas Prendergast - Signal Hill Capital Group

Okay, all right, well thank you very much.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Thanks Nick.

Operator

Thank you. Our final question is coming from Mark Dwelle with Ferris, Baker Watts, Inc. Please go ahead

Mark Dwelle - Ferris, Baker Watts, Inc.

Hey, good morning.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Good morning Mark.

Mark Dwelle - Ferris, Baker Watts, Inc.

Just two questions and they are both pretty simple. With respect to your discontinued operations, when you take the lease termination charge, as well as any settle up on you sort of an earn-out payment, that will all be below the line, which is to say non-operating, whenever that occurs?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Correct, it will all be in the discontinued line item that is not in the brokerage segment, nor in the risk management segment.

Mark Dwelle - Ferris, Baker Watts, Inc.

Okay, that's what I figured. Just wanted to be sure and with respect to the risk management segment, the international unit's been grown pretty nicely; can you tell us what the split is between domestic revenues and international revenues at this point?

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Our, excuse me, our international revenues are 15% of our total revenues.

Mark Dwelle - Ferris, Baker Watts, Inc.

Okay, that's all my questions. Thank you.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Thanks Mark.

Operator

Thank you. At this time, I would like to turn the floor back over to you for any further closing remarks.

Patrick J. Gallagher. Jr. - Chairman, President and Chief Executive Officer

Yes, I do have a few closing remarks and first and foremost, thanking you, all of you for joining us this morning. It is very, very competitive out there, but we as an organization, as a management team are focused on five very specific down on priorities. Number one, increasing our organic growth, we are a sales and marketing company, we get out and get after new business every single day. Secondly, aligning our service deliverables with our compensation. In other words, we've got to get paid properly for what we do, three, increasing our productivity in our margins. Fourth, hiring and retaining the right people, frankly the best people, because we are a people business. And fifth continuing to drive our merger and acquisition opportunities. If we deliver on these five areas, we will continue to grow and build the company and we are confident that we can do that. Thank you everybody for joining us this morning. We appreciate it.

Operator

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

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