Willis Group Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: Willis Towers (WLTW)

Start Time: 08:00

End Time: 08:57

Willis Group Holdings Public Limited Company (WSH)

Q4 2013 Results Earnings Conference Call

February 12, 2014, 08:00 AM ET

Executives

Peter R. Poillon - Director of IR

Dominic J. Casserley - CEO, Director and Member of Executive Committee

Michael K. Neborak - Group CFO, PAO and EVP

Steven P. Hearn - Chairman of Willis Global and CEO of Willis Global

Timothy D. Wright - CEO of Willis International

Todd Jones - CEO of Willis North America

Analysts

Jay Gelb - Barclays Capital

Robert Glasspiegel - Janney Montgomery Scott

Thomas Spikes Mitchell - Miller Tabak

Michael Nannizzi - Goldman Sachs Group Inc.

Mark Hughes - SunTrust Robinson Humphrey, Inc.

Brian Meredith - UBS Investment Bank

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Joshua Shanker - Deutsche Bank AG

Operator

Welcome, and thank you all for standing by. At this time, all participants will be on a listen-only mode until the question-and-answer session for today's conference. (Operator Instructions). I'd also like to inform all participants that today's conference is being recorded. If you have any objection, you may disconnect at this time.

I will now like to turn today's conference over to Mr. Peter Poillon. Thank you, sir. You may begin.

Peter R. Poillon

Thank you, and welcome to our Fourth Quarter 2013 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 as that term is defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those estimated or anticipated. These statements reflect our opinions only as of today's date, and we undertake no obligation to revise or publicly update them in light of new information or future events.

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2012, and for the year ended December 31, 2013 which we expect to file by the end of February and subsequent filings, as well as our earnings press release for a more detailed discussion for 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 and slides associated with this call.

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; Tim Wright, Head of Willis International; and Todd Jones, Head of Willis North America.

As usual, we will be happy to answer your questions after Mike and I offer our introductory remarks.

So let me turn to an overview of our results. This quarter we continued making steady progress in growing our top line, delivering 3.7% organic growth, a number that looked even better when given some added context. You know from our press release that we had some revenue recognition adjustments that reduced organic growth in the quarter. So, if you exclude those adjustments, we actually achieved organic growth of 4.8%. We are pleased with that growth as it is on top of the 7.5% we delivered in the fourth quarter of 2012.

Our full year number for organic commissions and fees growth was 4.9%. All of our business contributed well to that performance with global at 5.6%, North America at 4.9% and international at 4.1%. If you exclude those fourth quarter adjustments I just mentioned, organic growth for the year was 5.1%. All-in-all, our associates around the globe did a great job delivering consistent growth in 2013. Our team is hard at work building on that success in 2014 and beyond and we'll talk about some of the things they're doing in that regard later in my remarks.

Now, specifically on the fourth quarter. Our reported GAAP earnings were $0.37 per diluted share and adjusted earnings were $0.42. That $0.05 difference relates to an increase in the valuation allowance on our deferred tax asset which Mike will dive into during his remarks. Our adjusted earnings per share of $0.42 compares to $0.45 a year ago. We have to remind you for the last time I'm happy to say that that isn't an apple-to-apples comparison for how we did in the quarter. Had we accrued our bonuses during 2012 instead of amortizing retention awards, those fourth quarter 2012 adjusted earnings would have been $0.07 lower or $0.38 versus the $0.42 we achieved in the fourth quarter of 2013.

Now let's spend a few minutes looking at each of the businesses in some detail. I'll start with Willis North America. North America achieved organic growth and commissions and fees of 5.8% in the fourth quarter and 4.9% for the full year 2013. This was a significant improvement over the previous year which Todd Jones and his team deserve lots of credit. North America has offered its challenges over the years but this is the fifth consecutive quarter of growth in North America. Looking back at 2013, the business has growth very consistently throughout the year.

Our revenue recognition adjustment increased fourth quarter commissions and fees by approximately $5 million or about 160 basis points of the organic growth. Beyond that, North America's growth was again largely driven by new business wins and also helped by improved retention. Rates during the year remain positive in the fourth quarter and to this early point in 2014, we are seeing a leveling out of rates in North America and even some declines in some areas. We estimate that about 50 basis points of our growth in the fourth quarter of 2013 was attributable to overall rate improvement.

Growth in North America was well distributed geographically with good results in the metropolitan New York, New Jersey area and the West Atlantic and Midwest regions. We also recorded good growth across a number of industries and practices including financial services, real estate and mergers and acquisitions. We also continued to see good growth in our construction practice. In our Human Capital Practice, organic growth was flat in the fourth quarter, affected in part by seasonality. Having said that, there's a good story evolving with Human Capital & Benefits for Willis.

