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Willis Group Holdings Public Limited Company (NYSE:WSH)

Q1 2014 Results Earnings Conference Call

April 30, 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

Joshua Shanker - Deutsche Bank

Robert Glasspiegel - Janney Montgomery Scott

Chris Gallant - Nomura

Michael Nannizzi - Goldman Sachs

Paul Newsome - Sandler O Neil

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

Mark Hughes - SunTrust

Brian Meredith - UBS Investment Bank

Kai Pan - Morgan Stanley

Operator

Thank you for holding. Parties will be on a listen-only mode until the question-and-answer session of today's conference. (Operator Instructions). The conference is being recorded. And I'd like to introduce your speaker Mr. Peter Poillon, Director of Investor Relations.

Peter R. Poillon

Thank you, and welcome to our first quarter 2014 earnings conference call, which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings. A webcast replay of the call, along with a slide presentation to which we'll be referring can be accessed through our website. If any questions after the call my direct line is +1 (212) 915-8084.

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

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2013, and subsequent filings, as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also please note that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release and slides associated with this call.

I'll now turn the call over to Dominic.

Dominic J. Casserley

Welcome and thank you for joining us for the conference call. With me today are Michael Neborak, CFO; Steve Hearn, our Deputy CEO and Head of Willis Global; Tim Wright, Head of Willis International; and Todd Jones, Head of Willis North America.

I know you have a chance to read the news release that we put out last night announcing both our first quarter earnings and our multi-year operation improvement program. After we walk you through those areas in our prepared remarks we will be happy to answer your questions.

So let me start with an overview of our first quarter results. We delivered revenue of almost $1.1 billion, up 4.4% from the prior year. Our growth in commissions and fees we reported an organic 4.2% for the group. Over the past six quarters our organic growth has averaged 5.3%. One of the reasons we have sustained this momentum is that we have a portfolio of growth business across Willis Global, Willis North America, and Willis International. Not all may be firing on all cylinders in every quarter, but we have enough diversity in the global portfolio to underpin good organic growth. This quarter Willis International led the way contributing 7.2% organic growth. Willis North America contributed 4.7% and Willis Global came in at 2%.

Turning to expenses on an underlining basis total expenses were up about 5.5% compared to the first quarter of last year. While Mike will provide more detailed commentary on expenses later in the call this increase does reflect to a large degree all these growing investments in growth that I just discussed. We are committed to continuing to invest in our growth businesses in emerging markets but would be areas as in [inaudible]. Now with that context we have also identified that these opportunities could significantly step up our operational effectiveness and efficiency.

The multiyear operation improvement program we announced yesterday captured our planning for even stronger client service and substantial growth rate. Starting in 2014 and building in 2018 and beyond I’ll give more detail on the program later in the call. Let me turn to our first quarter earnings. Our reported GAAP earnings per share and adjusted earnings per share for quarter were $1.35 and $1.36 respectively. Once again those results in this quarter include the negative FX impact equivalent to $0.03 per share in the quarter. This compares to reported EPS of $1.24 and adjusted EPS of $1.46 in the year ago quarter.

Now let's spend a few minutes looking at each of the business in some detail and I’ll start with Willis North America. The North American business achieved organic growth in commissions and fees of 4.7% in the first quarter. The majority of North America's growth was again largely driven by new business wins combined with solid --. As we mentioned on our previous earnings call overall we are seeing a leveling out of rates in North America. We saw declines in some products at the top again from specialty lines such as aerospace. But we also saw rate increases in other lines including workers comp, construction, cyber and DNL. However in total rates did not materially impact our growth in the first quarter of 2014. For more in depth view of rates and market dynamics in North America please take a look at our spring updates for market that we published earlier this month. It is available on our website.

Looking at North America by region from beginning of the year we re-aligned our business in seven geographic regions Northeast, Atlantic, South, Midwest, West, California and Canada. Growth was well distributed across most of these areas led by strong result in the Midwest and the South. Looking at these results from an industry impacted perspective we saw a good growth across a number of lines.

Importantly our two largest North American practices, Construction and human capital both had a good start to the year. The construction sector grew in the low teens with group project revenue in quarter and our human capital practice was up mid-single digits. I’d like to provide an update on our healthcare exchange strategy which includes our own exchange offerings or Willis Advantage. We now have 16 currency and commission exchange branches in total and four of these are new to Willis. We continue to attract business from clients and prospects alike. We are now engaged in discussion with over 750 prospects of which about half are new to the capital practice. You'll remember when we last talk to you that by final is about 600.

For a company to decide to move to an exchange is a big decision and involves many months of work by their HR department and [appear] to communication stuff. So turning prospect into plan naturally takes time. So we are really pleased with our progress and our pipeline in this important growth area.

Let's now move to Willis International, our international operation grew 7.2% in the first quarter with most of the growth coming from the emerging and developing markets. Let me provide a little detail in the regions that comprise our international business. In Western Europe we saw modest growth driven by new business as well as potential. We're pleased with our ability to continue to grow in Western Europe given the generally weak economic conditions that persist in many of these countries.

Our growth was spread across the region with strong results from Iberia, Italy and Sweden. In Eastern Europe we recorded low double-digit growth, primarily driven by strong performance in Russia. Latin America delivered low teens growth. Most of the countries in the region continued to do well with strong growth in Brazil and excellent performances coming from many of the other countries including Venezuela, Argentina, Chile and Mexico. Asia also had a great report. Strong results in China and Hong Kong. Australasia was down by less than 1% with growth in New Zealand offset by a decline in Australia.

