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Willis Group Holdings Public Limited (NYSE:WSH)

Q1 2013 Earnings Call

May 01, 2013 8:00 am ET

Executives

Peter R. Poillon - Director of Investor Relations

Dominic J. Casserley - Chief Executive Officer and Director

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

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

Timothy D. Wright - Chief Executive Officer of Willis International

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

Analysts

Jay Gelb - Barclays Capital, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Arash Soleimani - Keefe, Bruyette, & Woods, Inc., Research Division

Raymond Iardella - Macquarie Research

Brett Huff - Stephens Inc., Research Division

Brian Meredith - UBS Investment Bank, Research Division

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

Robert Glasspiegel - Langen McAlenney

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

Jay Adam Cohen - BofA Merrill Lynch, Research Division

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, Director, Investor Relations. You may begin.

Peter R. Poillon

Thank you, and welcome to our 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 a 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 and that term is defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those estimated or anticipated. These statements reflect our opinions only as of today's date, and we undertake no obligation to revise or publicly update them in light of new information or future events. Please refer to our SEC filings, including our annual report on Form 10-K for the year-ended December 31, 2012, 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 J. Casserley

Welcome, and thank you for joining our quarterly conference call. By now you've had a chance to read the news release that we put out last night and have a copy of our slides at the ready.

With me today are Michael Neborak, Chief Financial Officer; Steve Hearn, our deputy CEO and Head of Willis Global; Vic Krauze, Head of Willis North America; and Tim Wright, Head of Willis International. We will all be happy to answer your questions after Mike and I offer our introductory remarks.

I'm now about 4 months into my new role, and I've had a chance to move throughout the company, working closely with our global leaders in London and also spending time in our key businesses in Europe, Asia, North America and Latin America. In fact, as soon as this call concludes, Vic and I will be heading to California to meet our top North American producers and visit a number of our offices in the Western region of the country.

From Willis Global to Willis International to Willis North America and finding, among our people, even more confidence, commitment and optimism and a lot of great ideas that will propel Willis to the next level in the years ahead.

So with that, let me turn to an overview of our results. Focusing on the top line, I'm pleased that we started the year with well-balanced organic growth of 4.1%, with each of our segments, North America, International and Global, achieving organic growth within 50 basis points of each other. North America led the way with 4.3% growth, with International and Global growing at 3.8% and 4.1%, respectively. My congratulations to Vic, Tim and Steve and their entire teams for continuing to build on the progress that was evident in the fourth quarter.

Now digging into the numbers a bit. Our reported earnings of $1.24 per diluted share in the current quarter include the impact from the $46 million or $0.22 per share expense reduction initiative charge that we announced on our call in February. This action, which was completed in the quarter, will drive expense savings that Michael will discuss later in the call. So if you account for the impact of the charge, our adjusted earnings per diluted share for the first quarter were $1.46. That is up $0.14 or 10.6% compared to $1.32 in the first quarter of 2012. And just to make sure you're taking in the full picture, that first quarter 2012 EPS number does not reflect the negative $0.01 impact on earnings from changing our remuneration policy, as we outlined on our call in February. In addition, you should also understand that approximately $0.10 of the EPS improvement results from a lower tax rate in the current period relative to last year. Mike will also cover our tax rate in a few minutes.

With those group-wide numbers as context, let's spend a few minutes looking at each of the segments in some detail. First, let's have a look at Willis North America. As I mentioned, North America achieved 4.3% organic growth in the quarter. In the year-ago quarter, North America organic growth declined. So this is a good result that follows on the back of a strong fourth quarter result. North America's growth was, again, well distributed geographically across the regions, a testament to the work that Vic and all of his national partners and their teams are doing to strengthen our business. The metro region, which covers the Northeast United States, and the Atlantic region led the way during this quarter.

In looking at our practices, Human Capital put up a strong organic growth number in the quarter, coming in at mid-single digits. With Human Capital making up more than 20% of our revenues in North America, that is an important and robust result.

Taking a look at construction, our second largest industry practice, our revenues grew by low-single digits. This aligns with views from the construction industry as a whole that construction spending in the U.S. is on the rise. We remain bullish on our construction business, as activity is clearly stronger than the year-ago period.

Rates during the quarter were generally positive, and we estimate that it accounted for a little over 1% of our growth during the quarter. For those interested, we recently published our Marketplace Realities report that discusses our detailed view of North American market rates. The report is available on our website.

In concluding these comments on North America, I think that with 2 consecutive quarters of positive growth, we are no longer looking back at the issues we have highlighted in past years and have set our sights ahead, ready for the challenges, certainly, but excited about the opportunities.