With organic growth of nearly 6% in 2013, the Practice performed very well and we are confident about our ability to grow it further. As we discussed with you on the last call, the Willis advantage, our healthcare exchange designed around our midsized corporate plans has attracted interest among current plans and prospects alike. We are now engaged in discussions with about 600 prospects for our exchange of which about half are new to the practice.

We believe that the opportunity for growth in this business both inside the U.S. and outside is substantial. We recently announced the launch of our Global Human Capital & Benefits Practice under Tim Wright in addition to his Willis International duties. That brings together all of our efforts in this space under one roof. You should expect to see a coordinated global strategy aimed at delivering the very best of Willis to our clients and increasing our share of this large and growing market.

Let's now move to Willis International. Willis International grew 3% in the fourth quarter bringing organic growth for the full year to 4.1%. However, that doesn't really tell the full story of international's growth this quarter, as a revenue recognition adjustment in China reduced commissions and fees by $15 million. Excluding the impact of that adjustment, international organic growth would have been 510 basis points higher or 8.1%. This was truly an outstanding result from the International team.

Let me provide a little detail on the region that comprised that business. In Western Europe, we had a very good quarter with high single digit growth driven by strong new business and solid retention. This is a laudable result given the generally weak economic conditions in the countries where we have a big footprint. The positive results were spread across the region with Denmark, Germany and Italy leading the way.

In Eastern Europe, we recorded low double-digit growth primarily driven by a strong performance in Russia. Latin America grew solidly once again with low double digit organic growth and strong growth in Chile and Venezuela as well as moderate growth in Brazil were drivers in the quarter. Now Asia was down in the quarter due to the adjustment in China that I mentioned earlier. The adjustment aside, however, Asia's underlying performance was very good with strong double-digit growth. A number of businesses in the region performed well with very good results in Hong Kong and Singapore.

Australasia, which I had the pleasure of visiting in November, had another solid quarter with mid single digit growth and positive results in both Australia and New Zealand. You've heard us talk in the past about challenges we've experienced in Australasia, but I saw firsthand how the team is working to put those issues behind us.

Finally, in the UK, our business was down very low single digits in the quarter as our effort to reshape that business under David Martin continued. You might have read our recent announcement in which we have combined under David our UK retail operations with our specialties division, which will now come under Willis Global. We expect this powerful combination to drive greater client value and selling opportunities thereby accelerating the performance of our business in the UK.

Let's now focus on Willis Global which comprises Willis Re, Specialty, Placement and Willis Capital Markets and Advisory. Willis Global recorded organic growth of 1.4% in the fourth quarter and full year growth of 5.6%. We all knew that the fourth quarter was going to be challenging for Global given how Willis Capital Markets and Advisory saw so much of its 2012 deal flow coincidentally come to fruition in the final quarter of that year with over $12 million of revenues.

As we shared with you before, WCMA is a lumpy business. It has a very healthy pipeline but the timing of the major transactions they work on is not ours to control. So if you exclude WCMA from Global's results, the businesses grew at 4.6%. This was largely driven by the specialty businesses which grew mid single digits on the back of strong growth in property and casualty and construction and financial and executive risks. These results were partially offset by declines in marine and energy and aerospace.

Willis Re was down very low single digits, in fact it was almost flat in its seasonally smallest quarter. North America and international reinsurance was down slightly partially offset by an increase in specialty reinsurance. The fourth quarter sees few renewals in reinsurance so that rate movement that you read about had minimal impact on the quarter's results. However, we expect that lower rates will bring some varying headwinds in 2014. I would expect that North America property and cat renewing in the second quarter to be most affected. Our first view report which we published in January and which is available on our website offers a detailed discussion on our views of rates in the reinsurance market.

Looking at our full year 2013 results, I am satisfied with the improvements we've made companywide both financially and operationally which are in line with many of the targets that we laid out at our investor conference in July. We achieved solid mid single digit organic growth across all three of our segments, the first time we've done that since 2006. And while expense growth outpaced revenue growth, we feel good about how and where we deliberately invested in the best people, systems and in positioning our firm for the long term. Importantly, our cash flow from operations grew to more than $560 million.

As we said in July, it's not our expectation that we hit the targets we set every quarter rather that we achieve it on average over the medium term. All of the changes we put in place in the second half of 2013, changes which we continue to announce and implement are designed to do just that. I also feel very good about the progress we've made on our strategic initiatives. As you saw in our news release yesterday, I discussed some of the important changes we've made, many made since we convened on our last earnings call in November.

Across the company, our associates can feel the pace quickening. Our clients are beginning to see a more connected Willis serving their needs. We also announced some acquisitions that we believe improve our position in certain markets, acquisitions that we expect will be cash flow generative. And we've also announced divestitures of non-strategic or underperforming assets. These are things we told you we'd do back in July and that work continues.

Most gratifying to me is the enthusiasm I see with these changes among our clients and throughout the Willis organization. It makes me all the more confident about the direction in which we're heading.

