Willis Towers Watson PLC (WTW) 2014 Q4 法說會逐字稿

Good morning and good afternoon and good evening, and thank you for standing by.

(Operator Instructions)

Today's conference is being recorded.

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

I would like to introduce host for today's conference, Mr. Peter Poillon, Director of Investor Relations.

You may begin.

Thank you and welcome to our fourth-quarter 2014 earnings conference call which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings.

A webcast replay of the call, along with the slide presentation to which we'll be referring, can be accessed through our website.

If you have any questions after the call my direct line is 1-212-915-8084.

Please note that we may make certain statements relating to future results which are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those 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, 2013 and for the year ended December 31, 2014, 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 from the SEC or by visiting the Investor Relations section of our website.

Also, please note 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 in slides associated with this call.

I'll now turn the call over to Dominic.

Welcome, and thank you for joining our quarterly conference call.

I must apologize, I'm at the tail end of a cold so I'll sound a bit nasally on the call.

With me today are John Greene, our Chief Financial Officer; Steve Hearn, our Deputy CEO; Tim Wright, head of Willis International; and Todd Jones, head of Willis North America.

Now, I want to start our discussion today by reminding you of the three key components of our value creation strategy.

First, we will drive organic profit and cash flow growth through our diversified portfolio of risk advisory, brokerage and benefits businesses with growth coming from across the group.

We are focused on delivering mid-single-digit organic revenue growth.

In parallel, we will manage our organic costs to create a healthy gain in organic margin.

Second, we will manage our targeted acquisitions to create value through stronger revenue performance and improved cash flow.

Third, we continue to transform our operational performance with our operational improvement program designed to deliver sustainable cost savings of $300 million from 2018, with a gradual process of cost improvement each year, up until then.

We expect that the program will add to our underlying margin each year, as it starts to do in the fourth quarter of 2014.

Combined, these three components will drive cash flow and shareholder value.

Now the reason I remind you of these three components is that, in the fourth quarter of the year, we saw all three of them in action.

First, our 3.6% organic commissions and fees growth outpaced our organic expense growth by 90 basis points.

And, as one would expect, achieving this spread led to good growth in other important metrics, such as operating income, operating margins, net income, and ultimately earnings per share.

The second leg of our value creation strategy is inorganic growth.

In the fourth quarter we saw the impact of our acquisitions.

Our underlying growth, which includes the impact of acquisitions, was 7.2%.

You can see from that how the acquisitions, as we drive synergies over the next few quarters, will continue to drive revenues and profits.

During the course of 2015 you should see greater impact from Max Matthiessen, which closed in the fourth quarter, and, once it is closed, Miller Insurance Services, along with our smaller acquisitions.

Finally, we had the early impact of our operational improvement program, which contributed $11 million of cost savings in the year, an annualized rate of about $34 million.

As the program gathers momentum in the next 12 months its impact will become, still, more apparent.

So in sum, the fourth-quarter results exhibited all three components of our value-creation strategy in action.

Let me now turn to organic growth.

As I just mentioned earlier, group organic commissions and fees grew 3.6%.

The segment results, however, were uneven, with one segment, International, growing spectacularly, while Willis Global was close to flat in some challenging environments, and Willis North America was slightly down.

The strength of our diversified model is such that we can deliver performance at the group level when our business units do not over perform evenly at the same time.

We have seen that throughout the year.

You should expect that in every quarter some businesses will be stronger than others, but we expect that the sum will continue to deliver good organic growth.

Let me now give you a little more detail on each of the segments in turn.

First, Willis International.

Our International operations led the way this quarter, growing 15.9%, bringing their organic growth rate for the full year to a very good number of 9%.

You know from our press release that this quarter's result had some tailwinds derived from adjustments booked in the previous year's fourth quarter.

But even without that impact, International achieved strong organic growth of 11% in the quarter.

Obviously, the quarter's results are very pleasing, especially given the backdrop of generally low to moderate economic growth across many of the regions served by the International segment.

We saw a double-digit growth across almost all of our international regions in the quarter, with the growth driven by strong new business wins.

On this call last quarter, I spoke of the International segment's growth trend outpacing general economic growth rates around the globe.

This quarter's results, and indeed the year's results, demonstrate quite clearly that our strong market positions, combined with discipline on how and where we compete in each of our markets, mean that we can deliver growth above trend.

On to Willis North America.

North America was down 2.1% in the quarter which brings the segment's organic growth for the full year to 2.8%.

You may recall that the segment faced a headwind in the quarterly comparison, caused by the non-recurrence of the $5 million positive revenue recognition adjustments booked last year, related to its personal-lines business.

Excluding that adjustment from last year, North America would have been down by less than 1%.

Now, you may be wondering whether the slight decline in North America in the fourth quarter is the harbinger of future weakness.

Absolutely not.

North America's retention levels remain consistent in the low 90%s and new business across most of its practices is strong.

We are entering 2015 with a strong pipeline of opportunities which supports our confidence in the business overall.

Weakness in this past quarter was, for the most part, isolated in two industries, the real estate hospitality group and construction.

Construction, which was down mid-single digits, was driven by weak-surety results and simply less construction project work, compared to the prior-year period.

We remain confident that construction is a real strength for Willis North America and, indeed, all of Willis.

Positively, we saw good growth in our financial institutions and service-industry practices.

I am pleased to say that our two largest product-based practices, Human Capital, in finance, and FINEX, grew mid-single digits and high-single digits, respectively.

Most of them also grew solidly for the full year.

Now on to Willis Global where organic commissions and fees were down [nort] 0.3% in the quarter.

For the full year, organic growth was 1.4%.

Once again, the quarter's results reflect a blend of results across the components of the segment.

Willis Re continued to grow solidly, despite significant headwinds from soft rates and some reductions in reinsurance purchasing among the largest insurers.

Its organic growth was in the mid-single digits.

Within the reinsurance business, Willis Re International grew double digits and Willis Re North America grew high-single digits, with both continuing to win new business and exhibit strong retention levels.

