Willis Towers Watson PLC (WTW) 2004 Q1 法說會逐字稿

Good morning and welcome to the Willis first quarter 2004 earnings release conference call.

All participants will be able to listen only until the question and answer session of the conference.

This conference is being recorded.

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

I would like to introduce the host for today's conference, Ms. Kerry Calaiaro, Investor Relations Director.

Ma'am you may begin.

Thank you and good morning, and welcome to our earnings conference call and webcast to willis.com for the first quarter of 2004.

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

This tele conference call will be available by replay starting at 10:00 A.M today Eastern Time, and ending at 5:00 P.M on May 13.

To access the audio replay please call 1800-283-4984 within the US or 402-220-9733 or by accessing the website.

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 for those anticipated.

Additional information concerning risk factors 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 non-GAAP financial measures we have included reconciliation to the most directly comparable GAAP measures, as a supplement to our earnings release which also may be found on our website.

At this time I would like to turn the call over to Joe.

Thanks Kelly and good morning everybody.

With me this morning is Tom Colraine, Chief Financial Officer;

Richard Bucknall, Chief Operating Officer; and Mario Vitale who is the CEO of North America.

Before I get into my usual remarks, I want the cavalry to come to the aid of Kerry Calairo.

But with the last three days, four days, or five days I know she is been bombarded by a lot of you with regard to questions having to do with contingents, the world trade center, and all that stuff going on.

I go into her office, and the phones ringing off the hook, so I have to start my comments off by giving you my own comments about the whole contingent map.

First off all, whenever there's a P&A assess to do we will do, and we will fully cooperate.

But you got to understand that the contingents that we receive in this company, I don't consider it being material.

Over time if you look at the last quarter which is a 9% increase in our revenue, and I took the contingents away, the revenue increase is still 9% is a couple of basis points it's a round up, it's just not something that we've considered to be significant.

I will also make reference to the fact that as we receive these contingents, there is a real service that we provide, there are things that we do from an operational point of view, and distribution point of view, the disclosures that we are supposed to make, we make, we do all the stuff we're supposed to do.

There is a couple of, I think interesting points of reference that you might want to use, I think the other day CAIB came out with some sort of release which described these contingents, which I think was a very good release, and secondly there was a J.P.Morgan study that came out last January I think that talked about contingents, specifically talked about us and how much we received that's related to earnings, that's related to revenues, and how we were involved in that whole process which I thought was directionally very accurate.

So as this goes on whatever the purpose may be we will fully cooperate, we'll do whatever we have to do, but understand this isn't something that we think is a bit

it's nothing that frankly bothers us or concerns us.

But however we are directed to behave, we will behave but not prominent part of what goes on in our company.

Secondly, as it relates to the World Trade Center, as you know the joy is out, I just give you a look back as people ask me all the time has anything occurred in the trial that disturbs me.

From the beginning I've said that we don't have a dog in this hut, and we don't, there is nothing that occurred in this trial that changes that.

The

aside, Silverstein went out of this way

again reiterate what great job we did, and no time to attend the trial and then the insurance company

down, both of which was the case before the trial and went couple of years ago ever since the event.

So, really the gaming is changed there, and in both of these occasions I know they are comparable, instead of waiting for the middle word in my comments or to the end to wait for a question to be asked.

I thought, I shared with you right upfront.

These are couple of issues that I think we're very, very comfortable with, we've always been comfortable with the World Trade Center, nothing has changed that, and we are equally as comfortable with whatever we are asked to do with regard to the subpoena and contingent.

We think we are doing a good job.

We run a good business, we spend less then we make to allow these things; we are not dependent upon maybe like others are.

I just want to tell you that which is not material.

So let's move on, and suppose if you got any question I'll be glad to answer them.

We're very proud of our quarter.

We had great efforts from everybody all over the world.

Our business model that continues to be sound.

One of things we always said is that we wanted to build the business that when the wind turns and went from more back to win our fate if you will, that is the

we would still want to continue to grow our business, our revenues would grow that our margins would expand, and that we would do a great job for our shareholders, specifically unified team and we do things for the benefits of our clients and that is continued to be the case here, we're really proud of that.

Just to give you some highlights of the quarter, the adjusted net income per share was 29% and $0.94 from $0.73 in the first quarter of last year.

Denmark, which is the acquisition we made or the rest of the acquisition, the rest of story if you will.

We own 30%, we went to 100%, and that got us $0.04 in the quarter, and currency, foreign currency has $0.03.

So, the Denmark situation is very good, it's very good.

The leading broker I might add in Denmark, and we are very, very proud to conclude that transaction, and we are very, very excited about that.

The organic growth in the quarter as I said earlier was 9%, because no contribution from the rate environment.

All the growth was from net new business.

Our adjusted operating margin was 35.5%, that's up from 35% a year ago, and I might add that the combination of the 9% increase in the revenue and continued expense discipline.

I mean the key word here is discipline, as what day-to-day in that regard just as an example, our G&A expenses as a percentage of revenue a year ago with 63%.

