Willis Towers Watson PLC (WTW) 2003 Q4 法說會逐字稿

Good morning.

Thank you for standing by.

Welcome to the Willis fourth quarter conference call.

All participants will be in a listen-only mode.

This conference is being recorded.

If you have objections, you may disconnect.

I would like to introduce the host of today's call, Miss Kerry Calaiaro.

You may begin.

.

Thank you.

Welcome to our earnings conference call and webcast at willis.com for the fourth quarter and full year 2003.

Our call today is hosted by Joe Plumeri, Willis Group’s Chairman and CEO.

It will be available by replay starting at 1000 A.M this morning eastern time and ending at 5:00 P.M.

On February 19, 2004.

To access the audio replay call 888-568-0064 within the U.S.

Or 402-530-7767 outside or by accessing the website.

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

As we begin our call, let me remind you 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.

Statements are subject to certain risks and uncertainty that is could cause actual results to differ materially from historical results or those anticipated.

Additional information concerning risk factor that could cause such a difference can be found in the company's documents filed with the SEC from time to time.

Due to the adoption of regulation G where we use nonGAAP financial measures we have included reconciliations to the most directly comparable GAAP measures as a supplement to our earnings release which can also be found on our website.

I would like to turn the call over to Joe.

Good morning.

Thank you.

I have with me Tom Colraine, our Chief Financial Officer, Richard Bucknall, our Chief Operating Officer, and Mario Vitale the CEO of North America.

We will take questions at the end of the call.

This is another great day for us at Willis.

We take great pride in announcing our results.

We work very hard at our results.

Everybody in this company looks forward to the achievements and look forward to measuring ourselves against the kinds of things that we set out as goals for ourselves every year.

We're proud we're announcing our 16th consecutive record quarter of results.

Obviously, this is due to everybody around the world doing a great job.

I know I say that every quarter, but it's a fact.

We have great people in this company.

Everybody follows the same model.

We're all going in the same direction.

It's wonderful what people can do when they are passionate and going in the same direction.

I would also add, and you've heard me say this before, that our motto is to set up to perform in all businesses.

As long as people have to buy insurance, and that's what we do, sell insurance, and we're not distracted by anything else, we feel very, very good about our business and what we're doing every day.

We think our model is sound.

I know I say that every quarter.

I think the great companies have consistent messages.

It never changes.

Our message, our focus, what we do in our model is pretty simple.

It's not going to change.

We grow revenue, make disciplined expenses, maintain disciplined expenses, which means you spend less than you make, and which expands the margins and you bring revenues to the bottom line and do that all together for our clients and shareholders.

That's what we do.

We set out at the beginning of the year -- we are focused on goals.

We talk about it all the time.

It is a big deal to accomplish our goals.

I thought I would talk about what they were at the beginning of the year and how we made out against them because it's really something that's pretty exciting.

First of all, we set out a goal to grow earnings at least 25% for the year.

We checked that box.

We grew 41%.

Next goal was to grow organic revenues at least 15% for the year.

We checked that box.

We grew 15%.

To expand margins, obviously, when I'm asked a question how much higher can your margins go, my answer is, I think we can do better.

It is always set up to do better.

We don't have specific goals in that regard, but we want to do better and expand our margins.

We certainly did that.

You can check that box.

That was up 200 basis points to 30%.

Beginning of the year we wanted to try very hard to get our investment grade rating, and we did that.

As you all know.

We thought we should have gotten it earlier.

We got that.

And we're positioning ourselves to do even better than that.

As you all know, one of our goals was to refinance our debt, which is a big focus for us in the fourth quarter, I might add.

We did that, did that very, very well.

Tom and his team did a great job at getting the debt refinanced.

You can check that box.

Every one of the major focuses and goals, accomplishments that we set out at the beginning of the year, we checked off.

Not achieving those things is something at our company and culture, this is not tolerable.

We pride ourselves on doing those things, and that's what we did.

I'm very, very proud of that.

I want to thank all my colleagues for the hard work doing it.

Let me give you a little bit more to follow on on that.

The adjusted net income per share rose 43% to 70 cents from 49 cents in the fourth quarter last year.

That grew 41% for the full year to 228 from $1.62, which I think is a great achievement.

For the fourth quarter, organic revenue growth was 11% with approximately 10% of that coming from new business and 1% coming from the rate environment.

I will talk about the rate environment in a little bit.

For the year, 15% organic growth rate was comprised of 12% growth in net new business and 3% from the rate environment.

I think that's a reflection of our new business and pipeline activity as well as what's going on with rates in our business.

We continue to set a steady hiring pace with our producer account up about 6% from a year earlier.

You can see if you track that, by the way, that's a steady 6%, 7% year-over-year of growing the sales force.

