Willis Towers Watson PLC (WTW) 2006 Q3 法說會逐字稿

Good morning or afternoon.

Thank you for joining us today.

At this time we'd like to inform you that you are on a listen-only until the question-and-answer session of our conference call.

This call will be recorded.

I'd like to turn the call over to Kerry Calaiaro.

You may begin.

Thank you, and good morning everyone and welcome to our earnings conference call and webcast at Willis.com for the third quarter of 2006.

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

A replay of the call will be available through November 9th by calling 800-234-3897 or 1-402-220-9689 outside the U.S. with no pass code or by accessing the website.

If you have any questions after the call my direct line is 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 Private 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 with the SEC from time to time.

Now I'd like to turn the call over to Joe.

Good morning everybody and thanks for joining us.

I have with me a number of my colleagues who are available to answer any of your questions during the question-and-answer session.

Tom Colraine and Richard Bucknall who are our Co-COOs;

Pat Regan, who you will hear from who is our CFO;

Grahame Millwater, who is the Chairman of Willis Re and also will be talking to you and updating you on our initiatives;

Sarah Turvill, who is the CEO of International;

Don Bailey, the new CEO of North America; and Peter Hearn, who is the new CEO of Willis Re and David Margrett, who is the CEO of our Global Specialisms.

Today we're really going to talk about three themes because there is a like going on in this quarter; there's a lot going on that is exciting I think in this company.

First we're going to talk about the quarter and nine months which we are all very pleased about and excited about our results.

Second, as you know, we have a number of initiatives that we have initiated starting way back at the investor day called Shaping our Future which is a bunch of initiatives that we are using to thrust the next five years of our vision for this company.

We're going to talk about that and obviously we're going to thirdly talk about capital management.

So we want to discuss all that with you on the call today because it is important that we do that.

We use these calls not only to report the quarter but also use these calls to update you on themes, issues, things that we talk to you about.

So it's a great opportunity to be able to do that so we're going to get all of that in.

First of all for the quarter, all the percentages were up and we're really as I said excited and enthusiastic about that.

Growth of the operating earnings per share is up 29% to $0.36 in the third quarter and we think that that is an outstanding achievement.

Our organic growth in commissions and fees was 8% which we think is very robust given the conditions which are fairly soft around the world.

Underlying margin expansion was about 300 basis points and our underlying improvement in the ratio of salary to benefits to revenues was about 4 points.

All of those things are not only good achievements as far as we're concerned but also the numbers are going in the right direction which we suggested at the beginning of the year we expected that to happen.

And that progress is all about executing and delivering on all of the things that are part of our plan for this year and the next five years.

The organic growth of 8% follows 10% in the second quarter and 6% a year ago.

So there's growth on a year-over-year basis.

We saw strong contributions from each of our business units.

North America was up 7% which followed an 8% in the second quarter and 6% a year ago, again steady growth year-over-year.

Our global business was 9% increase which followed a 13% second quarter and a 6% a year ago.

So very, very nice improvement in our global business.

And in our international business, a 9% increase which followed a 6% second quarter and a 4% quarter a year ago so that is an improvement all along the way quarter-over-quarter, year-over-year.

We are very pleased with our employee benefits and energy business which also had good results because those are two of the areas that we have decided as we talked about at industry day we were going to focus on heavily and that continues to show very good traction.

We also continued to see traction from our hiring strategy last year which not only came through in our contribution to revenue but also comes through in the benefits to our operating margins and also in our salary and benefit line.

So all of that a year or so later beginning to manifest that self in increased revenue, expansion of margin coming from lowering of the salary and benefit line because it is a year later and we expected that to happen and we're really excited about that.

As far as our M&A strategy is concerned, we closed a couple of small transactions in the quarter; notably we bought an additional 5% of Gras Savoye all going toward the time when in 2010, the beginning of 2010, we expect to own 100% of that company.

We had an opportunity to buy 5% more under contract.

We had the opportunity and the obligation to do that so we took advantage of that.

As you know, Gras Savoye is the largest independent broker in France and 11th largest globally with revenues of approximately $500 million.

We still intend, by the way, to acquire 50 to $100 million of revenue per year over the next five years and we're going to focus on targeted geographies and targeted areas such as employee benefits which all go toward our core businesses which we will talk about later.

We also started the buyback program, purchased 32 million, about 32 million late in the quarter.

So all of the things that we said we were going to do; all of the things that we visualized happening in essence manifested themselves in the quarter.

