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Brown & Brown Inc (BRO) Q1 2019 Earnings Call Transcript

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Brown & Brown Inc  (NYSE: BRO)
Q1 2019 Earnings Call
April 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Brown & Brown Incorporated First Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during this call including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the Company's anticipated financial results for the first quarter and 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. Such factors include the company's determination as it finalizes its financial results for the first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the 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, as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and 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. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the Company's earnings press release or in the investor presentation for this call on the Company's website at www.bbinsurance.com by clicking on Investor Relations and then Calendar Events.

With that said, I will now turn the call over to Mr. Powell Brown, President and Chief Executive Officer, you may begin.

J. Powell Brown -- President and Chief Executive Officer

Thank you, Kevin. Good morning everybody and thanks for joining us for our first quarter 2019 earnings call, I'm on slide three. For the first quarter, we delivered $619.3 million of revenue, growing 23.5% in total. Our organic revenues increased by 2% for the first quarter. I'll get into more details in a few minutes about the organic growth for each of our segments.

Our EBITDAC margin was 31.8%, which is up 60 basis points versus '18. Our net income per share for the first quarter grew 25% to $0.40 as compared to the first quarter of '18. During the quarter, we also completed eight transactions with annualized revenues of approximately $36 million. Later in the presentation. Andy will discuss our financial results in more detail.

I'm now on slide number four, similar to what we've been experiencing for a number of quarters, the economy continued to expand in Q1 of '19 with many of our customers investing in their business, hiring more people and growing organically. While overall premium rates remain competitive, during the first quarter, we did see some upward pressure in certain lines including coastal property, both wind and earthquake, also in automobile, employee benefits and general liability. The main line where we're seeing rates consistently down across most regions is workers' compensation. Most other lines of coverage are flat to up slightly 0% to 5% with commercial auto up 7% to 10%.

As a result of losses over the past couple of years, there's a lot of discussion that risk barriers want to increase rates, most pronounced in the London markets. But we are hearing this in other markets as well, where there's is a lot of talk -- while there's a lot of talk and desire for higher rate, there's still a lot of capital in the market. Therefore, we see some insurance companies tightening underwriting guidelines, but loss free accounts remain quite competitive. We're pleased with our investments in technology, innovation and new programs and we're starting to realize some of the initial returns that we expected.

I'm on slide five, let's talk about the performance of our four segments. In Retail, we delivered solid organic growth of 3.6% in Q1, with most lines of business growing through new business activity and growth on renewals of existing customers. We're pleased with the performance of all of our new acquisitions in Q1. Hays positively impacted our margins and is performing in line with our expectations. Please remember, we expect higher revenues and margins in the first quarter due to the amount of employee benefit, combined with the new revenue recognition standard that went into effect last year, that's relative to Hays.

During the quarter, we completed six acquisitions and realized approximately $95 million of year-on-year revenue growth from acquisitions completed within the last 12 months. Our National Programs segment decreased 2.3% organically. This was primarily impacted by less flood claims processing revenue, as compared to the prior year. We also experienced some headwinds in our lender-placed business due to the continued improving economy and some bank consolidations that are impacting our customers. Commercial and personal automobile continues to challenge all of our carrier partners. We have several programs that are auto focused. We're watching our retention of existing business and new business closely.

During the quarter, we realized good growth in our Earthquake, All Risk and wind programs just to name a few. Our Wholesale Brokerage segment delivered organic revenue growth of 3.3%. This growth was impacted by renewal timing for a couple of larger accounts, where the accounts are renewing in Q2 and Q3 as opposed to Q1 and prior years. If those accounts have renewed in March like they did in 2018, our organic revenue growth would have been over 4.5%. Therefore, our organic growth will be slightly higher for wholesale in the second quarter.

Our Services segment delivered organic revenue growth of 50 basis points for the quarter. As we mentioned during the year-end call, we expected lower claims in our Social Security

advocacy business resulting from the completion of advocacy work on a book of business in the prior year. Isolating this impact, the majority of businesses in the Services segment grew nicely. During the quarter, we completed an acquisition of a Medicare Set-aside business that will be complementary to our existing NuQuest Medicare Set-aside business.

Overall is a good quarter and we're really pleased with our results. Let me turn it over to Andy to discuss our financial performance in more detail.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Powell and good morning everyone. Consistent with previous quarters, we're going to discuss our GAAP results and then our adjusted results, excluding the impact of acquisition earn-outs. I'm over on slide number six. This slide presents our GAAP and certain non-GAAP financial highlights. For the first quarter, we delivered total revenue growth of 23.5% and organic revenue growth of 2%. Our income before income tax increased by 25.4% and our EBITDAC increased by 25.8%, both growing faster than revenues due to leveraging our expense base.

Our net income increased by $23.1 million or 25.4% to $114 million. And our diluted net income per share increased by $0.08 or 25% to $0.40. Our effective tax rate for the first quarter was 23.3%. Remember that the first quarter of each year we normally have a lower effective tax rate due to the tax benefit associated with the vesting of stock grants to our teammates. With our changing tax footprint by state and corresponding apportionment, we expect our state tax rate to be slightly lower. As a result of this last item, we are projecting our expected full-year effective tax rate to be in the 25% to 26% range, versus our previous guidance of 26% to 27%.

