Willis Towers Watson PLC (WTW) 2009 Q3 法說會逐字稿

Good morning and thank you all for holding.

(Operators Instructions).

Today's call is being recorded.

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

As a courtesy, when asking a question please make sure your cell phones, Blackberries are off before asking your question.

At this time I will turn the call over to Ms.

Kerry Calaiaro, Director Investor Relations.

Ma'am you may begin.

Thank you and welcome to our earnings conference call and webcast at Willis.com for third quarter 2009.

Our call today is hosted by Joe Plumeri, Willis Group Holdings Chairman and Chief Executive Officer.

A replay will be available through November 27, 2009, at 11:59 Eastern Time by calling 877-611-5293, or 1-203-369-4862 outside the US with no passcode, or by accessing the website.

If you have any questions after the call, my direct line is 212-915-8084.

As we begin our call let me remind you we may make certain statements relating to future results which are forward-looking 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 estimated or anticipated.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2008, and subsequent filings as well as our earnings press release for more detailed discussion of the risk factors that may affect our results.

Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also, please note that certain financial measures that we use on the call are expressed on a non-GAAP basis.

Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release.

I will now turn the call over to Joe.

Hi, everybody and good morning.

Here with me are Pat Regan, our COO and CFO, and Grahame Millwater, our President, as well as our members of our management team who are going to answer any questions that you need at the end of our presentation.

I just want to make one comment with regard to the news about Pat Regan becoming the CFO of [Aviva].

As you know we announced that last week.

It's a nice big job for him and we congratulate him for the opportunity he is going to have, but as we stated in the release he is going to be with us probably through February for year-end earnings.

We'll make sure that the (inaudible) transaction goes through as we'll talk about later on.

So he is going to be with us awhile, but I want to welcome him and congratulate him to his next to last earnings call.

Pat, congratulations.

Thank you, Joe.

Let's get on with our third quarter.

We had a busy and productive third quarter with a number of achievements that we're all very proud of, on a capital management front, S&P and Moody's, as you know, revised our outlook to stable.

We're very, very happy about.

We hade a very successful bond offering that was priced at 7% because we were 10 times over subscribed which helped the pricing very much and we were very proud of that and proud of how that went.

Operationally, the third quarter reflected a number of trends we have seen over the past few quarters with good growth in operating margin in the face of very soft insurance markets and economic slowdown, especial in the US and the UK and Ireland.

Let me talk about a few key metrics.

The adjusted earnings per share from continuing operations were $0.53 in the quarter compared to $0.32 last year.

A very good result as we absorbed the HRH acquisition and continue to manage the expense base which I think we're doing very well.

We had 2% organic growth in commissions and fees.

Growth came from 5% new business and 3% head wind from declining rates and other market factors so one of the trends you are going to hear about is our continuing growth in opening new accounts.

In the US, the rate head wind was still very pronounced at about 4%.

The real strength from geographic and business line diversity with 4% growing in global comprising specialties, Faber & Dumas and reinsurance and 3% in international.

International growth was negatively affected by the UK and Ireland, which goes inside of our international numbers, and they're dealing with some very difficult economic conditions.

Other than that, as will you hear later on, international grew at 7%, which was at their normal very good growth rate.

North America, we're very happy to say improved from the second quarter 2009 to a negative 3%.

Again, in the light of bad economic circumstances and in the light of a very soft market.

So we're very pleased to see the progress that North America is making.

The adjusted operating margin was 13.1% in our seasonally lightest quarter.

Good underlying business performance as we continue to focus on top-line growth while successfully right-sizing Willis.

Grahame is going to talk about that in a little bit.

For the current environment in these challenging economic conditions, and we are going to continue to look at opportunities that we have to right-size, to fund our growth, and that's not going to go away.

For the nine months, organic growth and commissions and fees of 2% including positive growth of 5% global, 5% in international.

Adjusted earnings per share from continuing operations were $2.21, and adjusted operating margin was 22.1.

So very, very good quarter.

A lot of things going on.

A lot of progress being made.

Going in the right direction, and we're very, very pleased with it.

Let me talk about North America.

North America continues, as you all know, to feel the brunt of the soft insurance market and the weak economy.

We are particularly exposed, as you all know to employee benefits and construction, and given this environment, and the fact that we are in the first year of the HRH integration I think he we're very pleased with the progress we have made.

Worst possible circumstances, worst possible economy, hits a couple of products that are big for us but yet our revenues continue to improve, the integration continues to go well, so against that backdrop we're very pleased with that progress.

We just completed the first year of this major acquisition, and the focus has understandably been on integration, physically and culturally, and not on recruiting new producers or growth or all the kinds of things you do when you are not distracted by those things.

That said, I'm very happy to report that there was an improvement to a negative 3% in organic commissions and fees which was a huge improvement from the last quarter, so we're becoming less and less distracted.

I will talk to you later on.

We changed the name back to Willis North America, Willis Group North America from Willis HRH, so we're coming out of integration mode and into beginning to grow our business and run our business.

Takes awhile to do that especially when you are in the midst of the economic circumstances that we've been in.