Now as far as the breakdown of the group and the various areas of the group, the organic growth was 8% as I said before and the net new business was 8%.

The impact of declining rates was fully offset by other factors such as a changed buying patterns and activity level.

So there was no net effect, if you will, or impact from rates.

In areas with exposures to windstorms and catastrophes such as windstorm, flood and earthquakes there are significant rate increases and shortages of capacity, Gulf areas of United States and so forth.

But outside of the windstorm and natural catastrophe exposures especially but not limited to North America, rates continued to soften basically across the board and we expect that to continue to happen.

But we are very pleased throughout the company with our results and now I'd like to share some highlights.

In North America -- and please feel free I'm going to go through the results of these various sectors and businesses but feel free to ask my colleagues any questions that you have just in the interest of time I'm going to go through this with you.

If we had more time I'd like them to do this but I will do it but please ask them questions when we finish.

North America, we're very pleased with the organic growth of 7%, as I said.

We had some very, very good traction in North America across the board which again came from the results of our hiring strategy over the past couple of years and our sales culture.

Our sales culture is always very prominent in what we do, a sense of accountability, a sense of tracking, a sense of measurement, a sense of watching, asking, all of us getting involved in the process.

Recently we did very well in the Southeast, South Central which is Texas and also the West.

In our practices we've had very good performance from construction which we continue to be very good at and an area which we're very proud of.

Employee benefits, same way and executive risk.

All these areas have been good steady continual performers for us and we're very proud of what they do.

Good people continue to join and we grow and be part of our culture.

But we've been more selective in our hiring.

We said we were going to be more selective in our hiring which is what you see in the reduction of our salary and benefits revenue line plus the fact that the hiring that we did a year ago is beginning to kind of smooth itself out.

So all of the numbers are going in the direction that we expected them to go in.

And our global businesses, organic growth and commissions and fees was 9%.

This is our great specialisms and which also includes reinsurance, aerospace, construction, niche, Finex, which is financial and executive risk business, some marine units all performed very well.

Reinsurance had a strong net new business while the markets remained very, very volatile but I can tell you that they did as well as generally the global businesses did.

We continue to be proud of their effort.

Willis UK and Ireland contributed to our overall growth especially in corporate risk solutions which is our large and middle market accounts.

And internationally, our organic growth in commissions and fees were 9%.

Our international business is far-flung and to get the continual results that we get from international especially given the fact that they work on a one flag basis which means they all work together is a really outstanding achievement and I'm proud of all of those results and all of those businesses.

Now that is putting sort of a framework around the quarter.

And with nothing else going on, the quarter I think was exceptional.

The quarter was directionally where we thought it would be and we thought we'd be at this time.

Now let me put a period at the end of that sentence and I'm finished talking about the quarter.

Now let me talk about shaping the future.

Again because I think it's important we take advantage of this call to do that.

Earlier this year we laid out a game plan for profitable growth and we called it Shaping the Future.

Those initiatives basically focused on driving the revenue growth and how we were going to do that; creating an optimal platform which would service an IT platform; becoming the employer of choice.

It's a people business and so without people enjoying working here and feeling like they can grow their careers we'd be behind the eight ball if we weren't concentrating on that.

And setting attainable financial goals which as you know is in five years to be at 28% or better in our margins.

We're all moving forward in all of these and remain really confident that these initiatives will make a significant impact on our company by expanding our revenues, operating margins and profitability.

Now a couple of things occurred during the quarter of which is a very big part of Shaping the Future.

First of all, we completed the sale of our London headquarters, Ten Trinity Square.

And we've subsequently leased back the building for 18 months so that we have enough time to prepare to move into our new headquarters which is on Lime Street right across from Lloyd's where we hope to move in early in 2008.

Pat is going to talk about the numbers associated with this sale.

Now what we did was and this is important, is you take a very old building which we think we got a very good price for, negotiated a very good financial transaction.

All of our associates in London get to work together now because we have a couple of locations and it is very cumbersome.

We had -- and we sold the building at a number which everybody believes is a terrific financial transaction.

And we get to go from a building which is beautiful but not functional for one that is.

And so we thought what we'd do is to take that very nice gain while we are in the process of creating and formulating our initiatives for Shaping the Future and use that gain to very good purpose which is to take a lot of the things which are important on the basis of our Shaping the Future initiatives and take a charge against that gain which makes all sorts of sense so that way we use the money coming from this transaction to take the charge so that our shareholders are not harmed by virtue of doing this.

So the story -- it is a terrific story.