Our attention is not to spike up 20% one year and go down and grow 5% the next year.

It is a steady 6%, 7% year after year, which is a nice infusion of new people into the company, a nice infusion of revenue with the attended cost that comes with that.

But very manageable.

You see when we go through our costs or salary benefits revenue line, that's been very very consistent because of the way we manage that process.

Important for you to understand.

Adjusted operating margin was 34% in the fourth quarter, up from 31% the year before.

A 300 basis point improvement, which says a lot about what I said earlier about what we do here.

Grow revenue and maintain disciplined expenses, expand margins, and bring the revenues to the bottom line.

Our margin for the full year was 30%, up from 28% for 2002.

I said before, as I anticipate a question, which will certainly come, Joe, when is that going to be, we don't target that.

I think we can do better.

I told you we have received the investment grade rating this past September.

We repaid the old term loans in November.

The new credit facility was in place in December and called the 9% senior subordinated debt this week.

The capital in the company has just been outstanding.

We're very, very proud of what we accomplished when you figure where we've come from.

The long-term debt declined 35% since last year and the debt total capitalization declined to 22% from 40% last year.

So this company has come a long way from the LPO in 1998 and from the IPO in 2001.

Our balance sheet certainly reflects that.

A year ago our debt was below investment grade.

A year ago total shareholders equity was ust over 850 million.

Today it is 1.3 billion or a 50% increase in our shareholders' equity.

We're proud of that.

A year ago we initiated a common dividend, which we didn't have before that.

We raised that in July.

The new quarterly rate of 1875 a quarter is 50% higher than our initial rate and our available cash on hand was 247 million and the net debt of 123 million or less than 10%.

It is actually 9%.

When you're coming from 80, which is where we were three years ago if I include preference shares, that's a huge accomplishment because of the discipline and focus with which we all run this place and we're all in sync as we do that.

As you saw in the release, we have a buyback authorization that has been increased to $300 million as of year end.

We have not purchased any stock under the existing program.

So we have now a tremendous flexibility to do a lot as we continue our program and now focus on, you know, other things as we check off the boxes, so to speak, in our quest to be the greatest insurance broker.

Let me take you through our business units, all of which have been firing on all cylinders and doing a great job.

I congratulate all my colleagues.

The revenues reported grew 19%, 577 million in the quarter, rose 20% for the year to over 2 billion.

That's a big deal here.

It is the first time this company has gone over the 2 billion mark.

We're all very proud of that.

Each business unit generated midteen organic revenue growth for the year, and we continue to improve the effectiveness of our global distribution capabilities under our one flag, Willis is a team sport global effort.

I just give you an idea of the excitement we have for growth in our revenue.

Obviously, our market share is not where we want it to be, nor is it where a couple of other of our global competitors are today.

But we look at that as great opportunity.

If you take our sales culture against the opportunity to grow our market share, the leverage is huge.

The worldwide market share is about 9% or 10% among the top ten brokers that basically said for every 1% of market share increase, it will generate about $200 million of revenue.

If you convert that to our margins, you could appreciate what that means to our future.

As long as people need to buy what we sell, we get excited about that.

In North America where we think we're very leveraged in terms of taking advantage of what we can do, we have 5%, 6%, 7% market share.

Every 1% market share increase in North America is 150 million of revenue.

So we're excited about that opportunity.

On the subject of North American revenues they were 225 million in the fourth quarter, 726 million for the full year, organic revenue growth was 12% in the quarter and 14% for the year.

I congratulate all my colleagues in North America.

That's an outstanding job.

That's only getting better.

When you look at some of our practices that now has some great people running those practices, our market share in the past has been very small, whether it be executive risk or employee benefits.

Even our great construction practice, you go on and on.

If you look at where we are today, with those practices.

We just came off a sales convention in Orlando a week ago that was very exciting and upbeat.

Everybody is on the same page.

You can see real growth coming from those areas where we hardly have a market share at all, yet we've accomplished these numbers.

When you look at North America, that's a retail operation.

When you couple that with international, which is also retail operation, you get the picture of what our business is like.

You have a three-legged stool here.

Two legs of the stool are retail distribution.

The other leg of the stool is the magnificent specialisms and abilities the manufacturing plants, I call them, that are representing our global businesses in London so that you've got great distribution feeding into these manufacturing plants.

As the retail gets better and better and feeds the manufacturing plants more, you get more market share and you get a continuum of growth.

Those global businesses grew very, very nicely.

Total revenue of over 255 million in the quarter. 1 billion for the year.

Again, you can see with the retail continuing to feed it, it's going to be terrific.

Our organic revenue growth was 9% for the quarter and 16% for the year, which I think was outstanding.