Let's now move to Willis International. Willis International's organic revenue grew a solid 3.8% in the first quarter. With a number of promotions and key hires that you may have read about in recent news releases from Willis International, Tim Wright has filled out his leadership ranks across the globe. This strong team and these steady results for Tim's segment in the first quarter are welcome as we face very uneven economic conditions across the many parts of the world that we serve and especially given the weak environment across most of the Eurozone.

Let me provide a little detail of International's results by region. Western Europe, a region that for Willis has had a very consistent record of growth in the face of generally weak economic conditions, reported a low single-digit decline in revenue. Weakness in the Nordics, after a strong fourth quarter, and flat results in Germany were partially offset by Switzerland, which was up double digits, and Iberia, up mid-single digits. Additionally, a few other important Eurozone countries, such as Italy and the Netherlands, managed low single-digit growth in the period.

In Eastern Europe, a growing market for us, we saw mid-single-digit growth primarily driven by Russia. In the U.K., our business achieved low single-digit growth in the quarter. This is a steady result locking the third consecutive quarter of growth in a difficult environment.

In Latin America, we continue to see great results, with growth in double digits. Brazil and Argentina were especially strong during the period. Despite a backdrop of political transition and significant economic challenges, our Venezuela operations were also very strong.

In Asia, we were up double digits with Korea, Hong Kong and Indonesia all delivering strong double-digit growth, while China grew low-single digits. We remain very excited about our China business with its strong leadership, industry-leading footprint, substantial market growth potential and strong pipelines in place.

Finally, Australasia, which had a difficult year in 2012, bounced back in the first quarter, as Australia delivered high single-digit growth. I believe Australia has great promise as a growth market to Willis, and I am very pleased with its performance for the quarter.

Let's now move to Willis Global. Willis Global comprises Willis Re, Specialty, Placement and Willis Capital Markets & Advisory. Those of you who have listened to our calls in the past will notice that we have now implemented the simplest structure for Willis Global that Steve Hearn had laid out on our second quarter call last year. Under this new structure, we have combined a number of our divisions into larger P&Ls under a smaller number of management teams. This structure is bringing our highly successful global businesses closer together and enabling them to work more closely with colleagues in Willis North America and Willis International.

Willis Global had a strong solid quarter, with organic growth of 4.1%. The reinsurance business grew mid-single digits in its seasonally largest quarter, with North America reinsurance reporting even stronger results. It was up double digits on the back of strong new business wins. International reinsurance grew mid-single digits, while Specialty Reinsurance was flat in the quarter.

Willis Re found rates during the quarter to be broadly flat. Once again, Peter Hearn and John Cavanagh, respectively, our Chairman and CEO of Willis Re, published Willis Re's closely watched 1st View report on April 1. In that report, available on our website, you will find detailed information on our view of reinsurance rates by region and product.

The Global Specialty businesses of Willis Global were up low-single digits, delivering good growth from new business. Faber Global had a strong quarter, recording mid-teen growth driven by new business. The Marine and Energy units grew mid-single digits, driven by strong growth in Energy. Offsetting this was weakness in the FINEX and Aerospace units.

With that, I will turn it over to Mike to discuss the rest of the financial results. I will return later with some final comments before turning it over to you for questions.

Michael K. Neborak

Thank you, Dominic, and good day, everyone. During my comments, I will be referring to the slide presentation that is posted on our website. In reviewing the numbers, all comparisons are to Q1 2012 unless otherwise stated.

So turning to Slide 3. Reported EPS this quarter was $1.24 versus $1.28. That reported EPS number becomes $1.46 after adjusting out the $46 million charge we recorded to reduce our cost base. Since the $1.46 includes $0.10 from a lower tax rate and $0.01 of favorable foreign exchange, we consider the underlying result to be $1.35, which compares to $1.32 last year.

The 19% tax rate in the quarter was driven by very low tax charge against U.S. income. As a reminder, our U.S. operations are in a cumulative 3-year loss position due to the goodwill impairment and a number of one-off charges recorded in 2011 and 2012. This requires us to maintain a valuation allowance against our deferred tax assets so that very little tax charge is booked against our U.S. income. We expect that this will be the case until our U.S. operations are beyond the cumulative 3-year loss position period, which is likely at the end of 2014 or early 2015.

The full year tax rate is expected to be 22%, so the tax rate for quarters 2, 3 and 4 should range between 22% and 26%. The quarterly tax rate is impacted by a number of factors, including the proportion of U.S. income to total income. During the time we remain in a cumulative 3-year loss position, higher percentages of U.S. income produced a lower tax rate.

For example, in the first quarter, the proportion of U.S. income to total income is higher than the remaining 3 quarters of the year largely due to the North American reinsurance business. Therefore, the 19% tax rate is comparatively low versus what we expect to report in the remaining quarters. Again, the full year tax rate is expected to be approximately 22%.

