Willis Towers Watson PLC (WTW) 2012 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen only mode. (Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Peter Poillon. You may begin.

Thank you, and welcome to fourth quarter 2012 earnings conference call and webcast. Our call today is hosted by Dominic Casserley, Willis Group Holding's Chief Executive Officer. A webcast replay of the call, along with a slide presentation to which we'll be referring to this call, can be accessed through the events and presentations page in the investor relations section of our 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 that we may make certain statements relating to future results, which are forward-looking statements, and 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. These statements reflect our opinions only as of today's date, and we undertake no obligation to revise or publicly update them 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, 2011, and for the year ended December 31, 2012, which we expect to file by the end of February, and subsequent filings, as well as our earnings press release, for a more detailed discussion of the risk factors that may affect our results. Copies may be obtained by the SEC or visiting the investor relations section of our website.

Also please note certain that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP-to-non-GAAP reconciliation can be found in our earnings press release. I'll now turn the call over to Dominic.

Welcome, and thank you for joining our call to discuss Willis' fourth quarter and full-year 2012 results. It is a new year, and obviously a different voice on this side of the line. I'm honored to be here with you, sharing important information about our Company, serving our investors, and working along with my colleagues to grow the value of Willis. In the weeks and months ahead, I look forward to more communication with you, and meeting you in person. I should say at the outset that from the very start, Joe Plumeri has been terrific in transition. He greeted with me great warmth, and has worked tirelessly to arm me with a wealth of knowledge and experience from his twelve years at the helm. I'm very grateful for that.

While my voice is new, there is a strong sense of continuity on this call. The people you have come to know on these calls are all here. By my side is Michael Neborak, our Chief Financial Officer, who will provide commentary on our results after my introductory remarks. Also here are Steve Hearn, our Deputy CEO and head of Willis Global, Tim Wright, our head of Willis International, and Vic Krauze, our head of Willis North America. Steve, Tim and Vic are all ready to answer your questions after Mike and I offer introductory remarks.

As today is my first turn before this microphone, it is worth spending a moment sharing what you should expect from me on these calls. My interest is in building total shareholder value for Willis and building interest among the investment community for buying more shares. We will always lay out for you, in a clear and transparent way, what you need to know about the performance of Willis and its main constituent parts. With that as context, today we will provide you with an overview of our results for the past quarter and the past year while highlighting the items, both positive and negative, that we believe most warrant your attention. So while our prepared remarks will be brief, our intent is to provide the balance of our time together today for a healthy exchange of questions and answers.

Let me start with the overview of our results. Our adjusted earnings per diluted share for the fourth quarter were $0.45 per share. That figure is, of course, net of the goodwill and remuneration charges that we announced in December and the deferred tax asset valuation allowance we announced in our earnings release yesterday. All of these charges came about as a result of the steps we took to pave our way forward. Mike will add more color on those charges in a few minutes.

For the full year 2012, adjusted earnings per share was $2.58. It goes without saying that we, as a management team, view this figure as a disappointment. It represents a declining group performance from the prior year and as such, is a result that we will work to reverse in the months and quarters ahead. However, as the management team stated a number of times during 2012, Willis faced a series of obstacles at skewed comparisons to 2011. Now, with the fourth quarter results in hand, it is important to record Joe's optimism, expressed on his last call, that certain metrics were pointing toward improving revenue growth. Today's results bear out that optimism, particularly in terms of the group's organic revenue growth, which came in at 7.5%. This number is the highest rate of growth for Willis since the third quarter of 2006. Importantly, each of our three segments, Willis North America, Willis International and Willis Global, contributed to the success. Let's spend a few minutes looking in some detail at each of the segments.

First, Willis North America. We are pleased that North America achieved 5% organic growth in the quarter. We recognize that the 5% appeared somewhat inflated when it is compared to the prior year period, which included a reversal of improperly recorded 2011 revenues that we disclosed previously. That said, if you exclude the prior year reversal, organic growth still came in with a little over 3%, which is better than we have done in North America since the second quarter of 2007. While we know it is premature to celebrate, we do believe it is a strong indication that the segment has turned a corner, moving beyond a number of operational challenges that Vic and the North American team have been grappling with. One metric that adds to our confidence is new business growth across the segment, which came in at a very strong level of 15%. In fact, that measure improved every quarter during 2012. Another metric that bears close scrutiny is our retention level. Our retention level for North America at the end of the quarter was 90%. This is up compared to the prior year period, and for the year the retention level for North America were solid at 91%.

These good numbers were not just isolated in one geographic region. For the first time in many years, every geographic region in the segment showed growth in the quarter, with the Northeast, Canada and Mexico leading the way. Looking at other regions but instead at our practices, there was also good news. For the second consecutive quarter, construction showed improvement, a reflection, certainly, of the stabilizing situation in the US economy. Organic revenue of construction this quarter grew at 3%, an improvement over the 1% growth reported last quarter. Importantly, for the first time in many quarters, we saw growth in the surety area of this group, which we take as a promising sign. Taking a look at the operations of the North America segment, Vic and his team managed to increase our producer headcount by 3% on a net basis in 2012. Vic talked about the importance of producer headcount on a previous call, and this increase follows a number of years of decline. It is an important turnaround.

