Willis Towers Watson PLC (WTW) 2004 Q2 法說會逐字稿

Good morning, and welcome to Willis second quarter 2004 earnings release conference call.

All participants will be in a listen-only mode.

After the presentation, we will conduct a question-and-answer session.

To ask a question, please press star, 1.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

We'll now turn the meeting over to Ms. Kerry Calaiaro.

You may ask your question.

Thank you, and good morning.

And welcome to our earnings conference call and webcast at Willis.com for the second quarter of 2004.

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

This teleconference call will be available by replay starting about 10:00 this morning and ending at 5:00 p.m. on August 5th.

To access the audio replay, please call 800-262-4859 within the U.S., or 402-220-9706 from outside, or by accessing the website.

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

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

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

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

Due to the adoption of Regulation G where we use non-GAAP financial measures, we've 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'd now like to turn the call over to Joe.

Good morning, everybody.

Thank you, Kerry.

I have with me, as usual, Tom Colraine who's our CFO and co-COO with Richard Bucknall, who is a co-COO; and Mario Vitale the CEO of North America.

If you have any questions that need to be directed to those gentlemen, they will be very happy to entertain them.

I think the best way to begin our conversation is to say that since we went public over three years ago, we talked about the fact that we were building a company for all seasons.

That when the wind turned to our face, that we wanted to have the ability to be able to grow our revenues, be able to watch our costs, spend less than you make, expand our margins, do all the kinds of things that we consistently talked about.

We wanted to be able to grow our cash position, which was why we always concentrated, you know, on our margins, and be able to build a great company.

I think that the second quarter is a perfect example of the durability of our Company, and a perfect example of our ability to operate in all seasons, because we're in a soft market.

I saw somebody yesterday say that we're in an impending soft market.

It's not an impending soft market.

This is a soft market.

And it's reflective, I think, in the revenue growth that you see from us this quarter, which I still think is a very, very good job with the wind squarely in our face.

Now I want to know through some of the aspects of why I believe that we're negotiating this facet of the market cycle in a very, very good way, and all of the things that we've done to prepare ourselves for it, I think makes us feel very comfortable.

First of all, we're talking about our model.

We talk about growing revenues, which we have.

Maintain disciplined expenses, which we have.

Expand margins, which we have.

The margins expanded in the second quarter by 100 basis points from 30% to 31%, and continue to validate that model by spending less than we make.

So all of those things are very much evident when you look at our numbers.

Our adjusted net income per share rose 16%, which is consistent with what we've said all along, that we would continuously grow our earnings by 15% year-in, and year-out, and we've done that.

It's 57 cents from 49 cents in the second quarter last year.

The foreign exchange cost us a couple of cents.

It would have been 59 cents, but that's the way it goes in the cycle.

You know, we got some credits.

Tom will go over that in the first quarter with you -- in the first quarter -- and because of the make up of our business, we didn't get any credit for foreign exchange in the second quarter.

And then you add the acquisition of Germany, which was a credit to us of 4 cents in the first quarter, which that hurt us a little bit in the second quarter.

So, you've got to put all those things together on a net-effect basis, we're very, very pleased with the way that came out.

We just don't control those items.

For the first six months of the year, on adjusted net income basis, our earnings per share grow 25% to 151 from 121 a year ago, which is, I think, a terrific performance over the first six months.

And as you can see now, the rate environment has not been favorable over that period of time, so I think growing our earnings 25% is something that pleases us.

We're never happy with anything that we do here, but when you look at everything on an all-in-all basis, we think it's pretty good.

For the quarter, organic revenue growth was 6%.

The net new business grew 9%.

There was a negative 3% impact from softening rates, 3%.

That's the biggest negative impact, or any kind of an impact, we found for a long, long time.

We talk a lot, and I read a lot, about people saying, you know, that there's still discipline out there and all that sort of stuff.

The fact of the matter is the rates have gone backwards.

They have been negative 3%.

And if you look at where we are in terms of growing our organic business, in the fourth quarter of last year we had a 1% net increase from rates.

So our organic growth was 11%, 1% coming from rates, which would have been 10% growth.

We had 9% growth in the first quarter, with a flat rate environment.

And 6% with -- this quarter, with 3% coming from rate.

So as a result, if you netted all that out, you had 10% in the first quarter -- or in the fourth quarter, 9% in the first quarter, and 9% in the second quarter, which we think was very, very steady.

So when you look at it, you know, from that point of view, our new business remains very steady.

And that's the part we look at, and that's the part that gives us extremely significant operating leverage with this head wind from rates.

Our adjusted operating margin was 28.6% in the second quarter, up from 27.8% last year.

For the first quarter of 2004, adjusted operating margin was 32.4%, up from 31.6% last year.

So, again, nice expansion of our margins.

I'm asked repeatedly how high can your margins go, when are your margins going to start flattening out?

My response has been always the same.

As long as we spend less than we make, that we will grow our margins, whatever it might be, and we continue to do that.

So these are all barometers that we here at Willis use as it relates to the health of our franchise, as it relates to checking the boxes to ensure that our model is working correctly.

And once again, I'm sharing that with you.

We've always talked about levers of our business.

We've always talked about the things that we can use to leverage our business, to make sure that we continue to grow.

And one of those levers is our ability to generate more cash and the effective use of that cash.

And when we look at what we've done in the last quarter, to effectively use our cash, which, by the way, at the end of the quarter was $291 million, the highest amount of unrestricted cash that we've had, at least since I got here.

Again, I think we're checking that box off as well.

We bought a million and a half shares of stock back in the second quarter for $55 million.

And so far, this year, we've repurchased 5.5 million shares for 203 million.

As you all know, we had been authorized 300 million to purchase.