Let's now turn to Willis Global which comprises Willis Re, Global Insurance, Specialty, Risk and Willis Capital Markets and Advisory. This is the first quarter in which our UK retail operations are being reported within Willis Global following the combination early this year of our Willis UK and Global specialty businesses in a new unit called Global Insurance. Willis Global reported organic growth of 2% in the quarter reflecting the blend of different results across this new set of businesses. The reinsurance business had another excellent quarter growing high single digits in a seasonally large quarter and on top of good growth in the first quarter of last year. Excellent results in our specialty reinsurance division led the way with mid-teens growth on the back of strong new business wins.

North America reinsurance was up mid-single digits also on the back of new business wins. Our international reinsurance was down slightly. We've noted a continuation in the trends with softening reinsurance rates across all the all classes of business and geographies and we're feeling the impact of these rates to a degree. But as the analytical broker we're helping to guide our clients through a maze of complex decisions in an evolving market. With our help our clients are achieving substantial savings in the cost of their reinsurance protection and some are taking advantage of market opportunity to buy more cover.

For a further discussion of reinsurance rates globally I referenced our updated first report that we published on April 1st. You can find it on our website.

Moving on to our global insurance business, it was down high single-digits reflecting a disappointing quarter for both the UK reinsurance business and parts of our global specialty business. Among the specialties businesses marine and aerospace continue to be hampered by challenging market conditions and some negative timing of revenues that we expect will come in later in the year. Within our construction, property and casualty business we saw less project related new business in the current quarter compared to last year.

This is simply due to the nature of this business, its result and [inaudible]. In our UK retail business weaker performance was driven by a variety of factors. These included revenue timing effect and lower levels of new business for example in our corporate business and reflecting the improving UK economy in our installed businesses.

At the beginning of the year we started the process of combining our specialty and retail operations in UK under one. We're confident that overtime this combination will enable us to deliver in market leading competition for our customers and drive good growth.

So overall we achieved solid 4.2% organic growth continuing the trend you had seen from us for the previous five quarters. Despite some areas of softness but we're actively tackling. With that I'll turn it over to Mike to discuss the rest of the financial results before coming back to you to talk to you about our operational improvement program and then moving to Q&A.

Michael K. Neborak

Thank you, Dominic and good day, everyone. I'll be referring frequently to the slide presentation posted to our website. I'd like to begin on slide three which summarizes the financial reporting changes we made at the beginning of 2014. The most significant change was combining our UK retail business which previously formed part of our international segment with our UK specialties businesses to form a new unit called Global Insurance within the Willis Global segment. I also want to highlight the movement of revaluation FX along with gains and losses on disposals out of operating expenses to a new line item below operating income called other income and expense.

For 2013 and 2012 we moved $22 million and $16 million respectively from net gains into the new line item. And for 2011 we moved net gains into the new line item and for 2011 we moved $5 million to net loss.

Now let me turn to the financial results for the quarter on slide four, which shows adjusted operating income of $326 million, basically flat when compared to the year ago number, and adjusted EPS of $1.36 down $0.10 from first quarter of last year. Please note however that three items negatively impacted EPS compared to last year. First, FX grew EPS this quarter by $0.03 while a higher share count, the higher tax rate each lowered EPS by $0.05.

Slide five shows 4.2% organic C&F growth broken out by segment. Dominic will provide the color on each of those segments, but let me highlight a carryover impact from the fourth quarter of last year. Recall, that last quarter our organic commission fee growth was constrained by a revenue recognition adjustment in China. Essentially revenue that was reported in the fourth quarter of last year under previous revenue recognition policy has been pushed to future period. That situation is now starting to reverse with a positive impact approximately $6 million to our current quarter. Removing the positive impact, International organic growth was still very good at 4.7% and the group's organic growth would have been about 60 basis points lower at 3.6%.

Let’s turn to expenses starting on slide six. Dominic mentioned earlier that the underlying growth in total operating expenses which excludes impact of the expense reduction charge incurred in the first quarter of last year and the negative impact of foreign exchange in the current quarter with 5.5%.

This is broadly consistent with the underlying expense growth we have seen over the last six consecutive quarters. I want to talk about the drivers of that growth in the current quarter then Dominic will discuss the operational improvement program and how we expect that program will affect cost base going forward.

First, salaries and benefit which accounts for about 75% of our total operating expenses. Slide seven shows that underlying S&P expenses increased by 5%. This was slightly better than the 5.6% growth we saw for the full year 2013. The main drivers of that growth are similar to what you heard us talk about in recent calls.

First, headcount, which is up about 3% from the year ago. And second, the impact of annual salary increases. The headcount growth has been strategically directed to areas where we see growth opportunities such as emerging and markets of reinsurance, specific business at Global Wealth Solutions of Asia and revenue initiatives such as our connecting movers program.

Let’s now look at other operating expenses. On slide eight you will see the quarter-on-quarter comparison. On an underlying basis those expenses were up $13 million or 8.7%. This reflects business development costs relating to connecting Willis with other growth opportunities. In addition we have increased spend on systems related projects.

Depreciation expenses for the quarter was $23 million, up 21 million last year driven by cost associated with the number of IP projects that came online late last year. All of this activity of course affects our operating margin.