As a result of our share repurchases, we've been able to maintain a relatively flat weighted average number of shares outstanding, as compared to 2018. This is offsetting shares issued in connection with our equity programs and for the acquisition of Hays. Lastly, our dividends per share increased to $0.08 or 6.7% compared to the first quarter of 2018.

Moving over to slide number seven, this slide presents our results after removing the change in estimated acquisition earn-out payables for both years. This approach provides a more comparable year-on-year basis. Since there were minimal changes to our estimated acquisition earn-outs for both years, our diluted net income per share increased by $0.01 for each quarter and therefore increased by 24.2% versus the first quarter 2018.

Moving over to slide number eight, this slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 23.4% and our contingent commissions increased $3.6 million, as compared to 2018. We'll give further clarity on contingent commissions later in my comments. This amount was impacted by recent acquisitions and instances where the final cash settlements were slightly higher than the amounts that we accrued in 2018. Our core commissions and fees increased by $113 million (sic $117 million) or 23.2% (sic 23.4%). When we isolate the net impact of M&A activity, our organic revenues increased by 2% driven by the items that Powell described earlier.

Moving over to slide number nine, to provide additional insight into the components of our EBITDAC margin, we've included a walk through from 2018 to 2019. In summary, it was a quiet quarter, so there is not much to breakout. Our margins were impacted negatively by 50 (ph) basis points due to the year-on-year change in the gains or losses on disposals of businesses. Hays positively impacted our margin by approximately 70 basis points for the quarter.

This resulted from the higher revenues and margins in the first quarter, driven by the amount of employee benefits business and how revenues are realized with the new accounting rules. We'll discuss the results of Hays in more detail later in the presentation. Other reflects the underlying margin improvement we experienced across our business, as we are beginning to realize some returns from our previous investments in teammates and technology and leveraging our expense base. This expansion was partially offset due to higher non-cash stock compensation cost.

On the following slides, we present the results of our four business segments, we're going to start on slide 10 with the Retail segment. Our Retail segment delivered organic growth of 3.6% for the first quarter of this year and total revenue growth of almost 40% driven by acquisition activity, contingent commissions and good organic revenue growth. As mentioned during the Q4 2018 earnings call, we expected the Retail division to have slightly lower organic revenue growth in the first quarter of this year, as compared to the second quarter of 2019, due to impacts of the new revenue standard in the prior year. While we did see this -- the effect is -- was less than anticipated due to higher incentive commissions received in 2019 for amounts earned and accrued in 2018.

Our EBITDAC margin for the quarter increased by 210 basis points, driven by higher contingent and supplemental commissions, the performance from Hays, leveraging our cost base and realizing some benefits from our previous investments. Our income before income tax margin declined by 120 basis points due to higher intercompany interest expense and amortization associated with our acquisition activity.

Moving over to slide number 11. Our National Programs segment decreased 2.3% organically. This was driven by approximately $3 million decrease in flood claims processing revenue as compared to the prior year, as well as some headwinds experienced in our lender-placed business. EBITDAC decreased $3.1 million or 8.6% primarily driven by lower organic revenues and decreased contingent commissions. Income before income taxes declined by 7.2% primarily due to the decline in revenues, but was partially offset by lower intercompany interest expense.

Moving over to slide number 12. Our Wholesale Brokerage segment delivered organic revenue growth of 3.3% and total revenues increased 6.7%, as a result of acquisitions completed within the past 12 months and an increase in contingent commissions. The EBITDAC margin increased to 190 basis points as a result of higher contingent commissions and leveraging organic revenues. Our income before income taxes increased faster than revenues due to the estimated acquisition of earnout payables that were recorded in the prior year.

Over to slide number 13. Our Services segment, organic revenue increased 50 basis points for the quarter, driven by growth in most businesses, but was substantially offset by lower social security advocacy claims. Total revenue growth is due to acquisitions that we completed in the last 12 months. From a margin perspective, EBITDAC grew slower than total revenues due primarily to a gain on disposal in the prior year, isolating the impact of the gain in the prior year, EBITDAC margins expanded nicely for the quarter. The lower growth for income before income taxes was driven by incremental intercompany interest charges, associated with the acquisitions.

Moving over to slide number 14, we wanted to provide an update on the Q1 performance of Hays which is in line with our expectations. Consistent with our disclosure for larger acquisitions, we plan to provide quarterly updates on the performance of Hays through the end of the first year post acquisition. Total revenue was in the expected range, while expenses were slightly better primarily due to the phasing of expenses associated with ASC 606. Please remember that a larger portion of the annual revenue and profit will be recorded in the first quarter due to the higher percentage of employee benefits business.

We continue to believe that Hays will deliver within the previously communicated full-year range of revenue and profit. Please refer back to the year-end earnings deck for the remaining quarterly estimates, which have not changed. A few other comments on the quarter and outlook. In order to term some of the borrowings for the Hays acquisition and further stagger our maturity ladder, we issued $350 million of 10-year public bonds, with a coupon of 4.5% in March. We're really pleased with this interest rate, as we issued 10-year bond in September 2014 at 4.2%.