I announced that at the end of the first quarter.

So as you can see, we have a little bit, you know, to go.

We plan on continuing to exercise our ability to do that against that authorization.

So we think we're effectively using that cash and are very excited about our ability to be able to do that.

I've constantly been asked about our ability to acquire companies, are we going to acquire, what are we going to do?

And I've always said that when the time is right, you know, we'll do that.

We will engage.

I always felt that the prices weren't right, but we were always in touch with people.

We knew where the dance was.

We just weren't quite ready to ask anybody to dance, but we knew where the dance was.

We were very excited to announce an agreement in principal to acquire a majority interest in Coyle Hamilton, which is Ireland's largest broker with revenues of about 60 million.

We'll initially have a minority interest, and that will grow over time, you know, to own that company on outright basis.

But that's consistent with our acquisition strategy.

This should close at the end of August and that will give us immediate presence.

We will have the number one share in Ireland and a strong management team in an area where we're very much under-represented.

And we're really proud to be in business with the people of Coyle Hamilton.

So when you look at the use of cash, we said we would put the cash to good use, and we're doing that and I think that the environment, I think bodes very well for the opportunities that we have to be able to do those things.

In the past we have stuck to our knitting.

In the past we have concentrated on growing our sales culture, which, as you can see, on an ongoing basis, not adjusted for rates, it's going very, very well.

Make sure we run a good business model, spend less than we make, but we really weren't -- and growing our cash.

And now you see what we're doing with that cash.

I'm going to talk a little bit about the market conditions and I want to add also, before I do that, that when you look at our businesses and our results, this is a very diversified insurance broker that's located globally all over the world, but that doesn't work.

It doesn't matter if you're diversified.

It doesn't matter if you're located all over the world.

What matters is that people work together.

This is an insurance broker.

This is a Company where people work together.

So that at any given time, whether it's rates or whether it's phasing or whatever the case may be, when you got everybody working together, you're going to get somebody someplace in the world that's going to help pick up the slack, whatever the case may be.

And I think you see a great example of that happening.

I'm going to get into that, you know, in a second.

As far as the rates are concerned, they declined across most lines during the second quarter.

It's just a fact.

During a soft market, that's the way it is.

Despite what others might say, I think we are.

But in the changing market conditions, usually what happens is is the rates get softer.

People buy more insurance.

Haven't seen that happen yet.

So the effects of people having to buy -- having the ability to buy more insurance because the rates are lower, that has not occurred, yet.

We look forward, frankly, to that happening, so that that-- I look at that, we look at that as the glass half full.

And, obviously, during the hard market, the third effect is that there is some pressure on commissions.

The commissions haven't gotten, come around yet to go back up again.

We anticipate that happening in the future.

So those are the effects of the soft market which has not occurred yet.

So if you take, you know, the last quarter, you're looking at mostly the negative effects, you know, of the quarter, rather than the positive effects of what soft markets do.

So that's really what's going on in the environment, and we look forward to the positive effects of all of those things happening.

Let me take you through each operation on a case-by-case basis.

North America continues to do very, very well for us.

We had [Inaudible] -- 183 million in the second quarter.

The organic revenue growth was 6%, but with a modest negative rate impact.

So North America would have been, would have done better.

And as you know, because you follow us, and the last three, four quarters, North America has done spectacularly, and in the meantime we've built some very, very good practices.

I'm not going get into some of the specifics of what's going on, but our benefits business is growing in the double-digit teens, high double-digit teens.

Our especially -- our executive risk business, high double-digit teens.

Our construction business, double-digit.

Health care business, more than a high double-digit teens.

The business in the P&C area is the one that distracts from that.

But all of the areas that Mario Vitale has been building on a practice-by-practice basis have been doing great.

And you can look forward to those businesses, I think, continuing to do well, because those were the areas where we didn't think we had great market share and those are the areas where we thought we could do well that would buoy our business on a day-in/day-out basis in all environments.

And I'm happy to note that that's really taken place.

In our global businesses, total revenue's 257 million in the second quarter.

That's where the organic growth rate was 3% in the quarter, and where we saw the greatest effect, and most notable pressure here in terms of the dramatics of the rate reduction, especially in aerospace, marine, reinsurance.

So that, kind of, you know, offset some of the, you know, effects of what was going on in North America.

But in a lot of cases over the years, those were the areas that contributed the most to this Company, and as we were building North America and continuing to build our global business, you can see the effects of our diversification.

We had great performance in our global markets area located in London, but obviously working throughout the rest of the world.

And our Willis UK and Ireland business bolstered by acquisition of Coyle Hamilton now, will make it even better.

So we look at that as a substantial businesses.

Those businesses are the ones that go back, you know, a long time and represent the manufacturing plants, if you will, of the way we operate our business.

The other retail piece of our business, which we've spent a lot of time growing, and Sarah Turvill has done a great job at doing this, our revenues were at 92 million, organic revenue growth was 11% in the quarter, with relatively neutral rate impact on average.

Although in this particular case it, varies on a country-by-country basis.

It just happens to, you know, come out on a neutral basis and we have -- we continue to have great performance in Asia and Latin America.

As you know, we increased our ownership to 60% in Argentina and 80% in South Africa, which is, again, consistent with our strategy to increase our minority interest into controlling positions.

So when you look at what we set out to do against the backdrop of what happened, we're very, very pleased, you know, with the results of what we accomplished against the backdrop of what our strategy is and what our tactics are.

I want Tom now to go through some of the specifics of the earnings numbers.

Tom?

Thank you, Joe.

Net income for the quarter was $96 million, or 57 cents per diluted share compared to $80 million or 47 cents per diluted share a year ago.

