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Willis Group Holdings Public Limited (NYSE:WSH)

Q4 2012 Earnings Call

February 13, 2013 8:00 am ET

Executives

Peter R. Poillon - Director of Investor Relations

Dominic Casserley - Chief Executive Officer and Director

Michael K. Neborak - Group Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Steven P. Hearn - Chairman of Willis Global and Chief Executive Officer of Willis Global

Victor P. Krauze - Chairman of Willis North America and Chief Executive Officer of Willis North America

Timothy D. Wright - Chief Executive Officer of Willis International

Analysts

Jay Gelb - Barclays Capital, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Paul Newsome

Robert Glasspiegel - Langen McAlenney

Joshua D. Shanker - Deutsche Bank AG, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

Raymond Iardella - Macquarie Research

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Ron Bobman - Capital Returns Management

Operator

Welcome, 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. Now, I will turn the meeting over to Mr. Peter Poillon. You may begin.

Peter R. Poillon

Thank you, and welcome to our fourth quarter 2012 earnings conference call and webcast. Our call today is hosted by Dominic Casserley, Willis Group Holdings Chief Executive Officer.

A webcast replay of the call, along with slide presentation to which we will be referring on 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 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, 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 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.

I'll now turn the call over to Dominic.

Dominic Casserley

Welcome, and thank you for joining our call to discuss Willis' fourth quarter and full year 2012 results. It's 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 in the outset that from the very start, Joe Plumeri has been terrific in transition. He greeted me with great warmth and has worked tirelessly to arm me with the wealth of knowledge and experience from his 12 years at the helm. I'm very grateful for that.

Now, while my voice is new, there is a strong sense of continuity on this call. The people you 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's 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 result for the past quarter and the past year, while highlighting 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 a balance of our time together today for a healthy exchange of questions and answers.

So 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 were $2.58. It goes without saying that we, as a management team, view this figure as a disappointment. It represents a decline in 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 states a series of obstacles that 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 towards 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 3 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. Now we recognize that the 5% appears 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 at a little over 3%, which is better than we have done in North America since the second quarter of 2007. Now while we know it's premature to celebrate, we do believe it's a strong indication that the segment has turned the corner, moving beyond the 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 the best calls 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, retention level for North America was solid at 91%.

Now these good numbers were not just isolated in one geographic region. For the first time in many years, every geographic region in this segment showed growth in the quarter, with the Northeast, Canada and Mexico leading the way. Looking at the regions and instead of our practices, there was also good news. For the second consecutive quarter, construction showed improvement, a reflection certainty of the stabilizing situation in the U.S. economy. Organic revenue 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 at the 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's a definite excitement from our success in having added new talent to our experienced core of producers. For the full year 2012, North America's organic growth was 0.6%. Again, we're not content with that achievement, negative 0.6%. Again, were 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 opportunities facing his 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 the International at the end of the fourth quarter came in at the 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 U.K., our business achieved mid-single digit growth in the fourth quarter and was about flat for the year. The U.K. business have been trending in the right direction throughout 2012, improving each quarter. We have just announced the hiring of David Martin, our new leader for our U.K. business, who bring substantial experience from the broker and carrier side, and our business in the U.K. 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 U.K., we have just announced Alberto Gallego, our new leader for Willis in the region, an internal promotion for the executive who has contributed greatly over the years to our success in Iberia. Again, this adds to a sense of new opportunity for Willis built on a continuity and the excellent track record we've had in Spain.

In Latin America, we are seeing the fruits of a historically high-performing region for Willis that benefit 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 has 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's still considerable room for improvement, we're excited by our 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 & Duma 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. Now 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 & Duma 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 increased 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 1 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 we've discussed in our prior call, the robust activity and the fees generated came from a number of capital market transactions that had been delayed throughout 2012. All in all, while I'm very happy to have Steve Hearn by my side as deputy CEO, it's 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 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 Steven 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'd like to discuss one additional item that you saw in our earnings release. This had to do with a charge 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, would deliver expected annual savings of approximately $25 million to $30 million, most of which 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.

Michael K. Neborak

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 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's important to keep in mind that the 2012 figure is after contributing approximately $140 million to our pension plans. It's worth laying out the math so that's very clear. So from the $524 million of cash flow, tracked $185 million for dividends paid, $135 million for capital expenditures and $15 million for debt repayment. When you do that, you're 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 this 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 noncash charges for North America goodwill impairment and a change in our remuneration policy where we eliminated the retention feature of our annual incentive program. Those 2 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 U.S. 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 3-year period going back to 2010. The 3-year cumulative loss in effect triggered the requirements to record evaluation allowance, which increased the tax provision by $113 million. Here are the key takeaways. 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 towards the prospects of our North America business. And finally, as North America records net income in future years, we expect the tax allowance will reverse.