Overall, we were pleased with our reinsurance results in 2014.

Innovation, analytics and strong-client service have underpinned the business, and we remain confident that this will continue despite the difficult market conditions, which we expect to persist for the foreseeable future.

Willis Insurance UK declined low-single digits.

Our insolvency and real estate businesses were down, and two of our largest specialty businesses, P&C Construction, and transportation weighed on the result.

We had commented previously that the fourth quarter would be a difficult comparison for the P&C Construction business due to a large project recorded in the prior-year quarter.

Soft-market rates in transportation, which includes marine, aviation, and aerospace, continue to impact results.

Offsetting this was solid growth in our natural resources, [F H A S] and large accounts businesses.

That is a relatively brief overview of our revenues for the quarter.

I'm happy to report that we're making good progress on expense growth, and John will take you through that momentarily.

Importantly, lower expense growth, coupled with our revenue growth in the quarter, has underpinned an improvement in our key underlying metrics this quarter and including EPS up nearly 18%, EBITDA up nearly 12%, and margins improved by 100 basis points.

Now, I'm going to ask John to take you through the numbers in a bit more detail.

Thank you, Dominic.

Good day to those on the call.

I'll be working off the fourth-quarter slide deck which is available on the website.

Starting at slide 3, this is a walk-through of our earnings, taking you through reported and underlying EPS from the fourth-quarter 2013 to the fourth-quarter 2014.

The key point on this slide is the impact of positive operating leverage, with revenue growth outpacing expense growth, creating a $0.10 positive movement in EPS.

This, as you know, is the first time in 2014 that the business has delivered positive spread.

It reflects mid-single-digit organic growth and progress with expense management initiatives.

Also included is a $12 million settlement for a book of business in our Global segment.

There was a comparable $4 million gain in the prior year.

Our reported EPS includes the restructuring costs related to the operational improvement program, which amounted to $16 million in the quarter.

Turning to slide 4, which takes you through commission and fee growth by segment, the difference between reported and underlying for each segment is the foreign exchange movement.

The difference between underlying and organic is the net impact from acquisitions and disposals.

You can see that FX had a negative impact on International and Global C&F, when comparing reported and underlying growth.

This was driven principally by the 10% depreciation in the euro against the dollar and the 5% weakening of the sterling.

When you look at International's underlying results, you see the strong organic growth coupled with the impact of the acquisitions of Max Matthiessen, Charles Monat, and the IFG business, yielding quarter-over-quarter growth of nearly 33%.

In North America, the 4.9% decline from the prior year reflects the impact of our portfolio management activity.

In the fourth quarter, we sold some non-strategic, slow-growth offices.

Associated with this we recognized a $13 million gain in non-operating income.

On an organic basis, we expected challenging comparisons given the high growth in the fourth quarter of 2013.

However, as Dominic said, we are comfortable with the outlook for 2015.

Moving on to the total expense walk on slide 5, from the left we adjust for $24 million of favorable foreign currency movements in the fourth quarter of 2014.

The most significant impact, as you'd expect, was from the euro and sterling depreciation, but we also saw most other currencies fall against the dollar.

Underlying expenses grew by $53 million, of which $33 million was from acquisitions.

You'll notice on the slide that, for the first time, we've isolated the impact of acquisitions and disposals on our expense base by providing organic numbers.

Organic-expense growth was 2.7%, so our cost management initiatives and savings from the operational improvement program are starting to come through in our results.

Slide 6 provides a similar walk of salary and benefit expense.

Underlying S&B grew $50 million or 9.1%, to $600 million.

This included a $20 million increase from M&A.

Excluding M&A, organic S&B was up 5.5%.

Looking at the drivers of that growth, organic head count was up about 1%, salary increase contributed 2% to 3%, in line with inflation and, finally, we saw increased production incentives in International tied to the strong sales growth.

Turning to slide 7, this shows the S&B trend on an underlying and organic basis by quarter.

There are three important points here.

First, on an organic basis, the first half of the second-half S&B is essentially flat.

The second point is simply that our 2014 acquisitions added about $25 million to S&B.

The final point is related to our head-count management.

Organic FTEs are up around 1%.

Onshore FTEs, including the impact of acquisitions, are flat, and offshore FTEs in Mumbai, increased by 200 during the year.

When we look forward to 2015, we should expect to see a continued focus in FTE managing.

So you are aware, there will be FTE movements from M&A activity.

We will also see a temporary increase in FTEs, as a result of parallel running of roles that are being relocated, as part of the operational improvement program.

The costs associated with the parallel running is included in the estimated program, spend figures we provided previously.

On to our operational improvement program on slide 8. The full-year 2014 spend of $36 million came in slightly below our last estimate of $40 million.

This was the result of lower-than-anticipated severance costs.

Savings of $11 million are ahead of our $8 million estimate.

Those savings were largely driven by head-count reduction initiatives related to organizational restructuring.

Very little of the savings came from moving roles to lower-cost geographies.

As I indicated in my FTE comments, the relocation of roles will be a significant element of our 2015 workstreams.

You can see that we've updated our key, operational metrics for the program, as promised.

The metrics are: the ratio of FTEs and higher costs versus lower-cost locations, the ratios of square footage of real estate per FTE, and the ratio of [desks] per FTE.

The improvements are modest but it is still early in the program.

What is important is that they are all headed this the right direction.

Finally, as we reflect on the overall progress, we are maintaining our estimate for the total spend in savings, but we're very pleased with the progress to date.

Now, before I move on to EBITDA, I wanted to point out that we have included, in the appendix, slides showing other operating expenses in the non-operating items.

These are fairly self explanatory but I'll with happy to answer questions as part of Q&A.

Turning to slide 9, underlying EBITDA was $193 million in the fourth quarter, up more than 11%.

For the full year, underlying EBITDA of $829 million was up a little over 1%.

While this is not where we wanted it to be, you know the story -- solid revenue growth largely offset by expense growth.

We anticipate that going forward mid-single-digit organic revenue growth, supplemented by M&A and strong cost management discipline, will allow us to drive EBITDA growth at a better pace.

