Willis Group Holdings Public Limited Company (NYSE:WSH)
July 30, 2013 1:00 pm ET
Peter R. Poillon - Director of Investor Relations
Dominic J. Casserley - Chief Executive Officer, Director and Member of Executive Committee
Michael K. Neborak - Group Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Jay Gelb - Barclays Capital, Research Division
Scott Theodore Brayman - Champlain Investment Partners, LLC
Peter R. Poillon
Good afternoon, and welcome to the Willis Investor Conference. I'm Peter Poillon, Director of Investor Relations for Willis Group, and I'd like to thank you for taking the time to join us or listen in during what I'm sure is a very busy earnings season for all of you. I have to tell you that we are a full slate of executive management here. And I think you'll find it very much worth your time for coming.
I should tell you that this presentation is being webcast for those unable to join us here in at The Plaza Hotel.
Now to start this off with a bang, I'm going to read you the warnings.
So here we go. Throughout today's event, we'll be making forward-looking statements. These are based on management's current expectations, estimates and projections. All statements that address expectations or projections about the future, including the company's strategy for growth, market position, expected expenditures and financial results, are forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Many factors, including those discussed more fully in our reports filed with the SEC, such as our most recent forms 10-K and 10-Q, could cause results to differ materially from those stated. We strongly encourage you to review these filings and obtain additional information about our risk factors. We assume no duty and we will not undertake to update any of the forward-looking statements.
Also, please note, that certain financial measures we use throughout this presentation are expressed on a non-GAAP basis. Our GAAP to non-GAAP reconciliations can be found in the appendix to this presentation. And with that, I'd like to introduce Chief Executive Officer of Willis Group, Dominic Casserley.
Dominic J. Casserley
Good afternoon, everyone. On behalf of Willis, I'm delighted to welcome you to our Investor Conference. In addition to those of us presenting today, we also have in the audience, from Willis, members of our board, including our Chairman, Jim McCann and Wendy Lane. We also have Vic Krauze, Chairman of Willis North America; Peter Hearn, Chairman of Willis Re; and other senior members of our management team, including our Head of Human Resources, Celia Brown; and Group General Counsel, Adam Rosman.
Since joining Willis at the beginning of the year, I have focused on 2 items: delivering strong results for 2013 and defining our future strategy. You all have seen our second quarter earnings last week, a third consecutive quarter of strong organic growth, evidencing our continuing momentum. This meeting, though, is about our future beyond 2013. Let me speak plainly. I see very considerable upside potential in this business. The conversations I have had over recent months with our clients and our people from Hong Kong to Madrid, from Phoenix to Bogota, from Kuala Lumpur to Chicago, have fueled my excitement about the opportunities before us and the talent we have to take advantage of them. So today is about sharing our strategy with you. And in shaping that strategy, I have met and heard the views of our investors in one-on-one meetings and in roundtables since the start of the year.
The essentials of our strategy can be clearly and succinctly stated. Willis is a solid cash-generative company. But there is significant room for us to grow that cash flow further. We will grow by being completely focused on where we compete, and that means the areas where we can succeed, and how we compete, which will be centered on meeting the needs of our clients. And you are going to hear those 2 core areas of focus, where and how, as linking themes from me and the management team presenting to you throughout today.
If we get that right, we will grow revenues with positive operating leverage, and we will grow cash flow and generate compelling returns from investors. So let's begin by making sure we are on the same page on who we really are.
We are global, not North American, not London-centric, we are global. We have 17,500 people across 400 offices in every major market. Over 21,000 people if you include our affiliated firms. And we are highly cash generative from our $3.5 billion of revenues that we produced in 2012.
Now we've often shown this revenue split between our 3 business units: Global, our reinsurance brokerage, and our specialty brokerage businesses; North America, our retail activities here and in Canada; and International, our retail activities in the rest of the world. Very roughly, a 1/3 each. But this is a reporting structure. It does not capture the interconnections between these 3 businesses. Let me give you some examples. Today, clients of Willis North America, use products and services from Global Specialties businesses. International clients, a Japanese manufacturer, for example, will have their U.S. business taken care of by Willis North America. Clients of our specialty businesses, for an instance, an energy client, will also be served by our retail office in Asia. So these businesses are all interconnected.
Now there is more we can and will do here to deliver all of Willis to our clients, and we'll come on to the details of that later.
So let me cover the running order for the day. I'm going to take you through the high level strategy. Mike Neborak, our CFO, will drill down on what this means for our cash flow and for our balance sheet. We'll then have some time for initial questions and then take coffee, and after coffee, come back for sessions from Todd Jones, newly appointed CEO of Willis America; Tim Wright, Head of Willis International; and Steve Hearn, our Deputy CEO and Head of Global, on how they are going to execute on that strategy on the ground with our clients.
I'll then wrap up and will move to the longer plenary Q&A with plenty of time for you to ask questions of the whole team.
So now let's turn to context. We believe there are 3 key questions. Why risk? Why risk advisory and broking? Why Willis? To the first question, simply put, risk is a good place to be. You're all familiar with a long-term structural drivers of this, increasing global GDP, the rise of the middle class, many estimating there will be 3 billion more by 2030. The growth of urbanization, 70 million or 80 million people a year, every year, moving to cities for the next 30 years. Aging populations and the associated challenges. At its most basic, more assets to protect, more risks to be managed, and a greater ability and appetite to protect the management. And if you believe we may see some more inflation sometime in the future, then the value that needs to be protected will increase. So a minor return of inflation will be a good thing for risk players and is past the story driving the forecast increase in the premiums in the long-term.
In addition, the world is facing an expanding set of risks. Companies are facing increased supply chain complexity. Remember how the Thai floods or the Iceland ash clouds affected those supply chains. In Thailand, the monsoon runoff swamped more than 1,000 factories in a country that supplies a significant part of the world's computer hard drives, driving up the cost of those components by more than 10% in the process.