As Dominic mentioned earlier, we delivered 4.1% organic commission and fee growth, which was broad based across our 3 segments. The adjusted operating margin declined 90 basis points driven by 5.1% adjusted expense growth, which is shown on Slide 4.

Excluding the favorable impact of year-over-year foreign exchange movements, underlying expense growth was 5.6%. You should note that Q1 2012 numbers are based on our old remuneration policy. If our new remuneration policy had been in effect during that period, the $1.32 adjusted EPS figure from last year would have been $1.31. The 5.6% underlying expense growth would have been 4.9%, and the 90 basis points of margin contraction would have been 50 basis points. The impact of this change in remuneration policy becomes more pronounced in quarters 2, 3 and 4. Slide 5 summarizes the quarterly information we provided on our last earnings call.

To reiterate, our S&B expense in 2012 would have been $48 million higher had we been accruing for annual cash bonuses throughout 2012 instead of amortizing retention awards. And let me remind you that this change in remuneration policy had no impact on cash flow.

On Slide 6, note that adjusted S&B grew 6.5% and underlying S&B, which excludes the year-over-year benefit from foreign exchange movements, increased 6.9%. The main drivers were an increase of approximately 500 full-time equivalent employees during the last 12 months and the year-over-year impact of annual salary increases. But again, this growth is overstated because of the change in remuneration policy.

The purpose of Slide 7 is to highlight S&B growth assuming that we accrued bonuses throughout 2012. On a comparable basis, underlying S&B growth was 6.1% or 80 basis points lower than the straight comparison.

Slide 8 shows that the underlying growth in other operating expenses was 1.4%, reflecting our focus on controlling these costs. As I mentioned earlier, we excluded from adjusted earnings a $46 million charge that was aimed at reducing our cost base in the future. We announced this charge last quarter.

Slide 9 summarizes the charge. To be specific, we eliminated 207 full-time positions, resulting in a $29 million charge included in salaries and benefits. In addition, property and systems rationalization costs impacted other operating expenses by $12 million. Lastly, we incurred $5 million of depreciation expense related to fixed asset write-offs.

While the total amount of the charge was slightly above the high end of our previously announced $35 million to $45 million range, there will be no further expenses related to this action in 2013. We expect the charge to generate savings of approximately $20 million in 2013 beginning in the second quarter. On an annualized basis, savings are expected to be in the range of $25 million to $30 million. Around 3/4 of the savings are expected to be S&B related.

Now let me comment on the Associates line, which is primarily Gras Savoye. The first quarter is the strongest for the Associates line, which contributed $15 million this quarter, unchanged from last year. However, for the full year 2013, we continue to expect that the Associates line will come in lower than last year as Gras Savoye completes its operational review. As such, at this time, we still expect the Associates line to be a loss of $1 million to $3 million for the full year 2013, with the losses more weighted to the second half of the year.

Let me wrap up with the balance sheet. We ended the first quarter with $531 million of cash, up $31 million from year end. Total debt outstanding at March 31 was $2.4 billion, up slightly from year end as well. As we do each year in the first quarter, we drew down our revolver to pay prior year incentive compensation. The drawdown in the first quarter amounted to $55 million, which compares to $85 million last year.

With that, I'll turn the call back to Dominic.

Dominic J. Casserley

Thanks, Mike. Before we take your questions, I'll conclude our preliminary remarks by saying this. To sum up, I am pleased that our results were very well balanced and solid across all 3 of our business units. At the end of the day, growing our business depends delighting the clients we have, working on their behalf everyday to provide them with resilience for a risky world and winning new clients based on the outstanding service we offer. In addition to the underground engagement with our leaders and colleagues around the world that I talked about a few minutes ago, I've also spent as much time as possible talking directly to our clients and insurance carriers with whom we work and welcoming their feedback.

All in all, I continue to be impressed with the quality of the global teams and the depth of service that we, as an organization, provide to our clients of every size and type in every geography. And that's just not my opinion. I've heard it expressed in so many meetings with our constituents, those we serve. But we can always do better. It is our intention to continue to improve on that client service, and doing so will only result in greater client loyalty, more new business wins, increased revenues and ultimately, expanded shareholder value.

With that in mind, as we continue to review and analyze all aspects of our operations around the world, we will be making changes, investing in markets and/or products that we believe will provide the best growth and value opportunities. We look forward to laying out many of these initiatives and strategies at our Investor Day in New York City on the afternoon of July 30.

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

The overall organic revenue growth of 4%, as we expected, that slowed from the sort of outsized growth we saw in fourth quarter of 2012. It would be helpful if we can get a sense of where you see the glide path of that heading forward, reflecting the rate environment, the economy and that new business growth.

