Brown & Brown, Inc. (BRO)

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Brown & Brown (BRO)

Q3 2013 Earnings Call

October 15, 2013 8:30 am ET

Executives

J. Powell Brown - Chief Executive Officer, President and Director

Cory T. Walker - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Ryan J. Byrnes - Janney Montgomery Scott LLC, Research Division

Sarah DeWitt - Barclays Capital, Research Division

John Campbell - Stephens Inc., Research Division

Al Copersino

Adam Klauber - William Blair & Company L.L.C., Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day and welcome to the Brown & Brown Inc. 2013 Third Quarter Earnings Conference Call. Today's call is being recorded.

Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward looking in nature and reflect current views with respect to future events, including those relating to the company's anticipated financial results for the first quarter of 2013. Such statements are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including the company's determination as it finalizes its financial results for the first quarter of 2013, that its financial results differ from the current preliminary unaudited numbers set forth in their press release issued yesterday, other factors that the company may not have currently identified or quantified, and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I would now like to turn the conference over to Mr. Powell Brown, President and Chief Executive Officer. You may begin.

J. Powell Brown

Thank you, Mary. Good morning, everybody. All 4 divisions grew organically in Q3 for Brown & Brown. Retail was up 2.5% from 2.3% in Q2; National Programs, up 14%, down slightly from 18.3% in Q2; Wholesale, up 15.8%, the big winner this quarter, up from 10.8%; and Services down, just at 4.6%, down slightly from 10%, which was significantly impacted by the Colonial Claims revenues in Q1 and Q2. The organic growth overall combined with 7.3% or $20,765,000 in revenue. In our results this quarter, we had a $1.3 million onetime expense associated with a possible acquisition that did not occur. Cory will discuss that in his comments. But most importantly, we're very pleased with our performance this quarter.

And with that, I'll turn it over to Cory for our financial report.

Cory T. Walker

Thanks, Powell, and you are right that we did have a very good quarter. We earned $0.39 of earnings per share, but that could have been a solid $0.41 but for 3 items that created some unusual noise in the quarter. I know that we don't really generally use that term, noise, but we did want to highlight 3 specific items.

One, we did expense $1.3 million of nonrecurring expenses in the third quarter pursuing a very large acquisition, which we were not the winners. These costs were separate and above our normal quarterly acquisition related expenses. Approximately $300,000 of those expenses fell into the compensation and benefit line item expense with the remaining $1 million in the other operating expenses.

Secondly, our July 1 acquisition of Beecher Carlson had a slow start due to some acquisition transition issues. They missed their third quarter revenue budget by about $3.9 million. Beecher is writing a lot of new business, and we still believe that much of that deficit will be made up next quarter and other quarters. We believe that the 12-month projections for Beecher Carlson's revenues and EBITDA that we gave last quarter are still valid and they will hit or exceed those targets. And Beecher's large account division, we believe that roughly 1/3 of their renewal revenues will fall into the fourth quarter. Now the combination of those first 2 items, the $1.3 million and the Beecher, when you extract that, that really does have about a 2% margin impact on a consolidated basis on EBITDA.

And the last item just to highlight is one that we kind of highlight every quarter. It's that it's the change in the acquisition earnout liability. And we pretty much tell you every quarter to ignore whether it's a positive or a negative because it's a very meaningless number. And of course, this quarter, it's $665,000, which was a positive earning. And so you just need to exclude that from any of your considerations.

From a revenue standpoint, our commissions and fees for the quarter increased 18.5% to $358.2 million. Now that's up from last year's third quarter of $302.3 million. We did receive $14 million of profit-sharing contingent commissions, which represented a nice increase of $1.9 million over the $12.1 million we received last year in the third quarter. The vast majority of that net increase came from our Retail and our Wholesale Brokerage division.

In the fourth quarter of 2013, we are currently estimating that we may receive between $4 million and $5 million of profit-sharing contingencies as long as the hurricanes stay away from Florida. Additionally, we did accrue $2.4 million of guaranteed supplemental commissions in the third quarter of 2013, which is about what we accrued for last year in the third quarter.

Now looking at the internal growth schedule. We had a very nice internal growth rate, as Powell mentioned, 7.3%. We -- our total core commissions and fees increased 19.4% or $55.6 million of net additional core commissions and fee revenues. However, within that net number, we had $34.8 million of acquired revenues. That means we had $20.8 million of commissions and fees -- of greater commissions and fees on a same-store sales basis.

As Powell mentioned, our National Programs and our Wholesale Brokerage divisions led the way with strong internal growth at 14% and 15.8%, respectively. I think the most important story is that our Retail division continued its incremental improvements with a 2.5% internal growth rate of its core commissions and fees.

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