We also want to talk about our cash flow from operations this quarter, as there was a material movement as compared to what was generated last year in the first quarter. As reported, net cash provided by operating activities is $5.4 million for the first quarter of this year and was $79.5 million in the first quarter of 2018. There are two main drivers, which are timing and nature.

The first relates to premiums payables to insurance companies, which decreased $56 million as compared to the year-end balance. In the first quarter of 2018, the balance increased by $14 million. This represents a $70 million change in cash flow generation during the quarter. This account represents pass through funds to risk barriers and therefore we can have large swings in the balance based upon remittance to carriers during any one quarterly period, which we realized movements like this in the past. The second item relates to the timing of working capital of settlements for recent acquisitions. This is temporary and will revert to normal timing over the next quarter or two. This timing negatively impacted our cash by about $30 million this quarter.

Both of these items are timing and will reverse over the coming quarters. Therefore, we continue to feel comfortable that our industry leading cash flow conversion ratio will remain over 20% for the full-year. While Q1 in total was a good year or was a good quarter for contingent commissions, we did see a $3 million decrease for National Programs. We expect this trend to continue for the remainder of the year, as we know our certain contingent commissions that we will not qualify for in the back end of the year.

For the full-year, we're estimating our contingent commissions in National Programs should be down about $12 million to $14 million. The remaining decrease should be recognized about evenly over the remaining quarters. This decline will be substantially offset by growth in retail. We expect Wholesale to be flat to down $2 million for the full-year 2019. For the full-year we estimate contingent commissions for the company will be down about $2 million to $4 million, as compared to 2018.

With that, let me turn it back over to Powell for closing comments.

J. Powell Brown -- President and Chief Executive Officer

Thank you, Andy for great report. As a diversified insurance broker, we have four distinct divisions that enable us to serve numerous customers across the United States and the world. There seems to be some excitement around possible rate changes. First, I'd like to reiterate, there is a lot of capital out there chasing a finite number of risks, thus we believe much of that rate pressure will be mitigated. There may be certain areas that need some more than others, but I'm saying as a broad statement that we mitigated.

Second, we're believers and supporters in the US economy and want to see expand further. However, we're always watching for signs of a potential slowdown and then how that might impact our business. Third, we try to present a clear picture of our business to everyone, analysts and shareholders. Our interests are aligned with long-term investors. We know there will be peaks and valleys, but we're investing for the long-term. There are acquisitions we could do, but choose not to because of the price or lack or not a cultural fit. Culture, it's an intangible thing that makes some companies great and others average. As we cross the 10,000 teammate threshold, we think about how we cultivate and drive our culture as we move toward our next intermediate goal of $4 billion in revenue.

To get there, we need to hire or acquire or some combination of the above around 10,000 more teammates. Excuse me, it's an exciting time at Brown & Brown and we have a lot of momentum. We have great teammates dedicating serving our customers. The acquisition pipeline is good. And finally, we now have a balanced approach to organic growth and margin expansion will deliver long-term value creation and Q1 was a good start to the year.

With that let me turn it back over to Kevin for the Q&A session.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We will now take our first question from Michael Phillips of Morgan Stanley. Please go ahead.

Michael Phillips -- Morgan Stanley -- Analyst

Thank you. Good morning, everybody and thanks a lot for all the commentary, they are very helpful and congrats on the quarter. I guess first question just want to drill down a little bit more on margin and thoughts there, I guess the bottom line of the question is, do you think what's kind of an inflection going forward, there's a couple of things that are possibly headwinds, some headwinds this year for margins. So maybe you can give little details on kind of the pluses and minuses about margins and kind of what you think going forward whether or not we're actually at an inflection point? And I'm not talking individual segments, just kind of corporate wide.

J. Powell Brown -- President and Chief Executive Officer

Sure. All right. So, Michael, as you know, one, the margin is impacted by several things, one, the business is operating more efficiently going forward. And that's a result of really high quality teammates. And two, the acquisitions that we make and if some of those are at slightly lower margins, and then they continue to improve as they are part of our team. So do you think we're at an inflection point? We believe that we are without something that we don't see or know off today, that's number one.

Number two, there are lots of opportunities for us to invest in our business, I know we've talked about this in the past, the biggest area or one of the most important area is just new people whether we hire them from another firm, we hire them from another industry, we bring them in, second would be M&A and third would be return to shareholders. That first bucket we think there is going to continue to be lots of opportunity to hire high quality people in the near to intermediate-term because there's lot of disruption in the industry. And there are some people out there that have worked for firms that maybe they aren't pleased with the new firms they want to work with. That does not mean we are going out and trying to hire a bunch of people from other firms. What it means is, there will be some high quality people who become available in the next 12, 24, 36 months and how we invest in those people may also have short-term impact on margins, but long-term it's increasing the capabilities of the team and positioning us well for the future.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Michael. It's Andy here. I would add a couple of things, I'll just remind you from our comments at year-end, I think the inflection point is spot on, that is pre the impact of Hays this year because we said that Hays would have a negative impact on margins this year, so keep that in mind. And then the other piece, we had talked about was the $8 million one-time adjustment that we recorded in the third quarter of last year in National Programs. And so those are kind of the two big items out there. And then we've kind of talked about the fact that we're at full investment on where we've been with technology, et cetera. So a lot of those headwinds are behind us and will slowly start to recognize benefits from those over the coming quarters.