We know that producers that have just come on board won't have an immediate impact on revenue growth, but having a growing base of expert people putting Willis front and center with new prospects is a leading indicator of further improvements ahead. In my initial meetings with leaders across North America, there is a definite excitement from our success in having added new talent to our experience core of producers. For the full year 2012, North America's organic growth was negative 0.6%. Again, we are not content with that achievement, but it is respectable when considered in the context of the difficult comparisons the segment faced in the first half of the year. I have spent a lot of time with Vic since October discussing both the challenges and the opportunity facing this segment. In the fourth quarter, we got a strong sense of the opportunities Vic has been describing. Let's now move to Willis International.

Willis International's organic revenue growth was a very solid 7.4% in the fourth quarter. This is a welcome result, considering the economic conditions in many of the parts of the world that we serve. As in North America, our retention level in International at the end of the fourth quarter came in at a strong level of 92%. And the other metric that we use to gauge our progress, new business growth, was also very good for international as a whole, coming in at 13%.

Moving from the whole to the parts, let's spend a few minutes looking at Willis International region by region. In the UK, our business achieved mid-single digit growth in the fourth quarter and was about flat for the year. The UK business had been trending in the right direction throughout 2012, improving each quarter. We have just announced the hiring of David Martin, a new leader for our UK business, who brings substantial experience from the broker and carrier side, and our business in the UK is poised to continue its progress. In western Europe, the region continued its consistent record of growth despite the difficult economic conditions. Western Europe grew organic revenues mid-single digits, with particularly strong performances in Denmark, Sweden and Italy.

As in the UK, we have just announced Alberto Gallego, a new leader for Willis in the region, an internal promotion for the executive who has contributed greatly over the years to our great success in Iberia. Again, this adds to the sense of new opportunity for Willis built on continuity and the excellent track record we have had in Spain. In Latin America, we are seeing the fruits of a historically high-performing region for Willis that benefited additionally from its new leader Luis Maurette taking up his post in late 2011. In the fourth quarter of 2012, Latin America continued its momentum, growing double digits, with particularly strong growth in Argentina and Brazil. In Asia, we were up low single digits. Within Asia, China grew modestly in the quarter, finishing the year as a whole with growth in the low double digits.

In Japan, the changes we made earlier in the year, appointing Dean Enomoto as our new retail CEO, contributed to a very strong result for our business there. And across the region, we are poised to maximize opportunity for Willis now that Adam Garrard, our former head of Willis in Europe, is established in Singapore as our new regional CEO. I had a chance to spend time with Adam in Asia recently and came away very impressed by our prospects. In Australasia, we did not achieve growth, and have taken action that helped to stabilize our revenues there. Among the steps we took was to have Roger Wilkinson, a longstanding Willis executive, who had helped to grow our business enormously over the years across Asia, to relocate to Sydney and take over our business in Australasia.

For the full year, International achieved 4.9% organic revenue growth, which is a testament to the strategy and focus of Tim Wright and his team. While Tim would be the first to say there is still consider room for improvement, we are excited for opportunities for growth across the globe. Let's now move to Willis Global.

Willis Global, as you know, comprises our reinsurance division, the global specialties division, Willis, Faber and Dumas, and Willis Capital Markets. While Willis North America and Willis International each brought welcome improvements in their performance in the last quarter of 2012, Willis Global proved to be the growth engine for the group, delivering 11.6% organic growth over the fourth quarter of 2011. Clearly, to achieve that type of growth across the Willis Global segment, certain businesses within the segment have to put up some outstanding figures. During the quarter, Willis, Faber and Dumas achieved low double digit organic growth. This was driven by robust new business, including major project wins. Reinsurance grew high single digits in what is a seasonally small quarter for that business. Within Willis Re, North America was up double digits, while specialty reinsurance creeped mid single digits.

Willis Re found rates during the quarter to be broadly flat, and for those interested in a broad rate discussion for reinsurance of the 1/1 renewal period, our first view report, published on January 1st of this year, is available on our website. It is a comprehensive and useful analysis of the reinsurance marketplace and worth a look. Another part of Willis Global, global specialties, was up mid single digits, delivering good growth from new business. Within global specs, construction, FINEX, financial solutions, and marine all grew nicely in the quarter, partly offset by the ongoing challenging rate and market environment in aerospace. Finally, Willis Capital Markets, in an active fourth quarter, recorded $12 million of commission and fees, compared to $2 million in the year-ago quarter. As was discussed in our prior call, the robust activity, and the fees generated, came from a number of capital market transactions that have been delayed throughout 2012.

All in all, while I'm very happy to have Steve Hearn by my side as deputy CEO, it is also great to have him wearing his other hat as CEO of Willis Global. Steve and his team have done an excellent job through the year of retaining our clients, winning new business, and securing a number of major deals that have kept the results solid and translated into strong 6.1% organic growth for the full year. You should know that Steve and I, along with our colleagues in the Willis operating committee, have been very busy these past few weeks taking the initial steps that will allow us to maintain our competitive edge and position ourselves for further growth in the quarters ahead.

Before turning the call over to Mike, I would like to discuss one additional item that you saw in our earnings release. This had to do with a charge that we will be taking in the first quarter of 2013 following our initial review of the organization. We have identified a number of positions that can be eliminated, and leases we can exit. The charge, which we will expect will amount to approximately $35 million to $40 million, will deliver expected annual savings of approximately $25 million to $30 million, most of which is from headcount reduction. With that, I will turn it over to Mike to discuss the rest of the financial results. I'll return later with some final comments before turning it over to you for questions.

