Willis Towers Watson PLC (WTW) 2003 Q1 法說會逐字稿

All participants please standby, your conference will begin in just one moment.

Good morning.

Welcome to the first quarter earnings conference call.

All participants will be in a listen-only mode until the question-and-answer session of the call, at which time you will be instructed on how to ask a question.

Today's conference is being recorded.

If anyone has any objections you may disconnect at this time.

I will now turn the call over to the Investor Relations Officer, Ms. Kerry Calaiaro.

Good morning, and thanks for joining us at this early hour.

Welcome to our earnings conference call and Webcast, at Willis dotcom, for earnings for the first quarter.

On our call today are Joe Jim Plumeri, Willis Group Holdings Chairman and Chief Executive Officer, Richard Bucknell (ph) our Chief Operating Officer, and Tom Kolrain (ph) our Chief Financial Officer.

This teleconference call will be available by replay, starting at 10 o'clock this morning, Eastern Daylight Time, and ending at five p.m. on May 8.

To access to audio replay, please call 888-562-4912 within the U.S., or 402-998-1704 from outside the U.S., or my accessing our Web site.

If you have any questions after the call, please feel free to call me directly at 212-837-0880.

As we begin our call, let me remind you that we may make certain statements relating to future results, which are forward-looking statements, as that term is defined by the Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results, or those anticipated.

Additional information concerning risks factors that could cause such a difference can be found on the Company's documents, filed with the SEC from time to time.

Due to the adoption of the new Regulation G, from the SEC rules, where we use non-GAAP financial measures, we have included reconciliation to the most directly comparable GAAP measures, as a supplement to our earnings release, which also can be found our Web site.

I'd now like to turn the call over to Joe Plumeri.

Thank you, and hello everybody.

I hope that excitement is consistent with new reporting rules, because we're certainly excited here, because we got off to a very, very good start -- a great start for 2003.

We couldn't be more pleased with the results, and the hard work of our business units, and especially and appropriately the terrific people at Willis.

We have great people, who work very, very hard, and our results are always to their credit, and they're totally responsible, you know, for some of the great things that are happening at Willis.

So, our net income, as reported under U.S.

GAAP, was 117 million, or 69 cents per diluted share, compared with 68 million or 43 cents per share a year ago.

Excluding the non-cash compensation for performance-based stock options, the adjusted net income was 123 million, up 48 percent, from 83 million reported last year.

Adjusted net income for diluted share was 73 cents, up 46 cents, from 50 cents earned in the first quarter of last year.

As you know, we concentrate a great deal on the growth of our revenue.

That is to say that the growth of our sales culture, so that our Company can drive and excel in all market environments, and we're very, very proud of that achievement and of that growth.

I'm even more proud of our ability to be able to take what we do generate in consistently higher revenues, down to the bottom line, by virtue of operating margin, and that's shown through in terms of our results in the first quarter, because that's what we concentrate on.

I mean that's what we do here, so it is appropriate that those results reflect that which we do.

Our revenues grew 23 percent, to 555 million in the quarter, underlying all organic growth, excluding the affect of foreign exchange acquisitions and disposals of 18 percent the first quarter, up from 17 percent a year ago.

So, we continue to see evidence of the sales culture taking hold throughout the organization.

One of the things that we look at, which we call our vital signs, is to look at the difference between what we are generating in revenue, coming from new accounts, and what we generate revenue coming from rates, so we could get an idea of what will sustain us better over time in all the markets.

And I am very happy to say that we estimate about 70 percent of our revenue, in the first quarter, came from net new business, and the balance was from the hard-market conditions or rate.

That's the highest that we've been able to achieve, so far, since we began our sales culture buildup, through our training and through our compensation and incentive programs.

In the fourth quarter of 2002 it was about 60 percent, so you can see -- and 40 percent from hard market were rates, so you can see that that's steadily doing better.

And if you look back at the fourth quarter last year that number was more like 55, 45.

So, we're very, very proud of that.

The trick in our Company is after we're able to achieve those kinds of revenue growths, is to make sure that we have the right expense discipline, to ensure that we bring it to bottom line and to net, and if I adjust -- our adjusted net operating income, which is operating income, excluding non-cash compensation for performance-based stock options, increased 33 percent to 194 million in the fourth quarter of 2003.