Cybersecurity. Whether defending attacks on your information systems or leaks from it is a major concern around the world. In the last few weeks, Gartner estimated that global spending on information security systems will soar to $85 billion in 2016 from $65 billion this year. And McAfee, working with others, recently estimated the global economic impact of cybercrime and espionage to be between $300 billion and $1 trillion a year. Also in the developing markets, we are seeing increased primary demand for resilience in the face of risks of damage to the recent immense infrastructure investments. From China to Chile, seismic activity is a major concern. The cost of earthquakes today, given the infrastructure and property in place, far exceeds the impact of only a decade or so ago. And these risks are only going to increase. Then there is the controversial topic of climate change and extreme weather patterns. Now you don't have to believe in climate change, you just have to be aware that more extreme weather patterns create new risks and new demand for management of, and protection from those risks. All in all, risk management is now a boardroom and CEO issue. Now I've seen these trends firsthand. For example, I met with the risk manager of a leading German multinational recently. Now he told me that his clients are the CEO and CFO of the company. And he said to me, he said, "Dominic, they don't want to talk about insurance. They don't understand insurance products. They want to talk to me about the risks to the income statement, the balance sheet and to cash flow. And how, as a company, we will be more resilient to those risks. If you, Dominic, can explain how we can make ourselves more resilient, you will win a client." So we live in a richer, riskier world where clients want solutions not just products.
And this brings me onto my next point. If you buy into risk as a sector, why should you be interested in a risk advisor and broker? And the answer is that the role of the intermediary of advisor in this world of exploding risks is strong, and it is set to become stronger for those that have the skill set to be analytical brokers. Now let me go into this a bit further.
At its simplest, the delivery of solutions to risk problems is about understanding the specific risks faced by a client and being able to predict the frequency and severity of those risks. So this is about staying close to the client and understanding their risks, and then staying close to the markets that can assume those risks, the classic transaction matching role, a brokerage role. But these relationships are changing. Many clients are demanding more resilience as their risks become more complex. And as I noted, they want solutions not just products. In generating those solutions, brokers are, and will increasingly become, data collectors and analysts for their clients. And as brokers increase their ability to collect and analyze data about plan's risks, they will also develop their understanding of the appetite of different pools of capital. In the traditional insurance carrier market for sure, but also in new capital markets to absorb the different classes of risk. We believe we will have the opportunity to expand our role in bringing value to both ends of the chain, in delivering more customized solutions to clients, and providing new investment opportunities to carriers and other providers of capital. In the riskier, more analytical risk world, the analytical broker, the broker that can combine specialty expertise with analytical power for the benefit of clients will win, and win on both sides of the equation, helping the corporate client and helping investment capital. And Steve will talk more about this later.
So the third question. Why Willis? We have strong fundamentals. We are a cash generative business. We do not have major capital expenditure or other large balance sheet needs so EBITDA can turn into cash flow. Although we are a regulated business, we are not subject to significant capital requirements. In many of our best businesses, where we offer distinctive capabilities, we are able to sustain and grow high margins. We are diversified by geography, here estimated across our businesses, by line of business and by quiet. Now this diversity is very important. I am often asked a question in investor and other meetings, what's the outlook for rates? And my question back is, which rates? North American property rates for middle market companies? Satellite launch risk rates? Florida cat rates? China health care rates? Brazilian facultative reinsurance rates? All these and many more are a major relevance to Willis, but our diversity helps mitigate the impact on our earnings of extreme swings in any one market.
On top of these fundamentals, we have distinctive strengths dating back to our birth in 1828. Unlike the other global brokers, we were born around delivering specialty insurance products. We have always been an analytical animal. We can and do focus on the complex, the difficult and the value-added, for specific industries or types of risk. And guess what, the DNA -- that DNA makes us perfectly suited to be analytical brokers. In a riskier, more data-driven world, we at Willis are superbly positioned to bring these industry and product skills to more and more clients.
In addition, we operate under one flag. Joe Plumeri, my predecessor, did many wonderful things for Willis. And one of them, instituting the concept operating under one flag, epitomized by the Willis pin we all wear, is a distinctive and long-lasting legacy. And this isn't just empty symbolism. I believe and I found that our culture at Willis is essentially one of collaboration, of pulling together as one team. And to connect with clients, you need to be connected as a firm. Now we need to mobilize that better to drive value, but the cultural foundations are there to support a much deeper and broader delivery of the whole firm to our clients. More on this from me shortly.
So we see a favorable macro and sector outlook and our own strong fundamentals. But let's be upfront about underperformance. There is no denying that recently we have underperformed. We have not, in the past few years, lived up to our potential, and we have not delivered the revenue or earnings growth our investors expected. Much of our underperformance in the past few years was because of specific problems we had in North America. As you know, in the middle of 2008, we bought Hilb, Rogal & Hobbs, HRH, for $2.1 billion. This was difficult timing to make such a deal, of course, as the U.S. economy entered a major recession.
In addition, we faced tougher integration problems unexpected. A fair number of HRH brokers decided they never aspired to be part of a global broker, and left, and in a number of cases, taking their middle market books of business with them. So while all brokers suffered in the United States because of the extreme economic conditions, we at Willis were especially hard-hit. And we can illustrate this by asking the question: If Willis had merely performed in the United States at the same level as their representative average of peers performed over the same period in the United States what would we have looked like? Well, the answer is that we would have delivered an extra 2% of revenue growth each year at the group level, and be not breaking in line with our long-term trend. [ph] So our overall potential was masked by specific HRH-related problems in North America. So if we continue to perform in North America in the way we have in the last few quarters, there is clearly upside available. And it is one element of return to the growth we saw in the earlier 2000s.
So what's the plan? As I said, there are 2 fundamental areas we are focusing on: Where we compete and how we compete. So for where. Which geographies we will prioritize, which client segments we will focus on, which sectors we will highlight. And how. How we connect all our capabilities to deliver the best of the firm to each client, how we innovate, capitalizing on our analytical power, and how we invest. Always in a selective disciplined way.