As you can see on slide nine, the adjusted operating margin declined 140 basis points, to 29.7%. Unfavorable FX accounted for 50 basis points leaving the underlying decline at 90 basis points. Looking at the segment margin North America and international achieved margin expansion this quarter of 290 and 60 basis point respectively. Global’s margin declined 310 basis point driven by relatively low revenue growth, continued investment in the segment and approximately 80 basis points of unfavorable foreign exchange.

Now on tax, the adjusted tax rate for the first quarter was 22% compared to 19% in the year ago quarter. It's worth stating again that the quarterly tax rate [fell] very meaningfully from the full year rate. In 2013, overall adjusted tax rate is 20% but the quarterly rate range is low at 19% in Q1 and is high as 24% in Q3.

On the associates' line, the largest component of which is Gras Savoye, first quarter 2014 showed a profit of $19 million compared to a profit of $15 million last year. As we stated in our last call we expect the associates line to be profitable in 2014 in a range of $10 million to $15 million, the seasonality of income to be consistent with prior year with a strong first quarter that -- the majority of loss income in the quarter. We expect that to be followed by flat to net operating 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 first quarter with $734 million of cash, down $62 million from year end but up over $200 million from March 2013. Total debt outstanding at quarter end was $2.3 billion, down slightly from the end of last year.

Cash generated from operations this quarter was $5 million down from $39 million last year due to changes in working capital most notably the payment of certain bonuses in March of this year that were paid in April last year. I'd also like to point out that we began repurchasing our stock during the last week of February and we repurchased 904,000 shares in the quarter at a full cost of $38 million.

Employee stock option exercises added $43 million to cash in the quarter. And finally unlike prior year we did not draw down from our revolver in the first quarter as cash on hand was sufficient to cover the seasonally high operating cash outflows associated with the payment of annual expenses in March.

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

Dominic J. Casserley

Thank you, Mike. As we announced recently John Greene will be succeeding Mike as Group CFO. Hence this will be Mike's last earning call. I want to take this opportunity to acknowledge the very significant contributions Mike has made over the last four years to the tight financial management of the group, the ongoing improvement of our balance sheet and the continued focus of the financial team on cash flows. Mike has also been a great source of advice and support for me as I've taken up the CEO role. So Mike thank you on behalf of all of us at Willis.

Let me now turn to the multi-year operational improvement program we announced with our earnings release last night which I touched on earlier. This program marks a significant step in our continuous pursuit of operational excellence. It is designed to further strengthen our financial capabilities and to deliver substantial savings starting now with annualized savings in our cost base from 2018.

Let me start with the financial details and then I'll provide some contextual background of the program. On slide 12 you can see that we expect that the program starting in 2014 will deliver cumulative savings of approximately $420 million through the end of 2017. From 2018 onwards the program results in an annualized reduction in our cost base of around $300 million. To access these efficiencies we plan to take a cumulative charge of $410 million starting in the second quarter of 2014 through to the end of 2017.

To the savings associated with the program are expected to offset charge to access them during the life of the program out through the end of 2017. We will then drive significant annual benefit from 2018 and thereafter. We've given indicative phasing on the $420 million of cumulative phasing in 2014 to 2017. We expect modest savings over the remainder of 2014 of about $5 million. Approximately $45 million of savings in 2015, approximately $135 million in 2016 and approximately $235 million in 2017. We expect that about 70% of the savings will come from work force relocation or reduction and 30% from real estate, operations, IT and other changes. These estimated savings are before any potential reinvestment. We expect a majority of savings to be reflected in earnings.

Today's announcement follows months of detailed analysis outstanding across all of our operations. As you can see on slide 13 work force location, real estate and technology will be the primary leaders in delivering our targeted efficiency gains. In some areas we're accelerating existing professionals successful initiative, in others we're bringing fresh thinking, endeavor maintaining and improving client service will continue to be at the heart of everything we do.

On the subject of location where we see possibly the greatest opportunities we have a track record of successfully operating across time zones from lower cost locations including Mumbai, Ipswich in the UK and Nashville. Further possible sites in Europe and Latin America are under active review.

We will now accelerate these successful initiatives to rebalance the footprint of our support function. Our current ratio of employees in higher office locations to employees in lower cost region is about 80:20. We will rebalance that ratio to approximately 60:40 by 2018 by moving at least 3,500 support roles under the current employee population of more than 18,000 into lower cost locations. Now this is a profound change that will take time to perform but it will give us a more effective allocation of people to the right places with the right field to deliver with maximum effectiveness and efficiency for clients. We also anticipate some reduction in support role as we roll our best practices and redevelop our operating percentage.

Ensuring we are effective in our use of space is another key focus for us. This is fundamentally about bringing more modern ways of using real estate to Willis, adopting the best practices of peer professional services we can make our real estate more user friendly and reduce its cost. The results of this work will be that we’ll reduce the ratio of seats per employees and average square footage per employee in line with benchmark norms.

Finally we will make more effective use of technology by reducing complexity removing duplications and obsolesce across business and geographies and tailoring system more closely to the client needs. We have managed to grow a powerful suite of IT applications but in the past they were developed independently via various businesses. The opportunity here is to reuse and rationalize the space and systems, going forward develop our IT in a fully coordinated way. We are known for the power of our analytics. I want that to be just as much a feature of our operational DNA as it is in the solutions we deliver for client.

This program will be overseen by a special working group involving key leaders and shared by our Group Director of Cooperation and Technology David Shalders. We are starting this program with significant experience and track record in the space. Most of the operating committee of the group has significant influence driving program of this nature and of delivering cost savings at Willis.