Turning to our corporate uses of cash and cash on the balance sheet on slide 10, in 2014 we invested in our future through M&A and returned capital to shareholders.

This included $241 million of M&A, $213 million of share buybacks, $113 million of CapEx, and $210 million of dividends, a 9% increase from the prior year.

This represents outlays of close to $800 million, an increase of nearly $450 million from the prior year.

All of this reduced our cash balance by just $161 million, bringing it to $635 million at year end.

For 2015 our Board approved a 3.3% increase in the dividend together with share buybacks of up to $175 million.

The intention of this buyback is the same as 2014, to offset the increase in share counts on the [exercise] of employee stock options.

Turning to slide 11, here's a report card on the progress we made in 2014 towards our medium-term goals.

We delivered mid-single-digit organic C&F growth of 3.8%.

Given the deliberate investments we made in late 2013, we did not achieve the 70 basis points of positive spread for the year, but we did make good progress in the second half and achieved 90 basis points of positive spread in the fourth quarter.

Full-year underlying EBITDA grew by a little over 1%.

As I mentioned earlier, we're not satisfied with that level of growth, but again we have some good momentum and look forward to improving this.

And, as I just covered on a previous slide, we executed on all of our capital management objectives.

Now, one final topic before I hand back to Dominic.

As you know, we announced a few weeks ago that we have signed an agreement to acquire an 85% interest in Miller Insurance Services.

We expect that we'll close in the second quarter subject to regulatory approval.

We are excited about the prospect of joining forces with a leader in the London Specialty Wholesale segment.

I know the analysts listening will be interested in the impact this acquisition will have on the consolidated financials, so I want to comment on a few things that might help you understand the transaction better.

First, Miller's publicly filed partnership financial statements in the UK are not reported consistent with US GAAP, so it is tricky to analyze its metrics on a comparable basis.

However, I can tell you their pro forma, stand alone EBITDA margin is roughly in line with ours.

As previously announced, we are not just holding Miller as is.

We are transferring businesses both ways, between Miller and Willis, to better align our customer offerings.

This, however, does create a bit of complexity, but we will be transparent with the impacts.

Second, as with all acquisitions in this industry, we are acquiring intangible assets.

We expect to amortize those asset assets on a standard accelerated basis, in line with GAAP.

So, amortization expense related to this transaction will be relatively high in the early years.

To provide a little more granularity, assuming the deal closes late in the second quarter, we expect it will be broadly, earnings neutral from 2015 through 2017.

However, when you exclude the non-cash impact of amortization expense, the transaction is accretive in the range of $0.04 to $0.06 in 2015 and $0.10 to $0.15 in both 2016 and 2017.

We will pay a little over 60% of the cash component of the consideration at closing and make three equal payments over the next three years, tied to retention of key leaders.

There is also a potential earnout payment after three years based on superior performance.

We assure you we will remain disciplined in our valuation approach.

I hope this is helpful as you think about the impact of the transaction.

With that, I'll hand it back over to Dominic.

Thank you, John.

To close, how do we see 2015?

While market conditions are far from ideal across our industry, I am convinced that the balance of our diversified portfolio, coupled with the continuous improvements in how we bring all of Willis to benefit our clients, will drive future growth.

This growth may not be evenly spread across all our businesses every quarter but, overall, we have enough growth engines to drive mid-single-digit organic revenue growth.

I note, once again, that we're progressing nicely in our expense management initiatives.

We finally lapped the investments we made in late 2013.

We've made good progress on our operational improvement program, finding ourselves slightly ahead of schedule on most metrics.

That gives us all confidence about our ability to achieve the expected results.

We will provide you with a full update on progress on that program with our second-quarter, 2015 results in July.

And, during 2015, you should see our acquisitions delivering more to our results.

In that context, as you know, by the end of April we need to make a decision about whether we intend to exercise our option to buy the remaining 70% of Gras Savoye we do not own.

Gras Savoye has franchises in France, Belgium, Eastern Europe and Africa, with, as you've seen from our associates line, improving results in 2014.

It is a potentially significant and differentiating addition to the Willis family.

We will update you on our deliberations on that possibility towards the end of April.

So, all in all, notwithstanding some challenging market conditions and the fact that performance won't be even across every quarter, I am excited that the three elements of our value-creation plan will work well in the full-year 2015.

Let me go over the three components again.

First, drive organic-profit growth.

During the year, we expect to see mid-single-digit revenue growth despite the challenges in some of our markets and improvements in our organic margin.

Second, invest strategically and in a disciplined manner in specialized businesses.

For the year, we expect to see our existing larger acquisitions: Charles Monat, Max Matthiessen and, for part of the year, Miller to deliver between $55 million and $65 million of EBITDA to the group's results.

And, third, continue to implement our operational improvement program.

Recall that, on an earlier slide, we reported that we expect to achieve at least $60 million of in-year savings in 2015.

We will update you on that figure in July.

At this time, however, we expect that by the end of 2015 we will have completed projects associated with the program that, on a full-year, run rate basis, will deliver over $150 million of savings.

That is half of our originally projected $300 million of savings.

Now, far from all of that, $150 million will impact 2015, as many of these projects only lead to changes in our cost base towards the end of the year or into early 2016.

But overall, we believe the impact of our organic-cost, management actions, combined with the impact in 2015 of our operational improvement program, will allow us to deliver at least 130 basis points gap between organic revenue and organic-cost growth in 2015.

We have more of that spread coming in the second half of the year than the first.

Together, these three elements of our value creation strategy will drive growth in earnings, improve our margins and increase our cash flow, all ultimately to drive shareholder value.

With that, I will turn it over to you for questions.

Thank you.

(Operator Instructions)

Our first question comes from Cliff Gallant, Nomura.

Thank you.

I appreciate the comments on your outlook for 2015.

I wanted to follow up a little bit.

A competitor of yours discussed headwinds in 2015 from low-interest rates and the impact of a strong dollar.

I was wondering if you could discuss those issues as you look forward to 2015?

Certainly.