We believe and Pat will get into this, that next year the effect in terms of cost savings for this particular transaction and the charge we're taking against it for the initiatives will be in the 20, $30 million range.

So that the story is an exciting story and comes at a very, very good time for us especially as it relates to where we are in Shaping our Future.

So I'm going to let Pat Regan now take over, give you a little bit more granularity not only on that subject but a lot of other things that we are doing.

Pat Regan.

Thank you, Joe, and good morning everyone.

I'm also going to be discussing three topics today; our underlying results for the quarter, the two significant items that impacted our results the gain and the oneoff charge, and our stock buyback.

Firstly the results for the quarter.

On revenue for the third quarter total reported revenues were $543 million up from $487 million a year ago representing an 11% reported revenue growth.

Foreign currency translation increased reported revenues by 2% and net acquisitions increased reported revenues by 1%.

As Joe mentioned, organic growth in commissions and fees was 8% for the quarter.

On operating margins excluding the impact of the building gain and the $84 million of onetime expenses, the margin for the quarter was 15.1%, up from 13.6% in 2005.

The quarterly phasing of incentive compensation and the reduction of market remuneration together negatively impacted the year-over-year comparison of the operating margin by approximately 150 basis points in Q3 '06 versus Q3 '05.

This gives an underlying margin improvement of approximately 300 basis points versus Q3 '05.

The improved margin was again positively impacted by increased net new business, accretion from our recent hires and lower pension costs.

Salary and benefits for the quarter, again excluding the Q3 onetime expenses, were $340 million or 62.6% of revenues compared to 65.5% a year ago.

Again adjusting for the impacts of the phasing of incentive compensation and the reduction of our market remuneration, the underlying S&B to revenue ratio decreased by approximately 400 basis points.

Another way to view the trends in productivity is to look at our revenue per FTE.

Net headcount at 30 September, 2006 was approximately 12,950, up 1% from year end as we continue our selective approach to hiring.

This translates to revenue per FTE of approximately $183,000 through the last 12 months of Q3 '06 compared to $174,000 to the year to December 2005, productivity increase of approximately 5%.

Other operating expenses again excluding the Q3 onetime costs were $106 million for the quarter or 19.5% of revenues compared to 18.3% of revenues a year ago.

This increase in percentage is primarily due to the impacts of foreign exchange.

Excluding the impacts of the gain on the building and the Q3 onetime expenses, net income for the quarter was $57 million or $0.36 per share up from $45 million or $0.28 per share for Q3 2005.

This represents an increase in operating EPS of 29%.

For the year-to-date, the operating margin again excluding the gain and the onetime expenses was 22.4% for the first nine months of 2006 in line with 2005.

For the nine months, the reduction of market derived income and the change in phasing of incentive compensation together reduced the operating margin for approximately 150 basis points.

That's the operating margin for the first nine months of 2005.

Therefore the underlying margin expanded by about 150 basis points.

The underlying S&B to revenue ratio improved by approximately 250 basis points to 57.5% for the nine months of 2006.

Turning then to our onetime items in the third quarter and taking the building sale first.

In September 2006, we completed the sale of our current headquarters at Ten Trinity Square in London.

The building has now been leased back from the new owner for approximately 18 months until we move into our new London headquarters building in early 2008.

Gross proceeds were $191 million which 25% was received in cash with the balance due on November 27, 2006.

Pretax profit on sale of $99 million was recognized in the third quarter 2006 and a further $22 million gain was deferred and will be recognized over the life of the 18-month lease.

While there is no cash tax payable due to the carryforward of capital losses, tax charge of $8 million was recorded in the income statement.

The sale of our building has contributed $0.57 to our earnings per share in the quarter.

Secondly as we discussed at the second quarter and also at our investor day, we have had a concentration of non-recurring [spend] to launch our strategic initiatives.

We expect that to total approximately 90 to $95 million in the second half of 2006 of which $84 million was incurred in the third quarter equivalent to $0.37 per share after-tax.

These third-quarter oneoff costs relate to the following initiatives.

Our international efficiency review $25 million including amounts for severance, property closure and external fees for specialist cost reduction; basis into consolidation and the rollout of our Willis client service platform, $10 million; primary severance costs and contractor fees; real estate rationalization of $9 million; reinsurance initiative of also $9 million including costs relating to designing value processes, severance and recruitment of specialist and analytics and advisory skills; taking our future London costs of $7 million including external fees for the design of our new London market processes;

UK's small commercial of $6 million primarily severance; and other costs of $18 million including some small-business closures and claim reorganization in the UK.