Dominic J. Casserley

Okay. As you know, we don't give guidance, but we remain optimistic and working with Vic and Tim and Steve. We are very, very much focused on serving our clients as effectively as we can and introducing new initiatives to meet their needs. So we remain optimistic for the outlook, but as you know, we don't give a specific guidance on our major P&L items.

Jay Gelb - Barclays Capital, Research Division

All right. And then switching gears to Gras Savoye, the option to assume the full control of Gras Savoye was extended by a year. Can you talk about what drove that decision and perhaps, ultimately, what that means for the ownership?

Dominic J. Casserley

Yes. This was pretty straightforward. We've been in dialogue with Gras Savoye for a while. As you know, conditions in the Eurozone have been interesting, and Gras Savoye is going through a restructuring, which Mike talked about and he -- we -- that's going to take place through most of 2013 and into bits of 2014. And in order that we inherit Gras Savoye, which is firing on all cylinders and to give us all full time to make sure that we are fully able to integrate and build all of the synergies that we want to build between Willis and Gras Savoye, given the present environment, we all make -- thought that it made sense to push the option back a year. It has no implications for our intentions. We continue to be very excited about Gras Savoye. It will give us a leadership position in a major market in Europe and of course, very interesting positions in Africa and the Middle East and Asia. So we are very excited about the opportunity and very excited about working closer and closer with Gras Savoye. However, as with any acquisition, when the time comes, we are going to look very closely not only at the strategic fit, which I just described, but also to make sure that the numbers make sense for the firm and our shareholders. And so that's the context of that decision.

Operator

Our next question comes from Greg Locraft of Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Just wanted to actually go -- get some color on the operating margin. 2 of the 3 segments actually, even with that S&B drag that you highlighted, actually showed year-over-year improvement. The one segment, Global, showed year-over-year declines. How do you think about sort of the operating margin by segment? How should we be thinking about Global going forward? And is the S&B impact really, from the change in the compensation, really centered in this Global segment?

Dominic J. Casserley

Let me just give an overview, and then I'm going to hand over to Steve Hearn to talk specifically about Global. Obviously, we -- our objective is to grow our revenues faster than we grow our expenses, hardly a great insight, and we are very focused on that, and that's the way we are going to deliver ongoing shareholder value to our investors. And in that context, you saw what we did with our charge in the first quarter, but I would say that we are going to continue to invest in our growth businesses. And we do expect -- and you should expect us to continue to try and expand the business and grow where we see growth opportunities. But at the same time, the solution here will always be to grow our revenues faster than our costs. Now referring to specifically to Global in the first quarter, let me turn over to Steve.

Steven P. Hearn

Thanks, Dominic. Thanks, Greg. Firstly, just to explain, the revenues in the core constituent parts of Global are growing faster than their expenses. So our reinsurance business and our reinsurance Specialty businesses, their revenue is growing faster than the expense. We are, as Dominic said, investing is those high-growth areas of our business, high-growth, high-margin areas of our business. Global also includes Placement, the Placement infrastructure on behalf of the organization, in totality, Willis Group analytics and corporate analytics, specifically, and Willis Limited, our regulated entity in the U.K. In the case of Placement and analytics, we've increased our investments year-over-year in technology and in people as strategic investments as we focus more closely on our Placement strategy, particularly executing Will Place, which we've talked about on calls previously. And the emergence of, as I've described it, the analytical broker as the corporate buyer is looking for more than just a risk transfer, insurance transaction, but looking for more consultative advice. We've invested in people in that area of our business. And finally, running a regulated entity anywhere in the world, particularly in the U.K., costs money. And there, we're investing in compliance, audit, legal, those types of areas in terms of supporting the development of that business. I'd tell you we're budgeted as a total in Global to expand our revenues at a faster rate than our expenses, per Dominic's introduction, and we continue to believe that's what we'll achieve for the year. That's our ambition.

Michael K. Neborak

Greg, one other item I would just point out, on Slide 5, a majority of that difference in the first quarter that's shown to be 4 is in the Global unit. So that also is distorting the expense growth a little bit above what Steve just described.

Gregory Locraft - Morgan Stanley, Research Division

Okay. That's great color, and I guess, if I could -- sort of reading between the lines, it sounds like the margin trajectory from a year-over-year improvement perspective in Global in particular is back-end loaded.

Dominic J. Casserley

I think you could assume that from what we've said, yes.

Gregory Locraft - Morgan Stanley, Research Division

Yes, okay. Perfect. Just shifting gears entirely, you mentioned pricing in reinsurance is flat. Pricing in North America is up 1. Can you give us some color on the international markets in terms of pricing?