We feel very good about the direction that we're going toward.

The improvement in organic growth was driven by increased new business.

So you start to see new business now becoming a top line focus for North America.

We've refocused our efforts on top-line growth, and as a result of that, our new business generation was double digit.

Operating margin in North America again continues to be outstanding.

It was 21.5% in the third quarter of 2009, up 1140 basis points, from 10.1% a year ago.

Again, you got revenues improving, you got synergies working very, very well.

That's what makes those numbers has.

We've reduced the pro forma combined expense base by about 60% through a merger integration and right-sizing Willis and the discretionary costs on a pro forma basis are down approximately 48%.

Productivity per FTE remains stable at 222,000 on a trailing 12-month basis.

Now, let me talk about the integration.

We have four main priorities during the integration process.

I've said this before.

I will remind you again.

Retaining the producers and clients, number one priority.

We have concentrated a lot on doing so, and as you know, we think we've been very, very successful, losing less than 5% of the productivity.

Expense reduction from synergies, we concentrated on that.

As you can see we've gotten many more synergies than we thought we would have, implementing the integration plan going very well, a lot of combinations, a lot of offices getting together, which we're very, very pleased about and converting contingent commissions, as you know, we're almost 100% there in converting those contingents to upfront commissions.

So the four targets, the focuses that we had we had are doing very well.

And we are succeeding and acceding our expectations on all fronts.

The producer and client retention remain high, as I said we've lost less than 5% of the production.

We believe that the growth rate of legacy -- at legacy HRH would have been similar to the legacy Willis North American numbers if you take into consideration the loss revenues are approximately 3% relating to producers who have left, which is consistent with what I have said to you, less than five.

They've got a hire commission base, about 85% there, so the commissions are because of the soft market are going to be affected more.

And the size of the accounts are smaller, so that they're affected by the recession.

But given all of those things, if you allow for that, the numbers are basically the same and we're very, very pleased with that.

With the combined synergy and right-sizing savings of approximately 49 million in the third quarter of 2009, we're now targeting cost reductions of over 180 million in 2009 as we continue to accelerate the pace of the integration and as well as identify additional savings opportunity.

So we expect a similar level of synergies in 2010.

Very good process on the integration work streams.

And as I said before, we've changed our name to Willis North America, so he we're in the completion stages, so to speak of, the beginning of the end, if will you, of the integration, moving toward growth of our business.

Let me talk about international.

International unit or granite growth and commission fees was 3% for the third quarter as it continues its record of impressive growth across many regions in the face of some slowing economic growth.

Now, excluding the UK and Ireland, I said this before, international grew 7%.

And international was the core basis of the countries that usually occupied all of the international numbers.

UK and Ireland retail declined 8% as they both face many of the same economic conditions and challenges that we're seeing in the US.

New business generations remain double-digit, and with two-point rate head wind.

As a result, productivity per FTE rose 3% from last year to 166,000 on a trailing 12-month basis.

Let me talk about our global business now.

The global business segment comprised of the global specialties, Faber & Dumas and reinsurance divisions have 4% organic growth in commissions and fees in the quarter and that was in the face of a three-point rate head wind with another standout performance in our reinsurance operation.

Global specialties, the revenue drivers were marine, aerospace, and FINEX.

The rate environment continued to be soft in a number of areas in global and specialties, although stabilization and firming occurred in energy.

In reinsurance we had high single-digit growth in the quarter with over 20% new business growth.

Just outstanding in reinsurance.

Revenue drivers exceptionally high, new business generation primarily North America.

The global operating margin was 18.8% in the third quarter up from 17.4% a year ago.

We are benefiting from the strengthening in reinsurance and the investments we have made over the last year or so as well as favorable impact from foreign exchange.

And as a result, productivity per FTE rose 3% from last year to 358,000 on a trailing 12-month basis.

So all good.

Direction is good in the face of a lot of head winds, but really feel good about the direction of all of our operations.

Now let me turn things over to Grahame Millwater to update you on our three priorities for 2009.

Right sizing, shaping our future, and driving growth.

Grahame.

Thank you, Jay.

To help drive the results that Joe has just articulated we continue to drive three main programs of work across the group.

Right sizing, shaping our future, the and driving organic revenue growth.

The right sizing initiative has been a major success for us through a combination of managing discretionary costs, performance management, control of benefits such as salaries and 401(K), and aggressive optimization of locations such as (Inaudible), Nashville, and Mumbai, we have delivered significant annualized savings since we began this process in August last year.

These savings are significantly above our original targets and will be articulated in more depth by Pat's later comments on the call.

Although we will not be able to replicate such a similar scale of savings as we enter 2010, it is absolutely our intention to maintain discipline in the expense management arena.

Reviewing our cost base is a continuous process for Willis.

For example, we will continue our process of performance management.

We will maintain strict control over discretionary cost and salaries and benefits in this current environment.

We are far from achieving the saturation points of our major service centers and are currently in the process of creating similar hubs for our international regions such as Europe and Latin America.

We continue to review our efficiency and our business units and are deploying lien processing analysis currently in several locations in the UK and international.