Let's start with where we are going to compete and a topic of geography. We will invest in fast growth markets. This slide shows the direction of travel. Again, using the same estimated geographic mix I showed before. We expect to rebalance our portfolio overtime, so that around 30% of our revenues come from high-growth market compared with just under 20% today. Now this might seem like a bad time to be increasing our investment in emerging markets with all the noise about lower growth in China, maybe only 7%; and Brazil, which is presently struggling to grow 1% or 2%. But the longer-term fundamentals remain in place. It is important to remember that these growth rates are for the economy as a whole. With these economies continuing to mature and catch up with the rest of the world, insurance is usually growing much faster than overall GDP, and brokerage of insurance in the corporate sector often faster still. We firmly believe that we will grow faster as we increase our exposure to these markets where brokerage is simply growing very strongly. Over the past few quarters, you have heard of a double-digit growth we are seeing in many of these markets. But to be clear, when we talk about prioritizing geographies, we do not just mean increasing our exposure to the developing markets. It also means identifying the faster growing areas within developed markets. So we see tremendous potential within North America. And that's about specific states, specific client segments and specific sectors. Todd Jones will expand on this after the break.
In a similar vein, we see specific growth opportunities in an otherwise sluggish Western Europe, and Tim Wright will talk to that later.
Let's talk about clients. We will not try to be all things to all clients. We're going to provide distinct offerings to different types of clients. In the large corporate market, the Global Fortune 1000 market, we're going to pick our spots based on our geographic relationships and our areas of technical specialty. We already have a big book of large corporate businesses, and we intend to grow it where we have a right to be successful. This means we will bring substantial analytics, data and customization to the needs of these clients. Today, we are winning business in this most sophisticated of segments, where we bring our special capabilities to bear, and we're going to invest behind this opportunity.
In the middle market, we have developed our proprietary Sales 2.0 approach that is now well tested and rolled out across most markets. It is essentially an industry-based consultative approach to broking for middle market companies that strongly differentiates Willis from the local, regional and national brokers in this market. We will build on our momentum with Sales 2.0. We're going to change our approach to the SME market. We will pursue 2 approaches. Either, we will provide an agency and facility model that can provide quality products at affordable cost for these clients, or we will rely upon our network of smaller brokers, powered by Willis products, to deliver value. In both models, we will provide value as an affordable cost.
Insurance companies, the main clients of Willis Re, are an important client base for us. They represent 15% of our total revenues. Willis Re has been so successful in this space over the past few years by building a distinctive position in the market as the supreme analytical brokers, combining sector-leading analytics with great technical broking skills. We will continue to distinguish our offering to insurance companies this way. But in parallel, in our primary business, we will be providing more capabilities in analyzing how they can serve our corporate clients better, and thereby, helping carriers build their position further.
We have leadership positions in a number of industry sectors, and I put some of the examples on this slide. Take Marine as one example. We have been a leader in the industry for 180 years. Our clients include shipowners, ship builders, third-party ship managers, charters, port and terminal operators, and shipyards. We are currently broker to 5 of the top 10 global shipper owners and broker to the largest shipper in the world, Maersk. But we can be smarter with that strength. We can capitalize on our expertise in relationships to build industry insight relevant to multiple clients across the sector. In a competitive market, this is what gives us an edge. And Todd has got some great material for you on this later.
Benefits and health care benefits form part of a particularly interesting sector. We are not always associated with leadership in health care and the related human capital and employee benefit business lines. The reality, this is a significant business, where we see massive potential in what is a highly fragmented market with demand trends that play right to our sweet spot. Let me give you the context again.
There are demographic challenges across multiple countries, and there is rising demand for health care services from the expanding global middle class. Therefore, there is the need for a device on how to satisfy staff demand for these services, while still controlling cost. We already have a very interesting and growing position in benefits. Globally, it represents about 15% of the firm and over 20% of what we do in North America. We've carved out a position in employee benefits where we do 3 things really well. First, we have a strong domestic position in North America under the banner Human Capital. We have built a $300 million business and it's growing, recently, at nearly 10%. We focus largely on the middle market, where particularly in light of the Affordable Care Act, so called Obamacare, there is a demand for advice as well as brokerage to navigate the complexity. Our wellness and brokerage proposition does this extremely effectively.
The second position we have is in selected international markets, in those markets where the health care regulatory structure plays to our strength. We have strong positions in markets as diverse as Brazil and China and Denmark and Spain. We're excited about these positions, and we'll continue to build them where we know we can be a distinctive provider. And the third position is in serving a number of multinational companies, who need on-the-ground capabilities often outside their home market. We are one of the 4 providers, who are credible in this space, and we serve over 200 multinational corporations on their international benefit needs on the ground. We will continue to grow that business.
So for us, benefits is a set of largely health care businesses with real potential, where we have carved out distinctive market positions that we can both defend and grow. So we've discussed where we will compete, in which geographies, client segments and sectors.
Now let's turn to how. Three elements: connection, delivering the best of the firm to each client; innovation, capitalizing on our analytics power; investment, deploying our resources in a selective disciplined way.
Let's start with connection. Today, about 25% of our global specialty revenues come from opportunities developed by our retail offices in North America and in International. It should be at least 50%. Our vast retail relationship should be a funnel to our experts. We have a great opportunity to improve this cross-selling, to leverage our retail, our businesses, to develop opportunities for our industry capabilities across geography, client segment and sector.
Now a second aspect of connection. We have a global network, and many of our clients take advantage of that network. But too many do not. We believe that there is a large opportunity to increase the global usage of our network by our clients. So to go back to my earlier example of the global interconnection of our businesses, I'm talking about a Japanese client seeking North American coverage, for example, or vice versa. In addition, we can increase our market share by converting specialty product areas into industry expertise. And by doing this, we can leverage our client access and industry knowledge to service the totality of the clients requirements, not just specific product requirements. And Steve will talk about more of this after the break.
If we do a better job of cross-selling our capabilities, we believe we will not only increase revenues from existing clients, we will also improve their retention, and we will also win new clients from delivering an enhanced capability. So those are the outcomes we have highlighted on the left of this slide.
How will we make this happen? It's about aligning the organization and how we serve clients. That means providing appropriate training and development for staff and the right incentives. Unlike banks, we don't come in for a lot of good media these days, but unlike banks, who generally do a much better job at this than we do, we do not presently think about products per client. By segment, we're going to focus on exactly such a metric. We will also cross-fertilize skills and personal networks by moving some people across the 3 business units and enhancing our sales processes and structures.