Excluding the non-cash compensation for performance-based stock options, and again disposal of operations, adjusted net income increased 17% to $96 million for the quarter, from $82 million in the same period last year.

For the first six months of 2004, net income was $244 million, or $1.44 per diluted share, compared to 197 million, or $1.17 per diluted share a year ago.

Adjusted net income for the six months rose 25% to $256 million compared to 205 million in the first half of 2003.

Adjusted net income per diluted share rose 16% to 57 cents for the second quarter from 49 cents a year ago and for the first half rose 25% to $1.51 compared to $1.21 last year.

Foreign exchange movements decreased reported earnings per share by 2 cents in the quarter compared to last year.

In the first quarter, there was proportionally a higher percentage of non-dollar revenues.

In the second quarter, a proportionately higher percentage of U.S. dollar revenues.

Expenses were relatively steady and so the dollar weakness had a bigger impact on expenses than revenues in the second quarter.

On the first quarter earnings call, I did say that given exchange rates at the time, we expected the first quarter 3 cent foreign-exchange benefit to reverse over the course of the year.

Our current view is that for the full year, 2004 rates could actually cost us around 2 cents in reported earnings.

But we are ahead by a penny year-to-date.

And therefore we expect a cent or two negative so for when it comes to movements into the last two quarters.

On operating expenses, general and administrative expenses rose 7% during the second quarter.

Excluding the impact of foreign exchange acquisitions and disposals, organic expense growth was 2% for the quarter.

As we said many times, we do work very hard every day in controlling every expense.

Salaries and benefits were 55% of revenues for the second quarter, and relatively steady at 51% of revenues looking at it on a trailing 12-month basis.

Again, very steady and very consistent.

Adjusted operating income rose 11% to $152 million in the second quarter, and as a percentage of total revenues, the adjusted operating margin was 28.6% in the quarter, up modestly from 27.8% a year ago.

In the first six months, adjusted operating income rose 17% to $388 million, and the adjusted operating margin was 32.4% during that period, up from 31.6% a year ago, almost a 1% expansion.

A few words on capitalization and liquidity, at the end of June, total long-term debt was $450 million, down 8% from $490 million a year ago.

In June, in accordance with the credit facility arrangement we drew down the remaining $151 million.

We still have an undrawn $150 million revolver.

In addition, as I noted in the previous call, we have hedged our exposure to rising interest rates through the end of 2006.

Interest expense for the year is estimated to be about $21 million for the full year of 2004.

Total stockholders equity at the quarter-end was approximately $1.4 billion, and the capitalization ratio or long-term debt to long-term debt per shareholders equity was 25%.

As Joe noted earlier, we still had $291 million of immediately available cash at June 30th, and so if you look at that on a net basis, that capitalization ratio was only 10%.

In the quarter, as Joe noted earlier, we bought back 1.5 million shares, so year-to-date 5.5 million shares.

In addition to that, we used $30 million for dividends in the quarter, and $18 million for acquisitions.

And With that, I'll hand it back to Joe.

Thanks, Tom.

I guess in conclusion, we're doing what we said we would do.

Vision hasn't changed.

Model hasn't changed.

It's a great model.

It's consistent.

It's a model that allowed us to thrive in a hard market, and it's a model that will allow us to thrive in a soft market.

It was built -- it was built to do that.

We continue to use all of our growth levers.

The revenue's growing in the sales culture, continue to watch expenses, use our cash flow for the best returns, buy backs, dividends, acquisitions, reinvest, recruit.

We're doing all of those things.

And I guess in essence, I want to reiterate that we'll grow our earnings year-over-year 15% every year.

And we continue to build our model and to run our business against the backdrop of that target and that focus.

We'll be very, very glad to answer any questions that you may have.

Thank you.

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

If you would like to ask a question, you may press star, 1.

You will be prompted to record your name.

To withdraw your question, please press star, 2.

Once again, if you would like to ask a question, you may press star, 1.

Our first question comes from Mr. Ron Frank of Smith Barney.

You may ask your question.

Good morning, Joe.

Hi, Ron, how are you doing?

All right.

And you?

Good, thanks.

Two things, if I could, first, you mentioned the likelihood that commissions -- that pressure comes off commissions in a soft market.

As recently as the third quarter conference call, you had indicated that you weren't seeing much movement down in fees and commissions.

I was wondering if that's been a phenomenon mainly of the last six to nine months.

And the second question is, your net new business production's been steady at 9 to 10% as you indicated.

If we're indeed in a soft market, as you indicated, and seems increasingly likely, the rate pressure isn't likely to stop at three points.

It's likely to get bigger as we go further into the soft market.

And just doing the math, if net new business production stays steady, and rate pressure builds, organic growth gets closer and closer to flat, which would put a lot of the burden or nearly all it for that 15% EPS growth on margins and share and capital management.

And so I know it's kind of long winded, but the question is, am I painting a realistic scenario for organic revenue growth, first of all, if not, why not, and if I am realistic, can the other two legs of the stool carry that EPS growth goal?

Yeah, well, first of all, as it relates to commissions, Ron, thank you.

During the entire hard cycle, people always ask on this call, and I guess other calls as well, how much pressure we were getting from commissions because obviously prices were going up.

Were we getting pressure from carriers to reduce commissions?

I always thought that from this perspective that, you know, you always get people wanting to cut you a little bit and, you know, that's just part of the negotiation in a business.

I never felt that it was something that was so recognizable and had such an impact that it meant anything one way or the other, but there was always pressure.

My point to make now is that that whatever pressure there was should be relieved, and they should start going the other way because of the softness of the market.

And we're going to get some, you know, credit for that.

As it relates to our own business, yeah, I think the three-legged stools help a lot.