Our G&A expense as a percentage of revenue in the first quarter of this year was 63%.

A year ago, our salary and benefit in revenue was 48% in the first quarter of this year was 48%, and if you look back on a quarter-by-quarter basis or you look back on a basis of the last 12 months, you find the trends to be the same, the last 12 months G&A was 67%.

The last 12 months before that it was a little bit higher and is trending down. 50% in salary and benefit to revenue percentage versus 52% on the trailing year before that.

So the discipline of the expenses management that continues, but that's all within the case.

Another great highlight of our quarter was we completed the secondary offering in February, and

ownership is down now under 6% from 74% at time of the leverage buyout in 1998.

We use that half of our buyback authorization, and purchased 4m shares at the time of the second year.

Moody's as what you know weighted our existing shelf at Baa2 to not just above the rating on our old debt prior to the refinancing.

We also got approval from the Chinese government to purchase 50%of Pudong Shanghai Insurance Brokers, which should give us, we hope, the inside track having done that which is been consistent with what we respond to do to get a license in China, so we are looking forward to that as well.

I think one of the great highlights of the quarter is that we instituted a new stock option plan that gets to 22% of our associates.

It is a partnership program that we thought was important to be able to obtain, retain our people to attract our people, that we looked at it like an acquisition because our people are great and we want to get more people involved with young people, the ability to be able train and the ability to be able to climb up the ladder.

There is great framework in different levels that you can achieve overtime in this partnership portfolio and as I said, 22% of our associates were involved in it.

So, we really are excited about that.

Those were the highlights of what we did.

I should now talk a little bit about the market conditions all of which you reported many times and I will just draw my $0.02 and the way to continue to moderate throughout the first quarter - - property rates overall were flat to down and once you count the energy sector, we have really seen rate reductions and in the middle market, the rates are relatively stable.

Casualty rates are flat to up to single digits.

There is some moderation in specialized risk such as D&O and E&O, but the trend is basically flat to down, you know, in our businesses as you go, but despite that because of the way we run the business, we are very, very proud of our results.

Now let me take you through business units quickly.

The reported revenues grew 20% to $665m

quarter.

North American operations, we think is really outstanding, not only is it growing, but it is consistently growing.

It was up 11% on a reported and organic basis, at $175m in revenue, solid contributions and we were building also very good segments in that business, whether it is middle market large accounts or really starting you know to increase and we got great leadership, in that regard now especially practices, executive risk toward benefit construction, run new business wins for us, in penetrating the Fortune 1000 companies.

But the whole idea is that you have to understand is that it's all about distribution, distribution and distribution business and that distribution helps our manufacturing plans whether they be in London or any place else in the world, you know generate business, sort of three legged stool, you got two legs of the stool one being North American distribution, one being international distribution, the other leg begin our London sort of manufacturing plant that's the way this is being set up, and our whole scheme has been to direct our efforts toward all of those things, working together in unison as a team.

I was very proud of our global businesses, simply because this is the, you know, first quarter on year-over-year basis.

We didn't have more premium, we didn't have extra charges that the aerospace, you know, went through over a couple of years.

There was a lot of moderation in those markets, but yet on a reported basis, we were up 17%, on an organic we were up 7% without all of those things taking place, surcharges or premium etcetera, we were still up 7%, and I was really proud of what we were doing.

I think that one of the things that was a little bit of a drawback in that growth was in the marine and the aerospace reinsurance area, where the retentions are higher, the rates were lower.

So, we even did 7% without, you know, benefit you know from that and without benefit from all the other things that were going on.

So, I was really, really happy with that.

We had two acquisitions in the reinsurance area, Ital Re in Italy and Kirecon in Denmark.

Overall, I think, we did just a terrific job.

Our international retail distribution was up 25% on a reported basis, $139m organically, 11% --We acquired as I said the remaining 70% in Denmark, had their annualized revenues by the way is about $50m and I have really high hopes and lots of confidence that we started with great margins in Denmark and that's just going to continue to grow and get more exciting for us.

We got a great business in the Scandinavian countries; we got great business all over the place.

This is really terrific.

Just to remind you, that we now as I spoke to you a couple of years ago, there were some outstanding associates that we needed to get to 100% ownership or to join the ownership.

We've now done that, Germany, Italy, Spain and Denmark, which represented the bulk of the revenues where those associates were, the only one left outstanding is Gras Savoye, which we own 33% of, its the largest broker in France and we have the ability at the end of 2009, to be able to purchase them, but obviously that's something that we are going to do when we have the opportunity to do, but that's the only on left.

Argentina, I should mention for our Argentinean friends are still out there, but obviously in terms of size, does not meet the same kinds of levels of the country I mentioned.

So our performances in Europe and Latin America have really been good, so this is across the Board effort, on behalf of everybody and we are really excited about that.

I'd like Tom Colraine our CFO to take you through the rest of the numbers.

Tom?

Thank you Joe.