Next, let me turn to innovation. Willis has a proud and successful tradition of innovation, as you can see from some of our most recent introductions to the market across a range of areas. The engine that drives the complex advice solutions that our increasingly sophisticated demand and value is analytics. But it's not analytics in a vacuum. Anyone can process data. Analytics must be informed by the detailed specialty knowledge of the sectors, geographies and broader factors that are relevant to our clients. And this is exactly what we are doing, matching our specialty strength with analytical power. More of this from Steve later.
And we will also innovate more broadly to meet client needs in particular markets. Tim and Todd will have examples on how we're doing that on the ground.
And a final point here. In my opening remark outlining our strategy, I made it clear that how we compete, and that includes how we innovate, is centered on meeting the needs of our clients. Having the client at the center of what we do requires us to make important choices on how we operate. And so I wanted to spend a moment here on the related issue of market derived income, or MDI, an industry rather than Willis-specific phenomenon, as you know.
Now MDI is the revenue that Willis can receive from carriers as opposed to commissions or fees from our insured clients. It's important to understand and, particularly, given the pace of innovation in our markets, the MDI can potentially take many, many forms. It is not just contingent commissions. For example, new analytical tools we developed, and there are some examples on this slide, which significantly improved the pricing efficiency and delivery of planned solutions, which is good for our clients, can also give rise to broker income from carriers, who use the technology to enhance their product offerings. So it's nuanced. We will, in the face of this new many different forms of MDI, apply a set of criteria to evaluate on a case-by-case basis whether we will take MDI. The criteria we will apply will include: Is the offering and payment of the relevant MDI ultimately in the client's interest? Is it transparent to the client? And is it consistent with regulations as appropriate? So that's what we will do, case by case using those criteria.
Okay. Now let's move on to the final component of how to compete. We are committed to stringent discipline on how we invest. As I've noted earlier, we are in a great industry space, and we are naturally strong cash flow generating business. One area we can go wrong in, however, is wasting that cash flow on poor organic or inorganic investments. So to guard against that, we will have a strict and disciplined process to insure we invest wisely.
First, we have a set of 3 criteria around investment: the underlying economics of the segment we are pursuing, our competitive position, and our ability to deliver on a plan given our infrastructure and the values of our staff. All 3 have to work for us to consider an investment. And we will apply those criteria in assessing how we allocate our resources between opportunities. And clearly, we will equally manage our existing portfolio of businesses just as stringently. And if those businesses do not perform over a reasonable time frame, we will redeploy capital away from them and reinvest in growth areas. And a key point. You can see we want to focus on growth opportunities, which can be earnings accretive and deliver strongly positive NPV. That is, they return more cash to us over time than we spend. We will not invest to chase short-term earnings, but then end deliver weak long-term cash flows.
On the subject of potential acquisitions, let's focus on a moment on Gras Savoye, in which we currently have a 30% stake with an option to acquire 100% of the business exercisable in June 2016. And we need to decide if we want to exercise the option by May 2015.
Gras Savoye is the leading insurance broker in France. Now while currently out of favor with some investors, I would remind you that France is the world's 5th largest insurance market. Gras Savoye has a strong position in both the large corporate Paris-based market and in the regions of France through its 28 offices across the country. The remaining business, again 30%, is international, with a leading franchise and many long-standing relationships in the growing African market, and also in Eastern Europe, the Middle East and parts of Asia.
This international portfolio has growth potential for long-term growth, and it's challenging to replicate from scratch or inorganically. Now we have known and worked closely with Gras Savoye across all of these markets for many years. So looking at this through the lens of the acquisition criteria I summarized just now, the opportunity takes many boxes. Focusing on economics, there are potential revenue and cost synergies between Willis and Gras Savoye. Additionally, Gras Savoye itself is currently reducing cost. This will lower profits from our associates' line in 2013, but should enhance the longer-term economics of the business. So we have about 2 more years of working together before we have to decide whether to proceed. Two more years if you like to[ph] do due diligence. Again, we decide prior to May 2015 whether to exercise our option in June 2016. Summing up, right now, we are in a good place. We are holding what we believe is a very attractive option. But we will only exercise it if it makes sense across those criteria. Of course, in working through whether to proceed or not, we will also factor in the competitive and economic consequences if one of our major competitors ended up owning the Gras Savoye franchise in France, Africa and other international markets.
So I have outlined our strategy on where to compete and how to compete. The detail on execution will come from Todd, Tim and Steve, but here's the top line. North America is returning to form, but we've only just started. There is enormous growth potential across specific microgeographies, specific industries and specific client segment. We've done our homework and we are zoning in on that growth potential on where we can succeed and how we are going to succeed, and that includes Human Capital, as I spoke about earlier.
For International, Tim is executing on 3 broad sets of action across the network: first, fixing underperforming countries; second, taking share through aggressive connected strategies, so that even in sluggish or difficult markets like Spain and Italy, we can grow; third, increasing our exposure to the highest growth markets in Latin America, Asia and Central Europe, the Middle East and Africa.
Global is a strong business. You saw the second quarter numbers. We are continuing to invest in that core strength. We remain very excited about our reinsurance business and its long-term growth prospects. Within our primary specialty business, we will focus on delivering those capabilities more through North America and International. That's at the heart of the connection piece I spoke about earlier. So that statistic again, 25% of current specialty revenues in North America and International. Over the medium-term, we will be driving for a significant increase there.
So I've talked about where and how we will compete in business terms. Let's turn to what that means in terms of the economic framing. In this business, shareholder returns are ultimately driven by the cash flow we generate. And you've heard me, from my very first quarterly call, place much emphasis on cash flow as on earnings per share. A reasonable proxy for cash flow over 1 year is EBITDA. It's not perfect, but you will all have seen how by changing our compensation structure to strip out retention and amortization, we've enhanced retention award amortization, we've enhanced the tracking of EBITDA to cash flow. And as we announced in our proxy, we have now focused on management incentives on growing revenues and profits. The management team is incented to grow organic revenues and profits on an annual basis, while the metrics of our long-term incentive plan, or LTIP, work over 3 years and, in addition, build in the impact of M&A, but will charge a cost of capital to ensure we do not do badly by our way to glory. So the team you are hearing from today and our people across the firm, are all tightly incented to deliver value to investors by growing profitably, and so driving up cash flow that can be used in the short and long term.