We estimate that these expenditures will directly lead to annualized benefits of approximately $60 million pre-tax, the majority of which will be direct to cost savings.

We expect that we should achieve the full amount of these benefits in 2009 with the vast majority having been achieved by 2009.

Net of the incremental cost of our new buildings, the annualized net benefit should be approximately $40 million pretax by 2009.

As Joe mentioned earlier we should see about half of that net benefit achieved in 2007.

These represent some of the significant initial steps toward our five-year margin target of 28%.

Grahame will talk through some more detail on these and the other initiatives in a moment.

Turning then to some other matters.

On foreign exchange, foreign currency translation had a negative impact of approximately $0.01 on EPS in the third quarter.

On tax excluding the effective tax on the gain of sale of the building, net loss and disposals, amortization of intangibles and share-based compensation, the underlying tax rate through the nine months ended 30 September, 2006 was 30.5%.

This is lower than the 31.5% effective tax rate through the first half of 2006 and the decrease contributed approximately $0.02 to earnings per share in the quarter.

On stock buybacks during the quarter we commenced our buyback under the current authorization and purchased $32 million of shares.

We intend to continue to buy back stock in the fourth quarter.

Market conditions permitting, may purchase another $200 million or so in the fourth quarter.

There was $154 million of cash and cash equivalents at 30 September and approximately $17 million of immediately available net cash.

For the quarter in addition to the buyback, we [used] $37 million of cash for dividends, $41 million of cash for acquisitions including $25 million to buy an additional 5% ownership in Gras Savoye, as Joe mentioned earlier.

We also used $117 million of cash in the quarter to make additional contributions into our UK pension plan bringing the total for the year for our UK and U.S. pension plans $211 million.

We estimate that in total we will increase this to $275 million for the full year.

We believe this represents sensible proactive steps to address our defined benefit pension.

With that, I'm now going to turn the call back to Joe.

Thanks, Pat.

As I suggested earlier, we've asked Grahame Millwater who is responsible for all the Shaping our Future initiatives and it's a good opportunity to bring you up-to-date on where we are because this is really a continuing story and it is the best opportunity that we have to give you that update.

Grahame?

Thank you, Joe, and good morning everybody.

Obviously Pat and Joe have both referred to the Shaping our Future initiatives and many of these we outlined in some detail to you at the investor day in June.

In the time available I can only give you a very brief outline on where we are on some of the major initiatives.

But I also want to touch on the detail planning process we're also currently engaged in.

Firstly let me talk briefly about remodeling the London platform.

This is the process of overhauling our London-based processes and technology.

We've drafted a very detailed overview of the process and organizational change that we're going to put in place in both our London (indiscernible) operations and we've also selected the technology platform that we're going to roll out.

The organizational change is already underway and that has already resulted in some significant cost benefit to us.

The process and technology we're piloting in our aerospace division, this is being launched on the 1st of December and post that pilot, we will have rapid rollout across the other London businesses.

Secondly, let me take the international efficiency review.

This is where we mobilized all the major retail -- international retail offices to identify both efficiency and growth opportunities.

We worked with the specialist teams both from internally and externally and this work has identified significant benefit opportunity and implementation is already underway.

Our operational platform.

This is a series of projects underway to improve the operating platform upon which we work.

Pat has already mentioned the basis of this consolidation which has already resulted in significant benefit by combining our two data centers.

We continue to expand use of our operational platform in Mumbai to the extent that we are now formally reviewing a second site to give us more capacity to move business there.

Our technology platform, we've already discussed shaping the future of London and the pilot there, but also our Willis client service platform in the U.S. is in the process of rapid rollout and that rollout will be completed by early next year.

Focusing on client profitability, this is to make sure that we are making a reasonable profit in all segments we are operating in.

Again considerable benefits are already realized in the various focused areas that we are piloting this in which is the global specialties.

We believe there are considerable opportunities as we roll this out to other parts of the group for further benefits.

We've also embarked on a major piece of work looking at the segments that we operate in.

This is detailed around the small commercial sector, the midmarket, large national accounts, global accounts and reinsurance.

And this work is really to outline where we want to drive the group over the next five years.

We're now enhancing that top-down view by very detailed planning at a business unit level against the backdrop of that overall vision.

Therefore as we enter 2007, we will have a very broad but very detailed view by segment in which regions, which cities, which specialty skills we need to derive to achieve maximum potential revenue growth at optimum margin.

This will focus where we invest be it acquisitions, be it team, or be it technology.