Thank you Dominic, and good day, everyone. Over the course of the next few minutes, as I review the numbers, all comparisons that I'll make are to Q4 2011 unless otherwise stated. During these few minutes of prepared remarks, I'll be referring to the slide presentation that we have posted on our website, so I'll give you a few seconds to pull that up. Okay, as Dominic noted, our fourth quarter performance reflected solid organic revenue growth and strong cash flow from operations. Let's start on slide 3 of the deck. It shows balance sheet and cash flow highlights. You can see that we ended 2012 with $500 million in cash. That's up $64 million from year end 2011. Total debt outstanding at year end for Willis was $2.35 billion, down slightly from last year. Effective capital allocation is an important area of focus. During 2012, we generated $524 million of cash from operations, an increase of $85 million, or 19% over 2011.

It is important to keep in mind that the 2012 figure is after contributing approximately $140 million to our pension plans. It is worth laying out the math so that is very clear. So from the $524 million of cash flow, subtract $185 million for dividends paid, $135 million for capital expenditures, and $15 million for debt repayment. When you do that, you are left with approximately $190 million. From that figure, we repurchased $100 million of common stock, and spent $69 million on acquisitions. After all that is done, it leaves a small amount of cash generated during 2012 carried forward. Now let me turn to the summary financial results for the quarter as shown on slide 4.

Please note that I started with the balance sheet and cash flow for a reason. While we recorded a GAAP loss in the quarter amounting to $804 million, or $4.65 per share, the charges that we took during the quarter had no impact on cash. We are very pleased that the cash balance grew and that the cash generated from operations improved nicely during the year. Our adjusted earnings per share were $0.45, or flat compared to the prior year quarter. These results reflected improved organic growth across all of our segments, muted by higher salaries and benefits and a higher effective tax rate.

I'll discuss expenses and the higher effective tax rate in a moment. Importantly, we grew adjusted operating margin by 40 basis points. Foreign currency rate changes increased EPS by $0.01. Certain items that were excluded from adjusted EPS are highlighted on slide 5. These items include the non-cash charges for North America goodwill impairment and the change in our remuneration policy, where we eliminated the retention feature of our annual incentive programs. Those two items were included in the 8-K we filed back in December. Additionally, we established a valuation allowance against our North America deferred tax asset. That item requires some explanation, so please bear with me for a minute. The US GAAP accounting rules around deferred tax asset valuation allowances are very prescriptive. The charges we took in the fourth quarter, when combined with the operational review charges we took in 2011, caused a cumulative loss in the North America segment during the three-year period going back to 2010. The three-year cumulative loss in effect triggered the requirement to record a valuation allowance, which increased the tax provision by $113 million. Here are the key take-aways.

First, the allowance relates solely to our North America operations, and is directly associated with recording the sizable goodwill impairment, as well as North America's proportionate share of the charges related to the change in our remuneration policy. Second, the allowance is not indicative of our optimism toward the prospects of our North America business. And finally, as North America records net income in future years, we expect that tax allowance will reverse. Let me talk about expenses highlighted on slides 5 through 9.

On slide 5, you see our total expenses. On an adjusted basis, which excludes the large charges, total expenses increased 5.9% to $705 million. On an underlying basis, meaning excluding foreign exchange, our total adjusted expenses grew 6.5% in the quarter and 4.7% for the full year. The next few slides show the growth by major cost category. On slide 6, you see details of our salary and benefits expense, which is the largest component of our expense base. Underlying growth in S&B for the quarter was 8.6%. The drivers of this growth were three things in particular. First, there was a difficult comparison with fourth quarter 2011, as that quarter benefited most from the 2011 operational review. Second, there was increase of approximately 400 FTEs during 2012. And third, there were annual salary increases. For the full year 2012, underlying S&B growth was 5.4%.

The purpose of slide 7, then, is to put the change in our remuneration policy into perspective. This is very important. In 2013, we are accruing cash bonuses. As shown on this slide, is accrued bonuses had replaced retention amortization expense beginning January 1, 2012, our S&B expense would have been $48 million higher. That is simply due to the change in accounting for the award. It is important for you to understand that the dollar amount and the timing of the award do not differ under the new policy relative to the old policy. So, as you are thinking about this, you should evaluate this change as essentially cash neutral. Importantly, you should use the higher salaries and benefit expense figure of $2.071 billion, shown on slide 7, as the baseline when modeling S&B expense for 2013.

Now please turn to slide 8, where the impact of the higher S&B expense is expressed as a quarterly reduction through our adjusted EPS as disclosed. In summary, if we had accrued bonuses throughout 2012, salary and benefits expense would have been $48 million higher and adjusted EPS would have been $0.20 lower. As our largest expense, the growth in S&B is clearly a focus for us, particularly as we continue to grow our business in 2013. Dominic mentioned earlier we will be incurring a first quarter charge in the range of $35 million to $45 million, primarily for headcount reductions. That charge is expected to help curtail the growth in this line. In fact, we expect the action will result in savings of approximately $20 million to $25 million in 2013, and annual savings of approximately $25 million to $30 million. The savings in 2013 will begin in the second quarter.

Slide 9 shows our other operating expenses. On an underlying basis, again meaning excluding foreign exchange, other operating expenses grew a modest 0.6% in the quarter and 3.3% for the full year. Let me spend a moment on depreciation and amortization expense. On past calls, we have commented about our ongoing investments in technology and systems. If those systems go live, depreciation expense will increase. For 2013, we expect depreciation to be approximately $18 million higher than in 2012. Partially offsetting this increase is a scheduled decline of $5 million in our amortization expense.