We have a track record of successfully moving roles from higher cost to lower cost locations and of managing those locations ourselves to benchmarks that are in many cases superior to those achieved by the major outsourcing companies. We will communicate openly with our employees throughout the process working hard to toward all those affected as much as possible. We'll report regularly on the progress we are making on the program. We will provide information and realize savings and actual charges in the relevant period and cumulative to date. In addition we will provide data on the underlined drivers of operational change, including the ratio of staff in higher cost to lower locations and as how we are changing the number of seats for employee and average square footage for employee. The savings in-charge estimates of the program reflect what we believe is achievable based on current analysis and judgment. We will track these estimates closely and look to drive greater efficiencies where we see opportunities to reach.

Let me now discuss the outcomes for the program which are laid out on slide 14. We see three core benefits, first stepping up on our operational efficiency for the benefit of clients. Second, reducing our operational prospects helping us to continue to invest in growth. And third, contributing to the positive operating leverage which will drive in turn channels. So to summarize it has been a good start for the year, the diversity of our portfolio and our ongoing targeted investments continue to underpin solid organic growth 4.2% this quarter and averaging at 5.3% at the last day.

Our stated strategy is sound and we remained confident about and committed to growing revenue faster than expenses over the medium term. The decisive program we announced yesterday fully support by commitment, we will execute with absolute focus against the profits we set and look forward reporting progress in few years. With that operator may we please begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Josh Shanker from Deutsche Bank.

Joshua Shanker - Deutsche Bank

Yeah. Good morning everyone. So questions about the strategic plan, the first question is why don't you take an upfront charge that we can overtime analyze whether you're successful in your saving by picking incremental charge as you save it makes it difficult for us to understand the degree to which you're making progress?

Dominic J. Casserley

Josh I think we actually would try and match the actions with takings to the charges we actually take along the way and if we want to -- very closely. I think it's actually not what we believe but I think it's much better to have transparency on we've taken particular actions in this quarter, they have cost us x and then you can start to track how they -- the savings come. But we feel very strongly that the approach we're taking is actually more transparent and clearer for everyone.

Joshua Shanker - Deutsche Bank

And is this part of the 70 basis points per annum improvement plan or is this an addition?

Dominic J. Casserley

So, obviously as we laid out our plan for 70 basis points or more the gap between revenues and costs over the medium-term, we had a range of cost saving actions that we would take over that time. Some of those maybe partly involved in this program but I think we definitely believe that as we've added to our analysis this is an opportunity for additional cost savings.

Joshua Shanker - Deutsche Bank

So while the incremental spend to achieve these plans is going on offset by the savings benefits. Are we going to see over the 2014-2017 period the hopefully the 70 basis points of moderate expansion you've laid out or does that really kick in beginning in 2018?

Dominic J. Casserley

We laid out a plan, first it's a good question. We laid out a plan to achieve a 70 basis points or more improvement in revenues and expenses over the medium-term and I'd definitely regard 2014 to 2017 a medium-term that we will be targeting to produce that sort of performance during that long time period.

Joshua Shanker - Deutsche Bank

So just on your -- so we should be seeing incremental margin expansions hopefully about 70 basis points per annum. Simultaneously as you're taking charges and offsetting them for this operational efficiency?

Dominic J. Casserley

Josh I am going to repeat what I said, which is that we set a target in July last year of improving our operating margin on average over the medium-term of about 70 basis points between revenues and costs. We remain committed to achieving that and we believe that the operational improvement program both underpinned our ability to do that and gives us the opportunity to exceed that target.

Joshua Shanker - Deutsche Bank

Yeah. But the point I would make that if it's happening to savings and then we expect another $300 million in 2018 that would be about 210 basis points over the next three years plus a much, much bigger lump sum in 2018 I guess is that the right way to think about it?

Dominic J. Casserley

Well as you know we don't give medium term guidance exactly on how revenues and costs are going to sort of flow. But what I think we can and we've also said there is some element of savings we're achieving on the program that we may put towards reinvestment to further drive growth but have made clear that we think majority of the savings will fall to the bottom-line. So I think the way to think about this, as I said this earlier too is that we expect over the medium term to be meeting the commitment we made in the middle of 2013 and as this program that helps underpin that and drive further improvement over the medium and longer-term.

Joshua Shanker - Deutsche Bank

Okay, well good luck with the program. And I look forward to further updates.

Dominic J. Casserley

Thank you very much.

Operator

The next question is from Bob Glasspiegel from Janney Montgomery Scott

Robert Glasspiegel - Janney Montgomery Scott

Gentlemen let me echo your positive comments about Mike, I have enjoyed working with you over the last 20 years and you're a real pro and I'll really wish you well and hope we can work with you again in the future, Mike.

Michael K. Neborak

Thank you, Bob.

Dominic J. Casserley

Thank you.

Robert Glasspiegel - Janney Montgomery Scott

Dominic maybe looking at Joshua's question little bit differently. How does this financial, this operational plan affect the cash flow dynamics. Now I've been under the impression that cash flow was going to grow faster than operating earning with capital spending and pension sort of flattish to declining. Does this change that dynamics?

Dominic J. Casserley

No, I think Bob you've got the analysis right. As we've said back in July we do believe that we have the opportunity to grow cash flow faster than operating profits because some of our CapEx and pension contributions we believe will be flat while we continue to grow the company and that we continue to believe. I think the impact of the program on cash flow is really through what it does to operating profits is that we expect as we said between now and the end of 2017 that the charges we take and the improvements to profit will basically be a loss. So may be some slight timing difference between those two things and we will give you a further update on that later in the year. But nor do we see them being a loss but quarter to quarter there might be slight differentials.