Now let me talk about expenses, which are highlighted on Slides 5 through 9. On Slide 5, you'll see our total expenses on an adjusted basis, which excludes a 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 3 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 an 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, if accrued bonuses have 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's 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're thinking about this, you should evaluate this change as essentially cash neutral. Importantly, you should use the higher salaries and benefits 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 a higher S&B expense is expressed as a quarterly reduction to 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 that 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've 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 margins for Willis improved 40 basis points from 18.7% in Q4 in 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. As alluded 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 Associates 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.

Dominic Casserley

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 delivered on that expectation in the fourth quarter.

I have been in my position of CEO officially for a little over 5 weeks. During that time, Steve and I have been meeting with our business heads, producers, operational managers, finance leaders from and others, who've been very constructive and candid about both the potential and challenges of the business. I've been very impressed with a depth of knowledge and experience throughout this organization. It adds to the level of excitement to 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' 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 2 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jay Gelb of Barclays.

Jay Gelb - Barclays Capital, Research Division

With regard to the organic revenue growth of 7.5% in 4Q, clearly there's a huge increase versus the prior quarters. There were called out a few onetime items in there, so I think we're all trying to get a sense of the sustainability of that pace of growth overall or will you feel more normalized your overall organic revenue growth pace might be?

Dominic Casserley

Well, 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 can say on that.

Jay Gelb - Barclays Capital, Research Division

Okay. And then 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?

Dominic Casserley

Well, Jay, clearly, that will be the result, but you and I can do the math as well together of how our revenues and costs develop over the course of the year. What I would 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 and without, as I'd say, getting overexcited about it. And we have shown, I think from Day 1, that we are focused on the 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.

Operator

Our next question comes from Greg Locraft of Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

I wanted to just -- I think what a lot of us are wrestling with is what is the base EPS from which you're 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're going to get that in August, is that sort of the message?

Dominic Casserley

Let's answer that in 2 parts. On the -- when the plan will emerge in order to 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're 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, Greg, go kindly back to Mike to go over that again.

Michael K. Neborak

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

Gregory Locraft - Morgan Stanley, Research Division

Okay, that's great. And then Dominic, over the next couple of quarters, it sounds like you'll be hard at work on the plan that's coming out as later this year. What are the top 3 things you're going to spend your time really digging into, the next couple of quarters?

Dominic Casserley

Greg, one of the great excitements about Willis, and we should all understand is what one of its great strengths, is it has a truly fantastic global platform. And the 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 will end up delivering value to shareholders, is an absolute critical thing we will be focused on. We will obviously be secondly focused on how do we do that in a way which delivers growth. We are absolutely convinced that the underlying need to create shareholder value is -- will be driven by our ability to grow this business, so we'll 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 a very positive margins and thereby gross cash flow. That's how we'll be thinking about it.

Operator

Paul Newsome, Sandler O'Neill.

Paul Newsome

I just want to make sure we're 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 possibilities of further restructuring announcements between now and the former layout in either August or September, is that right?

Dominic Casserley

Paul, I think what you should think about is that over the next few months, we'll be developing our strategy. And as I've said, it's focused on growth because we think that's 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'd 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.

Paul Newsome

That's terrific. I also want to make sure that I 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's sort of a couple of points less on a -- still extraordinarily strong. Am I directionally in the right idea to think about that, that way?

Michael K. Neborak

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 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're looking at something that's without some of these items that perhaps were a little bit exaggerated in the quarter for good reasons.

Operator

Our next question comes from Bob Glasspiegel of Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

I've got a couple of big picture questions, so you can take any direction you want, Dominic. But coming from a consultant background, you've experienced a lot of and seen a lot of companies like Willis firsthand. Now that you've 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 on being you running the company versus what you inherited?

Dominic Casserley

I will answer the second part of that question, first, I think there is no honeymoon period in the world any longer. And we're all responsible from day 1. 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're moving this thing forward, we're responsible for quarter-by-quarter. I think we've just been saying that if you were waiting for the big strategy plan, that's not going to come until after into August or maybe early September. But just to be clear, we're responsible of delivering each quarter after that period and beyond. Remind me...

Unknown Executive

Strengths.