Now on to slide 10, which shows our adjusted operating margin. Adjusted operating margin for Willis improved 40 basis points from 18.7% in Q4, 2011 to 19.1% this quarter. Obviously, the biggest factor in that improvement was a significant growth in revenues. This was offset by increased salary and benefits expense and declining investment income. You might ask, with 40 basis points of margin expansion, why were our earnings flat year-over-year? The answer is taxes. It is noted earlier the effective tax rate on our fourth quarter adjusted earnings was higher than expected. In fact, it was 33%, which compares to our more normalized 24% to 25% range. The high effective tax rate was driven by adjustments related to prior periods that were booked in the current quarter. These adjustments increased the tax provision by approximately $11 million, which equates to $0.06 per share. For 2013, our effective tax rate should be approximately 25%, but could fluctuate, depending on the geographic mix of taxable income.

And finally, let me comment on the associates line, which is primarily Gras Savoye. For the quarter, that line recorded a net loss of $7 million, which compares to a net loss of $11 million in the comparable prior period. For 2013, we expect that the associate's line will continue to lag as Gras Savoye completes its operational review. As such, we expect the associates line to decline $6 million to $8 million in 2013, compared to 2012, with a normal predominance of income recorded in the first quarter, and then net losses throughout the remainder of the year. And with that, thank you, and I'll turn the call back to Dominic.

Thank you, Mike. Before we take your questions, I'll conclude our preliminary remarks by saying this. Back in October, like many of you, I listened to the Willis third quarter conference call and heard Willis management state optimistically that they expected better revenue growth in the future. Joe Plumeri, the management team and all our staff that delivered on that expectation in the fourth quarter. I have been in my position of CEO officially for a little over five weeks. During that time, Steve and I have been meeting with our business heads, producers, operational managers, finance leaders and others who have been very constructive and candid about both the potential and challenges of the business. I have been very impressed with the depth of knowledge and experience throughout this organization. It adds to the level of excitement for the future of Willis that I expressed last October when I was announced as Joe's successor. We will continue to use the next few months analyzing our operations and understanding where and how we can operate more productively and efficiently.

My background and experience within the insurance and financial services industry, and my sense of where growth opportunities lie around the globe, leads me to believe that Willis has room for growth and improvement over the coming years. Of course, we are ever mindful of the changing and challenging economic conditions in many of the countries in which we operate that could challenge our growth. I know that many of you might want me to comment today on my overall strategy for Willis on new initiatives for the Company, but we are not yet prepared to share those plans. But as you can see from the charge we plan to take this quarter, Steve and I will not stand still. As we implement initial changes and manage the flow and process of our business over the first two quarters of 2013, our new strategy will begin to take shape. We then will look forward to discussing our plans with you in detail at an investor day in New York that we will host in early August or early September, and I hope to see many of you there in person. Thank you. We will now be happy to take your questions.

(Operator Instructions)

Jay Gelb, Barclays.

Dominic, congratulations in your new role.

Thank you very much, Jay. I look forward to talking to you about that in more detail in person.

With regard to the organic revenue growth of 7.5% in 4Q, clearly that was a huge increase versus the prior quarters. There were called out a few one-time items in there, so I think we are all trying to get a sense of the sustainability of that pace of growth overall, or what you feel more normalized overall organic revenue growth pace might be.

Jay, as you know, we don't give guidance on our major revenue and cost items. But I will tell you this, we are obviously all very pleased and excited by what we saw in the fourth quarter, and we believe that many elements of the strengths of Willis came through. But at the same time, if I was thinking about the full year, and just took the fourth quarter numbers and tried to extrapolate them across the whole year, I think that might be a brave thing to do. So that's as much as I think I'm going to say on that.

Okay. With regard to the actions you took immediately, in terms of arresting the growth in salary and benefits, it seems that even in year one, Willis might be positioned, on an adjusted basis, to improve the operating margin. And when I say that, that takes into account, adjusting for the $48 million of increase in the S&B line in 2012. So if we use, I think, an adjusted adjusted margin of around 20% for full year '12, is Willis in a position to expand margins?

Jay, look, clearly that will be the result. You and I can do the maths, as well, together of how our revenues and costs develop over the course of the year. What I will tell you is the following. We absolutely believe that long-term value creation for Willis will be the result of the actions we take to serve our clients better and grow revenues and the discipline we show at the same time in controlling our costs.

We are quietly confident about the revenue momentum in the business, without, as I say, getting overexcited about it. And we have shown, I think, from day one that we are focused on fact that our costs must be kept within a reasonable corridor at the same time. Clearly, we believe that value creation for Willis, one of the key elements of it must be a combination of revenue growth and margin expansion. And we are focused on achieving that.

Understood.

Greg Locraft, Morgan Stanley.

Congratulations, Dominic, on the new role. Wanted to just -- I think what a lot of us are wrestling with is, what is the base EPS from which you are going to build the plan? And then, it sounds as if you don't want to yet talk about the components of the plan. And I guess, in a way, it seems we are going to get that in August? Is that the message?

Let's answer that in two parts. On the when the plan will emerge in all its detail, that is right, you should focus on the investor day, which will either be in early August or early September, depending on logistics and dates and things. That does not mean -- please do not take that to mean we are going to be sitting around doing nothing until then. You will see actions emerge, steps being taken, as you saw already on this earnings announcement. But the whole plan we will not -- we will lay out then. As for the earnings basis, I'm going to hand you back to Mike to go over that again.