I'm want to go back to the history, at least of this Company, when I don't think the Company was in the position that it's in today, and I go back to the '90s, during a really soft market.

If I put my history hat on, and I'm never looking at a revenue growth that was anything but positive.

And this is when people were not working together as much as they are now.

This is when the people in London basically stayed in London, and the people in the United States stayed in the United States, and wherever else you were in the the world, that's where you stayed.

And the revenue growth was always positive.

Now we have sales culture.

We have training, we have accountability.

People are paid to grow, you know, the revenue.

There is -- this is a different Company and I feel very confident in our abilities.

I can't do much about, you know, the rates, but I feel very positive about the fact that we're going to get positive revenue growth irrespective of what the environment is, because I feel our diversification, our capabilities, the fact that we work together, that we're going be able to do that and, and to me, that's exciting.

I feel very comfortable with that answer.

Joe, given that expectation, and given that it sounds like we agree that rate pressure's likely to build from that 3%, and you expect to maintain the positive revenue growth, the fallout of that would be that you're confident you can drive the new business production growth rate up above the 9 to 10% level.

I can't tell you that I -- I -- I -- I can -- I can continue to do that.

I remember at the end of last year, somebody asked me, you know, will we grow the revenues at double digits.

I said, I can't promise we'll do that.

This is a crazy business.

I mean these rates are nuts.

I don't even know why the rates are doing what they're doing.

I can't control all that stuff, but I can tell you, I said this at the end of the first quarter, that wherever the top of the, the heap is with regard to revenue growth, we would be there.

But I don't know where that number is.

I continue to feel that way and I continue to feel that whatever the revenue growth is, it will be, a, positive, and, b, we will spend less than we make.

Okay.

Thanks, Joe.

Our next question comes from Ira Zuckerman of Nutmeg Security.

You may ask your question.

Yeah, Joe, can you give us an idea with -- contingent commissions have gotten to be a little bit of a subject right now, I guess Mr. Spitzer has moved on from our business -- your business -- from our business, and we are just wondering, a, if --

Thanks a lot, Ira.

Yeah, our gift to you.

Yeah, we haven't -- I guess what you're asking me is, you know, where is all of that basically where we were the last time we talked with regard to Mr. Spitzer.

Well, you know, we were giving him all the information that he wants, as I'm sure all of our competitors are, and we haven't heard very much about the subject other than to comply on an -- enthusiasticly with what he would like us to do.

As far as contingents are concerned, I remember the last call we had was right in the middle of all of the [Inaudible] as it relates to contingents and what Spitzer's going to do, and all the calls we got.

And I basically said that at the time that it wasn't-- it didn't concern me and that we had no material effect for that quarter on what contingents represented.

I don't want to get into every quarter what the contingents are, and then start the trend of having to get through the financial engineering of contingents quarter-by-quarter.

All I would tell you is it doesn't concern me.

Okay.

Thank you, very much.

Our next question comes from Mr. Jon Balkind of Fox-Pit.

You may ask your question.

Good morning, everyone.

Hi, Jon.

How are you doing?.

Doing pretty well.

Thanks, joe.

Just three quick questions.

One, in terms of operating leverage, it seems as your revenue trends benefit more from net account growth and less from rate increases, that reducing head count or even adding head count is -- adding head count's going to be more necessary, which means to maintain your operating leverage, you're going to have to manage non-comp expenses more aggressively.

So my first question is, one, where at levers in the business.

And then question two would be of your net growth, that 9% number, across the three business areas, where are you seeing the best trends to the positive, and where are things more stable?

I'll answer the last question first.

We're getting -- we're getting positive trends every place.

I mean, even where we were most effected by rates, which is our global businesses, our most seasoned businesses, and in London, we still had positive, you know, 3% growth in those businesses, and they were hammered rate-wise.

I mean everybody's got to understand when I say "hammered," the rates didn't come down gradually, they came down off the table.

And I think that's positive when you're growing at 3% in that kind of an environment.

You had -- you know, reinsurance carriers, you know, in the reinsurance business, the rates were less, the retentions were higher.

You had, you know, the marine business still, you know, suffering from rate effect that that goes back in Europe because there was no great effects on, you know, war premium.

There was great run-up in error space, both in rates and in surcharges, and that's all I hear anymore.

And so when you look at our global business, and it's up on a positive basis.

I think that's a good trend and I think that shows how good our people are and how well we run our business.

We always said, Jon, that since I arrived, that we were going to grow our retail business because I looked at that as manufacturing -- as distribution, and that everything else is manufacturing, and I got to tell you, I'm looking at those businesses, doing really well.

International is growing, you know, at double-digits and North America is, those practices are growing very, very nicely and they haven't even, you know, arrived yet, if you will.

So I think those are all positive trends.

When you get back to your first question as it relates to, I guess it has to do with recruits.

Because the standard, you know, in this business is that you go recruit people so that in the following year you can get revenue uplift from those people.

Isn't that going to, you know, effect your expenses.

If you go back and look at the trend of the last couple years, we had a net effect of about 6% of additional producers that we recruited on a net basis.

That contributed very, very handsomely to our business on a year-over-year basis.

But not to the extent that we recruited so many people that it had an impact, financially, on our expenses.

We try very hard to gauge the way we recruit.

We try very hard to gauge where we recruit in parts of the world where we need it, in parts of the business where we need it, and we're very selective about the people that we recruit.

So as a result, you don't find this expense come on, and then a year later the revenue comes on.

We try to run our business on an even-flow basis.

The other thing we do is we watch our head count, as you know, Jon, very, very carefully so that we make sure that the non-producing parts of the Company are constantly being leveraged against the backdrop of the producing parts, so that we manage our money very, very carefully.

We look at where we can refine our business from an operational point of view.