Robert Glasspiegel - Janney Montgomery Scott

And how much was the change in incentive comp timing from Q2 to Q1? How much of that?

Michael K. Neborak

In terms of the cash flow for the first quarter so that was basically the entirety of the change between the $5 million and the $39 million that I cited.

Robert Glasspiegel - Janney Montgomery Scott

So cash flow is running neutral even though the earnings were a little bit behind?

Michael K. Neborak

Yeah.

Robert Glasspiegel - Janney Montgomery Scott

Okay. Thank you.

Operator

The next question is from Chris Gallant from Nomura.

Chris Gallant - Nomura

Morning. I wanted to ask about some of the changes that have been announced over the last couple of months in terms of staffing changes and incidentally want to echo Bob’s comments that Mike you have done great work in the U.S. and good luck going ahead. But Dominic I’d like to know more about the new CFO, what qualities were you looking for in the person you hired? And then sort of within the manager ranks you saw a number of changes announced during the quarter as well and I was wondering if you could highlight some of those?

Dominic J. Casserley

So let me talk about John Greene. John comes to us from an experience in GE and was recently at HSBC. The qualities I was looking for well obviously many of those qualities is that we have in our existing CFO. John also comes with significant global experience having operated around the world and also I was looking for -- can achieve [inaudible] drive and monitor operational improvement and from his background John brings that to us too.

Other changes you must have noticed might be the appointment of David Martin to the COO of Willis Limited, I'll have Steve Hearn talk about that change.

Steven P. Hearn

Thanks Dominic yes. David's been with us over a year now, recruited in initially to run the UK retail operations as you recall from previous comment we talked together on retail business and our global specialty business in new unit to someone [inaudible] global insurer. And we have got David running that operations and combined for P&L for us which makes [inaudible] of Willis Limited entity to regulate sensitivity and so felt it appropriate to make some changes, a very little coming to replace needs regulatory approval as the CEO of Willis Limited working with our board in terms having -- I think there is some significant changes.

Dominic J. Casserley

Yeah. But do you think of any others you want to -- out?

Chris Gallant - Nomura

No, I think I saw some there were some hires in the healthcare practices as well and just more additions to high profile hires you’ve made.

Dominic J. Casserley

Yeah and then I mean I think what we can say generically, that we are committed to I think Willis to grow and drive our business. We do believe about Willis it's a very exciting platform for talents across both property and casualty and our human capital and benefits activities. And we are having interesting discussions with a number of people who see the growth opportunity with us. That is certainly true, the number of incoming calls we are getting from professionals in those areas who are noticing what we are doing and are interested in joining us is significant and we are very excited about it.

I will actually to Tim Wright who just helped me if you want the couple of steps in the human capital space globally. As you know we asked him to do practice in human capital and benefits globally as we start to coordinate that business globally and Tim just why don't you talk about that.

Timothy D. Wright

Thank you Dominic. And as you know we have substantial human capital benefits practice both the North America and around the world and that is a growing business, it's growing at a good rate and it's an area of focus for us going forward. We're bringing that -- in action with metrics into the geographies and we're making a number of important hires across that process including in Europe and our multinational capital benefits business which may affect us.

Chris Gallant - Nomura

Thank you.

Operator

The next question is from Michael Nannizzi from Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Thanks. Dominic could you, I mean it seems that you kind of purposely didn't lay out the timing of the expenses you kind of -- the concurrence of cost as opposed to the cost saves. Can you talk about the thought process around that and wouldn't you expect those expenses to come through, do you expect that timing to be up ahead of the saves or more concurrent? Thanks.

Dominic J. Casserley

That's a good question. And we do plan probably on our October call to give you an update on that -- on our view on the timing of the charges we would take. I think broadly as I said we see the timing to be close to the savings but we wanted to give you more detail on that October call. And I think it will be -- know you're right there maybe some slightly early you take charge and you see the savings a little later.

Michael Nannizzi - Goldman Sachs

Understood.

Dominic J. Casserley

We will give you more and more information on that call.

Michael Nannizzi - Goldman Sachs

Got it. And then in terms of the expenses is that related to current costs or projected costs. Like what is the base line for those saves, so is it I think you have some growth initiatives internationally so I imagined your projections would call for some growth in expenses in those areas as well. So is that 420 is that relative to the starting point of expenses today the 3ish billion today or is it in comparison to projected expenses in forward periods? Thanks.

Dominic J. Casserley

Maybe the easier number to focus on is annualized base 300 in 2018, right. That is a number again all of you we projected essentially would be in 2018. So it is a reduction against that so to say.

Michael Nannizzi - Goldman Sachs

Okay. So it's a -- we should be thinking about these expenses relative to projected expenses not necessarily current expenses?

Dominic J. Casserley

That is correct.

Michael Nannizzi - Goldman Sachs

Okay, great. Thank you.

Operator

The next question is from Paul Newsome from Sandler O Neil.

Paul Newsome - Sandler O Neil

Sort of the related question. When you think about these payoffs timing obviously there is big restructuring charges -- four year payout return. When you look at these other investments are you thinking in the same manner that full year kind of time frame it's roughly speaking the kind of payback for the investments that you're making particularly in the -- that you're talking about they could offset some of these current savings off the bigger structure?