So the conclusion on right sizing, we have far exceeded our original targets but we will continue to after microscopic focus on expenses in the current economic and rate environments.

Now let me turn to shaping our future.

We have again exceeded our targets in the third quarter.

We delivered 25 million of gross benefits for this quarter, a major contributions are as follows -- 8 million of this came from global placement, $4 million from client profitability, and $4 million from the [spoke] program in reinsurance.

Since we started this program we have delivered cumulative gross benefits of $146 million and net benefits of $81 million through third quarter.

Continued rolling investment we are funding from the program will continue to drive benefits throughout 2010 and beyond.

Shaping our future has delivered all we expected from it and the initiatives contained within it have now largely become a way of life for the business units.

Particular note should be made of our new program in North America of rolling out an integrated processing program that we have entitled Epic.

This will be key to further driving synergies post the HRH integration.

Current we are operating in North America on a number of operating systems none of which honestly can be described as state of the art.

Now driving growth.

The key focus of our efforts going forward is on driving revenue growth.

We have been market leaders in organic revenue growth in the sector for many years.

You only have to review our quarterly organic growth figures against our peers since we went public in 2001.

However, we are now setting as our benchmark some of the best organic growth practices outside the sector.

We believe that he we need to bring the same discipline we have applied to expense management and shaping our future to the sales and marketing arena.

For example, a relentless focus on segmentation and client driven value propositions.

Consistent and disciplined sales and pipeline management process to drive predictable and sustainable new business development.

Even though our retention figures have consistently improved over the past few years and currently stand at 91% year to date we continue to believe we can get even better and have set ourselves new benchmarks by business unit.

And finally, we intend to embark on a much more scientific recruitment campaign.

Willis is an attractive and successful company and we continue to recruit great talent.

However, we have not become systematic enough in our targeting and hiring of productive talent and again we will become very disciplined in our endeavors in 2010 and beyond.

However this will be combined with strong performance management to ensure we're not only recruiting and retaining our best but also ensuring nonperformance dealt with appropriately.

Many elements of this growth plan will require further investment.

This investment will be funded by a continued right-sizing program and the benefits derived from shaping our future such as placement and client profitability.

In conclusion, expense management is a way of life at Willis.

Shaping our future has delivered in excess of expectations, continues and increasingly embedded in the practice of our business units themselves.

Both continue to be critical to the delivery of our bottom line.

However this Company is positioning itself for breakout organic revenue growth and that will increasingly become the focus of our efforts.

With that I will turn the call over to Pat Regan, our COO and CFO, to review the financial results.

Thank you, Grahame, and good mornings everyone.

The third quarter saw us continue to execute strongly in terms of our balance sheet, the HRH integration, expense management, shape in our future and our earnings.

Adjusted earnings from continuing operations were $90 million or $0.53 per share up from $0.32 in the third quarter 2008.

The adjusted operating margin for the quarter was 13.1% up 100 basis points from 12.1% a year ago.

Margin for the quarter when compared to 2008 was negatively impacted by a number of financial head winds caused by the economic climates as well as the impact of the HRH acquisition.

Some what mitigated by favorable year-on-year, foreign currency.

Altogether totaling 290 basis points of negative impact.

The impact of the HRH acquisition diluted margin by 200 basis points due to higher amortization now offset by synergy savings.

Lower interest rates caused investment income to decline $12 million in third quarter or 170 basis points impact.

Pension expense increased $16 billion in the third quarter or 300 basis points impact.

This was somewhat mitigated by the non recurrence of last year's FX loss on the pension.

Certainly some of these head winds could reduce in the future.

Adjusting for these factors the underlying business performance contributed about 390 basis points of margin expansion.

A product of our organic growth of 2% or total pro forma SG&A expenses declined 2%.

This consistent delivery of underlying margin expansion through solid revenue growth and effective proactive expense management has been a really feature of our results all year.

Notwithstanding the significant impact of the economy in our business we have generated underlying margin expansion of approximately 500 basis points on a year-to-date basis.

This is even after a negative impact from rate of approximately 300 basis points year to date.

Much of this has been driven by the synergies and right-sizing savings we'll deliver in North America this year of over $180 million, compared with the right sizing savings in other segments of well over $100 million for the full year 2009.

Let me give you some more detail on the expense reduction work.

Despite the 300 basis point increase in pension cost on an adjusted basis salaries and benefits were flat at 62% of revenues compared to 62% also year ago.

We've systematically managed the group headcount allowing us to continue to invest in the business and absorb the increased pension cost while keeping our SMB ratio flat.

Through use of Mumbai, use of the hubs in Nashville and [inswitch], in depth review of client facing versus non-client facing roles, rigorist approval protocols and performance management processes, et cetera.

As I have said, this has allowed us to continue to invest this year, absorb those pension cost while keeping the SMB ratio flat.

Also on an adjusted basis other operating expenses in third quarter 2009 were 20% of revenues of good improvement from last year's comparable 22%.

Year to date on a pro forma basis we're down over $50 million on discretionary costs alone.

We have achieved savings of nearly $30 million in T&E, $7 million professional fees, $5 million in advertising costs, $3 million in printing costs, and many, many, many more similar savings.