We do a lot of things and are doing more things in India, which will make us more efficient both operationally and in terms of expenses.

Over time we're doing a lot of that, we're looking at levels of our people and proportionally looking to see where we can get the most efficiency from our people, you know, all over the world.

So when you look at that, we carefully look to see how we balance things out.

We look at every line.

We look at every cost and we look to see what's in the best interest of this Company and we have always done that.

This is not, okay, the market's soft and now let's go look at expenses, which is what I think most people do, you know.

We've been doing this since I got here, while the wind was at our back.

And so this is nothing new to us.

You know, we're used to this.

We train for this.

Thanks, Joe.

Our next question comes from Adam Klauber of Cochran and Caronia You may ask your question.

Thank you.

Good morning.

Hi, Adam.

How are you doing?.

Very good.

Thanks.

We're seeing some international acquisition activity.

Is that a pattern we can expect going forward, or do you think it's going to be a combination of international and also some U.S. acquisitions?

I -- I -- I think we are a global Company, so we know where the dances are globally.

We're located in every place in the world you should be located, and to the extent that we think we can strategically and tactically do something that's that helps us, you can look forward to that happening.

I don't think that there's any emphasis in one place or the other.

It's obvious that in North America that we always said that we had a lot of leverage simply because the footprint wasn't big, so you can count on that.

I guess it's kind of surprising that, you know, we showed up in Ireland, but when you looked at on Ireland, and we look at things all the time, it says in Ireland we were 13th.

And it maybe it made a good idea to be something more than 13th, and so, you know, we did something about that.

We're constantly monitoring it.

So as a global Company, if we think we can enhance ourselves, we have an apparatus in place now, as I suggested, that would give us the opportunity, to understand where all the players are, where the dance is.

And, you know, our strategy for the last three years, as you know, Adam, has been to rebuild our cash, refinance our debt, become very financially sound, so the day would come when we had the financial capability to be able to take advantage of the very thing that everybody else has always done, which is acquire.

I think we're in position to do that, not only because of our economics, but secondly, as we acquire, there is now a company that is sound to put these acquisitions on top of and we're very excited about that.

Thank you.

One follow-up.

Typically as the market softens, clients will buy more insurance, and you mentioned that to date you really haven't seen that activity.

I would imagine your brokers, as they see rates come down are saying buy more insurance, buy more insurance.

What's the current psychology of the buyer that you're hearing?

Well, you know, I -- I -- I hope they're saying buy more insurance.

I -- I think right now, you know, you've had such a drastic downward movement, you know, in rates that people are sort of reeling.

They haven't had time to prepare for all of that, and I think as a result, you're seeing a reaction to that.

I think as that settles in, and people are more comfortable with what kind of an environment we're in, I think you'll see the effects of them starting to understand what they have the ability to buy and that will change.

Thank you very much.

Thank you.

Our next question comes from Jay Gelb, Prudential Equity Group.

Hi, Jay.

Thanks, and good morning.

How are you?

Good.

Thank you.

To tag onto the last question, you mentioned two catalysts for growing the business in a slowing rate environment.

If customers buying more insurance and commission pressure's going to move up.

But the work we've done shows that in a hard market, that we're coming out of, customers are less likely to switch brokers so they can navigate the tough waters.

Do you think that trend reverses as well as you get into a soft market?

I think that that is what people usually have said historically.

Because, you know, in soft markets you drop a slip off the London Bridge and 55 people will grab at it doesn't -- that's pretty easy.

I actually think that if you provide value, which is what we're trying to do, and our client advocacies program, in terms of understanding clients' needs, I think that that's something that's novel to this business, and something that's exciting that we're going get better and better at.

I also think you haven't seen the effects of our service strategy in building our service and our systems.

And the kinds of things that I think historically you look at in our business, which is, you know, get the deal right, which is the policy and get it delivered to the client, make sure the clients get paid on time, and give them the kind of service and have them be able to talk to people the way they want to talk to people.

So, I think if we do all of that kind of thing that we put ourselves in front of people, you know, we're going get more than our fair share of new accounts, and hold on to much more than our fair share of our accounts so, and our retention, you know, strategy and our building new account strategy plays into all of that.

I just don't think that you've seen that fully executed yet.

Okay.

Thanks.

And then separately on the Coyle deal, that closes in August.

Can you give us more color in terms of seasonality for the second half of the year, and how that could affect margins and earnings for the back half of '04?

What I will do is I'll let Tom answer that question, and also Richard Bucknall, who runs that part of the world, and as well as other things, to give you a little bit of color about Coyle Hamilton as well.

Tom?

Yeah, the Coyle revenues, and expenses won't have too big of impact in the last bit of the year.

I would remind you that the closing date will actually be driven by regulatory approval and, so, it's not entirely within our control.

But end of August is our best estimate at this time.

Okay, and if it's 60 million of analyzed revenues, how much of that should we see in, I guess, the fourth quarter?

It won't be far off pro rata.

Okay.

And what -- how should we think about the effect on the margins or earnings for the back half?

I doubt if it would have too big of an impact.

The margins are certainly a bit less than ours.

In terms of color, I'd just comment that it's a very solid middle-market client base, particularly specialization and employee benefits and construction.

What we hope to bring to the business is obviously our global capabilities to help them go after bigger and bigger accounts, and more specialist accounts than they have now and hopefully, therefore, to improve the overall performance by working very closely with them.

If you look at the margins, how long do you think it will take to get them up to Willis' level?

Next Tuesday.

So the previous comment where you said margins are below where Willis' are now --

Yeah, everybody -- well that's the mission.

Everybody is below ours.

I don't mean that arrogantly, but the whole idea is when you make these acquisitions, you're going to find, you know, these companies with margins less than ours.