Michael Phillips -- Morgan Stanley -- Analyst

Okay, great, thank you both very much. That's helpful. I guess second question and if a little bit more detail on some of the early commentary on. You mentioned comp and I was just curious on specifically when workers' comp whether that's accelerated or decelerated in terms of the decrease in there from what you said last quarter. And then I believe you mentioned in your commentary that GL was up and I was wondering if you could provide little more detail on where that is, the press release or your slide deck mentioned professional lines is down, so what buckets of GL would be up. Thank you.

J. Powell Brown -- President and Chief Executive Officer

Okay. So relative to workers' compensation, there just continues to be pressure, this is a broad comment. So I don't think it's so drastically different than it was in our last earnings call. So I'd say it's similar, but you just need to be aware that if you've been in the business as long as I have, we've seen that line of business be a very difficult line and now it's seemingly more of a attractive line which I think is really interesting. Liability in terms of -- there are some carriers out there that are trying to figure out, are they actually making money in liability, long tail liability, not just short tail liability.

And so with that I would tell you that it could be any account, whether it'd be a manufacturer of a product or exposure like habitational, we have apartments or anything in between, so you could have premises or products exposure, carriers are reevaluating that that does not mean we're seeing high-rate pressure, it is very spotty on certain accounts.

So you might say like what. Well, if you look at certain habitational accounts, particularly in things that might be hard housing or things that are tougher classes of business, there may be continued rate pressure or changes in the terms and conditions or both, but we just mention it because there are people talking about it. We are not seeing rate increases sticking more broadly across the market, as you might think based on the amount of chatter on it, that's the important distinction.

Michael Phillips -- Morgan Stanley -- Analyst

Okay. Great, thank you. Well appreciate it.

Operator

We will now take our next question from Mike Zaremski of Credit Suisse. Please go ahead.

Michael Zaremski -- Credit Suisse -- Analyst

Hey, good morning. Thanks. I'll start with a pricing question, a P&C pricing question. In the deck, it talks about upward pressure on certain lines watching reinsurance rates. Could you maybe help us understand if there are any nuances in your book in terms of if reinsurance rates do continue to hard in. Are you guys more lever that to that then maybe other brokers, I believe you have more of a potentially a Florida component than others and I'm not sure if that's more in the wholesale or the retail, so maybe you could flush that out more.

J. Powell Brown -- President and Chief Executive Officer

Okay. So, as you know, if in fact you hear about and/or reinsurers are increasing the pricing, that does not necessarily mean that that price, dollar for dollar or a percentage for percentage will be passed through by the primary carrier, that's number one. So the price, which is born in the marketplace is set by the marketplace, it's not set by individual insurance carriers, there can be some that actually write a lot of a class of business. And if in fact they change that may trigger a change in others. But so -- I don't want you to think that if you read about reinsurance rates going up x amount, that means that you should automatically assume that primary pricing is going to go up, that's number one.

Number two, as it relates to living in Florida, Mike, when I joined the team now 24 years ago, our concentration in Florida was I think it was 60% of our revenue, it was significantly different. So we do have a large retail presence here. We do wholesale business here. We view program business and services business here. Those areas that typically would be most impacted by if you're asking about potential rate changes would be property driven accounts in Florida. So we write a lot of habitational and other property across the State of Florida. However, we're continuing to hear a lot of talk about it as I referenced in my comments -- our comments from London and domestic carriers, but we're not seeing it stick all the time.

So I would caution you about trying to draw direct parallel and saying, Brown & Brown's business, which is now maybe all in 10% or 15% of our revenue overall versus maybe 40%, 50%, 60% when I started at Brown & Brown is so heavily dominated in Florida. So therefore if there is a change, it's going to impact our business dramatically, I would caution you about that, number one.

Number two, as it relates to us versus other brokers, we can't -- I can't comment about their books of business. Although, we want to and do write a lot of business in coastal areas, Texas, the Gulf Coast, Florida, up and down the East Coast and we write a lot of quake in California, Oregon and Washington. And so having said that, we're starting to see some pressure, slight pressure in earthquake on some of the bigger limits, as you know it's been a long time since we've had an earthquake of any magnitude. And it's not a question of if, it's a question of when. So like I said, we are -- we're trying to be cautious and manage your expectations about what other carriers are saying or brokers about the marketplace, because we are just not seeing it yet in terms of pricing sticking.

Michael Zaremski -- Credit Suisse -- Analyst

Okay, that's helpful. And a follow-up for Andy on the tax rate. I know there's been a lot of changes to the tax regime over the last couple of years. So just curious as, do you think 25 to 26 or maybe a 25, 27 range is the kind of a new normal for thinking longer-term beyond 2019?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Hi. Good morning, Mike. Yeah, a 25 to 27 is probably a good range on it for the Company. I think barring what happens down at the state level and if there's any modifications in their approach, but with our overall footprint today, a problem we want it move significantly that's out there.