Yes, Greg, so what we are presenting there in the slide on page 8 is $2.38 as the base going forward into 2013. And then if you do the math in terms of that additional $48 million that is referred to in slide 7, it takes our margin down to a little bit greater than 20%. So those are where we are looking at the base, in terms of growing this business going forward into 2013 and later.

Okay, that is great. Dominic, over the next couple of quarters, it sounds like you'll be hard at work on the plan that is coming at us later this year. What are the top three things you are going to spend your time really digging into, the next couple of quarters?

Greg, one of the great excitements about Willis, and we should all understand is one of its great strengths, is it has a truly fantastic global platform. And things we obviously have to be focused on is how to take advantage of that global platform. And secondly, all the great specialty and expert capabilities we have across the world to serve our clients even more effectively than we do today. And I think the way in which we serve our clients and deliver value to them, which we'll end up delivering value to shareholders, is an absolutely critical thing we will be focused on.

We will obviously be secondly focused on how do we do that in the way which delivers growth? We are absolutely convinced that the underlying need to create shareholder value will be driven by our ability to grow this business. So we will be very much focused on, how do we grow this business? And thirdly, in response to Jay's earlier question, of course, how do we do so in a way that maintains very positive margins, and thereby grows cash flow? That is how we will be thinking about it.

Okay, great. And nice job to the team on the organic in the quarter.

Paul Newsome, Sandler O'Neill.

I want to make sure we are clear. We -- this is going to be a step by step process, as far as strategy is concerned. So we should be very aware of the possibility of further restructuring announcements between now and the formal layout in either August or September. Is that right?

Paul, I think what you should think about is that over the next few months we'll be developing our strategy. And as I said, it is focused on growth, because we think that is the key driver of shareholder value creation, as long as we maintain and gradually grow our margins at the same time. So when you think about how that strategy might evolve, I would as much be thinking about, how will Willis be thinking about where to invest? What are the growth opportunities which will drive the top line, as much as I will be thinking about restructuring, which is usually associated with a very large cost reduction. We may be doing one or the other, but bear in mind that growth has to be part of the plan.

That's terrific. I also want to make sure that I have just got some rough numbers here in my head right. But as I'm looking at your organic growth, which obviously was quite terrific in the fourth quarter, if I make an adjustment for the year-over-year benefit of the Capital Markets business, and the adjustment for the revenue reversal that happened year-over-year. I'm coming up with a number that is a couple points less on organic growth, still extraordinarily strong. But am I directionally in the right in the right idea to think about that that way?

Yes Paul, this is Mike Neborak here. I think that's correct. So we started at 7.5%. If you exclude the fourth quarter reversal of revenues that we took in 2011, that goes down to 6.75%. And then if you excluded half of the Willis Capital Markets revenues in the quarter, that would go down to 6%. So I think in that area there, you are looking at something that is without some of these items that, perhaps, were a little bit exaggerated in the quarter for good reasons.

Terrific. Looking forward to all the new things at Willis.

Great.

Bob Glasspiegel, Langen McAlenney.

I've got a couple of big picture questions that you can take any direction you want, Dominic. But coming from a consultant background, you have experienced a lot of, and seen a lot of companies like Willis firsthand. Now that you have been there a short period of time, what are the strengths of Willis that you see? And what are the areas of weakness that need to be upgraded? And the second question is, how long of a honeymoon period do you think you need before we can judge your results, and being your running the Company versus what you inherited?

I'm going to answer the second part of that question first. I think there is no honeymoon period in the world any longer, and we are all responsible from day one. I take no credit for these fourth quarter results, which are a huge credit to Joe and the management team and all the staff of Willis that were in place during that fourth quarter. And as you know, I did not come on board until the beginning of January.

But I think in the world we live in today, honeymoons don't last very long at all. And so, we are moving this thing forward, we are responsible for quarter-by-quarter. I think we have just been saying that, if you were waiting for the big strategy plan, that is not going to come until after -- into August or maybe early September. But let's be clear, we are responsible for delivering each quarter up to that period and beyond. Remind me -- strength and weaknesses. Yes.

So I think I have touched on these a bit, but let me reiterate some of them. We are very, very lucky. Through history and through the work of our predecessors and many still here today, to have a wonderful global platform, and I strongly believe that a global platform differentiates us in the eyes of many of our clients. What is special about Willis in that context is our ability to play as a global team. We really do fly under one flag, and Joe gets enormous credit. One of his great legacies in years to come of what he left at this Company, as well as many other things, is his focus on the one flag, and the way in which we play with clients and with markets is a fantastic strength of the firm.

Another great strength is, therefore, our ability to attract, retain and develop the skills of wonderful talent. And in the world where which is basically a people business, that is a great strength. And I think the fact Willis has the platform, scale and the level of specialty and expertise is a great strength for us and differentiates us from many others.

If you were to think about challenges, the challenges are all of you, because you are demanding, and you want us to live a consistent returns and growing returns over time, so we have to make sure we do that, and we have to be focused on that. And clearly, as has been no secret, that no one's tried to hide, we he had a legacy of challenges in North America, as a result of both the state of the economy and the HRH integration.