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

Michael K. Neborak

Thank you, Dominic, and good day, everyone. In reviewing the numbers, all comparisons are made to Q4 2012 and full year 2012 unless otherwise stated. As noted in other earnings calls this year, our change in the compensation policy to bonus accrual distorts the comparison to prior periods' expenses and therefore to prior periods' EPS and operating margin.

This quarter, that difference was about $15 million or $0.07 per diluted share and 180 basis points of operating margin. I'll walk though those impacts as we go through the numbers. I will also be referring to the slide presentation frequently that we posted to our website.

As Dominic mentioned, we delivered organic commissions and fees growth of 3.7% across the group. As you can see on Slide 3, North America led the way with 5.8% growth, International grew 3% and Global grew 1.4% in its seasonally slowest quarter. Total organic growth was negatively impacted by 110 basis points from two adjustments we made to conform our revenue recognition policy across the company.

First, in North America, we adjusted C&F up by $5.3 million. Previously we had accounted for our personalized direct build business on a cash basis because it comprises a large volume of low value policies. However, through better quality underlying data, we are now able to move this to an accrual basis in line with the rest of the group.

Second, in International, we adjusted C&F down by $14.7 million in China. We have been continuing to recognize revenue on the accepted local GAAP basis used by our China operation since we acquired it. As that business has grown and matured, we have now aligned this revenue recognition to the rest of the group.

Let me now turn to the financial results for the quarter on Page 4 of the presentation. Our adjusted EPS came in at $0.42 this quarter compared to $0.38 last year after normalizing Q4 2012 with the change in our remuneration policy. On the same basis, operating income was basically flat at $150 million and our adjusted operating margin declined 100 basis points. These results reflect strong operating performance in Willis North America, in International. They also reflect low adjusted tax rate for the group.

Offsetting these results were lower operating income in Global, higher average shares outstanding and a higher loss from our associates line. Global's performance was impacted by a number of things. First was a change to bonus accounting; second was the lower revenue from Willis Capital Markets which Dominic mentioned.

Third, was a small decrease in reinsurance revenue; and fourth, were investments in personnel for our reinsurance and placement organizations. For the group in the quarter, foreign exchange movements had a positive one-tenth per share impact on EPS.

Now let's take a look at some of the metrics for all of 2013 which you can see on Slide 5. Full year results showed solid organic C&F growth of 4.9%. After normalizing 2012 results with a change in compensation policy, adjusted EPS increased to $0.26 to $2.64 from $2.38. On the same basis, operating income grew modestly from $704 million to $730 million. Looking at the adjusted operating margin, it declined 20 basis points to 20%.

It is important I think to look at our results in this retrospective view which is how we analyze them internally. Seen in this way, we achieved good revenue growth in excess of 5% and EPS growth of approximately 11%. We're mindful, however, that our expenses grew 5.7% on an underlying basis which served to compress our margin by 20 basis points.

To drill down into the expense numbers in more detail, please turn to Slide 6. Underlying growth in total operating expenses in Q4 was 9.9%. On a like-for-like comparison of our expense base that number shows growth of 7.6% after adjusting for the change in compensation policy. That expense growth was higher than the first three quarters which averaged close to 5%.

Let me talk for a few minutes about the drivers of that fourth quarter growth. First, salaries and benefits; Slide 7 reminds us of a quarterly impact of changing our compensation policy. As we said before, our S&B expense for all of 2012 would have been $48 million higher had we been accruing for annual cash bonuses as we are doing now instead of amortizing retention awards. The impact for the fourth quarter of 2012 was $15 million.

Turning to Slide 8, we see that underlying S&B expense increased 10.7% of which 320 basis points spend from the change in remuneration policy. On a like-for-like comparison, underlying S&B expense was up 7.5%. This was above our recent S&B growth which range from 4% to 6% over the past three quarters. The main drivers of that growth you've heard us talk about on recent calls.

First, a combination of headcount increasing by about 3% since the start of 2013; and second, the impact of annual salary increases and third, the increased production incentives that accompany the growth and commissions and fees that we have been reporting.

The headcount growth has been strategically directed at regions and products where we see growth opportunities such as emerging and developing markets, reinsurance operations and in placement facilities. Most of the headcount growth came in the second half of the year.

In addition, beyond the normal growth factors I've mentioned, we've boosted our 401(k) match in North America thereby adding to benefit expenses. In doing that, we accrued a full year increase in the fourth quarter. And like many companies we also incur higher medical costs in North America due to increased claims.

In International we hired some proven producers in key markets that had sign-on incentives as part of that deal. Add it together, those three items elevated S&B by approximately $10 million or 180 basis points.

On Slide 9, you'll see the quarterly comparison of our other operating expenses. On an underlying basis, this grew 7.1% in the quarter. The growth of its area was driven primarily by higher professional fees, marketing and business development expenses.