Michael Zaremski -- Credit Suisse -- Analyst

Okay. Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

We will now take our next question from Greg Peters of Raymond James. Please go ahead.

Gregory Peters -- Raymond James -- Analyst

Good morning, everyone. Couple of questions.

J. Powell Brown -- President and Chief Executive Officer

Good morning.

Gregory Peters -- Raymond James -- Analyst

First of all I guess there is sort of ducktales with one of the earlier questions, but you talked about, Powell, in your closing comments about the opportunity to hire a bunch of new teammates. If I look, I look at your -- your revenue and EBITDA margins when you're $1 billion and then compare it with where you were when you had $2 billion of revenue, EBITDA margin still industry leading, but down 4%, 5% from what they were when you were smaller. When you think about getting bigger, do you think your margin profile is going to take another downward tick?

J. Powell Brown -- President and Chief Executive Officer

Well, let me -- let me back up and say that I think that we as an organization have continued to evolve as going from $1 billion to $2 billion, that means that we have additional capabilities to serve different segments of the marketplace and some of those segments, the margin profile is a little different than what we were doing predominantly as a $1 billion company, that's number one.

Number two, we have made investments and we'll continue to make investments in things like technology, which will help us scale the business. And as Andy said earlier, we believe we're at a technology spend that is good now, but we're always -- always evaluating that and that technology spend as you know is not just the infrastructure, but security. And so as we continue to look at the business, we have to continue to think about things that maybe we didn't think about as much when we were a $1 billion or $800 million company versus a $2.3 billion or $4 billion company on the way to $4 billion. So, that's a long answer to saying based upon what we know today, Greg. And without a unknown event or events that we do not see coming, i.e. like cyber security, we think that the margin profile assuming we make acquisitions that are similar going forward in the next five to ten years, we think the margin profile is going to be very similar. So I think that it's -- it is obviously speculation on our part because we don't know the opportunities that will be presented to us long-term.

But as you know, we are focused on growing organically and growing our margin, so we can reinvest that money over time. So cash conversion is really important to us, so we can reinvest that in our team. So that's a long answer to your question.

Gregory Peters -- Raymond James -- Analyst

Well, I appreciate that.

J. Powell Brown -- President and Chief Executive Officer

Great.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, hey, Greg. A couple other things just to keep in mind when you look back over time, keep in perspective what's happened with contingent commissions as those move up and down so to the margins in the organization and we've been on a downward trend over the past number of years just due to profitability on the carrier side, that's part of a cycle that's out there. We've -- we said publicly that we believe low '30s to mid 30, that's a really good range for our business. And if you look back over the last 10 years, we've been able to double the business and still stay north of 30%.

Gregory Peters -- Raymond James -- Analyst

Right.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

That's really good. But to Powell's point, cash conversion is what we think matters at the end of the day, because you can't count anything else other than cash. And the fact that we run north of 20% and we generally average somewhere around $0.23 of every dollar's free cash flow, and that's twice the average of the industry. We've been able to do that for a really, really long time that's what drive our free cash flow yield.

Gregory Peters -- Raymond James -- Analyst

Great. I have two other questions, another big picture question and a small nitpicky question on a comment you guys made. So let's -- the other would be around your benefits business, there's been a lot of news in healthcare in the last couple of months, one of your competitor, Willis, made a major move by buying TRANZACT. And then of course entering the political environment and there is discussion about Medicare for all, and I'm just curious about how you guys are thinking about your benefits business in the context of all these prevailing news items that are out there?

J. Powell Brown -- President and Chief Executive Officer

Okay. So number one, just to give you kind of a background, about 34% of our Retail business is employee benefits, OK? That's just to give everybody a baseline. Number one, we have small, medium and large accounts benefits business. Number two, if in fact you look at the number of uninsured people prior to ACA, then during ACA and then in this period of continued change, it's interesting to see that it was maybe 43 million people prior to ACA goes down to I think 28 million, Andy?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

29.

J. Powell Brown -- President and Chief Executive Officer

29 million and it's kind of hovered in that 29 million person range right now. So having said that, we take the discussions very seriously. However, we believe that the financing of a Medicare for all would be let's call it cost prohibitive. And there's probably a place for we believe that there is absolutely a place for private insurance. And in doing so, if there is something that is drafted, i.e. ACA again or ACA 2.0, then there is going to be further complexity in that which creates more demand, excuse me for someone to interpret those rules and regulations. And then giving customers solutions to address their healthcare costs.

So having said that we, number one, watch it very carefully. Number two, we believe that it is a, it sounds good to some people, but the reality in the application and the impact across multiple industries, ie, just a hospital, any hospital that you would go to and how they would be paid versus private insurance. It has a huge impact and you may have seen those articles, there was one in the New York Times this weekend. There's also a lot of discussion around Medicaid and so should Medicare and so-security and funding, ie, there was an article in the Wall Street Journal this morning on that. And how does that currently evolve and what will we as a country need to do in the next 10 to 15 years to address potential funding shortfalls.