Dominic J. Casserley

No, no. I think the first of all let me just go through the cost savings number quickly again for you. We see the -- rapid, so that's why we're saying that we will take a charge and we will start to see savings in those -- awashed through of course 2014 to 2017. In terms of other investments we make which are almost overwhelmingly in client facing activities, new businesses et cetera. The returns are obviously also faster than that. In some businesses we take we hire people and they join us and their impact can be positive in year -- it can be positive in year.

In most cases when we hire people we would expect them to be definitely positive in year two, definitely positive in year two. So that the return on building new businesses and hiring capabilities we tend to find it reasonably rapid. As I should say in some cases very rapid indeed but we definitely look to see as we build businesses to see returns in the year after we're invested.

Paul Newsome - Sandler O Neil

And are any of these cost savings depended upon the achievement of the certain level of organic growth in benefit with scale?

Dominic J. Casserley

No, no. These -- we've a reasonably scaled business today. We -- I should go back and reiterate we have spent month developing this business in great details and it is based upon specific action we see in the location of our staff, in the evolving the evolution of our real estate base and in consolidating and rationalizing some right IT. Those are actions which are based upon the days cost based and then that’s the way we see it growing and we are not relying upon further growth or further economies of scale to achieve the base.

Paul Newsome - Sandler O Neil

Well thank you. And best of luck to Mike as well.

Michael K. Neborak

Thanks Paul

Operator

Are we ready for the next question?

Dominic J. Casserley

Yeah.

Operator

The next question is from Meyer Shields from USA.

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

Thanks. This is probably more numeric then you may want to answer. But is there anyway finding how much the $300 million of full year run rate savings are already contemplated in the 70 point revenue [interest]?

Dominic J. Casserley

It's a good question and it's obviously a reiteration of I think Josh's question right up front. And the answer as I think our friend reiterates again. We are committed over the medium term that includes medium term 2015 to the 70 points or more gap between revenues and expenses. This program both underpins our confidence in that program and our ability to hit those targets and our ability to deliver 70 points or lower. Now that’s how we see this program.

The exact division between how much of this is helping us get to 70 and how much will push us beyond 70, it's hard to say and definitely by the time you get to 2018 because the world have evolved but we absolutely say that this should both underpin the 70 points commitment and help us to exceed it as we move forward.

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

Okay. I understand. Similar question now, in terms of the majority of the savings going to the bottom line rather than we invested, can we if you could define what the majority means?

Dominic J. Casserley

Yeah we will give you guidance along that along the way of the program obviously as you would expect and as you would want us to do. That will be based upon the attractiveness of investments along the way. But we do believe that the majority of the savings will flow to the bottom line. But if obviously you would want to do it would be wide in 2016-2017 resource specific investment opportunities with spectacular returns. If we should be investing in those we will do so but we absolutely believe that the majority of these savings will fall to earnings.

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

That’s great if you could refer you to maybe [inaudible] that will be great.

Dominic J. Casserley

We completely hear you and as I said we are committed to both providing you on a regular basis how the business how the program is evolving and provide you with underpinning of the key drivers of those savings so that you can see that they are really happening on the ground so we will report to you on this in how the 80:20 higher cost to lower cost ratio where our people fit evolves every time an we will report to when how our real estate platform is also.

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

Fantastic, thanks very much.

Operator

The next question is from [John Campbell] from Stevens Incorporated.

Unidentified Analyst

Thanks guys. First question here just it follows in line with the Josh question earlier and Dominic I know you guys don't give medium term guidance and outlook of that. And just looking beyond that 70 bps medium term goal, factoring in the cost reduction plan and I guess you know you would assumed kind of steady growth in here. If you guys just give us a sense or may be just a rough range of what you are kind of targeting for longer term operating margins?

Dominic J. Casserley

I am sorry you know we don’t give guidance of that nature. Obviously you can do the math as well as we can. If we deliver a medium term at this point the gap between revenues get extended you would see our margins improve and if we can do better than that in terms of the operational improvement program helping to drive increased cost savings we will do better again. So that’s all I can help you with basically because as you say we don’t give specific guidance of that nature.

Unidentified Analyst

Okay, that’s fair, just looking for a range there. But as you look at the cost reduction plan I don’t know how much detail you can give on us but is any of that plan…?

Dominic J. Casserley

No. [inaudible] as you know went through its own program during 2013 and achieved very good savings, a very successful program and saw you all the benefits in the associates line in this first quarter. Assuming that we go ahead with the acquisition of [inaudible] which is you know a decision we've to take next year and we've not made that final decision yet. But assuming that we were to go ahead with that they would be part of us during 2016 and we would obviously start to look during that period the opportunities to involve [inaudible] further in some of the activities we're taking and that may create additional opportunity. But at this point we're not including them in those numbers.

Unidentified Analyst

Okay. Great, thanks.

Operator

The next question is from [Al Capacino] from Colombia Management.

Unidentified Analyst

Hi. Thank you very much. It sounds like a large scale cost savings program of this sort perhaps was not contemplated at the time of the July Investor meeting. And if that's correct I hear what you're saying that this program gives you more confidence in the 70 bps spread and gives you the chance to perhaps exceed that. My question is did you find that some elements either the revenue or the expense management had turned to be more difficult than you had thought a year ago or is that not the correct way to think about this?