So in summary, we're executing on the initiatives we outlined at the investor day which are already we're deriving significant benefit from.

We've got this major piece of work identifying the growth segments and further detail will be forthcoming from that over the next couple of months.

And we are identifying further areas where we can derive both revenue growth and margin benefit to achieve our long-term goals.

The key theme of all this is ruthless execution and we believe we can achieve this within Willis because we are integrators and we work as a team.

We can actually make happen what we decide we're going to do.

We're disciplined in the implementation and execution on what we decide and we have a stable platform from which to implement this.

On that note, I'll hand it back to Joe.

Thanks, Grahame.

I know that was a lot to swallow but there is a lot of things going on here that are very positive that we want to share with you.

Let me just tell you that we obviously think we're making great progress.

For the full year just to give you some idea, we expect continued growth in organic commissions and fees.

We think our salary and benefit expenses as a percentage of total revenue will be less than 59% and we still expect modest operating margin increase expansion by the end of the just like we said we thought we would.

So everything is really on plan to do what we expected to do.

And we still expect, as we said earlier, over the course of the initiatives and expanding our future to have significant margin increase by the end of that five-year period and salary and benefits as a percentage of revenue below 54%.

So all the things that we are doing which we had to tell you today and that is the reason my we've got a lot of stuff going on is to give you an indication that we're focused and we have a great deal of purpose as it relates to our future and what we are doing.

We are very glad to answer any questions that you have at this point.

(OPERATOR INSTRUCTIONS) Charlie Gates.

Hi, I work for Credit Suisse.

Approximately how many people are covered by these terminations?

We're going to talk about people in this regard of about 400 people, Charlie, give or take a few people.

All of whom have been notified of the -- of what we're going through at this stage but it's approximately 400 people.

I guess that compares with the 15,400 staff which is in your news release.

The one gentleman said that you were going to pursue I believe ruthless execution.

Seemingly this amount of termination would appear small in that circumstance.

I guess the question is to what extent should analysts or observer foresee continued charges beyond the fourth quarter of '06 with regard to their repositioning of the company?

Well, first of all it's not 15,000.

The number is closer to 13,000.

The reason why you see printed sometimes 15,000 is it includes Gras Savoye.

We do not own Gras Savoye.

They are not in our consolidated numbers so the 400 is against the backdrop of closer to 13,000.

Actually it is 12,761 to be exact.

So the number is a little bit off base.

Secondly, we do not expect, to your second question, we do not expect to take any charges in 2007.

So you foresee no further charges specific to what you call the initiative or Shaping our Future in 2007?

That is correct.

Thank you.

John Balkind.

Fox-Pitt.

A couple of quick questions.

One, in terms of the benefits from the ongoing initiatives, could you just clarify how much of that is cost and how much is of revenue?

And then what is the timing over the three-year period?

Because I heard '08 and I heard '07, so I'm just mixed up on the timing.

It's Pat Regan here.

I'll take that if that's okay.

The vast majority of it is direct cost reduction.

In terms of the timing of it, we'll achieve the full amount of the gross benefits, I'll use the gross benefits for a second, of $60 million or $40 million net by 2009.

We'll achieved 50 of that 60 by 2008.

Of that net benefit of $40 million that we said we'd achieve by 2009, what we said is that we will achieve pretty much half of that in 2007.

Okay.

And then secondarily on the buyback, Joe, you guys have had a lot of flexibility for the entire year and I'm just wondering what your thought process is on capital management because you had an opportunity a couple quarters ago to buy back a lot of stock at a fairly low price.

Now you are looking at more fully valued.

So how do you think about it from a timing and return standpoint versus your other options for capital use?

First of all, I don't think I look fully valued.

Or better valued.

Come on, I can't do that.

Secondly, as we discussed so many times the money available to us to be able to buy back stock and the circumstances surrounding that opportunity sometimes changes.

And you've got to keep yourself flexible and nimble and that is what we did.

But it is fully our intention given the opportunity without other things possibly to think about is the buyback, the stock that we suggested that we were going to.

And as Pat said, in the next quarter we're going to buy back a couple hundred million dollars worth or more.

Everything remaining equal, that's what we're going to do.

But along the way things happen.

You have things other things that you've got to consider, Jon, and you know that is the reason for that.

But it is not due to inability to buy or financial wherewithal or lack of intent.

But you run a business, things change on a day to day basis, but it's fully our intention to buy back the stock that we said we were going to buy back.

Great.

And then a last quick question.