Dominic J. Casserley

I'll -- we'll give you some sense, of course. As your question points out, and I'm glad you phrased it that way, the very high-level headlines you hear about pricing in the markets hide enormous detail underneath, and you see these headlines about rates are firming in North America, whatever, and then you find the details are very different. So Tim has the difficult task here of trying to give a sense of what rates are doing across 3 quarters of the globe. But Tim, over to you with that task.

Timothy D. Wright

Yes, thank you, Dominic. Greg, the overall picture for International is modest rate improvement overall, but that disguises a considerable variation from country to country. We see rate increases in the places you would expect to see rate increases, where we have catastrophic exposure and claims experience, which Steve can elaborate on from a reinsurance perspective, but those will be places like Australia and parts of Asia like Thailand. So it's very much a mixed picture country by country, but I'm glad to say, whereas in the past, we would have said, overall, we are having a headwind from rates in International, we are seeing them being either neutral or modestly positive. Steve?

Steven P. Hearn

Yes, thanks, Tim. I mean, I think, I agree with both what Dominic and Tim said. I mean, rates are all over the place at a global level, and I've given up giving blanket answers, such as they're up x percent, down x percent, because it's just meaningless. You need to look, as Dominic said in his opening remarks, at the region, the specialty, the product line to get precise answers in terms of what's going on. What is interesting, we're seeing anyway, is the disconnection at the moment between reinsurance rates and primary rates. And again, we'll refer you to our website in terms of 1st View and what we came out with on the 1st of April in terms of reinsurance rates and likewise, as Dominic said, the Willis North America primary rates and what's going on there, which, again, which we have information on the website. The U.S. reinsurance renewal period, I think, is going to be very interesting, and we'll be watching what goes on there in terms of any rating indicators. But it's a very, very complicated world that we operate in at the moment, but at least, I think I would agree with Tim. We're not talking down everywhere and giving those sorts of blanket answers.

Operator

Our next question comes from Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I guess just to drill down a bit on the Gras Savoye deferral, so how should we think about that extra year? Is it the context of providing more time to generate cash for the eventual purchase? Or is it more time to invest for growth to generate leverageable operating income growth? And also, if the extra year allows for Gras Savoye to improve its own operations, does the formula to calculate the purchase price result in a higher number? And just one follow-up.

Dominic J. Casserley

Yes, I think I'll just sort of reiterate what I said the first time. The extra year makes sense on both sides because of the specific circumstances that are all too well publicized, what's going on in the Eurozone and in France. And the actions that Gras Savoye is taking, very sensible actions Gras Savoye is taking to get the business ready for further growth going forward, which is taking place, as I said, a lot of the action, in 2013, which explains why our Associates line will be trending the way that Mike described earlier on the call. Given that, we thought it made sense, if we want to take on Gras Savoye, we want to make sure Gras Savoye is a healthy, growing company, has a proven track record of performance in a new structure, a new environment and that we have as much time as possible to build up the synergies between the 2 businesses. So as we looked at what was taking place in 2013 and the immediate outlook in the Eurozone, we just felt more comfortable pushing out the option 1 year. The terms of our contract with them and our negotiation with them are confidential, but I can assure you we obviously took full account of what might happen in terms of their performance to make sure we controlled anything we paid for the business.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. So it's not fair to assume then, if Gras Savoye makes more money that the formulas will render a higher purchase price. That's not a good conclusion then.

Dominic J. Casserley

The terms are confidential. What I can absolutely assure you is we were very attuned during the course of the discussions, both the original discussions and these new discussions, to make sure that anything we paid reflected the true value of the business going forward.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And then can you talk about any -- the underlying trends that contributed to growth in Human Capital? Just what were the -- any color on incremental drivers or the granular drivers would be helpful.

Dominic J. Casserley

Well, let me turn over to Vic to get a sense of what was -- what were the underlying drivers there.

Victor P. Krauze

Thank you, Dominic. Actually, I think the Human Capital business results were reflective the investment that we actually made in 2012. As you may recall, we spent a fair amount of money hiring what we would call regional wellness teams as part of our value proposition for the businesses we serve. And we started seeing results from that. So one of the questions that I saw come up was, is this reflective solely of our decision to take MDI in that space and it was not. We did not get a full year effect on MDI, and so it was basically underlying business growth across the regions, and I was pretty happy with it.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. And then last one if could squeeze one last one in. In North America, how much did client retention, so higher client retention, factor into the organic growth? Or were there other factors involved that helped contribute to that nice number?

Victor P. Krauze

Retention did help us in the first quarter. It was close to 200 basis points. We're very pleased with what we saw in our retention efforts and seeing that it came through, so it was helpful.

Operator

Our next question comes from Adam Klauber of William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

I guess, what's the potential for you to increase your free cash flow going forward? And what are your priorities for free cash flow?