Dominic J. Casserley

I think that is not the correct way to think about this. When we stood up in July last year and talked about revenue and cost opportunities, we already had some ideas about where we would find some cost savings and by the way we have been taking those activities. The ratio of that we've been continuing to move the people our lower cost locations over the last certain period of time. I was aware and I've become aware and more convinced over the cost opportunities both leading up to July and after July.

We were seeking a team that would enable us to drive a very detailed -- program. We're able to hire David Shalders to join us at the tail end of 2013 to help us accelerate our analysis of our cost saving opportunities. And we've been in deep analysis of those opportunities over the last few months and developed a very, very detailed plan of which providing you the headlines on this announcement.

So I think what's the best way of thinking about this is that we had some ideas of where we would get cost savings, we saw some opportunities in July. What we've now done is deepened and strengthened our bench to enable us to drive that in great, great detail and in the process of doing so have become even more enthusiastic and raised what we believe are the opportunities. That is the program we're announcing today but it both reflects both thinking leading up to July and then deeper and deeper analysis of the opportunity which leads to this announcement.

Unidentified Analyst

That's very helpful, terrific. And Mike it's been a pleasure meeting with you and working with you over the last few years.

Michael K. Neborak

Thank you, Al. I look forward to seeing you again.

Unidentified Analyst

Thank you.

Operator

The next question is from Mark Hughes from SunTrust.

Mark Hughes - SunTrust

Thank you, good morning. The headcount growth of 3% in the quarter was clearly healthy in light of the market opportunity I guess and is there something you see -- is there a land grab out there that you need to keep expanding the staff in order to take advantage of some opportunity or if it fits in some part of your strategic offering and so therefore you can't just sort of start thinking pennies today or you couldn't six months ago that there is some sort of expense drive that is making you I guess I want to increase the expense structure at least in the near medium-term here which you will then taper off in the longer-term but why not to start pinching pennies today?

Dominic J. Casserley

So first of all to clarify that the 3% is the year-on-year increase. So it's comparing the first quarter of '14 versus the first quarter of '13. It is also a net number and we've been seeing and basically trying to target our headcount at particular areas where we see growth and holding back on headcount scenarios where we see less growth and less opportunities. So for instance in Asia we've seen headcount grow 11% year-on-year, we ensured it's up 6% year-on-year in other areas we have being reducing our head counts where we see lower growth.

So the net number absolutely reflects that, that we see significant opportunity to grow the business and we are going to put our results behind those and we will come back in areas where we see best growth. This operational improvement program enables us to do all that at an accelerated pace and deliver our financial metrics in the way that we like.

Mark Hughes - SunTrust

On a separate topic. The human capital business if you are able to land a reasonable number of those exchange prospects, would you expect the human capital growth to accelerate a little bit because of this exchange opportunity?

Dominic J. Casserley

So obviously the human capital exchange opportunity we are talking about is in North America and as we emphasize to you we are thinking about our human capital and benefits activities globally as well as North America. Within North America I guess we do particularly as we are finding that the prospect and actually the new plan includes a fair number of people who are either new to Willis, full stop or new to Willis in human capital and benefits in North America.

So absolutely as we drive that exchange forward we would expect it to add new clients to our base and therefore drive revenue. So yes we are excited about it, and let me reemphasize what I said back that it takes time to close these transactions because they are a major decision for a company they are changing the healthcare plans of their employees, you don’t do that overnight. So we’ve really started in this in the middle of last year we’ve close 16 to date and we a had a price line of 750 professionals we are having, you can see why we are excited.

Mark Hughes - SunTrust

Thank you.

Operator

The next question is from Brian Meredith from UBS.

Brian Meredith - UBS Investment Bank

Yeah good morning I have two questions for you. The first one is do the cash outflows with respect to the expense plan here have any impact on share buyback?

Dominic J. Casserley

No. We remain committed to sort of the capital allocation plan we laid out in July where we said we’d be looking at organic growth opportunities, inorganic growth opportunities, dividend increases and share repurchases. We delivered on all four of those bases. We delivered organic growth, we’ve done some M&A, we’ve raised our dividends and we started a share repurchase program. And we continue with what we said on our last call that we have a share repurchase plan on the moment targeted at immunizing the impact on share count options and we continue to be committed about that.

Brian Meredith - UBS Investment Bank

Okay great. And then Dominic the second question, so the insurance brokerage industry right now and then I guess it always is it's pretty competitive when it comes to talent in getting good talent. And then each time you kind of go through an expense initiative like you are going through right now can cause some internal pain. So I guess my question for you is that, is there a risk here of any kind of key talent or good kind of client facing people leaving as result of what’s going on here? Or is there something that you are doing to try to prevent that from happening?

Dominic J. Casserley

Well, it's very good question. And also keep you aware of this we do not believe it is risk that people manage. We are very focused on communications around this plan the consultation with our staff around the plan and the fact that the plan is fundamentally focused on serving our clients better. So once more example of what we are going to do and which is included in the provisions charge laid out to you the $410 million. It is very important to be make any changes to the service of our clients that we’ve parallel run the old process with the new process to make sure that everyone is comfortable, our clients are comfortable with new approaches were even better than the approaches we have today.

We have built in substantial amount of parallel running into our plan and there it's a $410 million charge we have applied. So we believe that we will be available for work with our few -- inside [inaudible] but the thing that really drivers their behaviors and excite them to get them out in quarters which is client service and making sure that clients are happy is absolutely going to be taken care of.

Brian Meredith - UBS Investment Bank

Great thank you.

Operator

Our next question is from Kai Pan from Willis.