As I mentioned earlier this all contributed to the pro forma decline in SG&A expenses of 2% on the quarter.

On a investment income, as I mentioned a moment ago we saw decline in investment income in the third quarter 2009 to $10 million from $22 million in the third quarter 2008 as global interest rates fell.

However, we have a forward hedging program in place which is generating significant savings versus if we just had had LIBOR-based rates.

We currently estimate investment income of approximately $45 million for the full year 2009 compared with $81 million in 2008.

Foreign currency movement had a negative $0.05 impact on earnings per share in the third quarter and an unfavorable 150 basis point impact on the operating margin for the quarter.

Obviously if you just look at that time year-over-year comparison to 2008, you have the loss on the pension [Gras Savoye] asset last year not recurring in 2009.

On to tax, the reported income tax credit for the quarter was $29 million, compared to $2 million income tax expense for the comparable period a year ago.

The third quarter 2009 tax credit reflects the release of a provision of $27 million which had been recorded relating to tax that would potentially have been payable related to the earnings of our foreign subsidiary.

Following a change in the UK tax law effective third quarter 2009 these earnings can now be repatriated without additional tax costs, consequently the revision has been released.

Also, every third quarter we do a tax true-up and as in previous years we have recognized a tax credit in the quarter of $11 million.

The effective underlying tax rate for the nine months was approximately 26% or close 24% including that true-up.

We should be able to sustain underlying tax rate slightly below that 26% going forward.

Earnings from associates, there was an increase in earnings from associates of approximately $10 million post tax compared to a year ago.

This increase was a result of our increased ownership as well as improved performance of Gras Savoye, and some elements of positive timing.

Turning to capital management, as Joe mentioned I have been very pleased by our progress on capital management throughout this year and particularly in the third quarter.

We obtained an improved outlook to stable by both Moody's and Standard & Poor's which gave us a great base from which to launch our recent bond issue.

The offering received over $2.4 billion in interest from investors enabling us to issue $300 million of notes at 7%.

Substantially inside our price expectation.

We were also successful in tendering for 64% or $160 million of our 2010 bonds.

These actions together with others have significantly improved our debt maturity profile.

Once the remaining $90 million of those bonds are repaid the only mandatory repayments in the next five years of the scheduled payments in our $700 million five-year term loan.

Total debt at end of third quarter was $2.6 billion compared to 2.65 at year end.

Also increase in cash to $203 million at 30 September 2009.

The combined deficit on our UK and US pension schemes was approximately $70 million at the end of third quarter, a $30 million improvement from the second quarter.

Total pension plan cash contributions will be approximately $70 million in '09, the and we currently estimate total pension expense for 2009 to be approximately $35 million net of (Inaudible).

With that, I will now turn the call back to Joe.

Thanks, Pat.

Before I conclude, I just wanted to circle back on a few things in the news.

Gras Savoye and Stanford Financial.

First Stanford Financial, with respect to the pending Stanford litigation, there's no material update.

Three of the four actions against us have been consolidated into a single Texas Federal Court and transfer requests with respect to the one case in the State Court are currently pending.

As we have stated previously, the company will continue to defend itself vigorously in these lawsuits.

As I said before, we do not believe that any Willis employee knew that Stanford was engaged in fraudulent activity.

Disappointed investors like those involved in Stanford situation frequently look for a deep pocket.

They look for someone to sue.

I believe the plaintiffs here see Willis as deep pocket and therefore have filed these complaints.

From my perspective, it makes no sense to think that investors making the type of investment at issue here would rely on a letter from Stanford's insurance broker.

It's just insane.

Now let me talk about Gras Savoye, in June 2009, the Company announced that it was in discussions regarding the potential sale of a portion of its interest in Gras Savoye.

Since that time the Company and other Gras Savoye shareholders have entered into an exclusive arrangement with [Astored] Partners, a private equity fund, but we have not entered into any definitive sale agreement.

Pending though the finalization of the financing terms we anticipate executing definitive agreements in the next few months pursuant to which we would expect, one, the elimination of the put presently exercisable by Gras Savoye shareholders.

Two, receipt of cash proceeds between 100 and 150 million, which we intend to use to pay down debt.

So that will increase our balance sheet.

And reduce our debt.

Cash in our balance sheet, reduce our debt.

Third, retention of 33% interest following the sale as well as the ability, so we still stay in business with Gras Savoye and all the synergies that have taken place with them as well as the ability to acquire the majority interest in Gras Savoye in 2015 so we still get our chance to buy the whole company so we think it's a win-win-win right across the board.

So we he think everything is going in the right direction, whether it's growth in revenue, whether we're continuing to save money and watch our expenses, whether it is HRH, whether it is Gras Savoye we really feel good about the position we are in and we will be very happy to answer any questions your may have.

Thank you.

(Operator Instructions).

Our first question comes from Keith Walsh.

Keith at credit at this time.

Good morning.

Hi, Keith.

First, couple pal questions for Pat, one for Peter Hearn, if he's available.

First, congrats, Pat, on the new position.