Starting off with the earnings, Net income for the quarter was $148m, or $0.87 per diluted share, compared to $117m, or $0.69 per diluted share, a year ago.

Excluding non-cash compensation for performance-based stock options and a debt redemption fee, adjusted net income increased 30 percent to $160m for the quarter from $123m in the same period last year.

Adjusted net income per diluted share rose 29 percent to $0.94 for the first quarter of 2004 from $0.73 a year ago.

The Denmark acquisition contributed approximately $0.04 during the first quarter as their earnings heavily related to the first quarter.

Our estimated total earnings from Denmark for the year are $0.03, and in particular will probably cost us $0.01 or $0.02 in the second quarter.

Foreign exchange increased the reported earnings by $0.03 per share in the first quarter.

As the dollar weakened against both Pound Sterling and Euro, compared to a year ago.

The dollar strengthened a bit since the end of the quarter and if

remain at these levels we estimate that this $0.03 benefit will reverse by the end of the year.

Operating expenses, G&A expense was 19% during the first quarter.

Excluding the impact of foreign exchange, acquisitions, and disposals growth on an organic basis was 8% for the quarter compared to the first quarter last year.

benefits of 48% of revenues in the first quarter, about the same as last year. 38.5% if you look at on a trailing 12 months basis.

Adjusted operating income was 22%, $236m, first quarter 2004 and as a percentage of total revenues the adjusted operating margin was 35.5% in the quarter, up modestly from 35% a year ago.

And margin on a twelve basis continues to improve against historical levels.

Capitalization on

.

As at the end of March, total long-term debt was $300 million, down 40% from $499 million a year ago.

On February 2, we exercised our option to call the outstanding 9% senior subordinated debt, moved $300 million under new credit facilities and repaid $70m from cash in hand.

We paid a $17m premium on redemption of the debt.

As mentioned in the release, that non-recurring item amounted to $0.06 a share.

We provided an estimate of interest expenses to $80m in our 10-K, that's excluding the premium redemption.

That will of course depend upon interest rates and assume no hedging.

We are likely to hedge our exposure to the rising interest rates in the future and that estimate is likely to rise slightly.

Total stockholders' equity at the quarter end was approximately $1.3b and the capitalization ratio, that is total long-term debt to long-term debt plus stockholders' equity was 18% at the quarter end, comfortably below our stated 30% target.

In addition to the debt repayment during the quarter, we had a $148m of cash for the stock buyback, $26m for dividend, $49m for acquisitions.

It was approximately $93m of immediately available cash at the quarter end providing significant financial flexibility to support the cash needs of the Company.

On June 2, we totaled a further $150m as required under the terms of our latest financial agreement to get the total of $450m drawn.

This would leave a further $150m facility on going.

The Middle

higher ratings will of course give us significant further flexibility on financing in the future if we need it.

On stock options, our usual non-cash compensation charges for performance-based stock options were recorded to the amount of $2m pre-tax in the first quarter compared to $8m in the same quarter a year ago.

The remaining estimated charge of around $12m will be recognized quarterly mostly through 2004.

In 2004, as Joe mentioned, the company just issued a new stock option program to retain and attract talent and create a way for the deep accrual of option holders.

We granted $5m options representing approximately 3% of total diluted shares at that time.

We are currently assessing the potential impact in the company of the recently issued FASB Exposure Draft on equity paid compensation.

If we adjust through the income statement all options using the Black-Scholes payer volume method, the estimated after tax expense in 2003 was approximately $6m or $0.04 a share as disclosed in the annual report and other filings.

Including the new option program, the charge will be approximately $14m or $0.08 per share in 2004 if we used the Black-Scholes method.

I would like to turn the call back to Joe Plumeri.

Thank you.

Thanks Tom.

I just want to conclude by reiterating that our long-term goal is to grow our earnings by 15% or better each year irrespective of what the market environment is.

We are continuing to build the company the way we think company should be built, we are building it in all environments, your revenue should exceed your expenses, widen your distribution, build the sales culture and I think very, very important in that is to continue, even though our margins are high is to continue to expand them in the best possible way we can, and I think this quarter is a great example of doing that.

If you ask me to sum up what this company is about I think great companies have two things: they have discipline but by the same token they are entrepreneurs.

It's a very disciplined company but yet we are very entrepreneurial in our sense of excitement, in our sense of aggressiveness and our sense to build the sales culture and it is very unusual when you have both of those things going on at the same time but I think this quarter is a great manifestation of our ability to be able to do that.

We will be very happy at this point in time to answer any questions that you have.

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

If you would like to ask a question from the phone, please press star one.

You will be announced prior to asking your question.

To withdraw your question, press star two.

Once again to ask a question from the phone, press star one.

Our first question is from Ron Frank.

Sir, you may ask your question.

Hi Joe, hi Tom.

Hi Ron.

Two quick things.

One, just a detail item for Tom.

Tom is Denmark still on the associate line in the first quarter or consolidated?

All consolidated.

Okay.