It's certainly not a particularly interest rate environment but I think most people presume that interest rates will be low.

So, we continue to believe that our interest income which, in previous years, way back in time, was an important part of the P&L, will be a very low number.

Obviously interest rates can also, in some ways, affect things like pension valuations.

We factored all that in.

We know what that might do.

As to the strong dollar, obviously our underlying numbers, the numbers that we often have you focus on, we strip out the impact of FX changes year to year, because sometimes they hurt us, sometimes they don't hurt us.

So, all in all, when we look at how our underlying EPS will perform, we factored in all the things you talk about into how we see 2015.

Dominic, if I can add, in terms of FX, we do see a little bit of headwind from the strong dollar.

So, if currency rates were to remain exactly where they are as of the end of the year, we would probably have something in the neighborhood of $0.03 to $0.07 worth of pressure on EPS from a reported standpoint.

Now, that will be uneven in the year.

The first portion, or the most predominant portion, would be in the first half of the year, and then impacts would tail out towards the second half.

Okay.

Thank you.

If I can have one follow-up.

The Miller transaction, I was wondering if you could talk a little more about it, about the strategic thinking behind the deal and why the structure as you've done it?

Yes, absolutely.

We are very excited about both those things, the strategic opportunity in the wholesale market in London and the way in which we have structured this to retain the attractiveness to talent going into Miller.

I'm going to have Steve Hearn provide a bit more background about how we see this.

Thanks, Dominic.

Thanks for the question.

Miller, I think people would recognize generally in our industry as being the preeminent, private London wholesaler, and an opportunity for us to work with a business that has consistently performed over many years in a partnership model.

An opportunity for us to take an investment in that business and to participate in what we believe, strategically, [to be quite interesting] environment in the London insurance market.

[There's] about 200 insurance broking firms in the London insurance market.

And we're seeing a trend towards consolidation there, and a [flight] quality of client and team and carrier as they move towards more alignment around stronger, better players, [looking obviously] for more and better service.

So, we see an opportunity to sustain the Miller partnership and the Miller brand and use that as a way of accessing that particular part of the market.

At the same time, we have a history, as Willis, of being in the wholesale business.

And, in fact, only a couple of decades ago Willis would have been renowned as a wholesaler.

And we still have some core parts of our organization in London, which are [wholesolid]in nature.

And, as we've announced, we'll be moving some of those businesses to [sit] within Miller.

And we think those businesses will be nurtured and grown very well by the management team in [the] Miller.

Like, wise there are some businesses within Miller that we think will work better, clients will be served better, by sitting within Willis.

And, probably, the best example of that will be the treaty reinsurance business in Miller, which we'll be moving into Willis Re which, again, has performed very well for us in 2014.

Thank you.

Next question is from Sarah DeWitt, JPMorgan.

Hi, good morning.

On your guidance for mid-single-digit organic revenue growth in 2015, that be up from 2.9% [ex], unusual items in the fourth quarter.

Could you just elaborate on what's driving that and how you think about the run rate by segment?

I can give you some generic.

We've been saying, Sarah, for some time that we see the portfolio businesses we have, being able to deliver mid-single-digit organic revenue growth.

And I think we made very clear how we see at least the early views on the North American business.

We continue to believe we have a very strong North American business and we're very comfortable with the pipelines and momentum we have in that business.

You've seen how International has now performed over a long period of time, it benefits from both the quality of our teams and their ability to win market share and some underlying growth in some of the markets, the combination has been highly effective.

And, as you've seen, we've announced a restructuring of a group into four segments going forward.

So, so we have a slight change in configuration of what used to be called Global.

And we think that more management focus on different parts of Global, combined with the unwinding of some turnaround activity we've had in the last 18 months, particularly in our UK business, gives us some confidence that we'll see growth there, too.

But I would reiterate, Sarah, what we've said again and again, and I said on my call, it is the diversified nature of our growth engines which gives us confidence that, through the quarters, we will deliver mid-single-digit organic revenue growth.

Some parts will be up more than others in any particular quarter but, over the course of the year, we are confident of where we are.

Okay.

Thanks.

And then on the amortization expense, after the close of the Miller transaction, what do you view as the right run rate for the total Company's quarterly amortization expense?

I'll take that one, Dominic.

We'll see amortization, without Miller, just about where we were in 2014.

We're expecting a mild uptick to maybe $57 million worth of amortization without Miller.

And then, in my comments I talked about the impact of the amortization on an EPS standpoint, with and without the amortization.

So, those figures, you can calculate those on the back of the envelope.

Quite honestly, the transaction is subject to final closing.

And as Steve alluded to and I talked about in my comments, the movement of businesses from Willis into Miller, and some businesses from Miller into Willis, will create a little bit of challenge in terms of trying to provide you a specific number on amortization at this point.

We also have a final balance sheet true-up that is yet to be calculated.

I would stick with the guidance that we provided.

We were explicit and thoughtful in the way we did that.

Okay.

Great.

Thanks.

Next question is from Kai Pan, Morgan Stanley.

Good morning, thank you for taking my call.

First question is on the 130 basis point-spread target between the organic-revenue growth and organic-expense growth.

It's great you have these specific goals, but what gives you confidence you can achieve that?

And in the case that your top-line organic growth is below your mid-single-digit target, given some market reasons, will you still be able to deliver that?

Obviously our 130 basis point margin, [not] margin, would be to gap between revenue growth and cost growth organically that we're forecasting for 2015, is a mix of how we see revenues developing, how we see our normal organic-expense management initiatives, and the flow-through of the operational improvement program during the course of the year.

That's why we have confidence in that number.

Now, if you were to tell me that our revenue growth was to fall well below the range of the mid-single-digits we're talking about into something you can no longer call mid-single-digits, clearly that number would start to be challenged.

But I think we would continue to believe we would produce the spread.

If you drive the revenues way, way down in any model you have, of course, you'll get less of a spread.

We don't see it that way.

We don't see it that way at all and we're very comfortable with what we're saying.

And if I could just add there, there is one additional buffer there.