But the first question would be, with the associates line that spiked up relative to previous third quarters.

Wanted to see if you can give us some color what's going on there, then I'll follow up.

Sure.

Couple things on that line, Keith.

The increased ownership at Gras Savoye compared to this time year ago, slight higher profitability, elements of timing, of that up side, if you assume pretty much half of it is kind of ongoing sustainable and the other half is due more to positive timing.

Then on the FX hit of $0.05, last quarter it really didn't impact your earnings, and just based on the movement of currencies I would have thought the opposite effect would have taken place.

Maybe if you could give us color on the hedging program and why the currency impact has become -- swung to a negative this quarter.

The currency impact, I can understand why it is difficult to forecast, because you've got essential three elements in there.

One, is the translation of our euro earnings, mostly euro earnings.

Secondly, our London based business where we have dollar income and sterling expenses and the third, is the impact of our hedging program.

None of those would exactly map outgoing forward.

We try and put a hedging program in place that mitigates the impact of primarily the dollar sterling ratio.

Effectively, the combination of that and the euro dollar movements is what gave that.

Last question for Peter Hearn.

On the announcement a couple weeks ago about some of the restructuring going on at Willis re, if you can give us some color, why the need for restructuring now, how that positions you, et cetera.

Keith, Peter is at a reinsurance conference, but Grahame is here.

Grahame is responsible for reinsurance overall so he will answer the question, okay?

Keith, it's much more -- it's not a dramatic change.

Much more of an evolution.

The two driving factors behind it is really to release more and more of our really productive talent and our senior productive talent, common theme throughout the group.

Some has just been releasing people just purely 100% to focus on production and client relationship management.

The other aspect of it is is Willis [REIT] is increasingly run as one entity so a lot of the drive was to bring together the talent of the Willis [REIT] organization.

So we look at global client, product lines, regional business, very much more as one entity.

That's always been a common theme.

But some of those tweaks have have been to drive that even harder.

Sought really has been an evolution process and just releasing some people to be external facing arched bring the organization together even more as one.

Thanks a lot.

Our next question comes from Jay Gelb.

State your company name.

Barclays Capital.

Thanks and good morning.

Could you give us a sense of what the goal is for the North American margins, if it was 23% on a pretax basis year to date?

The goal when?

I leave that up to you.

Obviously, we strive over time that with the consolidation nearing its conclusion and you see where the margins are, we would expect that on an ongoing basis we should clearly be in the 25% plus range in margins.

By when, Joe?

I can't give you a date by when.

That's why I asked you at the beginning.

But certainly well into next year we expect that we did this transaction to assume that we could get 25% margins over time on an ongoing basis, and that I will qualify by saying in this kind of environment.

I think that if the environment changes at one point in time, and the market becomes hard the leverage in North America because of the unusual nature of the commissions it should be much higher than that.

So I'm going to give you a framework of well into next year, I would expect our margins to be around 25%.

That's a guess.

That's not an estimate.

But that's what we would expect it to be.

If the market stays the way it is.

If you get a hard market, at one point in time, all of those head winds go away.

The head winds become tail winds.

We're commission driven to the point of 80, 85% in North America, and we would expect much greater margins than the 25.

Okay.

And then on the organic growth for North America, the improvement from minus 8 minus to minus 3 in one quarter, that was a big move.

Should we expect that type of continued pace of improvement going forward?

Yes, I would expect that the improvement should be very good.

I said, and I've said all along that when you do a merger, an acquisition of this magnitude, it is hard.

You guys know that.

It is very difficult to do.

And all of our management talent, Don Bailey's talent, Don Bailey has been to every office in North America three times, four times.

And all of our managers have been.

It's very difficult to do.

Throw on top of that, and then with difficult in a benign environment.

If you throw on top of that the fact that the economy has been bad, that a couple of continues, which were very big, [EV] and construction have been affect, I kept saying to everybody that's the reason why the revenue.

You can't be all things to all people.

The idea is to keep the people in place to do the integration, and our time will come when we get back to rang normal business.

And I think you are going to see that the normalcy of continues will start to be run and our expectation level will now change from integration over.

It's never really over, but over in a sense that you totally concentrate on it to now growing our business, and that's the phase I think we're in now.

Don, you want to add anything?

I think that was very well said, Joe.

Agree with all of that.

Two other quick questions on numbers.

One, what's the right run rate for amortization of intangibles, and which effective tax rate should we use for modeling purposes?

Yes, so you just take the $7 million that we had had as the one time acceleration, we take that out of the run rate, and that would be your run rate going forward.

Then on the tax rate, as I say, we have, as we have the last few years, we had the true-up in the third quarter.

If you included that true did you know we would come down a bit less than 26%.

We think we can do a bit better than 26% when you factor in things like our move (Inaudible - highly accented).

We think we can do a bit better than 26 going forward.

How much?

Probably close to 25.

Thanks very much.

Our next question comes from Thomas Mitchell.

Your line is open.

Please state your company name.

Miller Tabak.

It's wonderful to hear about all these cost savings but of course you had something like $0.22 or $0.23 a share out of that 53 cents of adjusted earnings that came from tax credits.