Depreciation expense for the quarter was $26 million, up from $20 million last year and above recent trends, driven by costs associated with a number of IT projects that came online during the quarter. In addition, we rode off 2 million of unamortized balances of systems and other assets we replaced.

Recall that our initial expected run rate in depreciation in 2013 was $24 million to $25 million per quarter. As typically happens, some projects were delayed in coming online so the run rate was lower until this quarter. All this activity of course affects our operating margins.

Looking at them on the apples-to-apples basis that I referred to earlier, the first quarter operating margin was down 50 basis points. The second quarter was flat. The third quarter was up 100 basis points and the fourth quarter was down 100 basis points. The four quarters together resulted in the full year 2013 operating margin being down 20 basis points compared to 2012.

Looking ahead, we expect quarterly variability again in 2014. While the variability is expected, we are focused squarely on delivering what we laid out last year; 70 basis points of spreads between revenue growth and expense growth on average over the medium term.

Now on taxes. Reported tax rate this quarter was 29% because we booked a further valuation allowance against our North America deferred tax asset. We established valuation allowance back in Q4 2012 when we recorded a goodwill impairment charge that put our U.S. operations in a three-year cumulative loss position. The impact of that valuation allowance was a higher tax provision of 9 million or $0.05 per share this quarter representing the entire reconciliation between reported and adjusted EPS.

You should note as we said before that the additional tax expense is non-cash and it will turn around sometime in 2015 as part of the entire valuation allowance which will reverse when North America reports enough income to emerge from a three-year cumulative loss corridor. When that occurs, we will report a lower or even negative full tax expense.

After adjusting out the impact from the increased valuation allowance, the fourth quarter tax rate was 21% which was in line with our expectations. For 2014 our tax rate should fall between 22% and 24%, but that range is very sensitive to the geographic mix of income.

It's worth stating again that the quarterly tax rates could vary meaningfully from the full year rate. In 2013 the overall tax rate was 20% on an adjusted basis but the quarterly rate range is low as 19% in Q1 and as high as 24% in Q3.

Moving now to the associates line. The fourth quarter of 2013 showed a loss of $11 million compared to a loss of $7 million a year ago, but it's slightly better than what we had anticipated at the cost of completing the operational review as Gras Savoye came in a little lower than expected. So, for the full year 2013 the associates line was 0 instead of a full year loss of 1 million to 3 million that we anticipated.

For 2014 we expect the associates line to return to a profit in the range of $10 million to $15 million. Seasonality of income should be consistent with prior years meaning the majority of Gras Savoye income will be recorded in the first quarter followed by flat in net operational losses in the associates line over the remainder of the year.

Let me wrap up with some comments on the balance sheet and cash flow. As shown on Slide 10, we ended the fourth quarter with $796 million of cash, up $173 million for September 30 and almost $300 million from last year. Total debt outstanding was 2.3 billion, down slightly from last year. And at year end our $800 million revolver was undrawn.

Cash generated from operations during 2013 was $561 million, up $36 million from 2012. The fourth quarter contribution to that was $195 million, down slightly from Q4 last year due to changes in working capital. Other points to highlight include our CapEx spend in 2013 was $112 million, down from $135 million in 2012 mostly due to project timing. For 2014 we expect capital expenditures to come in between $120 million and $135 million. Finally, employee option exercises added $155 million to the cash balance in 2013.

Thanks again for your patience as I walked though these numbers. With that, I'll turn the call back to Dominic.

Dominic J. Casserley

Thanks, Mike. I want to follow on Mike's conversation about our cash balances. We told you at our investor conference that we're going to use our cash in ways that we think are in the best interest of our shareholders. That could encompass a range of possibilities including investing selectively into the company to drive growth. We did that in 2013 as we made hires and growing businesses and regions and improved our technology and analytics. This is obviously reflected in our expense growth.

Second, strategic acquisitions. We cautiously did some of that in 2013 and already this year. We expect that to be part of our rhythm. Third, increased dividend. We've increased our dividend now for the past three years, with the increase announced yesterday being our largest since 2006. This indicates the confidence we have in our business strategies and our ability to drive strong cash flow.

Finally, share buybacks. As you saw in our release, the buyback we announced yesterday is intended to offset the increasing shares outstanding from employee option exercises in 2013. It is our intention that we'll continue this practice moving forward.

With that, let's now turn to the next part of this call by answering your questions. Operator, may we please begin the Q&A.

Question-and-Answer Session

Operator

We do have quite a few questions on the line. Jay Gelb with Barclays, your line is open.

Jay Gelb - Barclays Capital

Thank you. Good morning. First, just wanted to touch base on organic revenue growth; 5% for the year. You mentioned a few headwinds largely driven around P&C insurance or reinsurance pricing. I'm thinking the economy recovering could be partially offsetting that, so just trying to get your perspective on whether 5% organic revenue growth is still a decent run rate for the company overall?