If the revenue doesn't come in the way we anticipated, our compensation expense, [about] 20%, is variable in nature, so, tied to production incentives.

That will also reduce, should the top line not come in where we're anticipating.

Great.

Then my second question is on your cash position.

Given the acquisitions you have done so far, and also the pending Gras Savoye, you need to make a decision soon.

How do you think of your cash position given your projected free cash flow?

Do you need to borrow more?

When we look at 2015, we have an explicit assumption that Gras Savoye closes currently in 2016, should the Board authorize the option.

Leaving that aside, 2015, the way we're looking at the cash generation of the business, even with the acquisition of Miller, we don't see the need to go out and issue more debt.

There's a possibility that we'll pull on the credit line a little bit.

As you know, we have an $800 million credit line.

At the end of the year, there was zero on that credit line, so there's certainly capacity within the business in 2015 without issuing new debt.

Great.

Thank you so much for all the answers.

Next question comes from Jay Gelb, Barclays.

Thank you.

For the first quarter, which is by far the largest contributor to earnings seasonally over the course of the year, typically, would you still expect the spread to be positive between revenue growth and expense growth, and possibly even better than what we saw in the fourth quarter?

Jay, we're forecasting our spread over the course of the year, I've said it will be more oriented towards the second half of the year.

But clearly, our expectation is we'll produce a positive spread each quarter.

But it's very much going to be -- the overall number you're going to see in 2015 will be more weighted towards a spread performance in the second half of the year.

Okay.

That's helpful.

On North America organic growth, in addition to tough comps, year over year, in terms of resulting in a slightly negative-organic growth number in 4Q, is there anything else that you would view as a risk to not being able to show positive-organic growth in North America during 2015?

Let me turn it over to Todd Jones to answer that one.

Jay, the short answer is no.

We try to be very definitive about the performance in the quarter and what was driving that.

As Dominic talked about, the retention levels remain strong, in the low 90%s.

Our new business performance is strong, as well.

We're going in 2015, specifically in Q1, and the full year, confident in the underlying business for sure.

Okay.

And a final one, for the share count for 2015, will the buybacks essentially offset dilution from exercise of options resulting in essentially a flat-share count for the year?

Pretty much.

That's the plan.

We set -- what we do, Jay, is every year we look at, I say every year, now we're now in the second year of doing this, we look at the share options exercised during the course of the year, so, in this case during the course of 2014, and we're now buying back enough to offset that.

Makes sense.

Thank you.

Next question is from Josh Shanker, Deutsche Bank.

Yes, good morning, everyone.

And Dominic, feel better.

You're not the only one fighting the common cold.

My question involves the $11 million you've saved so far with the operational improvement program.

Are these jobs that have actually been severed, or is the $11 million salaries that you continue to pay to people until the time that you sever them because you've identified them as severance?

These are real changes to the audited results of the Firm.

So, these are real changes to the actual numbers of the organization.

They're out.

And that's why we're saying that the impact of our actions in 2015, you will see more of the impact of those in the second half of the year, because, obviously, they only flow through the P&L when we stop paying people or the roles have been moved to a lower-cost location, and the roles that existed in the higher-cost location are no longer being paid for.

So, when I see that you've paid $16 million in termination benefits, can I expect, going into 2015, that a significant portion of that is run rate savings that you're going to see on a quarter-to-quarter basis?

Could you ask that question again?

Didn't quite -- can you just ask it again?

So far you've said termination benefits, I think you've spent $16 million on termination benefits.

In 1Q 2015, is the vast majority of that non-repeating salaries that will be taken out, because you've let those people go?

Or, how should I think about that $16 million, what it's composed of?

Dominic, why don't I take that.

For the quarter, there was $36 million of restructuring charges, Josh, as you know.

$16 million was termination benefits.

And that broke down between North America, International, and Global.

We anticipate that the salaries associated with that termination benefits will have left the organization.

So, we know, for example, that there were approximately 300 people net that came out of the organization that comprised that $16 million of termination benefits.

There is selective reinvestment in certain areas, which makes the comparison, I'll say, dollar-for-dollar a little bit more challenging.

And there is inflation, as you know, between 2% and 3% when you take a look at our entire organization.

So, you can think about this as, yes, it's real dollars out.

There's some inflation going up against that and there's some mild reinvestment.

But the intention is, as we've said, and so far we've done a pretty darn good job in terms of executing against it is, that the majority of this stuff is going to drop down to the bottom line.

And we said, I think in my opening remarks, that the cost savings we saw this year of $11 million, the annualized rate of those was $34 million.

That's, I think, a clearer way of thinking about what the impact is.

Thank you.

And just to understand, by the time someone has been identified as a potential redundancy, how long will you be paying salary and termination benefits for that individual before they come out of the pool?

[Depends] on where they are.

It's very specific to geography.

If you think about France, it's closer to 12 months, Spain can be 12 months, North America, it's a function of time with the group.

On average, it would be somewhere between three and six months.

In the UK it's typically six months is the average -- three to six months.

Thanks for the answers.

I appreciate it.

Good luck.

All right, thank you.

And the next question is Vinay Misquith of Evercore.

The first question, I was wondering if you could give us color on the slowdown in growth in North America and maybe, to an extent, Global.

To what extent do you think it's just purely because of timing versus -- maybe some concerns around the restructuring efforts?

Todd, you want to talk about North America?

Yes, sure.

I think your analysis around [is] the timing is a good one as we think about North America, and specifically, which is why we focused our comments on the construction business, which by nature, due to some of the project-related revenue, we're going to have some unevenness in terms of the performance of that business.

We certainly don't think, as we talked about through this call, that there's anything to suggest anything other than optimism for 2015 about the business.

And then I think the impact of both the operational improvement program and some of the underlying strategies that we're executing on, I think we actually see those helping the business and supporting growth efforts into 2015 and as we think about years further out.

The Global perspective -- I think the question in there was restructuring efforts, anything to do with the economic performance in the quarter.

And, no, is the emphatic answer to that.

It didn't drive a downturn in our revenue at all.