Second, the margin gain year-over-year, operating margin was somewhat narrower than it has been in the past although was at a great absolute level, and my question is are we seeing there a higher level of reinvestment in some areas of the business or just the natural limit to operating leveraging as you grow to a certain level or could you sort of characterize that trend for us?

I think it's a combination of all those things, what I mean, you know, 35.5 is pretty good.

Right.

I think it's very good.

I mean it's a -- the acquisitions that are in there all are very very small, as you know, we haven't done any big acquisitions, so, this is blocking and tackling.

So, I thought you were going to congratulate me actually.

Well, I did say it was a great number.

I mean that's a -- 35.5, you go from a 35 to 35.5.

I mean give me a break.

I think that's a great discipline and as I said before in all seriousness I think if you spend less than you make that'll expand, then at these levels they're going to spend less.

In the last three years we've gone from 21.2 to 28 to 30 and now in the first quarter it's 35.5 versus 30.

So, we think that's great.

Matter of fact we're dancing in the streets.

Thanks.

One follow-up, if I could and by the way if I gave you a break you wouldn't respect me.

Trust me.

I'll always respect you.

The associates line

that was up year-over-year not withstanding Denmark being consolidated.

Could you tell us what the key drivers there were?

But of course, continues to put in decent numbers and the Euro being stronger against the dollar with

companies they were on.

Okay.

Great.

Thanks very much.

Thanks Ron.

Have a nice day.

Sure.

Jay Cohen with Merrill Lynch.

You may ask your question.

Hi, Jay.

Good morning.

We assume you got a number of different growth opportunities around the world and I am wondering if you could just in your line you add rank where you see better growth opportunities are?

I am afraid to rank them because everybody I think in terms of opportunity -- one of the things I've always said when talking about our company is that we're as well as we've done and as good as the numbers are.

There are couple of things that people have to understand.

Number one, our leverage is unbelievable, and I don't say that other than for statistical reasons.

I mean our market share around the world is in the 10% range, 8%, 9% to 10% depending upon where you're looking.

We still got 80%, 90%, 91% to 92% of the market to go and we've just begun to get this culture going, I mean that's exciting.

So, I think the whole world is leveraged.

If you ask me to break that down in North America, Willis bought Corroon & Black in 1990.

It wasn't until a few years ago that actually Willis and Corroon & Black actually started talking to each other.

I've said that before and the North American distribution where we're really coming on great.

I looked at our competitors numbers on organic growth and I look at our organic growth in North America which is absolutely pure, there is a maybe $10m or so of acquisitions in there.

I got to tell you man that's great stuff and that means we've got great leverage in terms of building market share as we build our middle market and our large account practice.

The large account practice stokes the fires in London for our manufacturing plants, it's stokes the service enquires of our branches all over the world, and I mean it's a huge leverage.

If you look at the international sector, I told you about that the fact that now most of these countries all have Willis on their name, every one of them.

There is not

3:50 --4:08 a place in the world that doesn't have Willis and their name probably, as a matter of fact it is all Willis and we just started that in the last couple of years and they're all consolidated now except one and all are starting to work together very well, I am very excited that double-digit growth is well on a retail basis.

The whole place is set up, so you've got to retail distribution against manufacturing plans which is specialisms, placement capabilities all over the world, global markets so, that you get local service by delivering global resources that leverage is absolutely huge.

Our or businesses in London which are our most seasoned businesses finally have the ability now to take advantage of business coming in from all over the place because we're now one company, and so that creates a lot of leverage for us.

It is really a very exciting time, and I think that is the real story.

It is not what we have done.

It is the fact that what we've done is

.

Are there any other, what you might consider, one-time gain in this quarter's earnings?

Well of course the Denmark that I mentioned where we will get $0.04 in the first quarter,

.

How did that $0.04 work through?

How does it work?

Yes, where is the $0.04 from?

It is the, you know the $50m of revenue more or less annualized in Denmark, heavily weighted towards the first quarter and which is very common with a lot of operating units -- you know moderately a decent margin and you sit and do the math, cost of

relatively small, and so you do get the big bulk in the first quarter.

I did mention earlier that it will go little negative in the second quarter, flat in the third quarter and a little further when we get into the last quarter.

You know that is there forever and that will happen every year and then that would improve every year, but it would by another $0.04 added every quarter.

So, it is -- one-time is relating to the quarter of this year.

But don't be confused Charlie, that is a real number in real business, and we have acquired it, so that is recovered.

That is a part of our business.

So, its not, you know, something that parachuted in.

Secondly, I would tell you that because they are associates now there is a lot of economies of scale, and I think margin improvement that will come from already a good business, which is the largest in Denmark, so we are all excited about that.

My only other question.

Can you offer any or other guidance as to a possible timing or the possible product of this contingency review by Mr.

.

No, I can't Charlie and that is why I lead off with that discussion.

I have not talked to anybody there, and I have not talked with Mr. Spitzer.

I don't know what is going on, and I don't know what promulgated in, I don't know, I really don't.

We got subpoena and we are responding to it.