And as a percentage of total revenue, the adjusted operating margin, which we're very proud of, was 55 percent in the quarter, up from 32 percent a year ago, or a 300-point bases point improvement, again reflecting what we do, generating sales, building a sales culture, watching our expenses and bringing as much as we possibly can to the bottom line, through hiring good people, nurturing our business and continue to invest in our operating platform, and doing all of those things and getting the results that we do.

So, we're very proud how all that is happening, because that's why (ph) we get up in the morning and willing (ph) to do.

I just want to remind everybody that (ph) our model has a (ph) siting (ph) units (ph).

Our model is a very global model, but we use our people, who are located all over the world, to locally get in touch with our clients, locally understand our client's needs, locally find solutions that are customized to our client's needs, and then find solutions on a global basis, so that our resources our global, our delivery is local, taking advantage of the relationship that we have with our client, and as a result fully customize everything that we do.

That may be called the old-fashioned way, but that's what we do here.

More old fashioned than that is the fact that we stick to our core business.

We are very good brokers.

That's what we do for a living.

Our people know that.

There are no distractions in this Company -- that is our model.

And I believe that that model, even though that's the little (ph) last (ph) part of this discussion, is what drives what we do here.

There isn't a person in this Company that doesn't understand what we do, and it's very, very important, because you don't get confused and you don't get bottlenecked with not understanding what's going on.

The market conditions -- so I might make some reference to, as I usually do, in this call -- the rates continue to rise in most lines and geographies.

The rates continue to rise in most lines and geographies.

The rates -- price increases have moderated in some areas, principally in property-related areas, but because of new capacity it's (ph) without (ph) the complete (ph) reasonable rates.

Carriers continue to be tough on terms and conditions.

And a client's awareness of risks they face continues to increase.

Clients need a great broker and that's what we do.

I would tell you, though, that in the casualty markets they're still quite firm, with price increases in the 10 to 20-percent range, and the D&O premium increases are still very high, often 50 to 200 percent was high deductible, so we would anticipate that the insurance premium rates will continue to rise through 2003.

That's basically where we were at the end of last year, in terms of rate, and so kind of see that continuing.

As far as business unit summaries (ph) is concerned, each of our business units, which is really exciting, has performed really well, and contributed to our strong performance in the quarter.

In North America our revenues were 158 million, in the first quarter, up seven percent on a reported basis.

Our organic revenue growth was 16 percent in the quarter.

The primary difference being that reported organic growth was the disposal of a third-party administrator in 2002, which was part of our plan to dispose ourselves of nine (ph) core businesses, or things that we call hobbies, you know, here at Willis.

It was another great quarter for North America business and we (ph) contributed (ph).

I believe there's tremendous opportunity to grow our business here, using all three components of our growth strategy.

The organic growth is doing very well.

The recruits (ph) are doing very well, and we haven't acquired anybody yet.

Our last acquisition was Goldman, which has turned out to be terrific -- very, very accretive in the first year, but we still have lots of ways to go, with regards to an aggressive recruiting strategy, and an acquisition strategy, and obviously we can always do more business.

So, as good as those results are, we still have lots to do in the ways we build our business -- organic growth, and (ph) (inaudible) and acquisitions.

Our global business revenue was 301 million in the quarter, up 28 percent on a reported basis.

The organic revenue growth was 18 percent in the quarter.

The primary difference between the organic and reported was foreign exchange, i.e., the weak dollar -- great businesses, and they've always been great businesses.

You hear me on this call say they're (ph) great business -- global markets, property and casualty, reinsurance, our specialist (ph), and (ph) it's including (inaudible) aerospace.

They all continue to grow from new business wins across the global marketplace.

Our international business reported revenues was 96 million in the quarter, up 41 percent on a recorded basis.

The organic revenue growth was 21 percent in the quarter.

The primary difference between reported (ph) and organic there was foreign exchange, the affect of the weak dollar, weakening against the Euro.

I would say that those good performances internationally can be attributed to across-the-board results that were terrific in Continental Europe, Eastern Hemisphere, especially Australia and Latin America, despite some of the issues that go in Latin America, our countries performed very, very, very well, and we're very, very proud of that.