So when I get an adjustment, I get down around $0.30.

And I'm interested in when the cost savings that you are talking about, which sounds so wonderful, actually will end up in what we would consider, at least I would consider operating earnings per share.

When will we see that?

In terms of the taxes, I just said there was the $27 million, which is truly a one-time item, and -- which is, what, $0.16 or 0.17 that you should deduct.

At the same time, I think a large element of that is more effective of our underlying rate.

But going forward if we use a 25% you wouldn't expect to see a tax credit in future quarters.

No, as I say, it was true-up as we've had in previous years.

We've add true-up in the third quarter.

We've also obviously had a couple of other items, the $0.05 FX, et cetera.

If you look at that you certainly arrive at a number higher than $0.30, and that is reflective of the 2% organic growth, the 2% underlying cost growth as well as we talked about.

I just want to add something to.

That when you look at the head winds with regard to pensions, and you look at the head winds with regard to interest income and you look at the head winds with regard to deal amortization and you are able to grow your margins, which means your underlying business is equal to if not greater than those head winds, that's where you are getting your operating leverage as it relates to the cost savings.

That's where you are seeing it, or the margins wouldn't be going up, or the earnings would not be going up.

So your seeing it there.

You are seeing it in North America with an enormous increase in the margin of 1,140 basis points, so you are seeing it in the leverage against those head winds which is why you are seeing the increase.

So taxes notwithstanding, that's how you are seeing that offset takes place, which means that the right sizing is being accomplished and the synergies are being accomplished as well.

Okay.

The second question is totally unrelated, but interesting.

Your ongoing interest expense increase base in part because, of course, you've been able to borrow money longer term.

I'm wondering about the expensive Goldman Sachs money.

That something that you have a chance to refinance?

In the quarter remember we had the 5 million extra interest, or extra cost on the interest line due to the buyback of the bonds we done the quarter.

Okay.

Sorry, Joe.

I'll answer the -- obviously, we are going to look over time at trying to refinance that.

I would like to get close to 13% money off the income statement and reduce that.

So, yeah, the answer is that as time goes on, next couple quarters or so, we'll constantly be looking that it loan.

We'd love to get that down to another number and find a way to do that and save some more money.

So yes, the answer is we'll be talking to Goldman Sachs on an ongoing basis to see if we can't cleverly figure out a way to do it.

Thank you.

Our next question comes from Meyer Shields.

Please state your company name.

Stifel Nicolaus.

Good morning.

With regard to Goldman Sachs timing, in terms of modeling was that timing issue basically earnings that came from future quarters?

I couldn't understand the question.

Did you mean Gras Savoye when you said Goldman Sachs?

I did.

Threw me off.

No, you shouldn't deduct it from future quarters.

Can you talk broadly about when you would become comfortable with share repurchases again?

Are we close to that point?

As you can see we're starting to get the balance heat straight again, and our goal is to pay down debt first and then after we're comfortable with the debt paydown to a point where we're around two and a half times debt to EBITDA, and we're not far from there now, then we'll start buying stock back again.

I want to remind everybody, I'm really so upbeat about this, when I got to this company nine years ago, the debt to EBITDA was 9.5 to 1.

I got it down to 1 to 1.

Same formula.

You grow your margins, you pay down debt, you get the debt down to a number that -- that's reasonable, then you start buying stock back.

That's exactly what we're going do.

Part of the plan, as you all know is that we were going to buy back the stock that we had put out to buy HRH.

The world fell apart, we never got an opportunity to do that but that will come, and as a result, the numbers will continue to get better.

I think they're great now, given the circumstances, but they will continue to get better.

So it's pay down debt, down to two and a half to one, buy back stock.

That's very helpful.

Lastly, with regard to foreign exchange going forward, I just want to check.

I would expect that to be a significant tail wind in the fourth quarter and first quarter of next year for global and international.

Does that make sense?

We should get some small positive impact in Q4 and Q1, yes.

Okay, thank you very much.

Our next question comes from Matthew Heimermann.

Please state your company name.

JPMorgan.

Question for the international segment.

The economy in the UK and Ireland obviously just didn't get weak so I was curious what changed that you started to see a bigger impact from those countries and in the quarter, and could you maybe give us a sense of what percentage the UK and Ireland are of the total international segment?

Really, what changed is, is that it's about 25% but what changed was is that it dramatically got lower because of E being construction in Ireland.

Ireland is the real problem.

As you know, the Irish economy is terrible.

We are the largest broker in Ireland, and so you are talking about a very big impact that Ireland has on our international business.

If you stripped that away what you are talking about here is still very good growth, as I said, in international, it's 7%, 7% in this kind of an environment in a soft environment which still has 2% head wind, I think is an outstanding achievement.

All of our countries, Spain, Italy, Denmark, Asian business, all across the board are still continuing to do very well.

Ireland and UK is a drag, especially given the fact that Ireland's biggest businesses are EB and construction.

So that's what you goal.

But I wouldn't read into it that international is getting weaker.

I would read into it that Ireland is getting worse.

And it really isn't a reflection of us losing accounts in Ireland.