But now when you put on all of our capability, and add to what they have been able to do, plus the synergies that are involved, we really think that you're going to have, over time, very nice and substantial margin improvement.

A lot of these private companies, obviously, they don't keep score the way we do.

So by definition, and I don't mean that to be curt, but it's true.

They're all going to be less than ours.

The trick is, is to find the ones that are very good, and ones that we can compliment what they already do and this one does what they do very, very well, and I think the compliments are terrific.

So is it safe to say, then, that the deal will be neutral to earnings this year and accretive in '05?

Yeah.

Yeah.

Great.

Thank you.

Our next question comes from Mr. Brian Meredith of Banc of America Securities.

You may ask your question.

Hey.

Good morning to everyone.

Hi, Brian.

Couple questions, first one, just a quick number one.

Tom, I think you said that interest expense is going to be 21 million for the year, is that correct?

And if that's the case is that a 6 million run rate now per quarter?

Yeah, that's about right.

Okay.

It's going up, okay.

The second question.

Joe, I assume you're still sticking by 15% earnings growth annualized?

Absolutely.

Okay.

And as we look out here, do we need to do some acquisitions to keep that going, particularly with what's going on in pricing in the industry?

No.

Okay, and then last question, as things get, you know, as we start seeing competition here in the marketplace, are you trying to push for more fee arrangements to shelter yourself a little bit from some of the impact of commissions?

Not necessarily, but we're 70 -- Brian, as you know, we're 70% commission, 30% fee.

That's more of an effect, or as a result of our middle-market business versus our large account business.

And one of the things you've heard me stress is that I think a huge leverage for us is our large account business, which is mostly fee-driven.

Not only will that generate more fees, and naturally represent what you call a hedge, but more importantly, when you're a global company and you have large accounts and those large accounts have, you know, have offices or plants in France or other parts of the world, that we have the ability to be able to service them.

That makes a lot of sense.

And the result of the, you know, of what we try and do the last three years, has been to increase that capability by people working together.

So the natural effect will be more fees, but we're not doing it, necessarily, to get more fees, as much as we are to get more large account business because it helps everybody all over the world.

We have yet to -- you know, you haven't seen the effects of that yet.

Gotcha.

Terrific.

Thanks, Joe.

The next question comes from Mr. Dave Sheusi of J.P. Morgan.

You may ask your question.

Hey.

Good morning, everybody.

Hi, Dave.

How are you doing?

Good.

I just wanted to address your formal comments here in the North American division.

Appears the growth engine's coming from the benefits side with some of the double-digit organic growth rates you're mentioning here.

Can you just add some color around the strategy on refining the outlook on that side.

And it seems to be an increasingly crowded market that a lot of people want to get into because of the margin on that business.

Can you just, kind of, address how you're doing it a little bit differently, what your target market is, that kind of thing?

Well, first of all, the double-digit growth is not just from benefits.

It's all the other areas that I mentioned.

You know, health care and construction and executive risk and so forth.

But, yeah, I'd like to answer the question about employee benefits.

I think that it's a very crowded sector, but I think everybody does the same thing.

I don't -- I haven't seen anybody that offers anything unique.

In our particular case, I think we have great people who run in North America employee benefits.

Rick Elliott and his team, I think do a fabulous job, but there is a couple of things that we do.

We don't want to be all things to all people.

We want to concentrate on the middle-market.

You know, the large account business, which is the domain of consultants, and the domain of all of the, you know, people who go after that market is not what we do.

We're -- we concentrate on the middle-market, very good at that.

You look to see what the middle market needs.

What they need is enrollment programs.

What they need is programs that are able to enhance human resource specialists' ability to be able to make it easier for people to make contributions to plans, to track those plans, to enroll in those plans.

We bought a company a year or so ago, a little more than a year ago called Sunaro, which is, I think, the best software in employee benefits.

It gives us a big leg up to be able to track and to enroll and to do the kinds of things that help HR Directors make their people feel that they're in touch with, and understand their benefits.

So there is a real rhyme to this reason.

It's not just hire a bunch of employee benefits producers who have relationships with companies.

There is a real program of specific products.

I can remember when I first got here, I said that a person at the time, who wasn't Rick, tell me what's different -- sell me our employee benefits practice.

They went on for an hour, and I said you told me absolutely nothing.

There's nothing different about what you just said.

We went out and hired Rick, bought some businesses, bought Sunaro, targeted the business, educated, trained our people more.

Everybody's in the same wave length.

I think we've just begun to, you know, just begun on that business.

And, as you know, it has a strange booking device, because you do it on a 1/12th -- 1/12th basis.

It doesn't hit, you know, all at once.

So I don't think you've seen the full effect of the results of what we've done in employee benefits, and I'm really excited about that.

I think, yeah, I think it's a terrific hedge and a terrific business.

Can you just remind us again what the mix is on the North American side?

In mix --

In terms of the benefit piece of it versus P&C?

Oh, the P&C piece is about half.

The piece -- you got employee benefits is in the 15% range.

You got construction is in the 12 to 15% range, and you got health care is about 5 to 6.

And that's a business that's -- that's growing, and executive risk is about 5-6%, but that's growing also.

So you got the specialty areas of about half of our business, and the P&C in the other half of our business.

Okay.

Thank you.

You're welcome.

Our next question comes from Mr. Alfred Lockwood of Roxbury Capital Management.

You may ask your question.

Hi.

Couple of things, if I could, kind of related.

One would be, can you give a refresher on the long-term retention and incentive strategies for producers.

And also, what your expectations would be for annual grants against the existing option plan.

Sure.

As far as our retention strategy is concerned, I -- we've done a very good job, I think, of retaining our people.