At this stage of the game, I'd like to turn this conversation over to our Chief Financial Officer, Tom Kolrain (ph), and then I'll rejoin you -- Tom (ph).

Thank you, Joe.

I'll start with operating expenses.

General and administrative expenses were (ph) 18 percent during the first quarter, compared to last year.

These expenses were 63 percent of total revenues, down from 66 percent last year.

Salary and benefits were about 50 percent of revenues for the first quarter, relatively unchanged from a year ago, although the real percentages and trend was a bit better on a constant (ph) basis.

These numbers are very reasonable, considering our recruitment efforts and a somewhat higher pension expense, about $400-million higher, over 2002, in the quarter.

Most of our new (ph) spending is deduction related and revenue generating, recruiting, training and performance-based compensation.

Other expenses were relatively flat over last year, and the growth rate in revenues is, of course (ph), they have far outpaced expense (ph) goods (ph).

I would remind everyone that the first quarter and the fourth quarter are our biggest.

Second quarter and first quarters are quite a bit smaller, but it's the year overall that matters.

When (ph) foreign exchange -- the weaker U.S. dollar, especially against the euro in the first quarter of 2003, compared to last year's first quarter, means (ph) euro profits (inaudible) into more U.S. dollars.

This, in fact, is muted (ph) to some extent by U.S. dollar also being weaker against the pound Sterling and, as you know, we have a (inaudible) pound Sterling expenses against revenues.

The net positive impact of foreign exchange movement (ph) in the first quarter of 2003, compared to 2002, was three cents per diluted share.

At cut rates of exchange we would expect the impact on the remainder of 2003, compared to 2002, to be immaterial.

On the non-cash charge for performance stock option, a non-cash compensation chart for performance stated (ph) stock options recorded in the amount of $8-million pretax in the first quarter, compared to $18 million in the same quarter a year ago.

As of the end of year 2002, all the performance criteria for these options has been met, and so the ultimate chart is now fixed at about $280 million (inaudible) charged this to represent some (inaudible) based solely on vesting (ph) pressures, and no longer had a mark-to-mark component.

So, it's very predictable now, although it's no more relevant than it was in the first place.

On (ph) an (ph) accumulative basis, as of the (inaudible) first of March 2003, the Company has recognized $246 million, but approximately 87 percent of the total estimated charge.

The remaining estimated charge of $36 million was the recognized portion, due to the core (ph), in accordance with the vesting schedule, but $20 million dropped (ph) from this (ph) for (ph) the remainder of 2003, and $60 million in 2004.

On taxes, the underlying tax rate -- that is excluding the tax effective performance options, acquisitions and disposals -- was 35 percent in the first quarter, and we would expect it will remain a (ph) profit, without level (ph), for 2003.

Capital (ph) itemization (ph) and liquidity -- at the quarter end long-term debt was down to $499 million, down 35 percent since last year. (inaudible) equity was approximately $970 million at the quarter's end, resulting in a debt to capitalization measure (ph) of (inaudible) 34 (ph) percent.

In addition, we had immediately available cash at (ph) (inaudible) of $93 million, providing tremendous flexibility for the core (ph) cash (inaudible) of the Company.

Later this month, as you will know, we filed a (inaudible) of share registration statement, but (ph) up to $500 million of securities, to have that financial flexibility.

And we also registered 20-million common shares, mainly (inaudible) our own shares.

The shelf (ph) is now effective.

Thank you.

And with that, I'll hand the call back over to Joe.

Let me just make a couple of comments about -- thanks, Tom -- about the outlook that we see.

I said that from the beginning -- I've said it all along, but we're building a great company for (ph) (inaudible), and our market environment is hard and soft, and hopefully get from these numbers that that's what's going on here.

When we look at -- we said, at the beginning of -- at the end of last year that we expect our organic revenue growth will be least 50 percent for the full year 2003.

We still, you know, stand by that expectation, and are very excited by that expectation.

We are confident in the outlook for the future growth of Willis, and are on course to exceed our goal to grow adjusted net income, for diluted share, by 25 percent or better in 2003, which was another projection that we gave you.

And on the long-term basis it's (inaudible) these earnings by 15 percent or better in each year, in all market environments.