When you consider in 2002 the enormity of all -- where the rates were in aviation and marine in 2002, the war premium and all the things that went along with it, which did not exist in 2003 and weighing terrifically in the exit 2003 to still maintain 16% growth rate and even a 9% growth rate for the quarter, I think, is outstanding, given what's going on.

The place is set up so everybody works in unison.

I think that's terrific.

There were great performances in our global markets operation.

All the placements that we do around the world, the global markets are specialisms, re-insurance, UK retail.

It is all leveraged together.

They work now very closely with North America and international businesses.

We enhanced our European reinsurance platform with two acquisitions this year, Italry-ph is a very good reinsurance broker and Kerakan, a very good broker in Denmark.

While on the subject of Denmark, I would also tell you that we own 30% of our Danish operation which is the largest insurance broker in Denmark.

We now have acquired a remaining 70% interest in annualized revenue of about 50 million.

This is consistent with our strategy when I told you every one of minority interest companies -- countries we had, we were going to strive very hard to get them up to 100%.

When you look at where we are now, all of the minority interests that we have, except Grosevua-ph, has been accomplished.

That's been terrific.

Our international business was Great last year.

Revenues were 97 million in the quarter 332 million for the year.

The organic revenue growth was 10% in the quarter, 15% for all of last year.

Really good performances in Europe, especially Italy and Spain, Latin America, Australia.

Terrific, terrific performance by all of those people.

That gives you an overview strategically and supported by the numbers in terms of how it is being executed and how that it is working.

I would like Tom Colraine to take you through the rest of the numbers.

Thank you, Joe.

The GAAP net income for the quarter was $180 million or 69 cents per diluted share, compared to $118 million or 70 cents per diluted share a year ago.

However, Like for Like excluding noncash compensation, performance stock options and net gain on operations and a one-time UK tax benefit on performance stock options recorded in the third quarter 2003, adjusted net income increased 45% to $119 million for the quarter from $82 million in the same period last year.

Therefore, adjusted net income per diluted share grows 23% to 70 cents for the fourth quarter of 2003, 49 cents a year ago.

Foreign exchange movement benefited adjusted net income per share by 4 cents in the fourth quarter.

GAAP net income for the year ended December 2003 was $414 million, $2.45 per diluted share compared to $210 million last year or $1.28 per diluted share a year ago.

For the year, adjusted net income increased 43% to 386 million from 270 million in year ended December 2002.

Like for Like adjusted net income per diluted share grew 41% to $2.28 for the year ending December 31, 2003 from $1.62 in the full year of 2002.

Turning to operating expenses, the reported G&A expenses rose 15% during the fourth quarter and 16% for the full year.

Excluding the impact of foreign exchange movements, acquisitions and disposals, expense totaled on an organic basis, Like for Like 12% for the year.

We continue to maintain a nice spread between revenue growth and expense growth.

Benefits were 46% of revenues for the fourth quarter, down from 48% in the fourth quarter of last year and steady at 50% for the full year.

We think that's a good rate.

Most of our new spending is on revenue generating spent recruiting, training and performance-based compensation.

We also continue to invest in our business and our systems throughout the year.

Turning to the margins, operating income and the margin, adjusted operating income rose 30% to $194 million in the fourth quarter of 2003.

Our percent of revenues, the adjusted operating margin is 34% in the quarter, up from 31% a year ago.

For the full year, adjusted operating income rose 29% to $629 million and the adjusted operating margin was 30%, up from 28 cents in the same period 2002.

For those of you who follow adjusted EBITDA margin rose to 32% from 30% last year.

Turning to the noncash compensation for performance, stock options, as I said many times before, this has nothing to do with the operations.

A noncash compensation charge for this item was recorded in the amount of $3 million pretax in the fourth quarter, compared to $34 million in the same quarter a year ago.

You'll recall through the end of 2002 there was a mark to market component of the performance based stock option charge with the share price falling in the last quarter of 2002.

We had a credit.

Clearly, nothing to do with our operations or our business.

As of the end of 2002, all performance criteria for these options were met and the ultimate charge is now fixed at about $273 million.

The quarterly charge now represents amortization based solely on [inaudible].

On a cumulative basis, at the end of 2003 the company has recognized $250 million and approximately 95% of the total estimated charge.

The remaining estimated charge of $50-ph million was recognized quarterly through 2004 was very modest through 2005.

As to the question of whether or not to expense stock options under FAS 123, we're not considering expensing them at this time.

However, we estimate [inaudible] in 2003 adjusted net income would have reduced that approximately $7 million, or 4 cents a share.

On taxes through the third quarter, the company had a tax rate of 35%.

Due to actual geographic mix of our results, the full year defective tax rate in 2003 climbed to 34%, which, as we said in the press release, benefited as a result by 3 cents per share.

Looking at capitalization of liquidity, December 31st, 2003-long-term debt was $370 million down 35% from $567 million a year ago.