So long answer to the question, it grabs headlines and there's going to be a lot of discussion about it in the next year and a half and we're going to hear a great deal of it right here in Florida because we have a battleground state here. We believe there is some different solution if a D was elected or potentially if an R was elected or reelected.

Gregory Peters -- Raymond James -- Analyst

Okay. The other final question I had, in your comments. Powell, you mentioned the changes going on with profitability in the carrier market around auto and you said specifically you're watching the retention of your auto-related businesses closely. Can you talk about where the size your auto-related business is, is it in the wholesale, which segment it's in, just give us some additional color behind that comment?

J. Powell Brown -- President and Chief Executive Officer

Sure. What I was trying to address, Greg or what we're trying to address is, remember, we have a couple of programs that are auto focused. And you know that we have are -- we have one in market, we write on behalf of a market and if in fact that market's appetite changes or tightens dramatically, that could impact the revenue of that program. I was specifically not exclusively, but I was specifically thinking about programs when I made that comment. Although, we do Wholesale some of that business and we also have some of that business in our Retail, that comment was directed primarily at programs and several of our large auto-related program businesses.

Gregory Peters -- Raymond James -- Analyst

And so are you getting in there any indication from the carrier about their change in appetite?

J. Powell Brown -- President and Chief Executive Officer

Well, we always have ongoing discussions around performance of the book in particular geographic areas and states and all of that. And there's nothing that we're aware of right now it is a dramatic change that's not what I'm trying to signal, but all I'm saying is, if in fact you believe some of the things that people write about companies, there is a discussion about reserves being underfunded. If in fact those reserves are partially attributed to auto books, then insurance companies might -- somebody might come to you and say, hey, this is impacting our entire book, this is what we want to do. We are not aware of that right now. All I'm saying is, it is, I'm trying to say that it is possible that there could be some things that carriers do that we're not aware of, that would impact our auto book and specifically in service and programs.

Gregory Peters -- Raymond James -- Analyst

Thank you for your answers.

J. Powell Brown -- President and Chief Executive Officer

Absolutely.

Operator

We will now take our next question from Elyse Greenspan of Wells Fargo. Please go ahead.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, good morning. So a few questions. My first question in terms of the Retail segment, some of your introductory comments you guys had pointed to the fact that you had said that the Q1 would be weaker, but it did come in a little bit better. Is the comment -- does the comments still hold true that the second quarter should be higher than the full-year average and the Q1 weaker or is it going to be more kind of even throughout the year. I'm just trying to tie together some of your comments from this quarter's call and then last quarter's call.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, hi, good morning, Elyse, it's Andy here. Yeah, I think the comment is still relevant to what we made at year-end. But with the first quarter coming in stronger than what we anticipated, that gap between Q1 and Q2 will not be as large as what we originally anticipated, OK? So just probably as you think of slightly (ph) -- so just probably up slightly from where we thought it would have been a little bit bigger gap before, but yes still little bit over the average, whatever average you're estimating for the year.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then the stronger Q1 growth was that partially due to -- it seems like some type of timing related to 2018 business or is it also that the growth was stronger partially reflective of a better economy, stronger exposure growth and pricing, then you might have expected at year-end?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I think it's a little bit of both, yeah.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. And then a few numbers question. The first thing on Hays, you guys said that it was about in line with expectations for the first quarter. The margin was a little bit better, so you guys got about $0.02 more earnings this quarter than your guide. So is the right way to think that we're going to see a couple cents lower earnings in the back three quarters or is the full-year earnings guide higher?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, Elyse, we had -- we had estimated that the full year would be $0.02 to $0.03 of contribution and yes, we were a couple of cents higher this quarter. We had already given projection that we said the second quarter would probably be down a penny. We still think that's probably a good range. And then Q3 and Q4 were basically flat on earnings per share. It might be on the round, now it may actually make a penny. We still think $0.02 to $0.03 is good, I mean the first quarter out, we still think we're in a position where we would change our full year outlook at this stage. Just because we've got phasing of the 606 inside there, we'd like to at least get a couple of quarters under our belt to give us a better view.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. And on the contingents outlook, you guys said that it would be down about $2 million for the -- $2 million to $4 million for the full-year. So does that mean that you guys are going to be down around $6 million, if my math is right around $6 million to $8 million in the back three quarters. And then why I guess if the Q1 was stronger, why you now looking for the back three quarters to be weaker relative to your prior guidance?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, your math would be correct on that in the back end of the year. So, couple of things that we make comments about is we'd -- we definitely had true-ups in the first quarter for contingents. And as a reminder what we have to do on contingent commissions is we're projecting what we believe that we're going to earn in the coming year that we're going to collect in the following year. So we have to make our best estimate on those. So we're almost always going to have some sort of adjustment primarily in the first quarter, Elyse, as we just get the final cash settlements. And so we saw those that came through. Then as we look into the back end of the year in our commentary was primarily around national programs. We definitely know there are some that we will not qualify for, we've already been told by the carriers. And again we're going to have a fair amount of that of will be offset by growth in Retail, but that's a pretty good -- based upon everything we know today.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. And then just one last quick numbers question, when you were talking about free cash flow, that 20% target that as a percent of revenue. And then you guys didn't settle the remainder of your ASR this quarter, when can you on settle that out until?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Perfect, yes. So when we talk about the 20%, that is a free cash flow conversion as a percentage of total revenues, OK? And then the ASR based upon kind of where we are at this stage, it wil -- it will settle out here in the second quarter.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. Thanks so much for the color.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

We will now take our next question from Yaron Kinar of Goldman Sachs. Please go ahead.