And so when you get to our results, the breakout of how those results took place, again, reinforces why we're so excited about being able to play in all environments, the fact that we are in a business over the long term, and that we'll build that (ph) business over long term.

I mean if you look at the key numbers here, the key numbers are the 18-percent organic revenue growth, the fact that it came 70 percent from opening new accounts, from doing more business with accounts, which is one of the ways that you describe sales culture, only 30 percent coming from rate, which means that over time we will hold (ph) well in all market circumstances, and the fact that 35 percent of that was brought down to the bottom line, versus 32 percent a year ago, or a 300-percent increase, is all part of painting the pastel of that story.

This is a growth Company.

I keep saying that.

We run the Company for (ph) well (ph) in all environments, and we're all in this for the long term.

But, for the purpose of this quarter, you know as steady as she goes, and we're continuing to do well, and all of us at Willis are very, very excited about the progress, because we work very hard at our crafts (ph).

We'd be very, very happy to answer any questions that you might have.

Thank you.

At this time, we would like to begin the question-and-answer session.

If you would like to ask a question, please press star one on your touch-tone phone, and you will be announced prior to asking your question.

To withdraw your question, please press star two.

Once again, to ask a question, please press star one.

Our first question is Renee Saki (ph) from Morgan Stanley.

Good morning.

Hi, Renee (ph).

How you doing?

Good.

A couple of quick questions.

One, Joe, if you could talk about the acquisition environment -- what you're seeing out there?

I know you mentioned that the last acquisition that you did with Goldman -- are things improving?

Are things getting more competitive?

Second question is on margins.

Tom, if you could give us an idea of what margins would have been ex foreign currency, if you have that number.

And third is just debt to capital.

Now that you're at 34 percent, where do we go from here, in terms of managing capital?

What's the next trigger?

Are you guys going to start buying back stock, once and if KKR (ph) issue their shares?

Thank you.

Thanks, Renee (ph).

We are, as we said, very aggressive about acquisitions, even though it doesn't appear that way, in the sense that we haven't made many, other than Goldman -- aggressive in the sense that we're talking to a lot of people.

We think we have terrific opportunity all over the world.

As a matter of fact, I chair, along with Richard Bucknell (ph) and Tom, on a lot of this -- you know, the Merger and Acquisition Committee, frankly that meets every week and review lots of things.

The environment is still I think pricey, but maybe getting a little bit, you know, more reasonable, to the extent that it's beginning to look like some of the numbers that we think are reasonable, but we're still aggressive about looking and talking to a lot of people, and still is very much a part of our strategy, Renee (ph).

We are playing (ph) it very close to invest, making as much money as we possibly can, building our cash position, as you can see, lowering our debt, so that when the day comes that there's possibilities and opportunities that are more reasonable, we're certainly going to be there, to be able to take advantage of them.

As it relates to the question having to do with the margin, and (ph) all (ph) that, Tom has to answer that.

Yes.

Thanks (inaudible).

Yes, the margin improvement was still almost 300-bases points, even at cost and contributions, which was in (ph) 2002, and 2003, so you had an equivalent impact of the revenues and the operating income, so no expansion came from the foreign contribution (ph).

As far as the buy back -- I think was your other question -- we've look at -- we continue to look at all kinds of options, Renee (ph), with regard to our cash.

The option buy back was one of the options -- acquisitions and option.

We choose the option of dividends the last time, but that doesn't mean that depending on the price of the stock we may not take advantage of that option, but those are always available to us.

And the good news here is that there was a time, way back when, as you remember, that these options were not available to us.

So, we're excited about the fact that they're available to us, because of the way we run the Company.

Great.

Just one final number's question.

If you could just -- what was the number for international, in terms of revenue and organic growth?

The revenue growth for international is 21 percent.

Great.

Thank you very much.

That's very helpful.

Thank you.

Our next questions from Brian Meredith (ph), Bank of America.

Good morning, Joe.

Hi, Brian (ph).

How you doing?

Two quick questions here.

One, can you talk about where your new account growth is coming from?

Is it coming from Fortune 1,000 accounts, or middle-market accounts?

And I have one follow up.

It's coming from across the board.

We're just finding very, very good account growth.

We're finding that our people are more aggressive about getting out and talking about Willis.

We showed up more.