It is directly an impact.

I think our retention in Ireland cover 95% in terms of holding on to accounts.

It is just a miserable nature of the -- they're the only country in the world that had an economic impact and did not have a stimulus package because they didn't have enough money to grant a stimulus package, so there's higher taxes that are being pushed on people in businesses in Ireland.

So it's a very unusual situation.

But our international continues to be very, very strong.

Is it fair, then, just to play your comments, that this is probably something that now that you are seeing kind of the worst of it hit numbers that will probably be -- keep international from reporting that 7% for the next several quarters?

We're always going to continue -- I'm going to give you both numbers, the and I'm going to give to the you with our Ireland and UK, and I'll give it to you without.

So you understand the strength in international.

So we continue to believe that the international number without UK and Ireland will continue to be strong.

And I think, as Joe mentioned, we had a lot of EB and construction in Ireland an economy that's quite reliant.

We think to an extent once we get through '09 we will have kind of bottomed out.

So that will get better, we hope.

That's helpful.

With respect to the global segment, this year clearly you've had -- that's been one of the few businesses where you've add real pricing tail wind with respect to reinsurance, at least, then obviously some of the specialty lines.

When we think about 2010, I mean, I would suspect that the rate tail wind in reinsurance flows down with capital growing perhaps retentions go up.

I guess are there other levers that you can pull in 2010 that might be able to help sustain some of the growth that you've seen this year?

Yes, I think you're right about your assessment about reinsurance with regard to rate.

And retentions.

Although we're not sure about retentions, will you probably see rate moderate in 2010.

I think the big offset to that is the unusual nature of our ability to open new accounts in reinsurance.

We have been very, very successful at opening many more new account in reinsurance across the board.

In the last three years, we talked about this before.

We put a lot of money in analytics, a lot of money into the Willis Research Network which is 20 Universities that opine on catastrophe around the world, which has been very successful.

I think our model in reinsurance is outstanding.

We've added capital markets to that in a big way with a team of people from Bank of America that have done a lot of deals.

You haven't seen any of that happen yet.

We basically have in this company now a boutique investment bank of people that have done hundreds and hundreds of deals in their life, so if you think there's going to be consolidation in M&A activity you have not seen that yet but we're participating, I think, are going to participate in a lot in that regard.

So I really see that there is a tail wind in reinsurance and capital markets, not necessarily in rate, but in terms of continuing ability to be able to open new business because of the way we've built the business.

So, yep, I think the rate will moderate.

I'm not sure about the level, but I'm very, very confident about our ability to continue to grow the business.

Okay, that's helpful, too.

I guess the last question I had has to do with the affiliate minority interest lines.

Can you just maybe give us pro forma the ownership changes that you are contemplating making in the next couple months what the year to date '09 number would look like and similarly, what the 2008 number would look like, so we can kind of --

No.

But I would tell you that net-net, Joe gave awe few of the moving pieces around what we're planning to do with the transaction.

Net-net when you factor the money and the changes you shouldn't assume any significant change to the earnings per share impact.

There will obviously -- it will show up on a couple different lines and we'll explain that more when we've actually done the deal.

But you shouldn't get a material impact from the transaction we're contemplating right now.

I guess just to understand, that is predicated on the view that the 100 or so million dollars you get in the transaction can be used to repurchase debt?

Yes, our assumption is that we will use the money we receive to pay down debt.

I'm just more curious just to understand the affiliate income line because if you do the debt that's pretty easy to calculate.

But I just -- I just was hoping for a little bit more visible he tee on that.

Yes, as I say, the only other thing I would tell you on that is the up side this quarter, half of it is probably nonrecurring.

If you wack that out that gets you something that's more sustainable for our current --

I guess I'll wait to hear.

Thanks.

Next question comes from Brian DiRubbio.

Yield Capital Partners.

First off can you help us out what your interest income would have been without the forward interest rate hedge, and how long does that hedge last for?

It's a series of not just one contract, so a number of them roll into next year as well.

A series of things we're looking at that so it doesn't reach a point where it kind of falls off a cliff and we get down to just lie beer based rates.

The simplest way to think about it is if you have an average cash balance around 2 billion and you apply LIBOR based rates you can kind of do the math yourself.

Quite a bit less than where we're currently getting.

Again, I went suggest we would fall to LIBOR based rates.

We have a series of ongoing contracts and other things that we're looking to do.

Any help you can give to us that?

Obviously what you mean this year is well above what you would have gotten.

It will probably be a nudge lower than this year's rate but not material lower.

Okay.

You were going through your expenses, one of the cuts that you made earlier this year was the elimination of the 401(K) match, which I think you said would have saved you $37 million for the rest of the year.

As that has an effect on employee morale is that something that you are contemplating reversing next year?

Total savings this year, we had a curtailment gain in our overall, couple pension plan changes but the 401(K) saved more like $10 million.

Only $10 million for that?

$10 million, yes.

Okay.

I'll answer the second part of your question, Brian, which was text on morale and what we're going do.

I think the morale is great.

We talk to our people all the time.

These are very difficult times.

Very interesting times.

We've talked to them a lot.