Dominic J. Casserley

Hi, Jay. How are you? Good to hear from you. As you know, we don't give guidance on our major line items. We continue with what we said in July. Our expectations for this company are mid single digit revenue growth and 70 basis points spread to expenses. That's what we said in July and it is still our expectation for the company over the medium term.

Jay Gelb - Barclays Capital

Okay. And then on the positive operating leverage, that's good to hear that you're still upbeat about your ability to achieve that. But if we look at the full year, the adjusted margin actually declined by 20 basis points. So, to what extent is your comfort on the ability to expand margins and keeping in mind we're starting off of a lower than expected base in 2013?

Dominic J. Casserley

It's obviously the right question. I'm very comfortable with this. We're focused as you know on driving cash flows and we need to be driving cash flow as a good clip over the medium term. That has to be a combination of steady revenue growth. We simply cannot drive the cash flow we need unless we are growing, as I said, in the mid single digit revenue number on a sustained basis. You don't get the cash flow growth over a sustained period unless you're able to do that. But in order to also do that, mid single digits without some operating leverage does not deliver the cash flow we want. I am very comfortable that we have been deliberately investing. So the expense growth you saw which resulted in a 20 basis points decline in margin for the group over the year is not the result of random expense growth. It is the result of very deliberate decisions we have made to invest in growth for the medium term. And so I'm very comfortable that now that we have a steady revenue momentum and we are investing to continue that revenue momentum that our ability to create that operating leverage is well in place. But obviously seasonally it's hard to prove but I'm very comfortable.

Jay Gelb - Barclays Capital

All right, thank you.

Operator

Our next question comes from Bob Glasspiegel with Janney. Your line is open.

Robert Glasspiegel - Janney Montgomery Scott

Good morning, Dominic and all. With the 20 basis point decline in year one and I think you articulated 70 bips over five years unevenly or 350 bips by the fifth year. So does that mean you have to do 90 bips a year for four years to catch up or was 2013 a reset year in your mind?

Dominic J. Casserley

Look, I said – I don't want to get tied to 70 actually, right. I think we actually said the minimum was 70, right.

Robert Glasspiegel - Janney Montgomery Scott

Right.

Dominic J. Casserley

So we're going to aim to deliver the right growth over the medium term to deliver – again, what I'm really focused on here, what we all collectively are really focused on which is growing cash flow, okay. And you can do the math, right. If you do the math – if our revenue growth was to slip, we'd actually have to get an even bigger margin increase and that's why we're so focused on making sure our revenues keep ticking along because if our revenues keep ticking along with the right spread, we can get the performance. So we have to do both and that's why we've been investing for the medium term here. If I were you I wouldn't get very focused on its exactly 70 basis points multiply it by X years and you get the number, right. Obviously, we position that as the number we need to achieve but we're really focused on growing our cash flow. That's the number I want us to see growing every year.

Robert Glasspiegel - Janney Montgomery Scott

Well, I'm with you on cash flow and moving to that, I was wondering if you could go through sort of the three legs of pension which is sort of what was the balance sheet adjustment year end, what's the funding and changes perspective with roughly 150 million drag it's been over the next three to five years perhaps and is there an EPS pickup from lesser headwind in 2014 from pension?

Dominic J. Casserley

Mike?

Michael K. Neborak

Thank you, Bob. So I'll make a couple of points to address those questions. First, pension funding should be down modestly in 2014 with I think the benefit of good asset returns and higher discount rates more apparent in 2015. And the reason I say that and reason for the delay is that we have to go through a process with the independent trustees in the UK and our funding agreement with the trustees will be renegotiated during 2014. So in 2013 we made cash contributions into our pension plans of about $150 million of which $100 million was related to the UK. So we will see some benefit in 2014 but I would consider it to be modest; again, with the apparent benefit coming more in 2015. And then with respect to the P&L impact from some of the changes that we have going forward, the annual pension expense in 2014 will decrease probably between $5 million and $10 million. And then I think the last point that you – or the first point that you asked was related to the accumulated or the OCI loss that we have in the stockholders' equity section of the balance sheet. The year-over-year change in that was a positive $160 million, so we improved it by $160 million or which $120 million was related to our pension activity.

Robert Glasspiegel - Janney Montgomery Scott

Thank you for the complete answers.

Operator

Your next question is from Thomas Mitchell with Miller Tabak.

Thomas Spikes Mitchell - Miller Tabak

So this actually looks like you had a pretty good quarter when we take everything out. One of the issues that we focused on is growth in the revenues per share concomitant with flat or rising operating margins is a key to stock performance. And we're interested in your outlook given your statement about buying back the added shares to the stock options, does that mean that we might have double digit increases in revenues per share in 2014 if we combine mid single digit growth in revenues with recouping the 5% dilution that we had from fourth quarter to fourth quarter due to shares outstanding?