I think it's bugging our clients that we show up more than we ever did before, and that when we do show up, our perspective clients are amazed that (inaudible) what the possibilities.

And the second thing they're amazed at is the way we do business.

We do business by taking a lot of time to find out about people's needs.

We don't do row-bow business here.

We don't (inaudible) the books (ph).

We do it by taking a lot of time with our clients and they like that.

Our clients like to be made to feel that we help them sleep at night and we make them look good, and that's what we do.

And the more we do that the more they like that, and that's very different than a lot of our competitors.

So, I'd say that's across the board, Brian (ph).

And then a follow up to that question.

Given that you clearly have a cost advantage, versus some of the other major brokers out there, you know, when going to get a new piece of business, or trying to retain a client, can you be a little bit more price competitive on fees or commission to get growth, and have you been doing that at all?

No, the answer is we haven't been doing that, at least not to my knowledge, at least to the extent where it represents anything significant.

Look, at the end of the day you're going to build a great business, Brian (ph), because you have something of value.

If you commoditize (ph) yourself, all we're going to do is play the game that my apple is redder than your apple, and that's not the way to build a long-term business.

The way to build long-term business is to create value in the client's mind that you can do something that they can't do, or don't want to do.

That's what will sustain a great business.

We spend a great deal of time doing that.

We're constantly asking ourselves here what do we bring to the table?

I ask our people that all the time, and if they can't tell me I don't deserve it, because why should somebody do business with us if we can't answer that question?

So, you know, there's always a price issue here or there.

I mean this is a big Company.

But, to the extent that that's the way we do business, or to the extent that it's something that runs rampant here, absolutely not.

We do business (inaudible) bring something of value, and that's very important to us.

Great.

Thanks, Joe.

Thank you.

Our next questions from Hugh Warrens (ph), J.P. Morgan.

Good morning, everybody.

Hi, Hugh (ph).

How you doing?

Good.

I missed the global organic growth rate, if you could hit that one again?

Global's 18.

Eighteen - OK, very good.

Tom (ph), a quick couple of numbers questions here.

If I drop down to the bottom of the balance sheet, I guess, a lot of us were surprised by the strength in the earnings from associates.

Is there anything unusual that was running through there ...

No ...

... or is that someone (ph) picking up?

... no, it's nothing.

And all of those (ph) sources (ph) sit a bit better, and obviously the big ones are grouped (ph) as one (ph) - France (ph) and our share (ph) under (ph) group, and in Denmark, but also the euro is considerably stronger against the dollar this year, and so for any given level of euro earnings you are going to have a higher number of ...

OK.

So, I mean, if we're trying to think of this - before we used to almost think of it as being associated to minority interests we're close to washing.

That obviously is not going to be the pattern as we go forward.

Is there any kind of guidance you can help us out with, for the next couple of quarters for the year?

Well, the other (ph) in (ph) a (ph) - of course in a minority interest (inaudible), we don't have the minority in Germany anymore, and that's fine (ph) with (ph) us, and - but, at the end of the day, you're right, they don't cancel out in the same way that they used to, but if you look at them in the context of the numbers in the other part of the income statement, they're still pretty small, so you know - yes, I would imagine that we would offset the equity from net income.

Associates would always keep the minority interest, but you know it's never going to be the most material thing to them (ph).

OK.

The other question I had for you, too, was on the long-term debt side.

It looks like you paid down something like another 68 million in the quarter.

Is that, you know, minimum payments you need on the principle side, or are you guys continuing to throw cash at the debt?

No, we - our next mandatory payment is not until the end of 2005.

In fact, we've beaten away most of the principle due to the paid off to that.

We just pay back the most expensive (inaudible) first.

And, no, it's all voluntary.

It's just what we think is the best use of the money ...

It's opportunistic debt reduction, Hugh (ph).

OK.

Opportunistic means, you know, we've been - on purpose, as you know, because of the way we run the business, generating a lot of cash.

So, we look at opportunities (ph).

Opportunities track (ph) positions, opportunities are lasting (ph) (inaudible) dividends, opportunities through this or that, and our opportunities have been here for - in paying down the debt, so we're opportunistically doing it, but there's no mandatory payments in here.

And when we find something better to do with our money we'll do it, but that's what's fun about our ability to be flexible here, and that's exciting.