Dominic Casserley

Strengths and weaknesses, yes. So I think I've 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 saw here today, to have a wonderful global platform. And I strongly believe that our 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 1 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 a world where, which is basically a people business, that is a great strength. And I think the fact that 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 deliver consistent returns and growing returns over time. So we have to make sure that we do that and we have to be focused on that. And clearly, as it had been no secret and no one's trying to hide, we had a legacy of challenges in North America as the result of the state of the economy and the HRH integration. But I think what you are seeing, which Vic had been singling throughout 2012, and we have now seen in the fourth quarter, that we are seeing a turnaround of that and North America is now going to be a great strength to this company. So I see the world pretty much like that.

Operator

Our next version comes from Josh Shanker of Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

But you're happy to talk about Willis' strengths, I know you're not going to unveil the plan right now, but from your view right now, what are Willis' weaknesses?

Dominic Casserley

I think I tried to touch on them a bit, Josh. The weaknesses are the ones that fates any broker/advisory firm is 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's a competitive talent world and we have to make sure it's -- we're 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 great -- the next great offering and to retain the analytical talent you need is fierce. Now we have had a recent 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 the less way you're 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've shown over the last 18 months, 24 months. But if we were too slow, let 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.

Joshua D. Shanker - Deutsche Bank AG, Research Division

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

Dominic Casserley

Nothing that at the moment gets me very excited. No, all right? We always constantly have to invest and play but -- in what we're doing. Did you have a specific point you were trying to make there?

Joshua D. Shanker - Deutsche Bank AG, Research Division

Well, I -- one thing which I -- obviously, the question of Will Place, how competitive it can be with GRIP and Marsh Connect. This is the question that we -- where we are not -- we don't yet from our end, but we hope that that's correct. And maybe you have some thoughts on that issue?

Dominic Casserley

Well I am slightly confident, but let me turn over to Steve Hearn, Deputy CEO and Head of Willis Global, to talk more about that.

Steven P. Hearn

Yes, sure. Thanks, Dominic. The -- Will Place technology and I'm placing it more generally, sits, from a management structure perspective, within Global, so it 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've said previously on previous earnings calls. The -- that is a very, very client-centric model that we've created with Will Place. So it isn't just about the relationship between us as an intermediary and the carriers within and we place the business, it's actually about the client and our relationship with that client in terms of 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're seeing 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. Have you -- moving forward, I would see that continue to be a significant part of our platform as we move forward.

Joshua D. Shanker - Deutsche Bank AG, Research Division

And finally, in your headcount reduction plan, is anyone in the 200 jobs have -- do you even announced yet, anyone -- or is this going to be -- begin going forward from here?

Dominic Casserley

Begin going forward from here.

Operator

Mike Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I guess one question, just looking at peers and you guys has -- a lot of other folks are deploying capital significantly either be it buybacks or M&A. Can you kind of 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, you kind of laid it upfront but M&A, pension, CapEx and how soon will buybacks legitimately be on the table? And then one follow-up.

Dominic Casserley

Yes. It's 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 of shareholders and investing in the business, broadly rough numbers. And obviously, we are very sensitive to the fact that what we're really doing there is investing for the long-term shareholder value growth or delivering immediate returns. And we have to get that balance right. And so we're going to be very focused on that. As I've said, we believe that the sustainable value creation of Willis must be based on long-term growth. And so we will be focused on that as well as on delivering value, short-term value, to shareholders as we've 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 this is the right thing to do, to return more to shareholders through share repurchases.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And then is leverage a factor in that consideration at this point for you?

Dominic Casserley

Well, as you know, of the 3 global brokers, we are the highly -- almost highly leveraged. And so we just need to be cognizant of maintaining very strong credit rating and so we have to operate within that envelope. And when we're thinking about acquisitions, when we're thinking about our returns to shareholders, we're not going to do anything which violates our credit position in the marketplace.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

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

Dominic Casserley

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

Operator

Tom Mitchell of Miller Tabak.

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

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 have been accrued through 2012, and I just want to double check on that. Would that -- would it be reasonable to assume that would have been about $12 million in the fourth quarter?

Michael K. Neborak

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 there'll be a little bit more than $16 million in the fourth quarter.

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

Oh, okay. I'm sorry, I wasn't looking at the slide. And then the second question is more -- I know you're focused on both the costs and revenues, but if we look at sort of the normalized run rate of revenue growth in the fourth quarter at around, let's say, 5.5% and 6%, and then try to think about what -- not so much what is the normalized rate of cost, but if you were able to sustain, let's say, a 5% growth rate in revenues, what sort of under -- 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?

Dominic Casserley

So Tom, as we've said again, we don't provide guidance on our major elements. What I can tell you is the following, I'll 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'll 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 charts, that we understand that fully. And would 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.