Growing the revenue line is only half of the equation. To drive EBITDA, a key issue for us and for you is how we manage our costs as revenues grow. Willis is a company that has had a reputation for tight cost control. That's not changing. We will continue to control costs through a number of management actions, and Mike will take you through some of that shortly. We'd set ourselves some demanding revenue goals that will require us to invest. The key is that we will be very, very selective. We will only invest where we can generate strong positive operating leverage. Where the numbers do not work, we will constrain investment, disinvest or, in a few cases, exit. So over time, we do have to invest in some areas for growth, adding new staff in the emerging markets, upgrading our analytical capabilities. All these things cost money, but you should expect us to reduce or control cost elsewhere, to deliver growth in revenues and positive operating margin. That is what we are managing towards.
As a midterm aspiration, you should think about the management team being focused on delivering revenues to grow in the order of mid-single digits. If you look at the last 3 quarters, for example, we have grown in the range of 4% to 7%. We will also be focused on ensuring that revenues outpace cost by more than 70 basis points. These will be good medium-term objectives. Let me be very clear about what I am saying and what I am not saying. There's volatility in the world, so any individual quarter may be outside the range, either way, above or below. But over the medium term, these are the numbers we are aiming for. Now we're not going to start providing 4 more quarterly or annual guidance. Our job is to set the strategy and to execute hard. I will leave the experts on the sell side to do the quarter-by-quarter forecasting, but I do think it is right that we are transparent with our owners about our ambitions for this business, about where our aspirations lie. If we deliver mid-single digits annualized growth over the medium term, with an over 70 basis points spread to cost, then we believe that we can grow organic EBITDA at a good rate. Add in our growing dividends, and we see the opportunity accepting that there'll be ups and downs in the market from valuation multiples, factors beyond our control, but we see the opportunity over the medium term to deliver mid-teens total return to shareholders.
Again, in anyone here, we could be performing either side of that range. For instance, year-to-date, to last night's close, the Willis TSR was around 29% versus approximately 20% for the S&P 500.
Now as we grow our cash flow generation, we will then have options as how to spend it wisely to deliver returns to shareholders. Here, we will be balancing delivering short-term cash back to shareholders and investing some of the cash to grow the pie even further. So first, we will be focusing on growing the business on a sustainable basis over the medium-term, using some of our cash flow the drive organic growth. Then after that, we can contemplate acquisitions. But I talked you through the criteria we will use and our disciplined focus using NPV analysis. That is a focus on the cash we will get back over time for the cash we will expend. In parallel, we will also be looking to redeploy some cash from exiting businesses that are owned by others on good terms. Then we want to have a growing dividend. I would like us -- to see us growing our dividend steadily every year. In managing all of these steps, we will be keeping an eye on our leverage. Mike will take you through some of the numbers in our recent work here. But I want to be clear, we are convinced that we are best placed by being an investment-grade company and we will manage to that end. That means we will have a leveraged balance sheet and we'll continue to use debt judiciously, but within the guidance of remaining investment grade. We also will see, as the company grows, opportunities for share repurchases. To be clear, we will not drive share repurchases at the expense of very solid stress-tested NPV-positive investment opportunities. But as we grow our cash flow, I world expect we will have room for share repurchases too.
So in summary, we will be aiming to deliver cash back to the investors on a sustainable basis. That means we will be balancing the need to invest for the future, while sustaining our investment-grade rating, with the opportunity to increase dividends and make share repurchases. And you should expect us to be making those trade-offs every year.
On a related point, we have analyzed the composition of our investor base and seen that about 90% are U.S.-based, and that's great. But given the global nature of the firm and our U.K. Listing heritage, we believe there is an opportunity to broaden our investment base, and we will be taking specific actions to do so to provide a broader base of liquidity and interest in our stock.
I've covered a lot of ground. So let me recap. Willis is a diversified cash flow generating business. If we grow revenue steadily and keep a gap between revenues and expenses, we will see growing cash flow. The management team is focused and incented on making that happen. In what we see as an exciting world of intermediating risk capital, Willis is well positioned globally to grow. What does success look like over the medium-term? Significant improvement in revenues and EBITDA, driven by deeper exposure to emerging markets, new leading market positions and significantly enhanced cross-selling. We see substantial upside available. We are going after that upside with ambition and urgency, laser focused on their we will compete, and how we compete. That's our strategy.
There will be an opportunity for questions about all that shortly. But first, I wanted Mike Neborak, our CFO, to put some flesh on the bones on some of the numbers I've spoken about. Mike?
Michael K. Neborak
Thank you, Dominic, and good afternoon, everyone. I want to be very clear around the financial drivers that will create shareholder value. I'm going to cover 5 themes: First, Willis is a growing profitable company that generates strong cash flow. There is good momentum behind the recent increases our top line growth. Second, we bring disciplined approach to managing our costs to grow operating margins. Third, as we grow, a significant proportion of the increased cash flow will be available for value creating opportunities. Fourth, we have a very healthy balance sheet and we're taking steps to make it even stronger. And finally, I want to reemphasize our priorities for capital allocation.
So let me flesh out these points. I want to underscore the strength of the Willis franchise over a long time frame and its ability to sustain growth through changing economic cycles. Dominic showed you this chart before. It shows our total revenues, which comprise of commissions and fees, together with investment income and other income. We've also included historical organic commission and fee growth.
If you look at the 5-year period from 2008 when we acquired HRH, we grew organically, on average, 5% annually. As Dominic stated, in the 4 years following 2009 through 2012, we contented with an unprecedented recession and together with disruptions to Willis North America, our largest business, we had underperformance. But even with those headwinds, we sustained organic growth of 3% on average over that period. And finally, with the challenges of HRH behind us and a better North American economy, we saw an inflection point in our results at the end of 2012. And through the first half of 2013, we have started to revert back to the higher growth rate that was achieved in the past. And now, with a new senior management team, driving fresh strategic initiatives, we are excited about the opportunity to build on the recent momentum and to achieve even greater potential.