Kai Pan - Morgan Stanley

It's Kai Pen, good morning, Morgan Stanley. Thank you so much for taking the call and just first a quick math question. Just try to understand the $300 million cost saving. If 70% of that coming from the relocation of those that’s $210 million and you said probably impact about 3,500 supporting those that's average about $60,000 per employee per year. It sounds they sort of took pay cuts given the average salary of $120,000 for your average employee, so I was just wondering is the math right?

Dominic J. Casserley

Well the math -- math is basically obviously the savings from the delta between the cost of having a role in that higher cost location and the fully loaded cost of that role versus the difference in a lower cost location. There is obviously where you are taking a role to where you are moving it. And if you take a role from some of our highest cost locations and you move it to Mumbai that was the big delta. You move it from a location in North America, Nashville through the delta but it's a smaller delta.

The average you have -- you have probably worked out well could be average of all different moves. The basic economics having roles hopefully better designed roles in lower cost locations with lower opening cost than our present.

Kai Pan - Morgan Stanley

In that light do you expect sort of majority of this impact this 3,500 sort of roles like about 20% of your total employee base to be turned over the next three, four years?

Dominic J. Casserley

Yes, we do believe two questions. We do believe that the actual impact on our staff to-date will be less significant than it might appear for two reasons. One because there is [maximum] turnover in that base anyway and so therefore managing this process should be easier because of that turnover anyway. And secondly because we're actually obviously going to defer the time of moving these roles it's not all happening at once, it's happening over a course of three years. So therefore we think the actual impact on the current staff in the high cost locations is less than the number might suggest.

Kai Pan - Morgan Stanley

Okay. So lastly on the timing of your margin expansion looks like in most of these savings were kind of back end loaded of this three to four year process. Is that fair to assume that the margin expansion would also being more sort of back end loaded?

Dominic J. Casserley

Well as I said there is a number questions about our medium-term commitment. But clearly if we're going to do better than our medium-term commitment of 70 basis points and see more improvement, this program will kick in more aggressively than that implies.

Kai Pan - Morgan Stanley

Okay. Well thank you so much. And good luck to you Mike.

Michael K. Neborak

Thank you, Kai.

Operator

The next question is from [Ronnie Broadman] from Capital Returns.

Unidentified Analyst

I barely know Mike but I am going to say goodbye and good luck anyway since everyone else said.

Michael K. Neborak

Thank you.

Unidentified Analyst

Moving off the topic that is your focus on Willis Re which has consistently done fabulous, I had a question obviously we're all aware that the reinsurance business particularly the underwriting side of it has undergone dramatic change, looks like it's here to stay and it's sort of broadening. And obviously there is a knock on effect to the intermediary to your reinsurance brokerage unit. And for the most part it's not really been talked about or a great area of concern from the management and the executive ranks.

But I am wondering Dominic what's your view maybe any other unit head there could comment on sort of what's your intermediate or a longer-term view of the reinsurance brokerage business it would seem to me that the sort of securitization is not a great trend for the intermediary but I'd really welcome your input?

Dominic J. Casserley

I am having to think hand over to Steven for a second. I am very interested the question about securitization is a good thing coming from the investment banking organization. We've been in the investment field because we do believe that actually there is some interesting analogy to be aware. We are talking to the evolution of capital in the industry, - moving the question about intermediation disintermediation. As an intermediary involved in that we do see plenty of opportunities but it does require us to be -- and be the analyst or provider and help us through our plans.

But let me have Steve talk a bit more about what we sees the outlook for us for the reinsurance business.

Steven P. Hearn

Sure, thanks Dominic. Yeah we did have another great quarter in Willis Re another great quarter for that business performed attractively over the years. And then unquestionably as you say an interesting environment in terms of great team in the reinsurance space and obviously if you include what going on in the long run?

As I said before on calls before, don’t necessarily drove the conclusion of that you see that impact directly in our reinsurance business' performance. We continue to grow through new business acquisition business from competitors we do have some fee based earnings in term of the larger reinsurance on file and clients. Dominic said in his remark do often take the opportunity to track the rates that are falling more. If I got out of the quarter perhaps after the question with a more longer term view we think -- I think the new capacity that’s coming into the reinsurance will be sustained in my opinion.

And I think those who have a prognosis but in the event of a main catastrophic event that with physical capacity might not actually agree with that I think sustained impact and that just becomes a matter of pricing.

For us we embrace that and see this is an opportunity as people start to embrace this new capacity and they often need advice and that’s exactly what reinsurance in for me to read all from the gain using the full weaponry of Willis’s global capability including obvious one of Willis aftermarket, that we see as an opportunity in fact great connection between those businesses that vary all the time and shift. Now opportunity if I have to about where our reinsurance business is and the improvements…

Dominic J. Casserley

Okay. And I am aware that we have run somewhat over our time. So I think we'll probably kind of bring this call to a close. Let me reiterate what I had said online. We are excited about the revenue momentum that we have -- we had over a number of quarters and had again in this quarter. We are excited about our growth opportunity which we discussed on the goal in a number of areas and about our ability to bet behind those big opportunities and hop back in other areas where we see less growth. And to underpin all this we announced a very important operational improvement program which is months of detailed work to layout where we see opportunities to restructure our cost base.

We’ll be led by an experienced team who know how to deliver these programs and we committed reporting back to you on progress in a few quarters. We that thank you very much and we look forward talking to you further.

Operator

That concludes today’s conference. Please disconnect at this time.

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