But I think what you are seeing, which Vic had been signaling throughout 2012, and we have now seen in the fourth quarter, that we have seen a turnaround of that. And North America is now going to be a great strength of this Company. So I see the world pretty much like that.

Greg, Jay, Paul and I, and the rest are cream puffs. You'll have no problem with us. (laughter)

Josh Shanker, Deutsche Bank.

I hope I don't ruin the parade and be the non-cream puff. But you were happy to talk about Willis' strengths. I know you are not going to unveil the plan right now, but from your view right now, what are Willis' weaknesses?

I think I tried to touch on them a bit, Josh. The weaknesses are the ones that face any broker-slash-advisory firm, as what we are, which is, we live in a very competitive world, and we have to win our business every day. And we can rely -- we can't live on yesterday. We have a great talent offering, but it is a competitive talent world, and we have to make sure it's -- we are as strong as possible in it.

This business, globally, is moving more and more to depend on analytics. We like to talk about the analytical broker around here. And in that world, the competition to develop the next insight, the next great capability, the next great offering, and to retain the analytical talent you need is fierce. Now we have had a recent -- a wonderful pipeline of new products and services we brought to the marketplace. But in any knowledge business like that, the life cycle can be quite short. And so our challenge is to continue to invest and build new products and capabilities. And unless we are able to do so, over time, you fall behind.

Now what I see at-Willis is a great desire and interest to continue the product innovation we have shown over the last 18 months, 24 months. But if we were to slow, let me tell you, we would soon see that in the marketplace. So, I think the ways of thinking about this is not to say, Willis must have some enormous specific challenge. Just to say this is a very competitive market, and we need to be on our toes all the time.

So you don't think there is any technological disadvantages between and you your competitors?

Nothing that, at the moment, gets me very excited, no. All right?

Okay.

We always constantly have to invest and play, but -- in what we are doing. Did you have a specific point you were trying to make there?

One thing which, obviously, the question of Will Place, how competitive it can be with GRIP and MarshConnect. This is a question that we are not -- we don't know yet from our end, but we hope that that's correct. Maybe you have some thoughts on that issue?

I am quietly confident, but let me turn over to Steve Hearn, deputy CEO and head of Willis Global, to talk more about that.

Yes, Sure. The well placed technology and placement more generally sits, from a management structural perspective, within Global, so has a report line through to me. I'm familiar with our competitors' propositions, and I guess it wouldn't be appropriate to get into the specifics of where I think some of their developments have been misplaced, but maybe to reference where I think we've done perhaps a better job.

Our model has been built around the client, which I have said previously, on previous earnings calls, that that is a very, very client-centric model that we have created with Will Place. So it isn't just about the relationship between us as an intermediary and the carriers within whom we place the business. It is actually about the client and on our relationship with that client in terms of the sales proposition to them. And how we articulate their needs within the context of the carriers that are available to place the business with, and getting a better match.

So, I think, over time, that will deliver to us increased sales penetration, and we've seen early stages of that, and also should improve our already-higher retention rates across our Business. So, I think Will Place, we feel, is of very significant strategic importance to Willis now, and that continues to be our view moving forward. I would see that continue to be a significant part of our platform as we move forward.

And finally, in your headcount reduction plan, is any one in the 200 jobs, have they even announced yet to anyone? Or is this going to be -- begin going, go forward from here?

Begin going forward from here.

Okay. The best of luck to all of you.

Mike Nannizzi, Goldman Sachs.

One question, just looking at peers and you guys is, a lot of other folks are deploying capital significantly, either via buybacks or M&A. Can you talk about your ability to do either or both of those in a larger way? And maybe more broadly, how should we think about these cash flow uses? I know Mike laid it out up front, but M&A pension, CapEx, and how soon will buybacks legitimately be on the table? And I have one follow-up.

Yes. Dominic here. The way to think about that, I think, is if you look at the $500 million-plus of cash flow we had in 2012, it was roughly divided 50-50 between returns to shareholders and investing in the business. Broadly, rough numbers. And obviously, we are very sensitive to the fact that what we are really doing there is investing for long-term shareholder value growth, or delivering immediate returns. And we have to get that balance right. And so we are going to be very focused on that.

As I have said, we believe that the sustainable value creation at Willis must be based on long-term growth. And so we will be focused on that, as well as on delivering short-term value to shareholders, as we signaled with our dividend increase. The -- if I think about 2013, I think we are going to be a bit more focused on investing for growth in 2013, but we have the potential, when necessary, and when we think it is the right thing to do, to return more to shareholders through share repurchases.

Is leverage a factor in that consideration at this point for you?

As you know, of the three global brokers, we are the most highly leveraged. And so we just need to be cognizant of maintaining a very strong credit rating, and so we have to operate within that envelope. And when we are thinking about acquisitions, when we are thinking about returns to shareholders, we are not going to do anything which violates our credit position in the marketplace.

Great. And then, just, I did see there was an 8-K that looked like a financial metric change from -- or to organic growth and organic EBITDA. So, does that mean -- does that follow that point that you are going to be more focused on the notional number, not the per-share number? And more on the operating side from that perspective?

We believe that long-term shareholder value is driven by cash flow generation, and so we are focused on revenue growth and organic EBITDA growth, which obviously, therefore, drives us to keep an eye on margin at the same time. We have other -- what you are seeing there is just reference to one of our incentive plans.

Right.

We have other incentive plans, which will reflect some of the other elements that you are talking about, right? So we are -- we will not be losing sight of the individual shareholder, and earnings per share issues.