You've seen our results over the last few quarters and you've heard Dominic discuss the initiatives for moving growth forward. One other factor to consider is interest income. Back in 2007, our interest income was $96 million. In 2012, it was $18 million. If you believe that we might see higher interest rates in the future, then you should expect some increase in our interest income too.
Our focus on revenue growth needs to be paired equally with strict expense management if we are to achieve a positive spread of 70 basis points per year on average. And as most of you know, we have not grown our margin consistently over the past few quarter years. As shown on prior slide, this has largely been a revenue issue. Weak organic commission and fee growth and declining investment income. While we haven't decreased our spending on talent compliance and technology significantly. Over the past few years, our focus on expense management is unchanged.
So I would like to talk about how our ongoing cost control will drive operating leverage by having expenses grow slower than revenues. On the left side of the screen is a pie chart plotting our expenses by category. You can see that our costs fall into 2 major buckets. The first bucket is salaries and benefits, including incentives. For 2012, we had approximately $2.1 billion of S&B expense, representing 75% of our total cost base. The second bucket is other operating expenses, which totaled approximately $600 million. Some of the larger items in this category are premises, systems & communications, travel and business development.
The strategic frame work that we have in place for managing our expense base is built around 3 principles: First, our culture of cost discipline has been well-established in Willis, dating back many years. One example of this discipline is our monthly business review process. Those reviews are tough and designed to challenge managers on their expenses across the board, and also to offer advice and support on how to manage and control the cost base. In short, expense control is part of our DNA. The second item is productivity and efficiency improvements. And we achieved this through increased utilization of our lower-cost hub locations in Mumbai, Nashville and Ipswich, England. Today, we have approximately 20% of our employees located in these hubs, will be standardized and streamline processes to reduce costs and to enhance delivery of our client service. Our goal is to increase that percentage in the future. And finally, is prioritization of investments. We focused on putting our capital and incurring costs in offerings and regions where we see strong demand and have a competitive advantage. Conversely, we will pull back from those areas where growth opportunities are not attractive. You will do more about this from Todd, Tim and Steve, later this afternoon.
So to sum up, it is our cost discipline, efficiencies driven by low cost hubbing and prioritized investment that will allow us to achieve at least a 70-basis-point spread between revenue growth and expense growth.
So with an improved strategy for growth and our continued emphasis on expense management, we are in a position to generate increased cash flow from operations that can be deployed in value-creating opportunities. We expect to grow cash in 2 ways: First, cash flow will grow through increased profits from our revenue initiatives and our expense measurement, as just discussed; second, we expect the proportion, I repeat, the proportion of cash flow allocated to pension funding and capital expenditures to decline over time. So let me expand a bit on that. First, with regard to capital expenditures during the past 3 years, we have invested heavily to support our business growth in relatively expensive IT projects, such as a new European data center, our new placement system, we refer to as Will Place, 3 new brokerage systems, a new general ledger and a new management information system.
These projects are expected to be largely complete by the end of 2014. As these projects roll off, new projects will roll on. For example, I expect that we will next invest in a global human resources management system to support the delivery of talent to clients and a company-wide data repository to support our analytics strategies, just to name 2. But I do not expect that the new projects would result in increased capital expenditures in the future. Secondly, we contribute approximately $140 million annually to our defined benefit plans. Much of that, about $100 million here in 2013 to fund pension deficits in the U.K. and the U.S. The primary driver of those deficits was the steep decline in interest rates over the past several years. All other things remaining equal, rising interest rates will have a very positive impact on our pension funding, as a higher discount rate reduces our pension liabilities. For example, a 15-basis-point increase in long-term guilt rates reduces our U.K. pension liability by approximately GBP 50 million. So if you make the simple and possibly conservative assumption that capital expenditures and pension funding going forward, stay relatively flat, then as we grow, a higher proportion of the additional cash flow will be available for further value-creating activities, such as investments in our core businesses, M&A, increased dividends, maintaining our strong balance sheet and share repurchases.
I'd like to give you some perspective on our capitalization. As a business that generates a significant amount of cash, we are very comfortable with our capitalization, both in terms of our leverage ratios and our maturity schedule. With fair investment-grade rating, as Dominic stated earlier, we believe is very important to maintain.
Since we bought HRH in late 2008, our leverage has declined from 3.8x adjusted EBITDA and has remained between 2.5x and 2.7x over the last couple of years. The ratio leveled off as the denominator adjusted EBITDA did not grow during those years. Going forward, we believe that our leverage ratio will naturally decline as our profits grow relative to our steady debt level. And while our leverage naturally will decline as our profits grow, we're continuing to work to enhance our capitalization so that we can support our business growth strategy. For example, last week, we took action to improve our credit facility. We pushed out the maturity on our term loan and revolver from the end of 2016 to the middle of 2018. We also increased the size of our revolver from $500 million to $800 million, which simply provides us with more financial activity as we move forward.
And you're also probably aware that we launched a waterfall tender offer for up to $500 million of our notes that are due in 2015, '17 and '19. This action will reduce debt costs while extending those maturities. We're comfortable with the current maturity schedule that having less debt come due during that time frame will give us more flexibility to utilize our cash flows, once again, for greater shareholder value-enhancing activities.
Now we've been talking a lot about shareholder value-enhancing activities, and you probably, naturally, want to know how we will approach deploying the cash that we expect to generate. Dominic gave you an overall perspective, I'm going to drill down in more detail and specify our priorities. So first and foremost, we must be focused on opportunities to strategically invest in our core businesses. Some of this will, of course, require cash flow. That can be in the form of talent, that can be in the form of systems analytics, development, and also in the form of compliance initiatives, all of which are designed to improve our service to existing clients and to attract new business to drive growth and build shareholder value. Beyond organic investments, m&A, of course, has the potential to accelerate the pace of strategic the relevant, but given the industries experience with acquisitions and our respect for shareholders' capital, we intend to be very, very disciplined.