Yaron Kinar -- Goldman Sachs -- Analyst

Thank you very much. I guess another couple of questions on contingent commissions. First, in the Wholesale segment, can you walk us through your thoughts there. I would think that if contingent commissions aren't improving or in fact are decreasing, I would suggest that the pricing action that we're hearing about and some tighter terms and conditions are necessarily manifesting themselves and better underwriting profit, is that a fair way of thinking about that for the industry, the Wholesale industry?

J. Powell Brown -- President and Chief Executive Officer

Yes, that would be a good way to think about it at a top level, Yaron. And that's really what -- if you look back to the last three years in Wholesale, we've seen a decline in our contingent commissions and is it's almost all entirely driven to profitability on the carrier side. So again while there's a lot of talks of trying to get some different rates and things of that nature, one will see if that kind of really takes hold on a consistent basis, but then the question is how long does it take to get back to an appropriate level of profitability to drive those contingents.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. And then if I flip that question to the Retail segment. So why are you expecting stronger contingent commissions there, is that purely a matter of growth in the segment or do you expect better profitability?

J. Powell Brown -- President and Chief Executive Officer

No, that's primarily almost all driven by the acquisition activity.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay.

J. Powell Brown -- President and Chief Executive Officer

Yes.

Yaron Kinar -- Goldman Sachs -- Analyst

Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

We will now take our next question from Mark Hughes of SunTrust. Please go ahead.

Mark Hughes -- Suntrust Robinson Humphrey -- Analyst

Yeah, thank you. Good morning. The interest expense, Andy, how should we look at that directionally for the balance of the year?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Hey, good morning, Mark. Is -- the guidance we've given at year-end, as we said, somewhere in the range of $66 million to $68 million, based upon kind of current debt outstanding and presuming that interest rates don't do any unusual. We still think that's a pretty good range. So while we issued the 10-year bonds in March, it wouldn't have a material movement on our full-year interest expense. And then obviously you hit -- subject to if we need to if more acquisition activity in any borrowings, but good for right now.

Mark Hughes -- Suntrust Robinson Humphrey -- Analyst

Okay. And then in the National Programs business, any sense of pipeline when you look at the potential opportunities, new programs, carrier appetite, is that -- so that business grow faster than the overall Brown & Brown as a whole or in line little slower, how do you think?

J. Powell Brown -- President and Chief Executive Officer

I think Mark, it depends. What I would say is there is a lot of interest in underwriting MGA, MGUs out there. So there's not not as many acquisition targets with size, however you want to define that than there are in retail. So you have a more limited scope or space number one. Number two, there are certain firms that are more interested in that business than other types of business, not just us. And so it depends on how the market evolves and the thus the profitability on the programs that we have in terms of the organic growth on those programs and we'll just think about that. And then you have the idea of supplementing organic growth with limited or I wouldn't say limited, but a smaller pool of acquisitions if that culturally makes sense financially. But we're very interested in the space and we absolutely want to invest in it with the right firm. So we're always looking for it.

Mark Hughes -- Suntrust Robinson Humphrey -- Analyst

Thank you.

Operator

We will now take our next question from Josh Shanker of Deutsche Bank. Please go ahead.

Joshua Shanker -- Deutsche Bank -- Analyst

Yes, thank you for the short-term update on cash flow items when you look out for. If I'm thinking longer-term on the difference between your cash flowing your net income, obviously, depreciation and amortization is a big item in there. What should I be paying attention to if I'm trying to figure it out over a multi-year basis?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, good morning, Josh. Yeah, those would be the two main items inside of there. I mean if you look at our net income or our pre-tax income, it generally runs in the range of about 23% to 24%. And so that's kind of got the fully loaded, that's just kind of a metric that we look at all the time as an organization. And then it depends upon the nature of the transactions that we do, and the amount of valuation attributed to amortizable intangibles, but you can get a pretty good runoff over time.

Joshua Shanker -- Deutsche Bank -- Analyst

Over any materially longer than one-year period of time, should there be any real difference in the growth rate between your net income and your free cash flow?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

No, I don't think so, I'm just trying to thinking through your question here is, no, not a -- should not be a significant amount. I think the one piece to keep in mind is the non-cash stock compensation, that's probably the one bigger item that's out there.

Joshua Shanker -- Deutsche Bank -- Analyst

Then I was going to get to that item, as you get bigger and there's the hunt for better talent. I know you train your own people, does the incentive structure change that you have to offer better benefits and maybe an ownership awards to your employees that that increases the percentage of non-cash comp that's a weight on free cash flow?