We talk to them about the way our business is and what's going on.

We're very proud of the fact that if you look at most of the savings, which has been enormous, as you heard, 100 million, 80 million in synergies, another 100 million of right sizing, very little of that most of that has come from things other than letting people go.

That is something we're very proud of.

We think the ultimately the best thing to do is have a job, and if you have a job the other kinds of things will come back.

If I look at the nine years that I've been here, I think we've let go a total of maybe 1750 people over nine years, where our competitors have let go over more than one Willis, which is over 20,000 people.

So we're very proud of the fact that we watch the way we run our business, and we're very disciplined.

So when you talk about morale, morale is not good if you have people that are being let go all the time.

That is when morale is bad.

We would like to put back the 401(K).

We'll see how the world goes.

We have every intention of doing that.

But we're going to see how the world proceeds next year, and we're going to -- and we told our people we're going to look at that as the beginning of the year develops.

Great.

Just finally, pension contributions for 2010 and 2011, still estimating that to be about 50 million pounds?

Yes, it should be approximately that.

For each year, correct?

Yes.

Thank you very much.

Our next question comes from Dan Johnson.

Your line is open, and please state your company name.

Great.

Citadel Investment Group.

Joe, you were helping with us the HRH performance in the quarter, and you identified three items to get to I believe a roughly negative 3% number.

And you identified sort of a loss of producers, the fact they've got a higher commission base and smaller clients.

I'm sure it's probably not easy to sort of try to figure out how to make those adjustments.

Would it be maybe a little poor clearer if you just helped with us what the actual organic growth was in the quarter for HRH?

We don't do that because it's tougher to track, because of a lot of integration in terms of a lot of our offices are already integrated, and will you have that number on a consolidated basis.

So I was trying to help you by telling you, anticipating your question what is it going to be.

I would tell you, because there's so many moving parts, the commissions are a moving part, the small business is a moving part, and the lost production, which is still under 5% against total, which is very good, I think it comes out to be about the same as where Willis is.

So we would anticipate that next quarter, when we consolidate the numbers and we're able to give you both sides, you are going to find that that will come out to be true and that we'll be in good shape.

I guess just to be clear, when we do consolidate in the fourth quarter, we won't be able to exclude people who left or commission base differentials when computing an organic, so that's sort of why --

We should have it totally computed by then.

Everything will be one.

We'll put it all together.

We won't to have differentiate it all.

But I'm giving you my best goals.

I understand what your point.

So you can anticipate what next quarter will be and the quarters after that by taking the HRH number, and I'm trying to give you a sense that when you make up for all of those things, it will be about the same, and we anticipate that, as I said earlier, that our direction is good as it relates to revenue in North America, and we feel comfortable with it, and we're in the next phase of development.

Great.

Let me wrap with the pension, 10 million, or the 401(K), I think was identified as 10 million.

Are there any other expenses we need to be thinking about, like maybe furlough benefits this year that -- assuming we have some improvement in the performance of the economy and therefore the company next year that we want to be think about things that get sort of added back that had to come out?

As we've done any of those changes as we've gone through '09 we have talk about each of them on the call, so that the other change we made it to US defined benefit plan is a permanent change.

The 401(K) we talked about being a temporary measure when we announced it.

Other than that there's nothing else to highlight.

The furlough , that just becomes part of a permanent

Choice program.

The Willis Choice program, which is a program, Dan, I think you're talking about where we allow people to take days off or weeks off without pay is that what you mean?

Yes, that's exactly it.

We're going to continue that in 2010.

But we should get more out of that than we did in 2009, because we started that program in 2009 late in the first half.

It was about April of 2009.

So we're going to begin in that January of next year.

So we anticipate getting the same if not better results.

And it was a program that was well received by the associates ?

That was great for morale as well.

People asked for it actually.

They had asked on an ongoing basis could, they take time off with their families, travel more, do sabbatical, all that kind of stuff, so we did and it worked out well.

We saved money, we saved employees, and everybody was happy with it.

And asked to us do it again so we will.

So I think we're going to get more from it, Dan, if that's what you're asking.

Excellent.

Thank you very much.

Thank you.

Our final question comes from Dan Farrell.

Please state your company name.

FPK.

You mentioned debt repayment is going to be the focus in the near-term.

Can you comment on which debt maturities you'd be targeting?

Specifically, is there any flexibility at all on the Goldman debt at 12.75?

I believe that had a three or four-year period, but I wasn't sure --

Debt repayments will be to the term loan.

Joe talked about the Goldman money earlier on.

Contractually there's a period of just over four years where there's a non-core period.

I said again, I'll reiterate on the Goldman deal, we have four-and-a-half years supposedly where it's non call, but I would anticipate as time goes on, that we'll try to do everything we possibly can, whatever that is, to reconstruct that transaction, and make interest rates more consistent with where they are today.

I can't guarantee anything, but I can till I'm going to try.

Okay, thank you.

Thank you.

That does conclude the Q-and-A session.

Thank you very much, everybody.

Have a nice day.

That does conclude today's conference.

Thank you all for participating.

You may disconnect at this time.