I'll give you a few elements that would factor into our decision-making. You should expect us to be very selective in how we invest. Our assessment criteria focuses on net present value, return on invested capital and earnings accretion. But first, as Dominic commented on earlier, an acquisition would have to be strategically important. Then from a financial perspective, it must have the opportunity for revenue growth, at least in the mid-single digits, and EBITDA growth, at least in the high-single digits, or we may accept lower growth in those metrics if the target company is accretive to our margin. So let's say, we'd look for markets in the mid-20s or better. Whichever is the mix, we will focus on cash flow from the acquisition after all synergies. The acquisition must deliver positive net present value from the cash dispensed. Additionally, the return on invested capital will be meaningfully higher than our cost of equity capital. And of course, the businesses should require little or no capital. We are not interested in entering businesses where we take principal risk.
Let me offer a brief commentary on dividends. Our dividend offers a stable current return and is a material component to the total shareholder return that Dominic laid out. Taking a look back a few years, our dividend was flat at $1.04 per share from 2008 through 2012, when we increased it to $1.08 per share, and then we raised it again in the first part of this year to an annualized rate of $1.12 per share. Our goal is to steadily increase the dividend overtime. Importantly, we understand that we are competing for investors' capital so we need to maintain a dividend and a payout ratio that is competitive and represents a yield that is attractive relative to the overall market.
And finally, let's turn to our use of cash to pay down debt or to repurchase shares. In terms of our debt, as noted earlier, maintaining an investment-grade rating is a high priority. There is a natural improvement in our coverage ratios over time as our EBITDA grows, but we will make debt repayment, if necessary, for our leverage ratios to fall safely within the applicable range to support this goal. Share repurchases have been modest since the HRH acquisition, due to constraints around leverage and our cash position. Going forward, however, our expected increased cash flow provides us with the potential opportunity to consider share repurchases. But let me emphasize, however, that we will buy shares only if the valuation is well below what we believe to be the range of intrinsic value of our cumulative future cash flows and, if doing so, represents a more attractive use of our capital compared to the other options I've just listed.
So let me wrap up by reiterating the points about Willis that I made in the beginning of my presentation. Willis is a growing profitable company that generates strong and stable cash flows. We bring a disciplined approach to managing costs in order to drive operating margins. Accelerating earnings, combined with peaking or flattening expenditures on capital -- expenditures and pension funding, will allow us to have greater capital to deploy and value-creating opportunities. We have a healthy balance sheet, but we're taking specific steps to make it even stronger. And finally, in laying out our priorities for capital allocation we have guided a plan to deliver both long-term growth and short-term cash to our investors.
At this point in the agenda, Dominic and I will answer a few questions before our break. Thank you.
Dominic J. Casserley
Thank you, Mike. So we have about 10 minutes for questions and then we're going to go for coffee. So if you could raise your hand and then somebody will bring you microphone and then we'll go from there. I've got a gentleman in the front and gentleman in the back. So why don't we go here.
Jay Gelb - Barclays Capital, Research Division
Jay Gelb from Barclays. On the gap between revenue growth and expense growth -- you knew this one was coming, obviously. That doesn't necessarily translate into 70 BPS of margin expansion annually, correct?
Dominic J. Casserley
No. Let's be very clear. What we want to see is do the math simply. If our revenues were 6 -- 6% growth, we'd like to see cost of 5.3 or better.
Jay Gelb - Barclays Capital, Research Division
Okay, right. Now, we're talking about over the intermediate term, that's what, roughly 5 years or so?
Dominic J. Casserley
No. We're saying -- we're talking about in the medium-term, we would like to see that on an annual basis.
Jay Gelb - Barclays Capital, Research Division
Should we expect that every year over the timeframe? I'm trying to...
Dominic J. Casserley
I think I've made clear that we live in a volatile world, right, and that revenues go -- things happen, but that's our target and we will manage towards that target. And in some years, we may do better than that, and some years, we may not quite do so well, but that's our medium term projection, that what we'd like to do, absolutely.
Jay Gelb - Barclays Capital, Research Division
Okay. And then on Gras Savoye. Can you give us a sense of where the margin is currently, and where it may need to be for you to be interested in...
Dominic J. Casserley
Again, obviously, what I'm interested -- what we are interested in is how much we're going to spend and how much cash we'll get back, okay? The steps they are taking now, which as we've said will depress our associates line in 2013, take out a good chunk of cost to improve margins. Where we're then very good -- obviously, going to be focused on is let's look at from 2016, when we will take over 100%. What the cash flows looks like going forward and how they're going to grow versus the cash flow we're spending. And we're going to look at this thing on a very tough earnings accretion, NPV basis, as you would expect. The steps they're taking now are wide steps to reinforce the business, improve its margin, improve its profitability, but after that, obviously, we want to see its growth too. We want to see both.
Jay Gelb - Barclays Capital, Research Division
Right. You mentioned very briefly in the commentary that you're taking into account that a competitor could buy it if Willis chooses not to. How could that come into play in the decision-making process?
Dominic J. Casserley
Well, obviously, we have to think about as we think about the cash flows is coming to us. We have to think, so what if we didn't own it and someone else did or how might that affect our business? So as you can imagine, natural scenario planning.
That was question 8, do you have anymore? The nice gentleman in the back, I think, had a question.
Scott Theodore Brayman - Champlain Investment Partners, LLC
Scott Brayman, Champlain Investment Partners. You alluded to the heavy spending on technology in prior years, and that might be easing up. Can you talk about specifics that you're doing in terms of the technology spending, the strategy around that to lessen the burden? Because it's a bit of a black or could be a bit of a black hole.
Dominic J. Casserley
Well, let me have a go at that and then I'll let -- I'll turn it over to Mike. I think what we're trying to explain is we have a rolling set of technology investment priorities. And they take cash, right? We're looking at it from a cash point of view. They take cash. And a number of those are now coming to fruition. Mike outlined some new ones that we think we should do, which is strategically important to the business to serve our clients better, to drive revenue growth. But we don't think that the sum of those will be any higher in terms of cash outflow than the ones we've been doing. So that as our overall cash flow grows, the proportion available beyond that will increase.