During the quarter the company repaid the outstanding $78 million term loan and cancelled their facility, a new $450 million bank credit facility and $150 million line of credit was put in place at this time Earlier this week, on February 2 we called the 9% senior subordinated notes and a premium of $17 million was recognized and will be reflected in the first quarter results.

Total stockholders' equity at quarter end was approximately 1 billion $290 million, up 51% from a year ago.

Capitalization ratio, our total long-term debt to total long term debt and shareholders equity declined to 22% at the year end and if you put in the $450 million new credit facility, that number would be 26%.

It was 40% one year ago.

There was approximately $247 million of immediately available cash at the year end that provided significant financial flexibility to support the cash needs of the company. –Debt nt of immediately available cash was $123 million or 9% of total capital at the year end.

I'll turn the call back to Joe.

Thanks.

I want to make a comment, as I always do about market conditions and how we see things at least for the forseeable future.

It is obvious that rates have moderated.

Property rates, overall, are flat to down.

Large accounts in the energy sector, we have seen rate reductions actually.

In the middle market, rates are relatively stable.

Casually, rates are up 5% to 10%.

Specialized risks such as D and O, E and O are still up double digits.

You have a moderating environment, I guess, across-the-board.

We shall see what goes on.

Basically, more of the same of what we kind of saw in the last quarter as it relates to the outlook.

As I said from the beginning, we're building a great company.

The rates are the rates.

We concentrate more on our client needs as long as people need to buy insurance and they need to have advice about what they buy, we're very very excited about what we do every day.

That's what important, especially with the great leverage that we have and especially with the market share improvements that we focus on as an objective year-over-year because it means so much to the development of our company.

The way we look at it is nine out of ten accounts we talk to do not get great advice from Willis, and they deserve that.

We do that enthusiastically every day.

Because our company is structured the way it is, that could bring a lot to the bottom line and grow our margins, as I said earlier.

Our long-term goal is to grow our earnings by 15% or better each year.

In all market environments.

I think I mentioned that last year.

We still feel very, very good about our ability to be able to do that.

Our objective is to grow our company 15% each year.

It doesn't matter what the market environment is.

That's what we'll do.

I think what's important, as I said at the beginning, is a couple of things.

Doing what we say we're going to do is very important to us.

If we say we're going to do it, everything is geared, everybody is focused on doing that.

It comes out of our mouth, that's what we're going to do.

I want to mention that from the day we started these calls and we talked about the vision of this company or the model of this company, they haven't changed.

The vision is the same.

The model is the same.

We are an insurance brokerage business.

That's what we do.

We want to be the very best at gaining insurance brokers, and we want to be profitable of doing that.

That model hasn't changed.

Growing a sales culture and talking about growing sales and recruiting people, watching expenses, that hasn't changed.

The revenues are growing at a very robust pace.

Much of that growth is coming from new business as we talked about before and bring it to the bottom line.

This is a growth company and we run this company and perform well in all markets.

If I could remind you of what we do, in our model, it's to sell insurance.

We do it every day as a team.

One of the big things that I know sounds kind of casual, a lot of companies that are global companies have trouble operating as a team.

This company operates as a team.

If something goes on in Europe, we know it in Cleveland.

If something goes on in Cleveland, we know it in Singapore.

Everybody operates and communicates with each other.

That's what we mean by a team sport.

It is a very global company.

We've got lots of resources all over the world, and our client locally will get that delivered to them with that local representation of those resources.

This is a very entrepreneurial place and entrepreneurial spirit with a great deal of discipline in terms of doing the entrepreneurial thing here.

Client advocacy is a big deal.

That means that somebody is assigned to a client.

We think everybody could be experts at the client and then use our resources to be able to open the portal that we call Willis and the great resources we have through these advocates.

We're, obviously, very passionate about what we do.

You can tell that from all of our voices and what we're doing in terms of building our company.

We would be very pleased at this point to answer any questions that you may have.

Thank you for listening.

Yes.

Are you ready for questions?

Yes, please.

At this time we are ready to begin the question-and-answer session.

If you would like to ask a question, press star one.

You will be announced prior to asking your question.

To withdraw your question, press star two.

As a courtesy to everyone online please limit yourself to one question and one follow up.

To ask a question, please press star one.

Our first question is from Ron Frank, Smith Barney.

You may ask your question.

Hi, Joe, Tom.

One question and then one follow up.

The first question, Joe, is, your 15% earnings growth goal, clearly we are in a rate environment as you've described it now, and, judging from the numbers, where organic revenue growth is, basically, converged with organic new business growth because the rate is sort of neutral at this point.

What kind of organic revenue growth rate do you reckon that you need to support the 15% EPS growth goal and, relative to that, where do you think can you hold the line on organic revenue growth as the comps get a little bit tougher?