Michael K. Neborak

Well, obviously Tom that slightly depends on what happens with option exercises during 2014. So what I think we've laid out is the process where – it is our intention to sort of immunize, if you like, the stock creep over time by buying back shares based upon option exercises. Whether we will do that on a concurrent basis or look at the end of each year and decide, okay, we had option exercise of X in 2014 and that means the need to buy that Y in 2015 we need to look into. But we clearly understand – I mean some of the metrics you were talking about revenues per share obviously EPS, et cetera are affected by our share count. And what we're saying to you I think very clearly is that we do not want as a group to be issuing equity which is obviously the most extensive form of capital that we could issue. We don't want to be issuing equity by charts. If we ever have to issue equity and please do not take that as a prediction that we will, but if we ever want to issue, we want to do that on a deliberate basis rather than having it drip out year-by-year by accident or by the exercising options. So that's how we think about that.

Thomas Spikes Mitchell - Miller Tabak

Thank you very much.

Operator

Our next question comes from Mike Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc.

I guess the one thing I'm trying to reconcile a bit, I mean I guess the idea that revenues grow faster than expenses we'll expand margin. I mean that makes sense. But it looks like this quarter you invested for growth which weighed on margins. And so I'm just trying to understand as you – is that something you expect to do whether it's hiring people or paying upfront bonuses to bring teams on or whether that is, how should we think about margin improvement if that activity continues? Does that mean it's a matter of you reaching scale in these particular initiatives for that margin improvement to kind of follow through?

Dominic J. Casserley

Mike, that's an excellent question because if we were to tell you that we were planning to continue to invest in hiring people ahead of revenues forever, that would be a bad in terms of what happened to our margins. We said very clearly that each – you have to look over the medium term and this particular quarter we had a serious of investments which I think Mike laid out in some detail in particular businesses. But obviously we hope they will drive is our plan that they will continue to grow revenue growth and that we will be able to manage our expenses. That's our plan while continuing to invest or manage our expenses to create a gap over the medium term of those sort of 70 basis points per annum average that we've talked about. So we got pretty cognizant that a growth policy which repeated the fourth quarter of 2013 on an ongoing basis would produce a very unpleasant result over time. So we fully understand that.

Michael Nannizzi - Goldman Sachs Group Inc.

So how should we think then about like a payback period if that's the rate, because it sounds like that's how we should maybe think about it is you will occasionally make investments where you see some greenfield opportunity or some runway for improvement, you'll do your ROI math, you'll make the investment and then you'll kind of look to see that growth fall off? How should we think about that return period for investments that you made this quarter, for example?

Dominic J. Casserley

I would like to be able to tell you that it's an investment like some big project building a bridge for a city or something and here's the return, the result of multiple investments. By the way we've been investing throughout 2013. We just had a serious of negotiations with opportunities come to fruition in the fourth quarter, in a sort of clump if you like. But we are investing throughout 2013 and we will continue to invest throughout 2014. The trick of course is to be able to free up other expenses so that we have space for those investments and that's what we're obviously focused on, making sure that as we invest in new capabilities, new analytics, new systems, new teams, we're also taking costs out of the in-stored based to free up space for those investments. So, if I were you I wouldn't think about it over the blip in investment in a quarter what's the payback. This is a continuous investment in our client facing capabilities and we are obviously looking very hard at taking cost out of the rest of the organization to create productivity improvements to allow us to make those investments.

Michael Nannizzi - Goldman Sachs Group Inc.

Got it. Thank you. And then just any update on Gras Savoye or could we get an update also on just kind of the operating performance that they experienced this quarter? Thanks.

Dominic J. Casserley

Yes, I mean on Gras Savoye generally, people are very pleased with the progress Gras Savoye is making. As you heard from Mike, they have now completed the operational review and made some very important changes in their operating model and their expense base. That is done. And we are therefore focused on assisting them and helping them grow the top line so that when we come to make our decision, which as you know, is really the spring of next year, we want to be looking at not only a more productive but also a growing asset. If we are to make that decision and it fully becomes a member of the Willis family, we will obviously hope to be able to rev up that revenue growth even more because we'll really be able to work with them as a member of the family. And that would be the case for the investment. But we definitely are very pleased with the progress that Gras Savoye made in 2013 completely on target in terms of the cost restructuring and now that team is focused on taking that more productive base and growing the revenues in their core markets, as you know, obviously France, the fixed market, insurance market in the world, in Africa, in the Middle East and parts of Eastern Europe and one or two assets in Asia. And we are obviously trying to help them do that.

Michael Nannizzi - Goldman Sachs Group Inc.

Great. Thank you.

Operator

Our next question is Mark Hughes with SunTrust. Your line is open.

Mark Hughes - SunTrust Robinson Humphrey, Inc.