In terms of hiring opportunity obviously you guys have become more selective but what are you seeing in the marketplace in terms of opportunity across your segments?

And then what have you learned in terms of the people that have worked out real well versus those that haven't?

Well, I'll start with the last question first.

The people that we hired last year and we continue to hire, we are very selective.

We turn down a lot.

I don't mean that in and arrogant way but the selectivity basically suggests that you're not going to take everybody that knocks on your door.

And that turned out really well.

Especially when you make the enormity of the hires we made in 2005, Jon, you are going to get usually a few people in there that don't work out.

But I would say that the majority, a lot, most have worked out very, very well which is why you continue to see the contribution to organic revenue growth that you see and it has worked our really well.

So we said at the beginning of the year that we were going to be more selective.

The opportunity existed last year, it didn't exist this year to the extent that it did last year but it still exists which goes to another question that you have.

We continue to see the opportunity to hire good people which we have done.

The environment has changed as it relates to the theater of it all but the opportunity still exists, Jon.

Great, thanks.

I wanted to make another comment to go back to what Charlie asked, which is a suggestion that with the 400 people -- you took the 400 people and related that to ruthless execution as it relates to the totality of what we have.

We have on an ongoing basis pared down at various points during the last year to two years a number of people, consolidated a lot of our operations.

We have done that on an ongoing basis.

What you don't see is major announcements that say that we're laying off thousands of people.

We don't do it that way because our business is more run on a day to day business where we're looking at that all the time.

So to look at 400 people and say by itself it doesn't appear that that is a great deal against the total doesn't suggest exactly what we are doing because we do that on an ongoing basis.

And I wanted to make sure I got that straight.

Thank you, sir.

Meyer Shields.

Stifel Nicolaus.

Can we get a rough percentage of the recruitment that you did in '04 and '05 -- what percentage of those producers are still with you?

I would say this is off the top of my head, I can get you the statistics, but I would say that the percentage of producers that are still with us are probably 80 to 90%.

Okay.

Can you give any sort of description in terms of the business that these folks are bringing to you?

Is that new business that they are cultivating or is that their previous -- that are accounts to their previous employer?

I think it's a combination of both.

There's always an expectation when you recruit people that they are going to bring business with them when they are allowed to do so.

And when the time is right to do so.

Allowed to do so as it relates to noncompete, time to do so as it relates to the renewal of the business.

And as we talked a long time that takes a while for that to happen.

But I would say that in this atmosphere what we've seen is not only them bringing their business with them, which we are very pleased about, but because of our sales culture and because of the way we prompt people and exhort people to cross-sell, the business has increased.

There's a lot -- there's a familial cooperative, collegial atmosphere here that people find refreshing.

And I know that sounds like a commercial but it is in a sense that it is reality.

And so people I think come here and they enjoy doing more business.

Okay, and one last question if I can.

You've talked a few times now about the employee benefits and energy initiatives.

I was wondering if you could give us a more concrete description of how that is playing out?

Well, that's playing out in a couple of ways.

In employee benefits as you know a while ago I guess it seems like nine months or something like that -- I'm looking at Greg Arms who is our Employee Benefits Practice Leader globally, and we hired him almost a year ago to grow our employee benefit practice on a global basis.

On top of the very good people that we already have both internationally and in the United States.

And I think that is playing out quite well.

In terms of the people we've hired, we've hard people to do our multinational business and to grow that out.

We've hired -- continue to recruit people from other places because our platform is a very good one.

So that is playing out very, very well which is why every quarter you hear me continue to say that our employee benefits is growing.

As it relates to energy, we hired a gentleman by the name of Phil Ellis which I reported a few quarters ago to run our global practice, our energy global practice.

But we're turning that more into a business on a worldwide basis rather than a practice which means everybody working under sort of one P&L system so that we can bring the greatest resources to bear on a complex but very emerging, if you will, industry, an exciting one.

So all that is playing out very, very nicely for us and that is why you hear me keep mentioning it here all the time.

Okay.

Do you want to put any numbers on those?

No.

Okay, thanks a lot.

But you knew I was going to say that.

I did.

Jay Gelb.

Lehman Brothers.

Good morning everyone.

Joe, I was hoping you could comment on some of the press reports that are out there potentially looking at Willis undertaking a transformational merger with a larger broker?

You were hoping that I would comment?

That was my hope.

I know, it's a fond hope.

No, I can't.

You know I can't comment on that.

Thank you.

Okay.

Next one, Gras Savoye, can you give us a sense of the valuation that was paid for the remaining 5% whether that's percentage of versus revenues or pretax income?