I mean I think - I don't think any of us thought in a year and a half, after going public, you'd be talking about having opportunities (ph) on paying debt this aggressively.

But, I guess the shelf that's our there, Tom - obviously your debt cost, with your upgrades, still look a little high.

I mean is the shelf just a vehicle that you're going to try to be more opportunistic in just refinancing the debt again?

Yes, I would use the word opportunistic in (ph) that (ph) (inaudible) set (ph) sure (ph).

I mean essentially we've had a couple of upgrades, in my opinion, where we're still a couple of notches below where we should be.

You know, as the balance sheet gets into even better shape, we would expect those upgrades to continue.

That would give us the opportunity to refinance and lower our debt cost share (ph) further.

And then in the quarter, on the commission and fee mix side, was there any change?

I know it usually has been something - as a rule of thumb you're running about 70 percent, 30-percent commission kind of fees.

Is that still a reasonable model?

I guess we're trying to get at, you know, client acquisitions - is there a shift going from mission to fee at this time, Joe, or ...

Yes, generally speaking, Hugh, it's the same - 70-percent commission, 30-percent fees.

OK, very good.

And then just one last question for you.

We've heard other people talking about starting to see some pressure evolving on the commission side for reinsurance, and I didn't know is John Pelli (ph) was around, but just wanted to see - are you seeing any slowdown or pressure from underwriters on commissions that you're getting paid for the brokerage on the reinsurance side?

No, absolutely not.

OK.

No.

You know, once in a while there's those kinds of discussion, but on a net basis absolutely not - no pressure whatsoever.

I'm looking at John Pelli (ph), as I'm answering the question, and he's nodding his head yes.

OK, good.

Great, we appreciate it.

Thanks for your help.

You're welcome.

Our next questions from Ron Frank (ph) from Smith Barney.

Morning, everyone.

Morning, Ron.

My question also relates to reinsurance, you know, in terms of - if you can give us some more color, since you don't break it out, on what affect the reinsurance comparison, in particular, may have had in the first quarter, since it's seasonally a fairly important period for that operation?

And maybe give us a little color on some of the trends you're observing in that market, and in that business specifically?

I'd say in the last three years our reinsurance division has been a very healthy contributor.

And in the first quarter it was no different than it has been.

It has been consistently performing.

And one of the great things about reinsurance is that if you look back three years ago, the mainstay of our reinsurance operation was outside of North America.

Now I think you guys (inaudible) the reinsurance across the board.

Our North American operation has come on very strong in the last couple of years.

We have recruited some very, very good talent, to go with the already good talent.

We had - outside the North America we had a great (inaudible) and it continues to do well, and that's great ...

OK, thanks.

OK, Ron.

Our next questions from John Belkin (ph) from Fox Pitt (ph).

Morning, everyone.

A quick question on the North American middle-market business.

Could you just talk about the different regions of the country where you've got the most traction and growth, where you may be having some issues, and if you are having issues sort of bootstrapping the growth, what kinds of things are you dealing with?

John (ph), I think what we said about (ph) our biggest point leverage is North America.

Our numbers have been terrific in North America, but still with what I think is some great opportunities in places of North America, where there's great density.

I think that we have great opportunities in California.

I kind of look at this whole thing as half full.

We're doing very, very well, but when you look at California, where we have offices in San Francisco, San Jose, Los Angeles, kind of in Glendale and Sherman Oaks and San Diego kind of thing, there's a lot of room for growth there.

I mean there's lot of offices or a lot of penetration, so I look as that as half full, and I still say, gee (inaudible) how much better we can do there.

We only have a couple of offices in Texas.

Those are mainly construction offices.

Again, a place that anybody would like at and say that's where you want to be, so we still haven't fought that fight yet.

In Florida, again a density and population, a great office in Tampa, beginning to build in Miami, but again nothing, you know, that you would like to see four or five years from now.

So, I look at that and I give you those examples as still to come, which again gets us excited, because we're doing as well as we're doing, with a lot still to come.

If you look at the Northeast, we don't have big middle-market presence in the Northeast, although we have a major office in New York, which is risk solutions or major-market business.

We have one in Boston.

We have one in Radnor (ph) and one in Piscataway in New Jersey.