Again, [I thought] we see the restructuring as a positive enabler for us as a business, not an impediment.

There's two bits to Global.

Firstly, the reinsurance business, which isn't Global, as you've seen had a very, very good strong quarter, particularly relative to its competitors and the headwinds that challenged it.

Our UK insurance business, as we've talked about before, is the sum of its parts.

So, there's some things in there that performed very well in the quarter, some which didn't do quite so well and some which really struggled both in the quarter and through the year.

So, it's a number of different things driving the quarter's result but certainly not resulting from the restructuring efforts.

Okay, that's helpful.

And just want to clarify that the movement of employees, that's really from a support-staff perspective, [correct]?

That's not really impacting [thing] the producers?

That is right.

The operational improvement program is focused on what we're calling the mid- and back-office activities.

You've heard us describe the program, but the movement of staff is around people in those roles.

Sure.

And then just one last question, a numbers question, the tax rate ticked up to 25% this year.

What's the normalized tax rate we should be expecting for the future?

I'll take that one.

We expect the tax rate to be in the range of 23% to 27%.

It will be a function of the composition of the earnings throughout the globe.

That's why there's a range there.

For planning your models, 25% is probably not a bad number.

Okay.

Thank you.

Thank you.

Our next question is from Brian Meredith, UBS.

One or two quick questions, and correct me if I'm not thinking about this correctly.

But if I look at what your planned expense savings are in 2015 of $16 million, that comes out to about 2% of the 2014 expenses.

Yet you're only looking for 130 basis points of spread between revenues and expense growths.

Does that imply that you expect underlying organic expenses to grow faster than the revenues this year?

And if so, why?

We're obviously taking a buffer in there for how we think the year will turn out in terms of performance.

But there is obviously, as we've said all along -- Willis is a growth business.

We have significant growth opportunities around the world.

So you should not imagine that, because we're focused on expense management, we aren't also focused on taking advantage of revenue opportunities in markets like China, Latin America, just two examples.

We are investing against our growth opportunities.

But broadly, we're very comfortable with where we see the combination of all those things turning out, in terms of our results and the spread we can achieve in 2015, and our continued ability to invest behind revenue producing opportunities for 2015, 2016 and beyond.

Can you maybe elaborate on the investment spending?

The reason I'm asking, Dominic, is, if this restructuring program wasn't going on, would that be what's happening?

Is that what we should expect from Willis longer term, is it expense growth outpaces revenue growth if you don't have some kind of expense-save program going on?

The other brokers, that's not the case.

No.

Our math show that we're still achieving an organic spread without the restructuring program.

Without it you're still achieving [it], okay.

Thank you.

That's all.

Thank you and next question is from Thomas Mitchell, Miller Tabak.

Thank you.

I have a couple of questions that I may just have misunderstood.

But, the $12 million in settlement proceeds that came in, does that flow through to underlying earnings per share, the $0.46, or is that excluded?

The $12 million is included in the underlying.

It's not part of commission and fees.

It's other operating income, it's part of revenue.

In the prior year, there was $4 million related to a similar type settlement.

And in this industry, occasionally, when certain producer groups or books of business end up moving, in order to avoid litigation or lock up periods for employees, many times the receiver of those resources will pay a settlement, and that's what we had in the quarter.

Right, but if we're putting a model together, we don't expect that every quarter.

We don't expect settlement funds to keep flowing in every quarter.

No.

I certainly would hope not.

Okay.

Fine.

Of course that means you've lost producers.

Okay, fine.

That's very helpful.

The other question is also about other expenses.

I just noticed that, and again, you correct me if I'm wrong but, the growth in salaries and benefits on an organic basis was well above organic growth in fees and commissions.

So that the positive operating leverage from the quarter came, essentially viewed that way, from a reduction in other operating expenses.

First of all, is that a correct way to look at it?

And then, second of all, going forward what should we look for in that area?

Let me have a [poorule] answer that while John gets to the numbers.

The reduction of our operating expenses is part of our ongoing expense initiative and reflects some rationalization we did, in terms of some of our specific branding spend we did in 2014.

We think that's a good set of scrutiny and initiatives we did.

The salary and benefits numbers had some peculiarities in them, which John will go through, related to prior-year comparison and some specific incentives paid in International, which made the number look large.

Why don't you talk about that.

Exactly.

In terms of -- let me start with other operating expenses.

Other operating expenses did go down in the quarter versus the prior-year quarter, as Dominic said.

There were some marketing and brand-related expenditures that did not repeat in 2014.

There was also, just as part of our overall expense management, we took a look at systems, infrastructure, and we found a particular system that had market appeal and we didn't feel like we were the best owners of it.

We sold it and we had a $3 million reduction to expense in the fourth quarter.

In terms of the salary and benefit growth in the fourth quarter, it was 5.5%, as I said in my prepared remarks.

I also included in the slide deck, that page that showed that S&B, from an organic standpoint between the first half and the second half of 2014 was essentially flat.

The reason I thought that was important was because, in the fourth quarter itself, in terms of the production awards, the International segment had a couple triggers that took an adjustment in the fourth quarter, up.

It didn't exist in the previous quarters.

So, if we straight line that, had we had a perfect insight in terms of how International would have done, there would have been a much more smooth S&B between quarter and quarter.

So, that's one component of it.

The other component of it is, frankly, a level of inflation.

We have significant operations in Asia and in Latin America.

The inflation rates in those countries are much greater than the US or the UK.

On a blended basis, we have inflation of about 2% to 3% reflected in 2014 versus 2013.

One of the levers that we're continuing to focus on is the FTEs that we have.

They're big pieces of cost base, the operational improvement programs in place in order to ensure our FTE base is as cost effective as it possibly can.

And we're going to continue to drive those numbers.

This is very helpful.

Thank you very much.

Next question is from Bob Glasspiegel of Janney Capital.

Good afternoon.

Can you walk us through what the acquired revenues look like for 2015 for modeling purposes?

And also, what the minority interest calculation might look like for the last three quarters.

For the last three quarters?