Scott Theodore Brayman - Champlain Investment Partners, LLC
But is there an opportunity to do things differently? And not spend as much money on technology, or is this is going to be a technology-intensive business?
Dominic J. Casserley
I think I said, we are -- we strongly believe that our positioning as the analytical broker, the broker who manages data, who has data at its fingertips to really help our clients, and has a very robust infrastructure of its own. It's very important to us. I think we just say, we don't see our need to, for that spending, to increase from its present levels, which gives operating leverage if you like, as we grow. I assure you, we look at all these investment opportunities with a very tough, again, NPV eye, I've seen the work we've done in the past and, going forward, I can assure you how we're going to think about this projects. Personally, I'm not a great fan of very big projects. I'd like to see them broken up into smaller components with clear deliverables along the way, so that we can chunk them up to make sure we're actually seeing impact as we move along. But I think what we're telling is, we should invest, you'd expect us to invest, but the level of investment is unlikely to increase.
The gentleman at the front here.
John Harris, Ruane, Cunniff & Goldfarb. I wanted to just go in for a second on the comment that I can't remember which one of you made earlier, which was that the progression of margins in the past and the fact that the margin had not been increasing in the past was more of a revenue issue than a cost issue, and you've always been disciplined on cost. And I just wanted to explore that for second because I think there would be a line of thinking through a general perception about the company that obviously predates your rival, that maybe be part of the revenue issue was related to the cost management and that cost were managed so tightly around here that it had an impact on the revenue. And the 2, in this business, are very much linked. And so I wonder, as you go forward, even if the revenue growth comes through okay, how can you be so certain that you will have the ability to grow the revenues faster than the cost and that it would even be prudent, only because talent moves around so easily in this business. And you may have competitors that are comfortable not seeing their margins grow at the levels might like to see your grow to.
Dominic J. Casserley
So it's a very good question. Again, I think, I mean, I've obviously spent quite some time analyzing what happened in the past, with Mike's help and many colleagues. And it's pretty clear that the effects of the challenges in North America, both the macro challenges in North America and our specific HRH-related issues, which by the way the team did a spectacular job led by Vic and Todd, to manage through, to get us to where we are today. It's pretty clear that those -- that, that impacted our top line, as we showed you. And I think broadly by about 2% a year. And that had also a bit of knock-on effect to a need to both control costs in North America and elsewhere. But your question has some validity to it. I do think, however, as I've gone into looking at the business, we've managed to maintain our investment around some of our most important revenue-generating business. Look at our performance in Willis 3. We've actually become the market leader in many cases, in being the analytical reinsurance broker. And what Peter Hearn, who is with us today, and others have been, we're quite a lot of investment during this period. We've continued to build-out our specialty capabilities. We've continued to expand our international footprint, growing the China business that you've heard about. So that I have found, though I heard that myself before I came, that was the rumor I'd heard about Willis. When I actually got in here, I've thought a bit of it, but actually now that revenues -- enough investment did take place during that period, some of it I've outlined, but as you see our revenue engine seems to be pretty robust to me. So I think as we have more sustainable revenue growth.
You talked about doing positive NPV projects and how you evaluate them and as it relates to share repurchase, one of you have added, that's kind of caveat, we have to make sure we buy at a significant discount intrinsic value and it has to at least be NPV -- the same NPV as these other projects. I guess my question would be, quite simply, if you have a NPV projects and share repurchase is a higher NPV. Does it matter what interest -- you know what the discount?
Dominic J. Casserley
So let me try and go over it again. We think we'll have, hopefully, growing cash flow available to invest. We're obviously going to look at ways to make sure that we have medium-term growth, so we can continue to grow dividends, continue to grow the business. We will look at M&A, but in a very disciplined way. I hope you understood, what we said about that. We are committed to growing our dividend, because we think that's a long-term commitment to our shareholders rather than one-off. It's a long-term commitment, which we're going to deliver on. And then with your comments on debt, where we think that, frankly, we can just grow easily into our debt level. We'll then think about share repurchases. Though I think the constraint on share repurchases, at that point, will be if for some reason the stock was trading in a way, because the market had a period of time where multiples have gone to very high levels, we might look at whether, that's an interesting level for the stock. We wonder whether that's the best use of our cash at this point. But on the other hand, we'll have that other better alternative. So we're not against share repurchases, we just want to make sure we do them sensibly. I'm going to take one more question. Then we're going to go coffee and as I said, after the next 3 presentation, we'll have plenty of time for more questions. Yes, sir?
Chris [ph] with Nomura. My impression of your comments today have been that you've -- when you come to Willis, you got a company with a lot of organizational strengths in an industry which is as good as it's going to be in. And perhaps that's good. But I guess I'm trying to get a sense of the changes that you're trying to affect about saying, setting some goals and targets. Is there anything about the company you found was -- where the company was in the wrong -- going in the wrong direction? I mean are you going to fix things or change things? So what -- are there any sort of low-hanging fruit, if you will, in terms of where will Willis needs to be fixed?
Dominic J. Casserley
No, I did not find any low-hanging fruit. I found lots of opportunities, many of which are actually going to require some of the things I talked about. Redeploying our resources overtime towards higher growth markets is an easy thing to say. I just did. But actually, actually making it happen on the ground, building our business in Brazil, building our business in other emerging markets. For Todd, to drive allocations resources within North America, with the team, to high-growth markets, that's quite complicated, actually. I talked, I think, a lot about the connection team talked about. And bringing together the different parts of Willis, so that we really, really operate as one team, is no mean trick. We think we know how to do it, we think we've seen how others have done it, and I'm lucky enough to have come from a professional service environment where that has been the lifeblood of what we've done. So I think we can do this. I think it's a great opportunity, but it is a change. It is a change and I think it's one that if we could pull it off, it's very hard to replicate. Very hard to replicate.
Right, coffee beckons. We're going to go outside, grab some coffee and then we'll come back and we're going to hear from the 3 business leaders, and then we'll have plenty of time for questions thereafter. Thanks very much.
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