Dominic J. Casserley

Well, I think as we discussed on the last call, focusing on cash flow is one of the things we want to do. The key driver of that obviously is our EBITDA performance, and that is obviously driven by the equation between our revenues and costs. And we see great opportunities to grow our cash flow, but we will be very focused on that. Now we gave you a picture of what our cash flow was in 2012. We will probably do that on an annual basis or maybe semiannual in such as to what the best way of doing that is. And we are going to be very focused on making sure that number grows. As I said to you, it's organic growth that is the key driver of our free cash flow performance.

Adam Klauber - William Blair & Company L.L.C., Research Division

And as to priorities for usage of that free cash flow?

Dominic J. Casserley

Oh, again, as we discussed on the last call, we will constantly have a trade-off to make between investing for medium-term growth, so that we can continue to grow cash flow on an ongoing basis into the future and returning some of that cash flow to our shareholders. We signaled our intent to be very focused on the latter by increasing our dividend at the end of last year. And every year, we will be looking at the trade-off between investing for the medium term and returning cash to shareholders. And that is a decision we will take every year. And we've got to get the balance right because we've got to make sure that we continue to invest for the medium term. We're active in many growth markets, and we've seen many growth opportunities. At the same time, we are very conscious and cognizant of the need to return cash to our shareholders.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. And one follow-up on North American organic growth, clearly, nice rebound in the last 2 quarters. Should we think about that the last 2 quarters are coming off weaker comparisons? Or should we think about it as 4%, 5% is more potential baseline, and if the environment gets better, pricing goes up, audit premiums turn around, you could actually improve from there? Not asking for forecast but just how we should think about the base.

Victor P. Krauze

Probably the best way I can answer that question is to say that we're continuing to focus on the 3 basics of the business that have helped us turn the business, and it's quite simply our new business pipelines, our recruiting efforts and our retention efforts. And I would expect that if we continue to do the things that we have been doing, we would continue to see results that improve over prior quarters, prior year's quarters.

Operator

Our next question comes from Arash Soleimani, KBW.

Arash Soleimani - Keefe, Bruyette, & Woods, Inc., Research Division

Just had a quick question. Are there -- is there any update in terms of potential investments within the health care exchanges? And from what you've seen thus far with both AI and NMC [ph] establishing an exchange, is there any concern in terms of them having tried to poach any clients or clients that you have that are interested in that type of defined contribution health care strategy? Is there any concern about them leaving to go to one of those brokers? Or is that not an issue in your eyes?

Dominic J. Casserley

When I first got to know the team at Willis, I was very impressed that thinking on this issue was very well advanced, and the team have been doing a lot of thinking about what best way for us to position ourselves in this space. We're making progress. So let me have Vic just describe how we're thinking about this.

Victor P. Krauze

Sure. It is an issue we're watching very carefully, and we spend a lot of time and effort in terms of examining the space. It might be one of the things I look at more than most others right now. What I can tell you is that we are looking very carefully at the exchange space. We are looking at a Willis option in that space in order to compete in that area. My view is that it is not necessarily going to completely disintermediate the brokerage space. There'll be a portion of customers that'll be interested in exchanges in the DC world, if you will, and we have a make sure that we have an option for those customers that do that. And -- but I'm not as concerned that the 2 exchanges that are out there would necessarily cause us to lose business to them.

Operator

Our next question comes from Ray Iardella, Macquarie.

Raymond Iardella - Macquarie Research

So just maybe touching back on Gras Savoye and the thought process in extending the option. Just kind of if I could your updated thoughts on sort of your capital flexibility and updated thoughts on potentially buying back stock debt or any other M&A opportunities out there.

Dominic J. Casserley

Well, obviously, we are doing medium-term planning around our financing needs and a great confidence in our financial flexibility to be able to execute the Gras Savoye transaction should we decide to proceed with it. And on the financial flexibility, we continue to look at our financial structure on an ongoing basis, and make sure that it is fit for purpose. As I said, we are very focused on free cash flow and focused on how we use that cash flow to both drive medium-term growth and to return cash to shareholders, and we'll be making those trade-offs on an ongoing basis. But in terms of financial flexibility to meet the needs of the company to grow and to invest in Gras Savoye and any other acquisition opportunities that we think pass our very stringent tests in being attractive, we're very confident.

Raymond Iardella - Macquarie Research

Okay, that's helpful. And then maybe, Mike, do you have the CapEx for the quarter handy?

Michael K. Neborak

The CapEx for the quarter was around $25 million.

Operator

Brett Huff of Stephens Incorporated.

Brett Huff - Stephens Inc., Research Division

My question is on investment priorities. In the prepared remarks, you mentioned that you've been looking around as you're evaluating your organization, have already started making some investments in Global. But can you give us just a broad sense of what kinds of investments you're going to make? Will it be people? Will it be technology? Will that investment include organic -- I'm sorry, inorganic acquisition of talent or other channels, et cetera? Just kind of broad strokes, what are the different pieces that you're thinking about in terms of investment?