I think we look at the totality, Ron.

That's a good question.

We look at the totality of the business.

We look at the way we run our expenses.

As you know, we're very, very fastidious about every line and everything we do and because the company is highly centralized from the point of view of our controls, we feel very, very comfortable when you put all that together.

We can grow our earnings at 15%.

We're very comfortable about that.

All of our business unit, as it relates to your question and organic revenue growth, all of the units are budgeted to grow revenues at double digits.

Every one of them.

I feel pretty comfortable given the way they operate that we'll do that.

I'm going to, obviously, fall shy of telling you that we're going to grow double digits.

I would tell you everybody is focused on doing that.

That's our goal.

We see no reason that shouldn't happen.

I will tell you at the end of next year, wherever the peer group is in terms of organic revenue growth, you can rest assured we'll be at the top of that heap.

A detail item.

Tom, you mentioned a $17 million item that was going to show up in the first quarter.

That got by me a little fast.

Could you repeat it?

Yeah.

The premium of 104.5. $370 million outstanding.

The cold premium to redeem the subordinated notes and replace them with the new.

To have that one-time charge --

That shows up as an extraordinary item extinguishment of debt?

It is not an extraordinary item, it is completely non-recurring It is -- we'll save more than that on the new facility.

Okay.

Great.

Thanks.

Charles Gates you may ask your question.

Hi.

I have two questions.

One and a follow up.

My first question, you made the point the company has grown market share.

Could you elaborate on that?

Yeah.

It is always elusive to gauge that because it's nothing but dividing one number into another number.

It is not a science.

Our sense is, if you look at our revenue growth over the last four years, when we started here it was a billion three.

Now it is over 2 billion.

That's a $700 million increase over a three and a half year period of time, basically.

Most of that is all organic.

There is an acquisition of our German operation in there, which was about 50 million.

We consolidated that.

And then a whole bunch of smaller ones.

So I would say that you've got about 75 to 80 million, maybe 90 of acquisitions.

So 600 million over a three-year period of time of pure organic growth.

And then when you look at our number versus the growth of the competitor and we just look at the numbers that you all see, we think that it's been a nice market share expansion based upon those figures.

Based upon those figures and, obviously, we have objectives.

I tell our people in North America, international, whatever it is, it is about growing market share, market share, market share because you convert those numbers from share to revenue to our margins to our earnings.

That's what we do.

We do that every day.

We check it every day literally.

That's a big deal for us.

When you're number three in terms of market share, and we don't want to be number three.

We're not here to be number three.

We think that's a big advantage for us, especially in a business when people every day don't say, I'll use last year's model or they don't say I'm not going to buy this year.

They buy.

The question is who do you buy from and how much do you pay.

When you have 90% of the market left, we get enthusiastic about that.

That's how it comes out.

My follow-up question, on page 2 of your news release, you talk about the redemption of the debt, the 9% debt.

What is the cost of the new debt approximately.

Its lyborg plus 95 basis points.

What would it be roughly?

Today's lyborg rates, maybe $14 million, $16 million a year.

Of course, we are allowed to hedge some of that.

We are looking at it.

It will be a significant improvement on what we paid in the past.

Thank you.

Thanks, Charlie.

Terry Shue, J.P.

Morgan, you may ask your question.

Yeah.

Just one clarification.

When you said, Joe, that for the fourth quarter you had net new business growth of 12%, was it organic growth, not 11%, which includes 3% in rates?

Did I hear that correctly?

The fourth quarter was 11% organic growth, Terry.

Right.

How much of that was rates?

One.

1%.

Did you have a double digit unit growth?

Yes.

I'm sorry I didn't make it clear.

Which is what you're targeting.

A follow-up question, some clarification on the goings on in the Silverstein case.

I get a lot of questions from managers and such.

What I read in the news, does that have any implications?

Whether one likes it or not, it does weigh on your stock.

I get questions about it.

I still don't know how to answer it.

I assume you have no exposure, as you said, because Silverstein has publicly said they don't hold you responsible.

Is that correct?

Yeah.

As it bugs you, you can imagine how it bugs me.

Since this all started, my response has been the same because nothing differently has happened.

Nobody has stated that they weren't bound.

If you’re an insurer, nobody says they weren’t bound.

The issue is whether it was one form or another, not that they weren't bound.

That means, obviously, we did our job.

From Silverstein’s point of view as you know, we have gotten commendations about our great effort.

It has gone in print that they have no intention of filing claims against it.

There's nothing to say.

If you look at it from Silverstein’s point of view, he got what he wanted.

He was bound.

As a matter of fact, we got him more insurance than he originally wanted.

That's stated in court documents.

So there's nothing going on there.

From an insurers point of view, nobody said they weren't bound, which is what our job was.