Thank you very much. Good morning. Can you give us a little insight into how Global is shaping up for the first quarter, reinsurance given the puts and takes there? How is organic perhaps trending? And then in the capital markets business, how is the backlog and the tone of business there?

Dominic J. Casserley

Let me hand it over to Steve Hearn, the head of our Global business to talk about that.

Steven P. Hearn

Thanks, Dominic. Hi, Mark. I guess the question is partly what happened in Q4 in terms of Willis Re and is that going to continue. I think as Mike said quite clearly we had a small decrease in our reinsurance revenue. In fact Q4 is very much our smallest quarter for Willis Re with just over 10% of our annual revenue. We're very dominant in international reinsurance markets that I'm sure you know which makes Q1 a particularly big quarter for us and Q2 quite a large quarter. We actually had a very good Q4 in 2012 for Willis Re, so we have that issue as well in terms of '13. So down a tiny bit of money in Q4. Full year we again smashed our two peer competitors in terms of growth rate and margin, so we had a great year in Willis Re. And frankly I see nothing different in terms of where we move forward. Dominic repeated we don't give forward-looking guidance, but we do see our continued strong performance from Willis Re. I'm guessing that probably in your questions where is impact of new capital and maybe what's happening there and what impact will that have on the rating environment? It will have an impact on the rating environment. It certainly is a headwind at one level and it is having an impact. We've seen that 11 [ph], refer you as we said to the west side to get more details of the first few from our reinsurance colleagues. But several whole hosts of other things impacting the reinsurance world, an absence of significant reinsured losses obviously being the most critical but interest rates, economic growth, M&A and fundamentally lots of higher retentions from insurers but it's also an enabler for us. Clients need advice when insurers are retaining more, they often look to be intermediary, particularly the analytical and consultative reinsurance broker to help them and we're very well placed in that regard. So we feel good about Willis Re. Second question in terms of capital markets, I've categorized Q4 '12 as great and Q4 '13 was good in fact above our budget. But as we keep saying Willis Capital Markets is a lumpy business. That is a lumpy sector and a lumpy business. So yes, of course some of the pipeline that we might have hoped would turn up in Q4 we hoped would turn up in Q1 and moving forward, but we can't be certain of that. We are absolutely doing everything we can to maximize what is a very strong pipeline, so we feel very good about that business in the future.

Mark Hughes - SunTrust Robinson Humphrey, Inc.

Thanks for that color. On the flat Human Capital performance in the fourth quarter, was that new business, rates, retention? What accounted for that?

Dominic J. Casserley

Let me turn it over to Todd Jones to talk about – now we're talking about Human Capital in North America specifically, so our Human Capital & Benefits business outside North America continues to grow very nicely. But Todd, why don't you talk about that particular quarter.

Todd Jones

Yes. Mark, it was really a function more of sort of the seasonality in that business. I think as we look at where that business is, as Dominic had mentioned, for the full year the 6% organic growth and what we see both in terms of the activity, pipelines and sort of new business that it's generating, we feel great about its prospects in 2014 and got an awful lot accomplished in 2013 to set us up for a good 2014 as well.

Mark Hughes - SunTrust Robinson Humphrey, Inc.

Thank you.

Operator

Our next question is Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank

Yes, a couple of questions that you talked about, I just want to follow-on on that one. Does the ACA or some of the issues going on there have any impact on your Human Capital business and kind of what's the growth prospects because the clients maybe in a decision in sort of buying and stuff?

Todd Jones

Yes, Brian, it absolutely does. I mean Dominic had mentioned – he gave you some stats around activity for the Willis Advantage which includes our existing client base that are interested in sort of fully understanding the exchange model, not just our model but the models that exist outside of Willis and then the prospect activity obviously has been off the charts. So we've been spending a tremendous amount of time in the education game, I'd say. And then we will continue to see that as an opportunity into 2014. It's clearly as you know a very evolving subject, so I suspect it's going to kind of continue to evolve, I should say, both from the provider side, the carrier side and the intermediary. So, we'll continue to stay poised to try and take advantage of it. We're focused on that mid market segment. I think we got a very unique proposition there and we're excited about where we're heading. But yes, it creates, to your initial question, a tremendous amount of opportunity for sure.

Brian Meredith - UBS Investment Bank

Great, thanks. And then the second question, maybe with respect to investment spending, is it possible to give us kind of what your CapEx budget is for '14?

Michael K. Neborak

Yes. I think, Brian, I mentioned on the call between $120 million and $135 million into 2014.

Brian Meredith - UBS Investment Bank

Got you, okay, excellent. Thank you.

Operator

Meyer Shields with KBW, your line is open.

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Thanks. Good morning. Two quick questions, if I can. One, Mike, you talked earlier about an increased 401(k) match in the fourth quarter that accounted for the full year increase. Should we expect that to be more evenly distributed in 2014?

Michael K. Neborak

Yes. It will be distributed evenly in each of the four quarters during 2014, so yes.