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

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 basis but there was rarely a period of relief where the cause 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.

Dominic Casserley

Tom, I understand your concern. There's not much I can do about it looking backwards. The -- going forward, I want you to very much focused on what we believe are the 2 drivers of shareholder value.

Unknown Executive

Yes.

Dominic Casserley

We have highlighted cash flow specifically for you to focus on because out of cash flow comes our ability to invest for the future and deliver short-term return, immediate returns to investors. And that is something we're 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, or when we eventually take it, we will be tracking very carefully that the costs we have taken a charge from actually exit the business in a timely fashion and do not get that backfilled left, right, and center or something. So that's what we will be working on. Now 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 exits the business.

Operator

Our next question comes from Ray Iardella of Macquarie.

Raymond Iardella - Macquarie Research

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

Dominic Casserley

I'm not going to comment on what Joe saw or did not see, or -- I think he has delivered over a long period of time terrific performance of this company. What I'm 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 what I described. And we, as a management team, understand that extremely clearly and need to make the right tradeoffs and decisions to deliver that.

Raymond Iardella - Macquarie Research

Okay. And then maybe for Vic, since we haven't heard him on the call at 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's premature as well?

Victor P. Krauze

Thank you, Ray, this is Vic, appreciate it. The short answer is no. In the fourth quarter contingents, or any type of income like that, did not help the quarter. Anything we've received on the employee benefits side would be in the first quarter of 2013.

Dominic Casserley

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 this space 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 on our contingent commissions. And then because of the 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 -- where what is transparent because we believe that posture is best for shareholders. That posture is best for 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 in the long-term.

Raymond Iardella - Macquarie Research

Okay. 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, I mean, has that helped you guys in increasing the talent in the organization in the first couple of months of 2013?

Dominic Casserley

Well I'll turn to it -- and then my colleagues will want to add, but I think it's too early to tell, generally. I think it's fair to say that the change had been welcomed in the company. The retention program we had was absolutely appropriate in past periods, it was -- seemed to be a good way of awarding talents. We came to a conclusion that a change would be in the best interest of the business and that's why we made the change. And I think it had been well received. I think it's too early to tell whether it has made a difference in recruiting whatever. Steve, do you want to add...

Steven P. Hearn

Yes. I'd probably give a bit of a 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 issue around retention. But it should be an enabler, it should it make easy. We're weeks into having that all available to us. I think Dominic's right, there's no impact yet.

Operator

The next question comes from Meyer Shields of Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

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

Dominic Casserley

It's spread broadly.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Are you seeing any indications of another slowdown in the U.S., may be driven by consumer spending or the things seem like the momentum for last year is continuing?

Dominic Casserley

Vic, why don't you take that question?

Victor P. Krauze

Happy to. We have not really seen any signs of a slowdown yet, that's evidence itself in the business. It's a longer term sort of view we would have to take on that. I mean 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.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Good, glad to hear it. And Mike, 2 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?

Michael K. Neborak

To answer your first question, your assumption is correct in the corporate expense. And as you know, as I mentioned, we typically in the Associates line, which is predominantly Gras Savoye, in the first quarter, it's very positive. So that positive will get reduced down versus the same quarter in 2012 and then the losses in the quarters 2, 3, and 4 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.

Operator

Our next question comes from Mark Hughes of SunTrust.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

The goal of a sustainable revenue growth and then cost increases or cost leveraging, would you anticipate that you'd be able to achieve that, say, in North American and the International business by the end of the year or will that be a longer process?

Dominic Casserley

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

Victor P. Krauze

I think that from a North American perspective, we should be able to contribute. While there were some challenges in 2012 as I look at this business going forward, if we grow our revenues we will always -- I think we'll 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?

Timothy D. Wright

Thank you. I think it's a different story around the world but the conclusion is the same. As I've said before, in International, we have opportunities to grow actually in most markets, with us seeing those businesses that have experienced decline or low growth taking share in markets which are low growth markets such as Continental Europe, which we've 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 in different parts of the world, the same conclusion.

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

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

Victor P. Krauze

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

Operator

Our last question comes from Ron Bobman of Capital Returns.

Ron Bobman - Capital Returns Management

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

Dominic Casserley

That's a little tough. Let me repeat what I said and then sort of sped up to answer you 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 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 positive. Now -- so that is all very good. And the pipelines that Victor's kept a very close eye on are looking strong, so that is all good. Now 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, that 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.

Victor P. Krauze

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's 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.

Operator

At this time, we have no further questions.

Dominic Casserley

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.

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