J. Powell Brown -- President and Chief Executive Officer

Well, Josh, it's Powell, as you know, we believe we have an ownership culture already and we do some of that already for our teammates. So, there are ways for people to buy stock at discount, invest in the stock if they so choose through the 401(k) and get equity grants based upon growing their books of business or running large businesses and the Company overall performing well. So it's something that we constantly and consistently think about to drive a desired behavior. But at the present time, it's not as though we think there's going to be some dramatic shift in our rewards program, a year or three years from now. We believe that it's going to kind of grow in line with what we're doing. There might be some things that we haven't thought of or would be new that we would think about how we use non-cash stock comp, but at the present time, no.

Joshua Shanker -- Deutsche Bank -- Analyst

Okay, thank you for all the answers. Appreciate it.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

We will now take our next question from Meyer Shields of KBW. Please go ahead.

Meyer Shields -- KBW -- Analyst

Thanks. One brief numbers question to start. You mentioned that there was some wholesale organic growth, that was basically pushed out to the second and third quarters. Do the expenses associated with that come in the first quarter or should we expect the expenses to be deferred as well?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

No. Good morning, Meyer. It's Andy here. It's -- most of the costs were born during the first quarter, the movement around would not have a material impact on the margins.

Meyer Shields -- KBW -- Analyst

Okay. So, that sounds like good news for coming quarters. So you got the -- I find it very helpful the waterfall for the EBITDAC margin, and I was hoping you drill a little bit deeper into that, the benefit sort of categorized as other, because it sounded, I just want to make sure I understand it, it sounds like that's a sustainable function of recent investments, were there any one-time positive or negative issues within that category?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

No, no and no real unusual one-time and I think our comments was a relatively quiet quarter. So I guess that's always a good thing compared to our previous quarters where we had a number of items that we've walk through. But, no, it just -- it really comes down to the leveraging our expense base with the revenue growth, you've seen some of the margin expansion associated with the previous investments and again those will be just slight as we continue to move forward over time. Then there is pieces maybe hard to fully get your arms around. There's also business mix inside of the organization. So not all businesses are of the same profitability. So depending upon how they move back and forth does have an impact on us. Again was a -- overall it was a good quarter, but that -- the growth that we had there still offset the non-cash stock comp. So it was a really good quarter for us, we're pleased.

Meyer Shields -- KBW -- Analyst

Yeah, fantastic, That's helpful. And then final question is it -- you talked about adding another 10,000 teammates, obviously no short-term time paper that at least on that a (inaudible), is it more expensive, when you go to like the second cohort of 10,000 employees, it is more expensive to maintain the Brown & Brown culture than it was for the first 10,000?

J. Powell Brown -- President and Chief Executive Officer

That's an interesting question. I think the answer would be directly related to how those 10,000 new teammates are onboarded. So if we hire them in groups and bring them into individual offices and train them up and launch them in their careers, we do that all the time. If we do inordinately high amount of that in acquisitions, we do acquisitions all the time do, but right now I don't think so based upon how we've done the last billion, but I'll be able to tell you better when we get there.

Meyer Shields -- KBW -- Analyst

Okay, that makes sense.

J. Powell Brown -- President and Chief Executive Officer

Yeah, you hear a lot in our commentary about specifically on M&A that culture is one of the most important things that we focus upon. And so if we continue with our disciplined approach of making sure that those organizations that come join our team, match on culture, it will make it much easier to sustain that process.

Meyer Shields -- KBW -- Analyst

Okay. Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) We will now take our next question from Adam Klauber of William Blair. Please go ahead.

Adam Klauber -- William Blair -- Analyst

Good morning. Thanks. Hays obviously is very strong benefits organization, what did they -- I guess what expertise do they bring to the table that you didn't really have. And how quickly can you roll that out to the rest of your organization?

J. Powell Brown -- President and Chief Executive Officer

They have a lot of strong capabilities in the middle and large employee benefit space. So I would say that's 500 lives and up and that is already occurring right now.

Adam Klauber -- William Blair -- Analyst

Okay. And then as far as Hays, what prospect as you go down the road in year two, year three to get the margin up at that organization?

J. Powell Brown -- President and Chief Executive Officer

They have done an exceptional job of bringing high quality talented people on board. Some of the people were investments just like we make investments in people early in their careers, where there was not a margin, it was more of an expense as opposed to a revenue positive and a margin positive. Those people will continue to add to a positive margin and over time we believe that there will be some upward increase in their margins. Remember, we've said Hays because of the way their business is structured is not going to be margin profile of middle market, but it will be somewhere slightly less, that's what we said periodically.

Adam Klauber -- William Blair -- Analyst

Okay. Thank you.

J. Powell Brown -- President and Chief Executive Officer

And then, Kevin, if there is anybody else left in the queue, we'll take one final question, OK?

Operator

There are no further questions at this time.

J. Powell Brown -- President and Chief Executive Officer

All right. Thank you all very much and have a wonderful day. We look forward to talking to you next time. Good day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 63 minutes

Call participants:

J. Powell Brown -- President and Chief Executive Officer

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Michael Phillips -- Morgan Stanley -- Analyst

Michael Zaremski -- Credit Suisse -- Analyst

Gregory Peters -- Raymond James -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Mark Hughes -- Suntrust Robinson Humphrey -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

Meyer Shields -- KBW -- Analyst

Adam Klauber -- William Blair -- Analyst

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