We -- we constantly, over time, revamped our option program, shareholder value's a big deal here, as everybody knows and I think that there's plenty incentives with regard to long-term growth and building net worth for people in our Company, you know, to retain them.

I think that all over the world, we stay in touch with our top 2000 people.

As a matter of fact, in our partnership, what we call our partnership portfolio program, we have a whole string of levels of partnership that I think is very retentative.

As a matter of fact, after this call, at 10:00 we have the top 2000 people around the world that will be on a call, that we call our partners that will talk about our earnings, we'll talk about what we're doing, we'll talk about their contribution.

I feel very comfortable about, you know, our retention plans.

Tom, do you want to answer the next question?

Yeah, on the options, earlier this year we granted in the region of 5 to 6 million options, and we would anticipate that future annual grants would probably be below that level.

How much below?

We don't know.

Okay.

And, just last thing to follow up on the retention incentive plans, how do you believe your comp packages compare to your competitors?

I think very good.

I think that when you look at the capabilities that our people have, which is the way you measure their ability to do more business, that's always first and foremost, because I don't think you should commoditize payouts.

I think you -- what you need to do is create value in terms of how much production a person has the capability to do, and then measure the payout against that ability to be able to grow, and when you do that, I think our program is outstanding.

I think our medical and pension packages are outstanding.

I think our option programs are outstanding.

We actually think that they have value over time here because we stress shareholder value.

I -- I think we've done a, you know, very good job.

There is always someplace somebody's going be able to go to make, you know, more money, but that's not the way we run our business.

We look at the thing on a long-term package payout basis.

And when you look at that package, we feel very comfortable with the way our people are treated.

Thanks.

The next question comes from Mr. Charles Gates of CSFB.

You may ask your question.

Hi, Charlie.

One moment, please.

Hello, anybody there?

Sir, your line is open.

Oh, thank you.

Can you hear me?

I hear you, Charlie.

Okay.

That's great.

Why do you think that the organic growth in your global business more modest than the other two segments?

I said that earlier.

I'll be glad to --

You know, for the slower student.

For the slower student?

That's certainly not you, Charlie.

Okay.

I said earlier that, you know, those businesses are the most seasoned, and when you look at marine, aerospace, our reinsurance business, which is all in global, I -- I said in our reinsurance business what's going on there is that the rates are less and the retentions are higher and that's being experienced by everybody, you know, across the line.

And I might add, that over the last three years, our reinsurance business had great growth.

So against a backdrop of that, our business is still very good.

They're doing a great job.

It's growing very, very nicely, but you got to look at what backdrop it's against.

Our aerospace business against the backdrop of very high rates, you know, during the highest peak of terrorism.

There were surcharges, war premium in both marine and aerospace.

And as a result, those businesses were, were generating great, great amounts of revenue growth.

Against that kind of a backdrop, it doesn't appear that it's growing very much, but you got to understand that it's against very, very high growth rates from before.

But I think that if you look at it on an absolute basis, they are doing very, very nicely, will continue to do very, very nicely and you got to look at the fact that our strategy today different than before.

And I mentioned this earlier.

Those businesses stood alone and still generated in the 90s, in a very soft market, positive revenue growth before the retail pieces of the distribution fed into them and the way we're structured now.

So we look forward to all that positively taking place, plus the fact that I think that they are growing very nicely on their own.

Richard, do you want to add anything to that?

I think that in terms of global businesses where you see the biggest rate reductions as being large property accounts, energy accounts, we've seen [Inaudible - highly accented language] some P&O even, and the aviation accounts, which all, of course, peaked post 9/11.

And as Joe said, on the reinsurance area, being increased retentions, as being the discontinuance of the qualifying corporate shares out of [Inaudible - highly accented language] in a number of cases, the participation by the companies of coinsurance and higher retentions.

Then in the very specialist classes like marine in particular have withdrawn from the market entirely.

So the business has an ultra-competitor, but if somebody were drawing the market, there's obviously no longer a reinsurance program in place.

I think those have been the overall issues that we've contended with.

When you use the term aerospace, that's synonymous with aviation?

Yes.

Yes, indeed.

Okay.

My final question.

Approximately, say a year ago, in the second quarter of '03, approximately what portion of global revenues would have been specific to marine and aerospace?

Right off the top of my head, Charlie, I don't know, but give Kerry a call, and she'll be glad to tell you.

The reason why I'd ask the question was you identified at least three times that was where the carnage was, seemingly.

Right.

Well, carnage is a tough word.

Well, going the wrong way, sir, from a pricing.

That's created one of the biggest rate reduction.

But, check with Kerry and she'll have a conversation with you about it.

Thank you.

Okay.

The next question comes from Ms. Terry Shew of J.P. Morgan.

You may ask your question.

Yeah, a detail question on interest income.

In the second quarter and for the six months you see a decline in interest income.

Interest rates are up some.

I think you commented earlier that you hedged the debt costs, the interest expense.

From an interest income standpoint, why would one see actually a slight decline there?

For the same reason, Terry, you know, we were-- we locked into the interest income rates a long time ago.

So last year, for example, we were getting dollar interest rates of about 5%.

Okay.

And that was way over the market.

So that -- some of that hedging's just fallen off, so I would expect the interest income for the next couple of quarters to be, again, a couple of million dollars below the --

Right.

Right.

Because you had locked in at higher than current short-term rates.

Yes.

Right.

Let's see, oh, also, if you could help me walk through the share count.

You talked about buying back a million and a half shares in the quarter.

Yeah.

At -- reading your last 10-Q report as of 4-30-04, you had 158.5 million shares outstanding.

Wouldn't that share count have come down if you bought back more?

Well, the -- the share count, I'm -- I always refer to is the purely diluted share count, so the share price rises on the treasury stock method that the share count would go up, and so buying back the stock would help mutualize that.