Miller -- won't you be taking 15% out if you only own 85%?

Oh, I'm sorry, yes.

In terms of minority interest related to Miller, we're actually not going to get into that level of granularity on this call.

We haven't closed the transaction.

We have a number of elements we have to work through.

In terms of the M&A numbers, we have included, within the press release, detail of what those numbers are.

Now, typical convention when we look at these is that we'll use 12 months of revenues as inorganic, and then it falls off and becomes organic.

So, an easy analysis on that would be actually quite difficult for this call and, honestly, at this point I'd prefer not to go through that.

We can go back to you, Bob.

We've said, I think, Bob, what we think the EBITDA impact in 2015 of these acquisitions will be.

We can't give you the exact minority number against Miller, because we haven't closed the transaction and there are lots of moving parts between it, as John explained.

Okay.

I'll nail Peter with some follow ups but I think there's still an equation with too many unknowns to have our specific components be reasonable.

It's going to impact margins analysis, but certainly we can do it.

A more strategic question.

You guys haven't given short-term guidance in many, many years.

And it seems to fly in the face of your native instincts, the little I've gotten to know you, to put a target out there that we can shoot at.

What's the tactical reason that you're going back to giving guidance?

And can we read into this that you've got a level of confidence that you're seeing things behind the numbers that give you confidence that you can actually put a target out there to shoot for?

The reason we've done this is, you will remember, that about 18 months ago we had an investor conference and gave medium-term guidance on revenues and what we saw in terms of the spread between revenues and costs.

We've been very clear that in 2014 that we did pretty well on the revenue target, we certainly did not do so well on the gap between the revenues and costs.

And therefore, this time we thought it was important that markets and investors understood how we saw 2015 specifically operating on that margin spread, given what we said 18 months ago.

As to the second part of your question, as to confidence, we wouldn't have said it if we weren't confident.

Okay.

So, we could look that you're going to be giving nearer-term earnings guidance on a go-forward basis?

Once you start giving guidance, you have to stick with it, I think.

What we will clearly not be doing, Bob, is giving quarterly guidance.

When we get to this quarter next year we'll decide what we want to do in terms of, again, reassuring people about how we see the two key components of organic performance, which are how we see revenue growth and how we see the spread between our revenues and costs.

But we are definitely not getting into the game of quarterly guidance.

Thank you.

Our next question is from Mike Nannizzi from Goldman Sachs.

Thanks.

Just a couple here.

On the International segment, lots of organic growth there but, there didn't seem like margins really reacted that much.

I'm guessing there was some expense investment.

Just trying to get an understanding of the operating leverage in that segment and how we should think about how much organic growth should help to support margin expansion there.

Let me hand over to Tim to talk about the dynamics of that International portfolio.

Thanks for the question, Mike.

Obviously we had very strong revenue growth in the quarter, even adjusting for the revenue recognition change last year.

And there was margin expansion, but it was modest, as you say.

I would say, not to repeat everything that John just said but, I think he covered it because these are high-growth markets.

There are costs associated with that growth.

But also, we did have some exceptional incentive payments that were triggered in the quarter that probably narrowed that margin even further than you would expect it to be on an ongoing basis.

So, we are absolutely, in the International segment, looking to achieve positive operating leverage on the back of strong continued growth.

Okay.

Thanks.

And then, just on that nickel or so of other income in the settlement of that contract, I'm just curious, when we think about underlying, should we be thinking about that as run rate earnings?

And if so, it sounds like that's a one-time item.

Is there a reason that we should think about that being part of what would otherwise be interpreted as an underlying earnings number?

What we tried to do is be consistent with how we treated it in the past, actually.

I mentioned in my comments that there was a $4 million gain or settlement in 2013, fourth quarter.

In previous quarters in previous years, those sorts of settlements have come through other operating income.

Now, this is -- I appreciate it is sticking out -- the quantum of the settlement is 3 times bigger than the number last year.

So, from my standpoint, these settlements typically mean some producers are going somewhere else.

In this case they did not go to a competitor, to be clear.

It's not something we plan for, nor do we budget it.

I would say there's a trend through history that indicates there will be some sort of settlement.

Now, I would expect that $12 million is an outlier.

Okay.

And just on the share issuance in 2015 in the offsetting buybacks, is this something we should expect will continue?

Is there a backlog of options that are coming through and so you can see or get some idea of how that's going to play out?

Or, are we going to be through the bulk of that if you do have that level of visibility in 2015 and, at some point, we can think about buybacks reducing the share count?

How should we think about that dynamic?

At the moment we just set a policy, Mike, which is about offsetting that effect of share-option issuance.

That's how we set our buyback.

That's how we're going to manage it for 2015.

So, we're offsetting the 2014 issuance in 2015.

We're going to monitor what happens in 2015 in terms of how much we have, and then we'll make another decision at the end of the year.

We've made clear now, I need to say it's only two years, we've made clear that our ingoing starting approach is that we at least need to offset that impact on the share count.

Got it.

So, we shouldn't be thinking beyond 2015 that there's an opportunity for that share count to just net come down, that we should just be thinking about the buybacks and share issuance neutralizing one another.

That would be an ingoing, modeling assumption, yes.

Okay, great.

Thank you.

The next question is from Meyer Shields, KBW.

Good morning.

A couple of questions.

With Gras Savoye there was a $6 million improvement in your share of the results from fourth-quarter last year to this year.

Can you break that down between FX movements and actual fundamental improvements?

While John thinks about that, let me give you some overall.

2013 was an unusual year for Gras Savoye.

They were doing their operational improvement program, if you like, or levels of it, and those costs ran through all the numbers in 2013, a little bit into 2014 but mainly in 2013.

So, we had some delta as that program therefore didn't affect the numbers very much in 2014.

But nevertheless, the underlying performance of the business did improve, and has been improving, and we feel good about that in terms of its contributions to us.

That's in terms of the underlying what's going on.

Now, let me have John think about FX here.

And I've thought about it, Dominic, and I don't have a specific answer on that at this point related to Gras Savoye.