But, basically speaking, that's a - you know, that's the more (inaudible).

So, over the years, as you will find us filling these gaps in, which will even make the numbers, and even make the sense of Willis being able to take care of more people and opening more accounts, be even more profound (ph).

Sounds good.

Thanks, Joe.

Our next questions from Adam Clawber (ph) from McCorkin Colonial (ph).

Good morning, Joe.

Hi, Adam (ph).

How you doing?

Good.

Two questions.

Number one, how long will it take for your new hires to become fully productive?

And then number two, could you talk about growth and continued commissions?

They better be productive by lunch on the day they show up.

But, I don't know, they're all different.

You know, it depends at (ph) on how quickly they join us, what time of the year they join us, you know, when the renewals are for the book business they bring.

It's all those sorts of things, so it's very difficult to tell you.

But, I would tell you, we like to hit the ground running, because this is a very aggressive place.

But, it's very difficult to say a number, because if you come in a certain kind of a business it takes longer.

If you just went through a renewal (inaudible) and joined us.

I don't - you know, I don't know.

But, we can get in a (ph) good productivity (ph), as you can see, from our new hires.

The other question was ...

Continued item - yes, continued were a little higher in the quarter, but it's still only about three-and-half percent of total revenues, so you wouldn't even spot (ph) it on the revenue growth with a magnifying glass.

Thank you very much.

Thank you, Adam (ph).

Our next questions from Steve Love (ph) from Langon McGlenny (ph).

Morning.

Hi, Steve.

How you doing?

I'm well, thanks.

Good.

Two questions.

One, if you could give us - and maybe you said it and I just missed it - what the organic expense growth would have been in the quarter, year-over-year?

The spread would have been about the same, so about 12 to 10, I believe, Steve.

OK.

And then my second question - in the press release you give that the immediate available cash approximated 93 million.

That's a number that I think compares to the fourth-quarter press release of 120, but doesn't wash with what the balance sheet cash and equivalent number is.

Can you reconcile those numbers for me?

Well, reconcile is probably too strong a word.

The balance sheet cash and equivalent includes fiduciary (ph) cash on cash that we owe and that's pretty tied up, say (ph) in our cap (ph) of (ph) insurance company.

When we talk about immediate available it means actually write a check tomorrow and have it in your bank account until that's completely free and it's a gap (ph) ...

OK.

OK, thank you.

And we'll ask, once again, if anyone has any final questions, please press star one.

Our next questions from Charles Gates (ph) from Credit Suisse First Boston.

Good morning, sir.

Hi, Charles.

How are you?

I just have one question.

If you step back and you visualize that commercial-lines pricing moderate over the next say 18 months, what do you believe, and what's (ph) the (ph) observers will see as the most important trend in your business, during that period of time, sir?

Well, I can tell you what - I can't tell you what they think, but I can tell you what we think.

That would be wonderful.

What we think is what I said when we reported our fourth quarter in last year, which is that we want to be able to sustain growth rates of earnings per share of 15 percent or better, and that's what I think we can do.

One of the things that we're most happy about is tracking the number of how our revenues are made up.

Our revenues are made up now 70 percent by getting new business.

And there's no acquisitions in there.

There's no - there are a lot of cities we're not in, as I said earlier.

I mean we look at this thing and we say, gees in the future it's even rosier than the past.

And so that's how I come to the conclusion that based upon the way we run our business, and the disciplines we have, that I feel very confident that we can grow this Company 15 percent plus a year, cash earnings to share, year over year, over year, or better.

So, that's what I would see looking in the horizon, if I'm looking at Willis.

Yes, whatever the (inaudible) environment is, Charles.

Thank you very much, guys.

Our next questions from John Armatage (ph) from Eggerton (ph) Capital Limited.

Hi, and congratulations on the great quarter.

Thank you very much.

I just wanted to ask, did you - was there a lot of discretionary revenue investment in the quarter involved - put in place with a view to sort of grow the business going forward?

And what would you say the level of that was?

When you ask, John (ph), about discretionary revenue invested, I don't ...

Revenue invested, i.e., costs.

Oh, you mean systems and things?

Systems, hiring, training ...

Yes.

Yes.