Got it. Great.

Tom Mitchell, Miller Tabak.

I just wanted to go back for a second to the question of the salary and benefits costs that would have been $48 million higher, if the cash bonus had been accrued through 2012. And I just want to double check on that. Would that -- would it be reasonable to assume it would have been about $12 million in the fourth quarter?

You could -- if you wanted to spread it evenly, I think on slide 8, we basically, based on how the numbers fall, $0.07, so that would be a little bit more than $16 million in the fourth quarter.

Okay. I'm sorry. I wasn't looking at the slide. And then the second question is more -- I know you are focused on both the costs and revenues, but if we look at the normalized run rate of revenue growth in the fourth quarter at around, let's say, 5.5% to 6%. And then try to think about what -- not so much what is in the normalized rate of costs, but if you were able to sustain, let's say, a 5% growth rate in revenues, and that's organic growth. What underlying growth in costs would you think is an appropriate way to look at it from this point going forward?

Tom, as we said again, we don't provide guidance on our major elements. What I can tell you is the following. Repeat what I said before. We are very clear that the drivers of shareholder value here have to be sustainable revenue growth and growing our costs a little bit less than that each year. So that you get a combination of growth and some margin expansion along the way. We absolutely recognize that. You should see in our actions in the first quarter around the charge that we understood that fully. And we will be focused on this issue very closely, in the coming quarters and years, to make sure that for you, we deliver sustainable revenue growth and we manage our costs appropriately.

I appreciate that. I think my underlying concern is that Willis has had, in the past -- has come through with a series of restructuring charges, each of which was followed by a reduction in the expected cost spaces. But there was rarely a period of relief where the cost of the restructuring charges disappeared, and the benefits of the cost savings clearly came through. And I have a concern that we may be entering another new period of repeated charges, with adjusted earnings looking terrific, but the adjusted adjusted going back may be more challenging than that adjusted number.

Tom, I understand your concern. There is not much I can do about it, looking backwards. The -- going forward, I want you to very much focus on what we believe are the true drivers of shareholder value here. We have highlighted cash flow as specifically for you to focus on, because out of cash flow comes our ability to invest for the future and deliver short-term returns, immediate returns to investors. And that is something we are going to be very much focused on, going forward.

And we will be managing this business exactly the way I described. And I assure you, for instance, in the charge we have taken in the first quarter, when we eventually take it, we will be tracking very carefully, that the costs we have taken a charge for actually exit the business in a timely fashion and do not get back filled left, right and center or something. So that's what we will be working on. We may decide to take some of those cost savings and invest some of them in what we believe are high-return future investments. But we will be very focused on making sure the costs we are taking actually exit the business.

Ray Iardella, Macquarie.

Maybe just a more strategy question for you, Dominic. First, thinking about in the past, the commentary from Joe was, there wasn't an expense problem, it was more of a growth problem at Willis. Clearly, fourth quarter results showed some improvement on the growth side. But with the charge and the -- you taking a fresh look at the business, what are you seeing, I guess differently than, maybe, what the prior management team, or prior CEO was seeing?

I'm not going to comment on what Joe saw or did not see. All I can tell you is he delivered, over a long period of time, terrific performance for this Company. What I am focused on is exactly what I've been saying. Which is I want us to grow this business steadily based upon our franchises around the world, because we are able to deliver distinctive value to our clients, and thereby win new business and retain our existing client base.

And we will be focused in parallel in making sure that, over time, our costs expand at a slightly slower pace, so that you get the combination of revenue growth and some margin expansion. And that's going to be the focus going forward. Will that happen every single quarter? I can't tell you, but that -- the pattern we want to produce is exactly the one I described. And we, as a management team, understand that extremely clearly, and need to make the right trade offers and decisions to deliver that.

Okay. Then maybe, for Vic, since we haven't heard him on the call this time. But maybe, thinking about the growth in North America, I know employee benefits is a big part of that business. Maybe can you talk, was there any benefit from contingent commissions? And then, maybe secondly, Dominic, any update on your opinion on contingent commissions? Or maybe it is premature, as well?

This is Vic. The short answer is, no. In the fourth quarter, contingent or any type of income like that did not help the quarter. Anything we receive on the employee benefit side would be in the first quarter of 2013.

And on the general issue, the way I think about this is actually more broadly thinking about market-derived income, of which contingent commissions are a part, and there are many elements of MDI. Our position has been, very clearly, that we think that whatever we do in the States has to be in the interest of our clients and has to be completely transparent. And that posture, I think, is a sustainable and appropriate one for us to take. And we will continue to take it. And that applies across the whole area of MDI, and I think it is a sustainable, and the right position, which aligns us with the clients and is clear to one and all.

You have seen that we had a position a few years ago that we took no contingent commissions. And then, because of changes in the marketplace, and competitive issues, we took the decision to take them in employee benefits in North America and as Vic said, we will probably see some revenue from that in 2013. More broadly, we will continue to keep this under review, again in the context of what is right for our clients, and what is right, what is transparent. Because we believe that posture is best for our shareholders. That posture is best for our shareholders. It is a sustainable position in the marketplace. And we will continue to keep this under review to make sure we are serving our clients right and doing best by our shareholders for the long-term.

I appreciate that response, Dominic. And one more, if I can squeeze it in. In terms of headcount, just broadly speaking, the change in compensation, the bonus payout. Has that helped you guys in increasing the talent in the organization in the first couple of months of 2013?