The valuation is based upon a very complicated formula that was set out when the deal was completed in '98 and based upon revenue and it's based upon EBIT.

But it is not based upon how well they are doing now.

It is based upon a formula that was set out way in advance.

So the bottom line of all that is is that the execution of this 5% was a very good financial transaction simply because it was set in the past not based upon what they are doing now.

So as a result of that, we think the economics made a lot of sense even though it doesn't change the way we report our relationship with Gras Savoye.

Okay.

And then separately on organic growth it has been very strong versus peers.

Can you talk about the sustainability of that going forward?

Yes, that is a question that I'm asked all the time.

And I think it is very sustainable.

I mean despite the fact that I think we're running into softness, it's not the first time all you guys have written about this going into the next year.

I think that the whole idea in this business is to keep the accounts that you have, get more from the accounts that you have which means cross-selling and open new ones.

And when you have 9, 10% marketshare like we do and you've got 90% of the people out there that don't do business with you and you couple that so you've got a big universe to draw from, and you've got a sales culture that constantly promotes people working together and constantly promotes opening accounts and talking to accounts and retaining accounts and selling them more things that are in our covers, if you will, we think it is very sustainable.

I don't know, somebody reported that we -- there was 10 quarters in a row where our revenue growth was higher than our peers, I guess this is the 11th.

But there is a reason that happens and I mentioned this on the call before that we talk about it all the time.

We all engage in selling and it is the most exciting thing that we do.

And it should be because that's our business.

So we believe that we will always -- it is our standard, if you will, to continue to outperform first ourselves because that is always the best criteria.

And then secondly, to look at ourselves and think that we do a good job at this.

I really think for as well as we've done there is a lot being done now to make our sales processes better, to install sales processes and retention processes that are better than they were before.

So I would all hope that that would get better as we go along.

I don't think you've seen Willis in full form as it relates to sales and as it relates to the sales process, Jay.

Okay, thanks.

And then finally just a detailed question.

For the 5 to $10 million of restructuring charges, will those also be excluded or not included in the adjusted net income which is the basis for everyone's estimates?

Jay, primarily those costs are going to be -- I believe at this point they will primarily be severance type of costs so I would imagine we would treat those in the same way.

Okay, great.

Thanks for the answers.

Keith Walsh.

Keith from Citigroup.

Good morning, Joe.

Just one question actually two questions.

Revenue growth, maybe directionally if you can give us where that is coming from?

Is it new hires, pricing or you are winning business from competitors?

And then second, looking at the large corporate market, I guess your competitor Marsh has the dominant share there.

How do you look at that market, how important is it in your growth plans and are you getting a seat at the table there?

Thanks.

I think that the growth is coming across the board.

I'm looking across the table as we speak.

I know that's an easy answer but I'm looking at all of my colleagues that are in the room with me and it is across the board.

When you heard my numbers earlier with regard to North America, global and international, it's just across the board.

New accounts, we continue our underlying growth -- it was 8% with no inhibition from rate as I said earlier, our new accounts continue to be robust.

Our retention is good; not as good as it could be.

My colleagues keep reminding me all the time I'm looking at one of them right now that it is better than everybody else and I keep saying I don't care about everybody else, I care about our own standards.

So it is across the board and I think when a lot of these initiatives that we make reference to all the time are in full bloom I think it would get better.

To your other question and I'll be glad to if you want to hear from any one of my colleagues from anyplace in the world they are here to talk to you, I think in a larger [case] basis, we have I think we are gaining marketshare but -- and we definitely have a seat at the table.

But I don't want to have the same seat if it's going to cost us money to do it.

I don't want to have to give up fees to be able to have that seat only to find out that I had a wonderful seat and I walked away with no chips.

I don't want to sit at that table.

So our strategy, which is part of our initiatives, is to take the things that we are good that, our core businesses and go after the global 500, if you will, or more against the backdrop of the core businesses and the things that we are good at, things that we think we can compete very favorably and things that we think people will pay for.

And as a result not only be able to compete very favorably that gives us a seat at the table but when we walk away we walk away with chips rather than just have a seat which makes no sense whatsoever.

Okay, thank you.

Marc Serafin.

Morgan Stanley.

I'm not asking you to comment about rumors of course but at what point would the company consider a more transformational acquisition or something other than the 50 to $100 million bolt-ons that we expect throughout the next few years?

I said I think our last call that we really -- the bolt-ons have to do with our planning process which is our strategy.