The improvement, as Dominic said, from what we've seen, both looking at the financials from the business as well as the activities that have happened, there's fundamental operational improvements in Gras Savoye that is driving the improvement.

But what we will do after the call is we'll post some information and Peter will get back to you, Meyer, if that's okay.

Tim, you wanted to add to this.

Just a very small point, but Gras Savoye obviously is predominantly euro-denominated.

Two-thirds of this business is in France, a one-third of its business is outside.

Some of that business outside also has a euro linkage.

But there is a significant proportion, maybe a quarter, that is non-euro denominated, and actually may even benefit from improvements in the dollar position.

So, there is a degree of offset and complexity, even within the numbers.

It's not just a straight euro plane.

Okay.

That's very helpful.

If you decide to buy Gras Savoye, what currency do you pay for it with?

Is that euros?

Yes, the transaction is denominated in euros.

Okay.

Is it too early to consider hedging given how strong the dollar's been relative to the euro recently?

Meyer, we actually looked at that.

At this point we don't have a decision from the Board.

The management team's going to come through and make a recommendation,.

The Board, in terms of preliminary discussions, has been supportive.

The final outcome will depend on due diligence.

In terms of from that decision point through to the end of the year, when we look at the forward rates, the euro interest rates are going to be low for some time based on those curves.

We looked at locking in rates and actually we found that to lock them in at this point it'd be uneconomical, based on our projections of interest rates.

But we're going to continue to evaluate that shortly after we have the decision from the Board.

I would remind you that the present structure is for us not to close that transaction until the summer of 2016, so we're looking quite far out at this point in terms of the hedge we'd have to do.

Okay.

That's helpful.

And one more question, if I can.

I'm not sure I understood whether the expectation for mid-single-digit organic growth, does that apply over the course of the year to all four of the new segments?

No.

As I've said pretty clearly, I think, a number of times, we see the combination of our portfolio delivering that growth.

You saw in the fourth quarter how it was quite uneven, but we delivered mid-single-digit.

And we think during the course of the year the portfolio will continue to perform strongly in that mid-single-digit range.

Quarter to quarter, some will be up more than others.

Often, as you know, the comparison can be simply relating to a particularly strong or a particularly less strong quarter.

It can affect the percentage delta.

So, again, I would have you focus on the portfolio and how it's going to perform.

Okay.

Understood.

Thanks so much.

Next question is from Adam Klauber of William Blair.

Thanks, good morning.

A question on cash.

It looked like you used roughly $770 million of cash.

When I look at your release, I think you generated cash around $460 million.

You ran down cash by another $160 million.

So there's like $100 million, $120 million gap of where cash came from.

Where did that extra cash come from?

You're right.

We've been continuing to work hard on our cash management activities, and we'll continue to do so.

And the combination of those things has enabled us to continue to drive our management [to] cash.

John, do you want to talk more about that?

There's cash from earnings, certainly.

We also had sales of slow-growth offices in North America, which I think the cash impact there was $70 million, $80 million positive.

We had this settlement that we talked about for another $12 million.

They're the big chunky items, then the rest is through working capital.

We've had a pretty consistent effort to try to do two things on the working capital piece.

One was extend payable days.

We've done that.

That will turn into about $20 million of cash in terms of bringing it forward.

And then on the receivables, we've' just begun starting work on that to shorten that conversion cycle from essentially billing to remittance and we're hopeful that that will enhance the cash position in 2015.

Okay.

So, as we think about 2015, right now you have $635 million of cash.

Can that balance come down somewhat again?

Yes.

The way we think about it right now is that in terms of the cash that we'd need for working capital purposes, as well as from a regulatory standpoint, in particular geographies, is between $400 million and $300 million.

So, that means there's, call it, $300 million of cash available for investing opportunities.

That's why we are very comfortable in thinking through our ability to absorb the Miller payments and continue to do the share repurchases during 2015, with some call maybe upon our revolver but not having to issue more debt.

So, that's how we're comfortable there.

Okay.

That makes sense.

And then one question on Miller.

A very good organization, so very good deal.

Will that be the majority?

I think you mentioned $55 million of potential additional EBITDA.

Will that be a majority coming from Miller?

It obviously depends when we close exactly how much will come from Miller.

But the combination of the continuation of Charles Monat, Max Matthiessen, and some smaller deals, I think, will continue to be the majority in 2015.

Okay.

Thank you very much.

Thank you.

Our last question is from Mark Hughes of SunTrust.

Yes, thank you.

When you look for the faster growth in revenues and expenses, should we start on a base, if we're doing some modeling, at the 18% organic operating margin or the 17% reported operating margin?

It depends what you want to model, I think.

Let me tell you how we think about this to help you think about it.

Obviously, why we've given you more transparency this time around is to make sure you see more clearly how our organic business is performing.

And very much, when we're doing our initial planning, we look at our organic business for the coming year and how we see that performing.

So, we're interested obviously in how we see that model.

Then we lay on top of that acquisitions and how we see that, they impact.

And then we think through what's the impact of the operational improvement program in year, because, as we said to you, when the impact of the operational improvement program actually hits the numbers, depends on, frankly, timing of when projects get finished, when people actually move, when the people actually leave the organization.

So we think through those components.

And, so, we have an organic view at the Firm and then we have, if you like, an underlying view of the Firm which relates to these various things.

And that's how we model it.

And we're obviously interested in driving EBITDA coming out of all of those different ways of looking at the Company and the margin in both of them.

Right.

So, when you provided the guidance, your thought was the base for 2014 was the organic performance of the business rather than the reported, which was about, as I say, about 100 basis points lower?

Yes.

When we said that revenues will grow faster than expense growth by 130 basis points, we said that's organic revenues and the impact of organic expense actions and the impact of the operational improvement program in 2015.

Right.

Okay.

Thank you.

All right.

There are no other questions at this time.

Thank you very much.

Thank you very much, everybody.

We look forward to talking to you again at the end of our first quarter.

Thanks very much.

Thank you.

This completes today's conference.

You may disconnect at this time.