But I have to tell you, it just doesn't bother us, it is not material, it's not major part of what we do, and what we do, we think is very legitimate.

All the disclosures that we are supposed to disclose whether they be in our billing notices or fee agreements, and whatever we are supposed to do we do here.

So, you know, I don't know what to tell you other than we will do what we have to do, but doesn't bother us, it is not material.

Thank you.

Jay Gelb, Prudential Equity Group.

You may ask your question.

Hi, Jay.

Good morning.

Joe, I was hoping you could talk at least directionally about margins by the individual segments, where they are relative to each other and whether we could see further improvement on individual basis and perhaps you can talk about where to see the opportunities in China from a revenue and margin perspective.

And then finally if you can talk about the performance options testing by year end.

First of all we have never broken down our margins by business segment.

We don't get into that, but I would tell you that -- I think that across the board obviously to have these kinds of margins there isn't anybody that did show up

they all contribute and they all do a great job.

I think that the biggest leverage is in our newest businesses although they are high, and as I look at our competitors numbers all margins in the retail sectors of our business which is North America and international seem to be as high if not higher than everybody else, but I think the leverage there is huge, but right across the board, I don't know any place where the margins aren't up to what our expectations are, as a lot of people know -- you just getting involved in looking at the company Jay, that when I first got here all of those places and operations that we call

were disposed off, that did not give us high margin.

So, we think that there is still a lot of leverage, you know, in our margin.

Yes.

The performance options you mentioned by the year end, Not only them but the other tight options we call them that was granted at the time of the KKR acquisition of the company.

That is one of the

GAAP under the ATB 25.

It is worth noting the current currency discussion document becomes more attractive.

Their

would never have existed.

The estimates I gave for this year's charge using the Black-Sholes method of $0.08 would cover all options and we will completely replace that.

So, the new option programed essentially was prudently placed partly to further

people who were in that program, but obviously as Joe mentioned to involve a further almost 2000 people as well.

I like Richard Bucknall to answer the question with regards to Chinese being very, very involved,

in our international people and the acquisition of Pudong Shanghai, Richard.

While this has been trading in China for many decades, particularly in the reinsurance and aviation reinsurance sector.

I think the opportunities that we see in China, specifically relate to the multinational clients that operate in China from our clients all around the world.

Many of them have investments and proposed investments in China.

And now we will be able to serve their interests and look after their interest.

And I think in specific sectors, we would envisage opportunities in the energy, the construction, the infrastructure and aviation.

And I think, as a starting point those will be the areas we focus on, by definition the insurance brokering industry in China is relatively immature.

So, we will obviously watch for opportunities with great interest as soon as we get into it.

Thank you very much.

Thank you.

David Sheusi with JP Morgan.

You may ask your question.

Hi, good morning everyone.

Good morning.

Couple of questions here.

Could you give us an update on the M&A side in the US.

It looks like you have had your eyes outside the US, is there anything different that you see in the market that is kind of driving that?

And then secondly on the organic growth side, can you give us some parameters on how to think about the balance of the year, what your expectations are, kind of going into '05, and what that would mean to organic growth?

As far as the acquisitions are concerned, we took them the same way.

The best metaphor I can give you is that even though we have not been active, it seems like everyday somebody is buying somebody.

Even though we have not been active, that does not mean, as I said before we don't know where chances are.

I know where they are.

Excuse me, we talk to everybody and as I said when is time is right, we will be very happy to engage.

When we think the time is right, the prices are right.

It appears that even though I haven't seen any manifestations on that yet.

But that may be happening soon as the business sort of changes and the environment changes, but we are very tuned to what is going on, and nonetheless excited.

As a matter of fact we have a platform now, which we would be able to integrate companies that we wouldn't be able to do three years ago, because we were shoring up our own company and creating our own culture.

So we are pretty excited about whatever opportunity might come up, might come about.

Just to respond to that.

I hear you, I guess frankly in your former commentary that you're expecting to draw down on a credit facility about a $140m in June?

Yes.

Okay.

And I guess how are you thinking about that capital, are you looking more on the M&A side, or can you give us an update on the repurchase or something?

The reason I have drawn that as $150 in June 2nd

June the 2nd.

And of course we will have to use real possible usage for that capital, the acquisition, that stock buyback, reinvesting in the business and possible something on the pension side.

So, we've got all the opportunities available to us.

As I said, we still have, we had to authorize $300m of buyback of stock reduced, possibly half of this.

So, that is an option that is available to us as well.

Okay good.

The other question you asked about was organic growth, and what we thought organic growth would look like.

I have no idea, I guess on our last call, people would ask me, you know, what I thought our growth would be, and my response was that I didn't know what the rate environment was going to be doing.

It seems like the rates are falling of the cliff quicker than people had imagined.

So, it is very difficult to make any predictions as to what the organic growth would be, but I did say that whatever the organic growth rate was in the industry, we would be at or near the top of that rung, and it appears that that is the case.

So, whenever you look at in terms of

of organic growth I feel comfortable that we will be able to do that.