Dominic J. Casserley

Well, Brett, we're in motion on that, and we hope to give you much more information on July 30 at our Investor Day. But it will come as no surprise to you that we're going to obviously be focused on opportunities to grow with attractive returns. And so we're going to be targeting our investments, I think, on growth areas. That does not mean just the emerging markets. It means growth areas throughout the world and in all our businesses where we see specific opportunities. And it will be organic growth is and actually our preferred way forward, but where we see attractive M&A opportunities that, as I say, pass stringent tests in terms of a strategic and cultural and integration fit and very tough net present value analysis of what the cash flows will actually bring us. And then we will also consider inorganic growth but again, focused on growth.

Brett Huff - Stephens Inc., Research Division

Okay. And just a quick follow-up, the expense reductions that you have going for, I think you said the annualized savings would be $25 million to $30 million or $25 million to $35 million. Should we think about that as dropping to the bottom line? Or should we think of that as part of the source of funds for some investments going forward as you guys look to the next few years?

Michael K. Neborak

Well, we said, on an annualized basis, it would be $25 million to $30 million. And I think, to answer your question, both of what you referred to in terms of what we -- some will drop to the bottom line, and some will be used to invest for future growth of the business going forward.

Operator

Our next question comes from Brian Meredith of UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of quick questions here for you. First, Mike, I'm curious. Could you just give us what the depreciation and amortization run rate's going to look like here going forward?

Michael K. Neborak

Well, take the figure that's in the Q and subtract $5 million from it because the reported numbers I mentioned included $5 million related to fixed asset write-offs. Take that number, subtract $5 million and multiply it out by 4. So I think a number of about $21 million plus per quarter is really what you should model.

Brian Meredith - UBS Investment Bank, Research Division

Second question, just back on the benefits business and getting the contingent commission to change the compensation structure, what was the impact on the organic revenue growth rate from that in the North American business? And where are we in that process right now? I mean, what's the benefit going to look like going forward?

Michael K. Neborak

Well, the benefit, though, looking forward is somewhat hard to calculate given the very nature of that revenue stream. Though, we think we'll do better on it as we move forward. As a reminder, we only started that, effective April 1, so we didn't get a full year run rate. So and it was approximately $2 million in the quarter, and we actually had some legacy HRH run-off MDI of close to $1 million. So the impact was not that significant. So I would expect it would be helpful downstream.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then last question, what was the impact of Willis Capital Markets in the quarter in the Global business? Was it a benefit for organic growth hurt [ph] ?

Dominic J. Casserley

Steve, do you want to...

Steven P. Hearn

I'll take that, Dominic.

Dominic J. Casserley

Yes, thanks, Steve.

Steven P. Hearn

No, it was a negative comparable year-on-year. We don't get into stripping out the absolute numbers in terms of the Capital Markets business. As it think we've explained before, it's a very lumpy business in terms of a small number of large value transactions, but it was down year-on-year, quarter-to-quarter.

Operator

Tom Mitchell, Miller Tabak.

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

I'm wondering if you could elaborate a little on the trends in reinsurance rates. There have been a couple of underwriters who suggested that reinsurance is less attractive as a place to be putting their capital, whereas certain parts of North America seem to be more interesting. I'm wondering what your observations are.

Steven P. Hearn

Sure. I'll take that as well. Yes, again, I'll repeat. It is all over the place in terms of rating environment, and I'll point you back to the website in terms of some detailed commentary region by region, country by country and line by line. I certainly, my view is not that this is a place people aren't interested in putting capital at the moment, quite the reverse. We've seen all sorts of new capital turn up in the reinsurance world, particularly in the property cat area so far. But I think discussions we're having and hearing that capital is starting to look more globally in terms of where it's turning up and also product line wise is getting into some interesting places, relatively modest at the moment, maybe $35 billion, something like that, but growing. And we see more, not less of that, and again, I think that's probably a reflection of the macroeconomic environment of where capital can go to, to make a return. And reinsurance offers an interesting opportunity. So no, I think more capital, not less.

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

And in terms of nontraditional but people who are raising cat bonds and other alternatives to traditional underwriting, are you seeing anything in that area that's a meaningful change from where it was, say, a year ago?

Dominic J. Casserley

Yes, again, I'd say more not less is my summary answer. There's certainly a lot more interest and activity. There's been a lot of debate about the fickle nature of that capital, and whether it's a temporary development or something that's going to be more sustained. My personal view is it's more sustained, and it's coming from some places where you find long-term investments. And we'll see what happens, but certainly seems to be more, not less.