I'll turn to any of my colleagues who want to add, but I think it is too early to tell, generally. I think it is fair to say that the change has been welcomed in the Company. The retention program we had was absolutely appropriate in past periods, was -- seemed to be a good way of rewarding talent. We came to the conclusion that a change would be in the best interest of the Business, and that is why we made the change. And I think it has been well received. I think it is too early to tell whether it has made a difference in recruiting or anything. Steve, do you want to add (multiple speakers)?

I can probably give a bit of perspective. I think the working hypothesis should be that it should make it easier for us to attract talent. Not that we haven't attracted talent, obviously, over recent years with the previous reward structure, and the issue around retention. But it should be an enabler, should make it easy. We are weeks into having that tool available to us. I think Dominic is right, there is no impact yet.

Okay. Best of luck.

Meyer Shields, Stifel Nicolaus.

Dominic, the 200 people -- or 200 headcount reduction, is that basically focused in a single unit? Or is it spread more broadly?

It is spread broadly.

Okay. Are you seeing any indications of another slowdown in the US, maybe driven by consumer spending? Or do things seem like the momentum for last year is continuing?

Vic, why don't you take that question?

Happy to. We have not really seen any signs of a slowdown yet that's evidenced itself in the Business. It is a longer-term sort of view we would have to take on that. I can read the news like everyone else, and surmise what might happen. But frankly, our new business activity is picking up and our pipelines are getting stronger. So, until that changes, I'm going to retain my optimism.

Good. Glad to hear it. And Mike, two quick numbers questions, if I can. Corporate expense still at about $25 million a quarter? And for Gras Savoye, should we expect the decline in income to be spread evenly over 2013?

In answer to your first question, your assumption is correct in the corporate expense. And as you know, as I mentioned, we typically, in the associate's line, which is predominantly Gras Savoye, in the first quarter, it is very positive. So that positive will get reduced down versus the same quarter in 2012. And then the losses in the quarters two, three, and four will get a little bit higher. So it will be spread more or less evenly throughout the year, as best we can tell at this point.

Okay. Fantastic. Good luck.

Mark Hughes, Sun Trust.

The goal of a sustainable revenue growth and then cost increases -- or cost leveraging. Would you anticipate that you would be able to achieve that, say, in North America and the international business, by the end of this year? Or will that be longer process?

Well, I think Vic and Tim should comment on that, but I think it is our view that all our segments should be contributing on that basis. And that is what we are working towards. But Vic, why don't you go first, and then Tim, you can talk about international.

I think that, from a North American perspective, we should be able to contribute. While there were some challenges in 2012, as I look forward at this business going forward, if we will grow our revenues we will always intend to grow our expenses at a lower level. We managed to grow our producer headcount last year, but we did not increase our S&B. And so we take a pretty disciplined view of the business, and plan on continuing that. Tim?

I think it's a different story around the world, but the conclusion is the same. As I said before, in international, we have opportunities to grow actually in most markets. Reversing those businesses that have experienced decline or low growth, taking share in markets which are low growth markets, such as continental Europe, which we have shown in the fourth quarter in this year, and more than making the most of growth in emerging markets. And that revenue dynamic is reflected, also, in the costs, by creating opportunities for a positive spread, as Dominic described. So in different ways and different parts of the world, the same conclusion.

Right. Rates in North America, how sustainable do you think the recent trend has been? Seems like a mid-single digit, according to the broader surveys? Do you think that is sustained here in 2013?

This is Vic. And I think that they will be sustained. I think from -- based on what we are seeing, that any increase in rates has flattened out. So the trend is not going up, but I don't expect any major changes in rates from the past couple of quarters, as I look forward.

Ron Bobman, Capital Returns.

Vic, you -- I'm sorry, not Vic. Dominic, you made a comment regarding North America and Vic's business, and I think it was in the Q&A. Basically, and I'm putting words in your mouth, but it was something close to, North America is on -- has improved, it turned around. It is going to be positive or improving from here. And I'm wondering if, assuming I'm in the ballpark of what I think I heard you say, Vic, could you expand on that please?

(Multiple speakers.)

That's a little tough. Let me repeat what I said (multiple speakers) to answer appropriately, rather than having words put in his mouth. It is clear, from what you have seen Vic report and say during 2012, and what we have reported today, that a number of indicators in North America are now turning the right way. We have growth in producers, we have positive organic revenue growth, and many of the forward-looking indicators are very positive. So that is all very good.

The pipelines that Vic has kept a very close eye on, are looking strong. So, that is all good. As we go through our strategic review, we are going to be looking at all our businesses around the world. All our businesses around the world, to make sure they can contribute fully to growth and margin expansion, and that includes our businesses in Taiwan, and includes our businesses in North America. But the base in North America is clearly heading in the right direction, which is great news. With that, let me hand over to Vic for his commentary.

(laughter) Thanks, Dominic. All I can do is go back to what we actually started in 2011, and really try to drive through 2012, which is what I believe drives this business. And that is pipelines, that's recruiting, and that's retention of our clients. Those are our leading indicators. We seem to be improving in each one of those, and so, while we can't give guidance, all I can say is I feel like we are on the right path.

We have no further questions.

Thank you very much, everybody. Thank you very much for your interest in Willis, and taking part in this call, and we look forward to meeting many of you in person, and of course, preparing for that investor day I talked about in August. Thank you very much.