I also feel comfortable that our expense levels in terms of the way we run our business will always be adjusted to whatever that growth is.

Thank you.

Congratulations on the quarter.

Terry

J.P.

Morgan, your line is open.

Yes.

Hi, Joe.

Hi, Terry.

If you can comment on staffing and recruiting and may be review again I think each quarter when I've asked you in the past, you talked about approximately how many people you hire etcetera, the growth in your produce so forth, and what areas are you still filling in.

I had seen some of your releases where you've hired some high-powered people for instance ahead of your New York office.

May be just generally talk about staffing.

Yes.

I think as we grow, thanks Terry.

I think first of all, as we grow our business -- this business is all about intellectual property and this is about people.

And what you are reading about whether it is Leslie Nylund, who you are referring to who joined us a month or so ago from March or other people that are joining us.

Yes, I mean the whole idea is just to build a nice company that's exciting enough, that if you build it they will come.

And they are coming.

I don't know what to tell you, and we are welcoming them and embracing them.

Yes.

That's what the whole idea of the future is about.

And that's what the whole idea of attracting great people work.

In systems and operations, Jennifer

joined us from AIG with greater systems and operations experience.

It goes on and on, I don't want to list all the names.

But, it's just terrific when you see people, that's what fills great companies and as far as your recruits are concerned, we haven't changed a great deal.

One of the thing we try to do in running a company Terry as you know is eliminate

.

Your business is good, you hire a lot of people, business is bad, you get rid of a lot of people.

That's routine.

And we've been pretty steady with regard to when we hire.

It's continuous.

We are always watching our numbers, we are always watching on headcount, we are watching our salary and benefits of revenue line.

But, nothing has really changed.

Is it fair to say that the organic growth is really not driven by bodies.

Like you don't have headcounts up X %.

No, absolutely not.

Okay.

So, on average headcount again I guess depends on who you hire.

Is it fair to say you are growing moderately, certainly not more that 5% or 6% in terms of number of people?

Is that a fair comment?

It's a fair comment, and if your underlying question is, it is the organic growth this quarter or any of the past quarters highly depends in about hiring a lot of people, which brings in lots of business.

The answer is no.

That's not what we do here, we don't bring in lots of people, they do lot of business and then go through the cycle.

This is a steady progression of building a sales culture, acquiring good people on a moderate basis over time.

If you remember that the figures in the last quarter, we were recruiting about 6% every year and it has been that case all along, that's pretty moderate.

That's not huge injections of people.

We think we are doing it the right ways, it has worked so far.

It's good for them.

And that's gross right, and you have some net attrition too.

Is that right?

Yes.

Great.

And the other thing is that I just want to make sure.

I think you did mention in the past that you never give performance guarantees or compensation guarantees.

You hire people and they produce.

But, you don't pre-guarantee them.

That's correct.

Bonuses and such.

I hate to keep on going back to this contingent commission thing.

But, why is it that said like companies can't give more, confirm more precise numbers as far as what proportion of revenues it is like in your case, the 2% to 3% you said it's approximately right.

Why are there no better, more precise numbers?

Well obviously, in the past we've simply never have given that, because we didn't think they were material.

And the precision of them, I don't think its material.

What I told you it was point something, something.

I don't know whether it would matter one way or the other.

I think what is important is this is simply not material.

Okay.

Is the 2% to 3% you said it's approximately right?

No, I said that if you looked at that JP Morgan report, I think it was about 2.5% that was at the end of 2002.

Right.

And, I would tell you that if you fast-forward it to the end of 2003 on a proportionate basis directionally that would have been correct.

Okay.

But, has it necessarily increased.

I think there is.

No, you are asking me whether it spiked up so that it's material.

I'm telling you it's not material.

I don't consider it material.

Okay.

Thank you.

Nick

, Sandler O'Neil.

You may ask your question.

Good morning.

Thank you.

I have two questions.

First, how much did Denmark contribute to this year's first quarter international revenues of the $135m and last year's $96m?

I said I couldn't break out.

As I said there is a limit.

I have a duty.

We did say that International's organic growth was 11% but not excluding acquisitions and foreign currency maybe about 45% on a supportive basis.

Okay.

The way which they will generate revenues, we said it's $50m for the year.

And the second, can you give us some trends as far as pricing between large and middle market accounts?

If you can ballpark Willis' consolidated book between large and middle market account, how would you try to break that out?

I would say that the bulk is, if you look at our commission versus fees split, it's 70% commission, 30% fee, and the reason it is broken out that way is because most of our business is commission based, which means middle market, we get paid in commission, 30% comes from the fact that we do that amount of business with large accounts

.

I have also stated on the record that I'd love to see that being more like 60:40 or 55:45 or whatever the case might be.

I think that will happen over time, because I am very optimistic and excited about our ability to gain market share in the large account sector, which is coming along very nicely.

Great.

Thank you.

Thank you.

Adam Klauber of Cochran, Caronia.

You may ask your question.