Right, right, because I was looking at the basic number of shares outstanding.

That stood still at 158.

Wouldn't that just only affect the diluted shares?

A, well, of course, the buy back will have taken place progressively through the quarter.

Right, right.

So it might not have that big an impact.

Right, and going forward, you generate substantial cash flow for share repurchases if you don't make, or have opportunities to make additional acquisitions.

And assuming that, you mean you have the capacity to buy back a lot more than the normal dilution from option issuance.

That's right, right?

That's correct, there'll tremendous flexibility.

Right.

And so if we -- if we have the opportunity to buy back a lot of shares going forward and, or we may choose to do something more beneficial with that.

Right.

Terry, you just described the enormous leverage we have.

Right.

Right.

Because you still do have a little bit of dilution from just the continuous option grants.

But just looking at your annual cash flow, it looks like it's north of $500 million now, right?

Exactly right.

The cash flow -- free cash flow tends to be about the same as the bottom line net income.

Right.

Right.

Right.

Because it had exceeded that for a little while.

And now I gather the two numbers are pretty close.

That would be about right.

Okay.

Thank you.

Thank you.

Our next question comes from Michael Lewis of UBS.

You may ask your question.

Thank you.

Good morning.

Good morning, Michael.

How are you doing?

Just two quick questions.

Again, since half your North American business is P&C, one of the ways, obviously, that you can offset the rating situation is penetrating the North American market better.

You don't have big positions in a number of states.

You've laid out a course to get greater penetration in certain markets.

Maybe you can just drill down a little and give us some idea, other than the broad statements you have made, what specifically can be done.

I mean, to gain from a 5% market share and, you know, beyond just, you know, hiring some, some producers, is there anything specifically that you're doing in important states to get, you know, much better penetration and how successful has that been?

And real quickly, you have a 70/30 mix in commissions and fees.

You talked about a 50/50 mix.

Over what period of time do you think you can go from 70/30 to 50/50?

I didn't say 50/50.

I said that as we increase our ability to open a more and do business with more large accounts that number will shift.

I didn't say necessarily 50/50.

It might get to 60/40, 55/45, who knows.

But there should be a, you know, there should be a shift.

I think one of the things about North America, and the reason why I said we have great leverage in North America, is you can see our business is growing quite nicely.

But when you look at our, our footprint, our footprint suggestions that we have lots of room to be able to grow in North America.

I mean you look at the states that are the densest parts of the population, Florida, the New York area, Texas, and California.

We don't have a very big footprint.

We got a couple offices in Texas, albeit very good, but only two.

We got a couple of offices, really, in Florida, very good, but only a couple.

And in California, you know, San Diego, Los Angeles, and San Francisco.

I think that there's a lot of room to be able to grow there.

Mario has done a great job with regard to sales, pipeline growth, accountability, cross-selling, all the things that we do there.

He should talk about that in a second.

I think there's lots of room to continue to do all of those things, and we're very specific about that.

We got, you know, strategy in the Northwest.

We have a strategy in the Midwest as, you know, as well, in the the South.

We've regionalized these areas quite well, and we've gotten very, very good people in those areas that I think as I look back, a lot of the regional people are new, very sales-oriented people.

So, you know, we -- yeah, we've done very -- a lot of specific things.

Mario, do you want to add to that?

Yeah, a few more things, besides what you were saying, really pushing our specialty business.

The point that healthcare, we're up very high-double digits there, and we'll be pushing that out drastically.

Environmental, executive risk, construction, and in the large account arena.

We have more organized net arena that we've been in a long time and our thrust is really strong.

On your question concerning the footprint, there are opportunities.

We have such a small market share and in so many places, by doing what we're doing very aggressively, we are growing, and we're take a hard look at places that were not.

At the end of the last quarter, as an example, we weren't in the Denver -- out in the area at all.

Now we have a big, growing office of both executive risk, employee benefits, P&C people on the ground.

So, we'll be taking more of a look at locations where we're not.

I think you'll see some pleasant surprises coming from that.

Thank you very much.

Once again, if you would like to ask a question, you may press star, 1.

I do have one more question.

Mr. Jon Balkind of Fox-Pit.

You may ask your question.

Thanks, just a quick follow-up.

Joe, could you let us know what percentage of annual revenues comes from your reinsurance and wholesale businesses?

We don't -- we don't break that -- we don't break that down.

But they're a significant part of our business, Jon, and they continue to grow, both of them.

Sounds good.

Thanks, Joe.

Our next --

Okay.

Anybody else?

I do have one more question from Mr. John Schneller of BM Naught You may ask your question.

Hi, Joe.

Hi, John.

Real quickly, just to touch on the subject of PSAs, your two global competitors tend to derive substantially more operating income from PSAs than Willis.

If -- I suspect that they -- and I'd like you to comment on this question, and then a follow-up.

I suspect that they can lead on price because they know they are getting, say, roughly 5% back and PSA.

Has that historically put Willis at a disadvantage?

And the follow-up question would be if that is the case, if PSAs are wiped out completely because you derive less of your operating income from PSAs, would that put Willis in a stronger position going forward from a sales perspective?

To the first question, it has from time to time.

I've been told by our people who say, you know, they've been very aggressive in the pricing because they've made them up in PSAs.

Not across the board, but they've stories about that.

I can't quantify that.

As it a result of that, whatever happens with contingents, I told you it doesn't concern me.

But following your scenario, if there was more widespread aggressiveness in pricing because it was -- because they get more PSAs, if that's the case, then, yes, we would be positively effected by that.

Thank you.

Okay.

I currently have no questions.

Thank you very much, everybody.

Have a great day.