Operator

Our next question comes from Bob Glasspiegel of Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

Dominic, I think these board announcements are often a lot more important than we investors, appreciate, and this -- you recently announced -- the company recently announced the Nonexecutive Chairman replacing Executive Chairman and a large investor on the board. Was wondering if you could sort of summarize where the board is coming from on these announcements? What they mean and what sort of skill sets these guys are bringing that you'll tap.

Dominic J. Casserley

Sure. Well, the -- when I came on board as CEO, we moved to a structure of having a Nonexecutive Chairman and a CEO, and that's what we did. And then, as everyone knows, Joe Plumeri had announced his intent to retire in the middle of the year. So what we've done is to find within our existing board, Jim McCann to take over the role of Nonexecutive Chairman. And that's a wonderful transition. We're very excited about that, excited about the extraordinary leadership that Joe has provided this company for over 12 years and excited that an incumbent member of the board is stepping up to become Nonexecutive Chairman. So that's a quite natural transition. In the course of that happening, we realized that we needed to do some medium-term planning as to how the board might evolve, and that has been underway for quite some time. And we knew that with Joe leaving the board, we would have a board place open. And we have -- we've been going through this process, and we were in dialogue with Jeff Ubben, who is one of our major investors in the company, being -- began a series of very constructive dialogues over a prolonged period of time. And we're delighted to welcome Jeff onto the board beginning again in July. But that is a part of an ongoing process we're going through. We also announced -- you will have seen that we have 2 more vacancies emerging. And whereas in the middle of that process I described, and looking forward to announcing 2 new names in the near future.

Robert Glasspiegel - Langen McAlenney

Great. I just wondered if you could just tell me the skill sets that Jim and Jeff bring. And perhaps, what you're looking for -- what the board is looking for as far as depth that they don't have now?

Dominic J. Casserley

Well, in terms of what we're looking for, generally, our business is a reasonably a complex global operation with deep operations North America and around the globe, Europe, Asia, Middle East, Latin America. So we, obviously, are looking for strong capabilities who can -- are used to leading companies in that world. And generally, we're looking for people who want to contribute to enabling us to be a long value-creating company in the medium term. The specifics around Jim and Jeff are, obviously, Jim is a very seasoned CEO and knows the company extremely well, having been on the board for many years. And so we're delighted to have him as Nonexecutive Chairman. And Jeff Harbin has very deep experience on a large number of public company boards, so they bring -- both of them bring great strengths to the board.

Robert Glasspiegel - Langen McAlenney

It'd be great if Mr. McCann could be at the Investor Day, so we can get to meet him.

Dominic J. Casserley

Yes, we will certainly try to make that happen.

Operator

Our next question comes from Mark Hughes of SunTrust.

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

Two quick ones. The employee benefits impact on organic growth in North America, was it positive? Or was it a drag?

Michael K. Neborak

The employee benefits impact was positive. It was -- they had mid-single-digit growth, so it was helpful, it was in line with everything else we did.

Dominic J. Casserley

Okay, great. And then we call that practice as our Human Capital practice.

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

Yes. Right, yes. And then in terms of the Willis Capital Markets, the pipeline you have occasionally commented on it in the past, are there any larger transactions? Or what should we expect for the 2Q or the balance of the year?

Steven P. Hearn

Yes, I'll take that one again. We have a fantastic Capital Markets business, a leader in the insurance industry in terms of our proposition and advice. It is very active. It has a very full pipeline prospects and existing engagements that it's working on. It is, as I said, a lumpy business because obviously its revenues and the announcements are dependent on a transaction, typically a transaction happening. So you see these periods where quarter-on-quarter things move around, but we're very, very happy with our Capital Markets business and expect it to be a contributor to growth of revenue and margin this year.

Operator

Jay Cohen, BoA Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

I just wanted to follow up on the U.S. business. In the past, you've shared some metrics with us as far as producer count and what the new business pipeline looks like. I'm wondering if you can give us an update on those metrics.

Michael K. Neborak

Sure, I'm happy to. On the pipelines, the pipelines are as robust as they have ever been. We are maintaining a level, I think I have indicated in the past, that our initial targets were 2x, and we had gotten to 3x, and we're in excess of that still. On the recruiting front, we're down, what I would call, a handful of producers. In the first quarter we traditionally drop a little bit. The recruiting dipped, as producers were looking to the hire, waiting to collect their bonuses from their previous firms. And then last one is retention, and where we came in for this quarter was above what we had traditionally done and in line with, aspirationally, what I'd like to hit. We target 95% retention. No one's ever done that consistently, but at 93%, I'm a pretty happy guy.

Operator

At this time, we have no further questions.

Dominic J. Casserley

Well, let me thank everybody for attending our call. We are very excited about your interest in our company, and we look forward to continuing to engage with you in the coming months. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may disconnect at this time.

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