So there's nothing, really, different.

As a matter of fact, I can go so far as to say that our auditors told us yesterday, as we had our board meeting, that they saw our -- our outside auditors saw no reason to continue to footnote in our proxy the World Trade Center.

In this day and age, that's a big deal.

They didn't think it was of material interest in this country to continue to footnote it.

I don't know what else to tell you.

Right.

What I read in the paper, the various finger pointing between Swissery and Silvetstein has nothing to do with you?

Absolutely nothing to do.

Nothing has changed.

What changes from time to time is the back and forth motto of the people.

What happens is the closer you get to trial or there's an event that happens.

There's a -- a judge makes a decision.

Then you get the articles start to be written.

There is a lull period.

Then the PR people take over.

What happens is because we were in the mix, there is no question about that.

Willis' name gets mentioned and portfolio managers say, what's going on with Willis?

The answer is unequivocally we did what we were supposed to do.

We did a great job.

What annoys me more than anything is people should be patting us on the back for the biggest property placement ever.

I think that was unbelievable.

We did that in a very, very short period of time.

It was an unfortunate disaster that took place, but our client was happy.

We did what we needed to do for our client.

All the people that we placed insurance with, not one has said they weren't bound.

Which means we did our job there.

What they do legally and against each other, obviously, is for the courts to decide.

I've always felt comfortable with it.

In a highly regulated environment where auditors tell you that you have to put everything in prospectuses and everything in proxies.

To say there's nothing material going on, you don't have to footnote it anymore, I think says it all.

Thanks very much.

Brian Meredith, you may ask your question.

Good morning.

It is [indiscernible] for Brian.

Joe, can you talk a little bit about the M&A environment, how competitive is it, what are you seeing out there?

Heading into 2004 given where pricing is and moderating, what you're seeing now and what you expect.

Thanks for the question.

It has been the same for the last couple years.

You've heard me say a lot of these acquisitions, I think, are overpriced.

I still think they're overpriced.

It seems that there's more of them.

As markets seem to get softer, there seems to be greater acquisition activity.

The history of the insurance brokerage business is a history of growing through acquisition.

That's not our model.

Our model is to grow -- growing the top line by doing more business, which is what we do.

We sell more insurance.

We sell more to our client.

That's what we do.

Acquisitions for us, I look at as being gravy.

That doesn't mean, by the way, that I want to know where the dance is.

I want to know where the music is.

I want to know where the dance is.

I want to know what's available.

So far I haven't seen anything I want to dance with.

Don't misunderstand the fact we don't do that.

I don't want our M&A department to be bigger than the sale department.

That's insane.

Tha’s not what we do.

I know where the dance is.

Obviously, we have plenty of economic ability to be able to do that where it makes sense strategically we'll do that.

At this point in time, I haven't seen anything at the dance that's attractive.

Some of these prices are still a little out of line, not what we want it to be.

We know where the dance is.

The model will be growing the top line even when we make acquisitions, I might add, growing the top line organically.

Acquisitions are gravy.

That's not our core business.

Our core business is selling insurance.

It is not acquisitions.

One follow-up.

In terms of your organic growth rate, would you say the shift is changing in terms of where it's coming from, large account, middle account?

What's really great about our business is because we've had such a low market share for a long time and Willis has not been aggressive as it should have been in the past.

When you start being aggressive and you go after it, you go after everything.

I'm not interested in small, small accounts that are not profitable, but you see movement across all lines, middle market and large accounts.

We have a company here that you have a middle market account and you're someplace in the world and you have a local relationship with one of our client advocates and a client finds out that that relationship is still the same, but, yet, that person represents all of Willis all over the world, that's a big deal.

Finally, I think in the last year a lot of fortune 500 companies that never looked at Willis the way they looked at some of our competitors now that we’re showing up, like our client advocacy model, like the fact that it is a very customized approach to doing business.

We are opening a lot of accounts.

We're winning a lot of accounts from our competitors, which is very, very good.

Thank you.

Hugh Warrens, you may ask your question.

I have two questions.

Can you talk about employee benefits and trends and whether there is any impact from the ongoing shift from employees bearing more of the burden of the cost?

Are you talking about internally or our employee benefits practice?

The brokerage.

I'm sorry.

The brokerage.

I think one of the things you are going to find is a dark horse for us in the world is employee benefits.

Our employee benefits practice has some really great people in it.

On a worldwide basis I would say especially in North America we're getting off the ground where the need for employee benefits is greater, simply from a governmental point of view.

In America the shift as you said and appropriately, the shift is -- went from the government to the company, from the company to the employee.

All because of costs.

I think that that's going to be a big business for us.

Our practice leaders in North America are outstanding.

We bought a great company in North America that's a great software company that builds our software that makes us unique.