Could you give us an idea of revenue per employee first quarter, revenue per employee or producer first quarter this year compared to first quarter of last year, and what are the factors that are affecting that number?

Revenue per producer and revenue per employee continue to be on the up and up item.

We will not quantify that because, it is a little bit misleading, particularly with the impact of foreign currency, but that productivity measure continues in the right direction.

We expect that to continue.

Are you signing a higher proportion of larger accounts as time goes on?

Are we what?

It's only a higher proportion of larger accounts, bigger fees, and bigger commissions?

Yes, because we have such a small market share in that sector across we do in all businesses, but especially in the large account segment.

So, that is something that we concentrated on.

That's why I said the leverage in our ability to increase market share is, I think, huge, and no more than any place else, but the large account sector when you open an account, not only do you create great relationship with the large Fortune 1000 companies, but your global

, we have the ability to be able to surface that kind of account all over the world.

So, we will underleverage in that regard.

Unlike if I take away from this that we're switching our strategy from middle markets to large markets, large markets to middle market, has nothing to do with that.

We are global businesses and we are going after all these segments.

We're going after small commercials to make sure that they make money.

We're going after middle market to make to sure that grows and get our fair share, which is not enough yet.

We're going after large accounts to get our fair share, which is not enough yet, and when I am even in a personalized business to speak of, I mean this company is fledgling.

I am trying to get that across to everybody, and every category is fledgling with great infrastructure, great foundations, and great experience.

So, we across the board, we are saying about all this.

You have got the kind of market share that we have, and you have rates coming down, and new dollars that consume this place don't know it is soft dollar.

I doesn't whether it used to be hard or it used to be soft, it's new here, and given the fact that our expenses are always constructed so that our business gets the kind of margins we want, we are excited about that new business coming in.

There is no plane of reference.

So, it is terrific.

Thank you.

One follow-up question.

Is the reinsurance brokerage division maintaining a type of growth it has in the last few years?

It did not maintain the same growth, because I told you the retentions were higher and the rates were lower.

Those growth levels were really dramatic in the last couple of years.

By having said that, we're very happy with the growth rates and relative to what I've seen, we have proved so far, we were right up there.

Thank you very much.

Thank you.

Peter Monaco, Tudor Investment your line is open.

Hi, Peter.

Good morning.

Thanks for your time.

Couple of questions Joe.

Now that you've significantly deleveraged, what is your thinking about what the right capital structure for the company is going forward?

Are you making reference to our percentage of debt-to-capital?

Yes, I guess so.

You paid down a lot of debt since you became public and you've recently started some share repurchase.

What is the optimal -- I mean to the question it is.

What is the optimal capital structure for a company like Willis?

Well, Tom said earlier that -- our stated target was trying to be in the 30% debt-to-capital rage, we're well below that at this point of time, which I think gives us additional leverage in order to do a number of things, buyback stock, make acquisitions, we'll have a time to think and usually do.

You know, when disposing money or business, as you know Peter, it's a very cash oriented business, we don't have mark-to-markets everyday, we just got to make sure that we pay our people and pay the rent.

And so, if we always tried to stay around the 30% range that's the stated goal, it's not important to me, but we're very happy with where we are and very happy with the cash that we have available to us to continue to grow our business.

Is it safe to say that as it -- to generalize that deal pricing, acquisition pricing for you folks it is probably not as attractive as it was a couple of years ago?

No, I think ever since -- at least I've been in the business, which means here I always thought that was priced a little bit on the high side.

I think it was a little high and then it got much higher and then I should see and I can only tell you what I read, that it still seems to be high.

You are looking at revenue multiples and EBITDA multiples paying higher, then I would like every case obviously is different.

You look at these things on a case-by-case basis, where there would be strategic or tactical acquisitions, but we're watching them all and we're acutely aware of what's going on.

In light of the prevailing asked revenue or EBITDA multiples that you are seeing, what kind of return does might acquisitions offer these days?

How does that compare with your hurdle rate for acquisitions and how does that compare with buying back stock as you started to do?

Well, we want that stock because we thought that the best use of our money was to buy our stock back.

And we thought that at $38. 26 that was the best use of our money, given what was available to us in terms of what's the best interest of the company.

So, at that time, we thought that was the best use of our money and that was what we thought was better than making an acquisition.

Obviously, with the prices of stock the way it is today, I don't need to tell you the rest, you know about that story, but you have to look at these things on a long-term basis as well as it make strategic sense.

I told you that North America is a very big leverage point for us.

There are a lot of places in North America either where we are or we could be better or bigger and we're looking at opportunities to show all of that up.

So, it's a -- I think this is a really good time in the movie.

Fair enough.

Thanks.

Thanks.

Peter.

Brian Meredith, Banc of America Securities.

You may ask your question.

Hi Brian.

Hi, good morning every body.

Two questions here for you.

I am sorry to harp on this contingent thing.

But, just one quick question, Tom maybe you can answer this of course, if we look at the contingent commission by segments that where do they typically lie.