In other words take a country, we want to grow that country, we want to grow that country against the backdrop of a core business and if we find a core business for example -- and let's say a core business for us is marine and we take a country where we think we can reinforce our marine business in that area, then we're going to look for a broker that gives us the ability to do that.

And we're going to continue to do that and if we find good deals and good brokers against the backdrop to that example that is exactly what we are going to do.

We're not really interested in -- because the place is so organic and because it works so well together to do a deal just for the sake of doing a deal.

That doesn't mean to say that if there's opportunities that come along that represent something that is interesting, unusual, exciting and can be transformational will we take a look?

It would be silly for me to tell you that we wouldn't do that.

Of course we would take a look at that.

Because I think that is what we all should be in a position to do and its part of my job to do that.

And then maybe we could hear a little bit from Don Bailey and see just -- get an update from him on what he is seeing and what changes he expects to make having succeeded Mario.

Okay, he is happened to be right here and he's ready to jump on the microphone.

Thanks, Joe.

Thanks, Marc.

The very good news for me has been that in my nearly four years with Willis have had a chance to sit in some different seats, build a lot of different businesses, executive risk, WRS, middle market, claims and risk control and then the COO job before sitting in this seat.

So to suggest that the transitioned has been seamless is probably pretty fair.

We immediately jumped in and announced a few enhancements to the management team to include a new COO, Tom Ealy, and to get to what Joe was talking about in terms of really focusing on our core growth effort, Joe Gunn has been named as head of sales, head of client development.

Frankly, what he's going to be focused on is growing North America.

And in the three buckets that Joe talked about.

Getting more from the producers and the client advocates that we have right now, focusing on strategic recruiting and then contemplating some of the acquisitions that our very strategically placed throughout North America for us.

So we are very excited.

We're very engaged.

We're taking on a lot of the Shaping our Future initiatives that Grahame articulated as well.

We haven't missed a beat and we're excited about what this quarter and then 2007 brings for us, Marc.

Thanks.

Jon Balkind.

Joe, just a quick question on the Gras Savoye, does that formula change over time or is it a static formula?

It's pretty static.

Great.

Well, it looks like a pretty good deal.

Yes exactly.

That is why we did it.

We did it because it made a lot of sense.

I would tell you that there was an obligation to do it because when these time shares came up we had an obligation to buy if other factors did not take advantage of it.

But we were quick to do it because as I said it was formulaic and it was done a while ago and that company has done much better and is much bigger than it was when the deal was made.

So pretty good, Jon.

Sounds good.

Meyer Shields.

Stifel Nicolaus.

One quick question.

Can you quantify the contingent commissions received in the quarter based on the amended agreement with Eliot Spitzer?

I mean we haven't done that.

That was too soon to cut any kind of an MGA agreement.

That is basically against the backdrop of our [programs] business in North America and that happened a month or so ago.

Nothing has gone through the system yet.

None.

Okay, thanks.

Chris Neczypor.

Goldman Sachs.

Joe, I think I've read in the past that revenues for Willis have historically been split somewhere between 70% commissions and 30% fees broadly speaking.

I was wondering if you could maybe give us an update in a general sense where that split is today and maybe where you see that split going in the future giving some softening in certain markets?

Oh sure.

I always said 70/30, as you know.

I think it is drifting now toward 65/35 which is what I said all along that I thought it would do, we wanted it to do.

So it is about 35% now fees, 65% commissions.

More than that, as you know, it reflects the type of business you do.

We always wanted to do more fee business with larger middle market national global accounts.

And so I think my number reflects the success we are having in growing that business because by nature that is fee business not commission business.

So hopefully when the five-year plan is up you'll see that number drift more toward 60/40 maybe even half and half, who knows.

But it certainly is drifting in the direction in which we wanted it to go.

Okay, that is great.

Thanks, guys.

I might also add that one of our initiative has been our small commercial business and our ability to make that business profitable.

We always thought it was profitable.

We had this discussion a couple of calls ago.

But we think we can make it even more profitable.

So the more we grow -- look, the fact of the matter is is that most of the world's accounts are small.

And we're around the world.

So the more we can make that profitable obviously the better off e can -- or more profitable.

And so we are pretty excited about the systems and the strategy we're putting in place to do that and obviously that is all commission business.

So as one goes up the other one kind of evens itself out.

But that is the trend.

Okay?

Any other questions?

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Okay, it looks like it's 9 o'clock and I know you guys have other things to do.

Have a nice day and thanks a lot.

Appreciate it.

This concludes our conference call for today.

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