If you look at what Willis has to offer in employee benefits against our competitors, we blow them away every time.

Everything we do in this company I want to know, what do we do better than everyone else.

Why should somebody do business with us and not somebody else.

If we can't answer that question we should go back to the drawing board.

We asked that question a year or so ago in employee benefits.

The answer wasn't as good as we liked it.

We recruited Rick Elliott and his team in North America.

Today, far and away we have the best benefits practice.

Our market share is hardly discernible because benefits are so big.

That's a great point of leverage for us.

That's why I get so excited.

Our executive risk business, same thing.

So, yeah, employee benefits, you could look to this company as being in the next couple years a leader.

Whatever investment we have to make, that's a big business.

We think selling, financial services to employees on a work site basis is a big deal, and furthering that business.

There's much to do with regard to the whole issue of employee benefits and work side marketing for financial services that's huge.

In all the businesses I was affiliated with before, one of the bigger close rates is because employees need direction.

It is time-consuming to go out and seek financial help.

To do it on a work site basis with a company like us, I see the leverage as tremendous.

Thanks.

Second question, can you give any commentary regarding the recent filing for the remainder of the shares.

Say that again, please.

I'm sorry.

You're cracking up a little bit.

I was hoping to give some commentary on KKR’s recent filings to sell the remainder of their Willis shares.

Yeah.

The filing, obviously, was us filing, not them.

That obviously was to give us some flexibility with regard to what their future is.

You know, they're in the business of doing the kinds of things they did for Willis which gave us the opportunity to do the kinds of things we're doing today over the last three years they have helped us with our liquidity.

I would imagine sometime in the future that's why you file a shelter of flexibility of obviously, taking the ownership, which is now about 23% of the company down.

So it gives us that flexibility.

That's why we did that.

Okay.

Thanks.

It is helpful.

Nick Persos of Sandler ONeill, you may ask your question.

Could you share with us your thought process on the buyback given the recent authorization?

Yeah.

We did that because -- for a couple reasons.

At these levels our company, one of the better things we can do with capital, you always asked me, what are you going to do with the money.

That's one of the options that we have, that we haven't availed ourselves lately.

I think that's a prominent option for us.

Last quarter we focused on the refinancing of our debt.

We wanted to get that done because that meant a lot to us with regard to saving money and all the obvious reasons.

We asked the board for added flexibility so we could refocus our efforts on where we were with that and give us that additional flexibility, which they gave us the ability to do.

Stocks are accretive.

When the opportunity presents itself, we have the flexibility to be able to buy up to 300 million.

We're very excited about that possibility when it comes.

As we head into '04, any consideration on the income statement to break out the employee comp with the operating expenses and maybe provide a balance sheet in the press release?

We always keep these things under review.

I think we piece together all the information we provide.

We do a pretty good job of breaking out more detail than most companies.

We'll keep it under review.

Thank you.

Steven Labbe from Langen McAlleny.

Good morning.

Two questions.

Any help you can provide for us as to what we can expect from equity and net income from associates and minority interest in '04 would be helpful.

With regards to the Danish acquisition that was completed, was curious as to whether that was that the largest associate in your box, so to speak after Grasevua-ph?

No.

Their of the same level as Germany.

They are the largest -- it's interesting.

My associates did a great job, I’m looking at Richard Bucknall when I'm saying this.

They did a great job in that minority interest.

It was the minority interest that used the Willis name.

They got their cake and ate it too.

They're well known in Denmark.

I'm excited about that business.

I guess Germany was about the same size.

Grosevua looms out there as a $300 million revenue business.

That still is out there.

Steven, on the medical part of your question, obviously Denmark, the equity net income associates will go slightly and on the minority interest, it's possible it will do the same.

They brought out the remaining pieces in Italy and a larger proportion.

After Grosevua, the next biggest associate is in Argentina, which is really a pretty small compared to Denmark.

Thanks for the help.

Adam Chrouber, your line is open.

Good morning.

Hi, Adam.

How are you doing?

Good.

Thank you.

Your G&A expense line grew, if I understand correctly, roughly 12%.

What's your target for 2004?

First of all, I think we're very -- what we look at is that G&A line, as you know, Adam, relative to the spread between the growth of the revenue and the growth of the expenses.

The G&A line in itself is not what's important.

What's important to us is how it stacks up against the revenue spread.

Whether or not that investment is yielding revenue for us in growing our top line.

That's what's important.

Obviously, those spreads have been good.

We made the right investments.

That works out okay for us, better than okay.

Secondly, we look at the G&A number against the revenue number so if the total G&A revenue is going in the right direction, that means we have invested the money well while controlling the growth at the same time.

If you look at the G&A, the revenue over the last three years, it goes from 74% to 70% to 68%.

The 12% is not what we look at.