... what would you feel is the level of cost devoted to growing the business going forward well and managing it now?

OK.

Yes, there's a great deal of system expense in the costs that we mentioned.

There's a great deal of recruiting expense in the costs, and there's a great deal of training expense.

All of the things that we've said in the past that we were going to invest in, as you can tell by the results, those investments, you know, are (ph) paying more.

You can't really see the systems yet, because that's a longer-term issue, because we're rebuilding our platform, both in terms of planes (ph) and accounting, on a worldwide basis, so everybody's on the same platform.

But, yes, we feel very comfortable with those discretionary costs, and they're very much part of the long-term strategy, which, by the way, John (ph), we've been very consistent about.

I announced, I think a year ago, or so, on the same call - or even longer - that we were going to invest capital in training, which we have.

Our training is up and running and doing very well.

As a matter of fact, every day I get a report on how well the students think the training was - write their little notes, which (inaudible) some things.

I chair of Systems Committee, which is up to operations, which gives me updates every week, along with Tom and Richard Bucknell (ph), on systems and operations.

We take that very seriously here, because of not only being better at servicing our business, but also the efficiency of serving that business, so we've done that.

And in the area of recruiting, the first thing we talk about every week is our (inaudible) community (ph) is out headcount, meaning how many people came in and how many people left, because this not a business of machines, it's a business of people, and that becomes very, very important for us.

So, we're doing all the things that we set out to do a couple of years ago, and are investments, I think, are paying off very well, John.

Terrific.

Well, thank you very much.

Thank you.

Our next questions from Greg Lafkin (ph) from Citigroup.

Morning.

Good morning, Greg (ph).

Can you just - Sterling and the amount of expenses - how many in Sterling and the amount of revenue.

Based on some of the prior filings and estimating it to be about 40 to 45 percent of expenses, and 20 to 25, maybe 30 percent of revenue.

Does that sound about right?

Yes.

Yes, it does, Greg.

The euro proportion has definitely been increasing in recent years, but the gap between Sterling extends (ph) into (ph) (inaudible) revenues.

It doesn't continue to reduce more (inaudible) in (inaudible) count (ph) again.

This is the first quarter, in a long time, where we're reporting (inaudible) had any kind of noticeable impact.

OK.

I just wanted to understand that part.

Thanks.

And our final question, sir, is from Hugh Warrens with J.P. Morgan.

I figured I couldn't let go if nobody else is going to be there.

Tom (ph), one other question for you.

In the quarter, in your North American business, which was a little bit stronger than we thought it was going to be, is there any unusual contingents in the quarter, or any heavy kind of a, you know, performance-based things coming back from the carriers or volume based coming back from the carriers?

No.

As I've said, Hugh, it continues to ware off a bit, but nothing that you could see - nothing you could see, because it continues up (ph) pretty modest (inaudible) overall.

OK.

I wanted to make sure also, with regard to the question - John, you asked about, you know, our investment - discretionary investments and our costs.

If you'll look at our general and administrative cost to revenue, on a quarter-by-quarter basis, we're really proud of that.

Our first quarter of '02 was 66 percent, and in the last quarter, per quarter (inaudible) 63 percent, in the fourth quarter of '02 it was 67 percent, in the second quarter of - and third quarter of '02 it was 77, in the second quarter of '02 it was 72.

So, I mean the investments are paying off, and we're growing our business, and our money is being spent wisely, and I think that's a great barometer of that of that number.

And I failed to say that when you asked that question.

Joe, one last question for you.

It's Hugh again.

Can you just comment on the 20-million shares from the KKR (ph) side and how that came about in the shelf?

Yes, when we did the shelf we just thought - or they thought that for the purpose of flexibility and I guess I kind of regenerate that - is that while we were at it, you never know what goes out there, and just to be flexible, and while we were going about the process we would add KKR (ph) shares.

As to whether or not they're going to be sold soon that's something you'd have to ask them, but that was purely from flexibility focused (ph).

...

OK, great.

Thanks ...

And hopefully, you know, if we needed it, full (ph) liquidity (ph), as we hopefully get more people interested in our stock.

OK (ph)?

Sir, we have no further question.

We thank you very, very much, everybody.

Have a great day.

Thank you.

This concludes today's conference call.

All participants may disconnect.