Can you kind of give us a percentage of North America, International and your Global Specialties business?

No, I mean, we would state these are immaterial overall -- to the individual status.

I understand but they weren't immaterial to the stock price in

-- that's the problem.

What was that Brian?

I mean the weren't material to what happened with your stock and that's why we're just trying to get an understanding of, if you know, what -- and try to compare that to people.

No.

I think people are careful that we have disclosed things that happened, we disclosed everything to the extent that you should believe there is nothing of real significance in there Brian.

Okay.

And then the next question Joe, if I'm looking at your 15%, the earnings growth rate as we are looking out going forward, is there any, call it minimum implied revenue growth that you need in order to make that.

And the reason I'm asking that is if you look at, you know; one, organic revenue growth slowing; two, some of the associates the ability to kind of increase the joint ventures.

There is only really one major one left there and looking at the M&A environment, you know, it's difficult right now.

No.

I don't - - we don't make those predictions based upon a certain amount of revenue growth.

We make those predictions because we think that under all environments, Brian under all circumstances, given the way we control our expenses, and given, especially the way there is the variable piece in our salary and benefits compensation line, variable to the extent that if the revenues go down, there is less compensation and the same thing on the upside, I might add.

If you put all that together, the way we've constructed the company, we feel pretty comfortable that we'll be able to grow the bottom line 15% or better year-over-year, I mean that is the stated goal.

We want to over a three-to-five year period on a compounding basis double earnings of the place, I mean that's the way the place is set up.

That's what we do.

So, no it doesn't - - if the earnings are 12%, 13% growth, I feel the same way.

If it's 6%, 7%, 8%, I feel the same way.

It's the way that the place is constructed so that the result that we want is what we get.

Okay.

Have you all ever given a percentage of how much of your comp expense is incentive?

Would you have that kind of rough estimate you can give us?

What we've said is that our salary and benefits are 50% of revenue and we have said that the variable piece is 15% of that.

15%.

Terrific.

Thanks.

Okay.

By the way your comment about, you know, the stock price kicking in with the contingent stuff, it's not a function, I think last Friday, of what percentages everybody talking about, you tell me is not material, I just think that your name appears like everything else.

And, you know, there is subpoena and everybody rushes through the door.

I think that's unfortunate.

There is nothing going on.

I feel very comfortable with what we are.

Okay.

Thanks.

John Balkind, Fox-Pitt.

You may ask you question.

Good morning everyone.

Hi John.

Just a couple of quick questions on sort of what hits the top of your list currently from an infrastructure standpoint.

What are your two or three major projects that you are working on and when do you think you will complete them?

From an infrastructure point of view, we're still working in our Global Service Platform, which is the platform that puts all of our offices all over the world on the same systems technology platform.

We're working on our Accounting and Settlement Platform, and I think thirdly, we're looking to determine what our branch of the future is, which is very exciting.

What I mean by

that is that, when you're a global company which means delivering global resources locally, you want to be able to staff your business correctly and be able to service your clients in a way they want to be serviced, which means that all of the things that you don't have to do locally that are transparent, you could do elsewhere.

We're looking, we've lots of outsourcing opportunities to us in Ipswich in England, and India, and Nashville.

And we're very very excited about the possibility of being able to construct our service platform, so that with technology and with people on a local basis, we're able to really make service a real prominent part of our platform.

Thanks Joe.

Thank you.

Craig

, Citigroup.

You may ask your question.

Good morning.

When you go through the employee benefits, business, retention plans there, is this growing in the teens or something higher right now?

And then you can also point a little bit more detail on the interest rate hedging program, are you looking to 100% hedge?

Your first question had to do with the growth?

Well, I didn't hear you.

Employee benefits.

Okay.

For employee benefits business, we're really excited about both the North America and worldwide basis.

We think North America since we recruited great leadership there,

North America and a lot of great people and benefits, that's an exciting group of people we are really proud of, that business is growing very, very nicely well into the double digit.

We acquired a software company called

, which has filmed out our product offering in terms of enrollments and things that we offer companies, our employee benefits base is just terrific, and our move is to take -- we are doing in North America and expanding that throughout the rest of the world as one of these countries are more dependent upon companies and employees being able to take care of themselves.

Tom will do the hedge for you.

Yes, Craig, and if we were to hedge all of the interest rate exposure from today, the charges will be at $20m to $22m this year and about the same next year.

Okay.

Thanks for the questions.

If I could just circle back and put it in a different way on the international contingent conditions, but half of those contingents come from international areas?

No, we are not looking at it that way, no, not at all.

Much smaller?

No, it's not smaller and it's not larger, I mean we don't look at it that way, we look at it as one company.

If your question has to do with there is more internationally then you don't have to worry about the US kind of piece and all that stuff, that's the one direction to go and I'm telling you it's not matured.

Okay, thanks.

Ken

, Sabia

.

Your line is open.

Actually question was answered, thanks Joe.

Okay.

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

Sir, at this time, there are no questions.

Thanks everybody, and have a good day.

Bye.