It's that number, the percentage -- that number has gone down, which says that the investment that we're making and when we do spend money, the money is being spent to generate revenue.

Thank you.

One more question.

As rates come down in some markets, did that create opportunities for your producers to go get business?

I think we have opportunities no matter what's going on.

I want to stress that.

Rates are the rates.

I think a lot of people, maybe it is because I come from a different business.

I've done this for long enough that I'm well seasoned.

Maybe not well seasoned.

I think people make too much of rates.

I look at it differently.

I look at it that 90% of the world does not have an account at Willis.

When they go to buy what we sell and if we do a terrific job with differentiating ourselves and giving a better product with better service and we work hard at it, as professionals and shareholders we got to make a dent, Adam.

You mean, you got to make a dent.

It doesn't matter what the rate is.

So I don't think it gives us any more or less opportunity than anybody else.

I think our opportunity lies in our ability to go out and do business.

Thank you.

Jim Baker, you may ask your question.

Good morning.

I had a couple of numbers questions on the cash flow.

Do you have figures for the year for cash from operations and capital expenditures and cash spent on acquisitions?

We haven't made that public yet.

I can't say the free cash flow for acquisitions and dividend was $434 million

Could you repeat that number again.

$434 million.

That's before capital expenditures.

After capital expenditures, but before dividend and spend on aquisitions.

474.

434.

434.

Okay.

That's a big number.

The interest expense for '04 obviously will be down a lot.

Did you mention that 14 to 16 would be the full year number or is that the annualized rate going forward?

If you take a Lyborg rate of 2%, then our charge would be $60 million.

That's assuming Lyborg doesn't change and that is assuming 9% in notes for the month in existence.

On the other hand, you have the one-time $17 million redemption premium to be paid on top of that.

Right, right.

We will be looking ahead.

If we hedge forward a good chunk of the debt, then in the short term that number would rise.

You might lock in some fixed rates?

Exactly.

I wanted to understand, if you could, the breakdown of the organic revenue growth by division of net new business versus rates for the year and the quarter, if you have those numbers.

We have not revealed that level of detail.

We think when you look at the sub unit level you get enough volatility in the numbers.

It is not a smooth progression one to the other.

With all the estimates involved, we think we've provided as much useful information as we can.

In the 10-K, won't you reveal those for the full year?

No.

Then, finally, I wanted to get some sense as to your thinking as to what your 22% debt to cap now.

You have, Joe mentioned the share repurchase authorization.

Is your debt about as low as you need it to be at this juncture?

Yeah.

Joe said that we try to run the Company debt to cap under 30%.

That remains the case.

That would still be the case even if we've exhausted the $300 million buyback authorization.

Thank you very much.

Barry Cohen, your line is open.

Hi.

A quick question.

Because of how marine and aviation have a significant backend impacts in your market share in this business.

Could you give us a sense for the change in the organic relative to the change in those rates year-over-year?

Yeah.

What I'll do is Richard Bucknall who runs our specialisms in marine and aviation will answer that question.

I want to make sure we understand the question.

Are you talking about the difference between the rate of growth of year ago in those areas or global areas versus the rate you saw last year?

Yeah.

They had a noticeable decline in both those sectors you have market share in and the organic revenue, which was strong.

Only a 1% rate impact.

Last year it probably was higher so it impacted the way the organic got printed.

I'm curious given the declines if you can give us an sense of what the impact was.

We have seen a leveling reduction in rates in the aerospace sector, particularly the airlines [inaudible] and marine and war.

I think our sense is that the withdrawal from the aviation sector leveling off now of that process.

Also, in terms of our performance, we're pleased with our performance.

Okay.

Thank you.

Terry Shue, you may ask your question.

I have a follow-up question on currency.

The 4 cents was a meaningful number in the fourth quarter.

Can you give some general idea sensitivity about currency impact for some of the brokers?

For instance, Marsh.

They always say they are naturally hedged and you see it in the revenues.

Is there any earnings impact?

Can you comment about currency hedging?

Yeah.

I don't know whether Marsh said in the most recent quarter that there was no impact, I didn’t see anything in writing.

They always say they're naturally hedged, that the earnings impact gets, more or less, washed out.

That's always been the case.

You see the significant movement of the dollar.

It still had a 4 cent impact on the bottom line.

Looking in to 2004, given the weakness of the dollar, it looks again as if we could expect revenue and expense growth to continue to be inflated, but, certainly, at the moment, it looks as if there's impact on the bottom line.

The 4 cents is for the fourth quarter.

The full year number, did you give a number?

7 cents. 3 cents in the first quarter.

Thank you.

Once again, if you have a question, press star one.

Sir, at this time there are no questions.

Okay.

Thank you very much, everybody.

Appreciate your interest.

Thank you.

Have a nice day.