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Okay. And is that just a North American issue or does it go beyond that?

Michael K. Neborak

No, it's a North America issue. It's not only within Todd's business, it also has some indications for our Global business that has a presence in North America as well, but it's more concentrated in our North America retail business.

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Okay. And do you have an estimate for what the actual growth in share count is likely to be before the offsetting impact of repurchases?

Michael K. Neborak

Well, a lot of that depends on how many options we can exercise during 2014 which we don't know. So to answer your question, we're looking to do basically with – the share buyback is to reduce the outstanding count by about 5 million shares from where it is today. And then the difference between – what that result gets and where we end up will relate to the option exercise that take place during 2014 which Dominic mentioned. Our goal is to immunize against those as well, but that would be handled outside of what we announced in the $200 million buyback.

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Okay, that's helpful. Thank you.

Operator

Alex Lopez [ph].

Unidentified Analyst

Good morning.

Dominic J. Casserley

Good morning.

Unidentified Analyst

This is directed to Steve. Steve, I was wondering if you can give us a progress report on some of the top line initiatives for Global, specifically Global 360, Global Solutions, i.e. catering to the larger accounts and also your cross-sell initiatives.

Steven P. Hearn

Okay. Thanks, Alex. And we have others, but I can certainly comment on those three. 360, we have operational on our London specialty portfolio. As you know that's providing additional capacity in terms of London specialty book. We're operating with a carrier at the moment and intend to have other carriers join us, but we have a healthy pipeline of capacity interested in operating specifically on G360 in London and in fact have consideration in terms of extending that capability elsewhere around the world. We're taking our time. We're being very thoughtful in terms of the way that we're going about this. We, as I say, had a healthy supply but we need to be sure it's a sustainable supply and provides positive outcome sustainably for our customer base. So we feel good about where we are and watch this space. We expect further announcements in due course. In terms of Global Solutions which you'll recall is about increasing our penetration of the largest accounts in the world. Not just a feature of Willis Global, it's actually a feature of Willis and they're following the work that we did on strategy last year, the initiation of what we now describe as connecting Willis which is working with Willis International, Willis North America and Willis Global in terms of getting our industry geography and broking colleagues to work much closer together and in turn providing backup outcomes for our customers. And again, I feel very good about where we got to there in terms of progress. We made five global industry appointments of a dozen global product appointments and are now rolling out that strategy around the entire organization, in fact next week in Atlanta we'll be doing it to North American leadership groups. So, good progress there. And your final point I think is cross selling which is something we do every day if we possibly can and again it goes back to that connecting Willis' strategy.

Unidentified Analyst

Great, thank you.

Operator

Next question is Josh Shanker with Deutsche Bank.

Joshua Shanker - Deutsche Bank AG

Good morning, everyone. Thank you for taking my questions. I just wanted to go back to the topic of investments versus personnel a little bit. Obviously – and I don't want to put words in your mouth, a year ago you said that you could add personnel through changing personnel that you wouldn't need to net add personnel to get the scale you need to grow. Is that still the case?

Dominic J. Casserley

Joshua, thanks for your question. We did add about 3% to our headcount during 2013 very selectively. Now that's a mixture of different things. It is investments in some of our highest margin businesses which you've heard us talk about. It's also we've increased our headcount in Mumbai which is our processing and analytical center we have where we basically have been moving roles from high cost locations into the Mumbai base and that can actually have over time a positive impact on our cost base. So, I had said all along to you that we are a growing company, okay. We need to be a growing company and we're trying to grow our top line by mid single digits. We grew our revenues 5%, we grew our headcount to 3% and my expectation is as we drive our productivity improvements, we will continue to see, as I hope, strong revenue growth and productivity effects which will start to mean we're able to drive that revenue growth without driving the headcount at exactly the same pace. But during the year we grew by 3%. But as I say that's a mixture of multiple different things, many of them hiring key people to drive revenues going forward; others hiring people to enable us to manage our overall expenses. Again, I want to emphasize that our focus is on growing our cash flow every year because that is what we believe drives shareholder value. And so we're very much focused on that metrics.

Joshua Shanker - Deutsche Bank AG

I'm totally sympathetic with the cash flow argument, just trying to understand a little better. Should we expect probably to net add personnel in 2014?

Dominic J. Casserley

I would not be surprised if we did.

Joshua Shanker - Deutsche Bank AG

Okay. I appreciate the candid answers. Thank you very much and good luck in the next year.

Dominic J. Casserley

Thanks very much. Thank you.

Operator

There are no other questions from the phone lines at this time, sir.

Dominic J. Casserley

Thanks very much. Thank you very much everybody for taking part in our call. We greatly appreciate your interest in our firm and we look forward to talking to you about our progress in 2014.

Operator

This does conclude the conference for today. All participants may disconnect at this time. Thank you.

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