We'll get started with the first presenter. First up today, lead off hitter, Dominic Casserley, who is CEO of Willis. He's been CEO for a little bit more than two years. Prior to that, he had spent 29 years at McKinsey, worked all over the world, actually found time to write two books during that time. I've only written one, so he's double my output. Actually, I haven't written any. It's a joke. Since he's been at Willis, he has instituted a significant amount of change. Really to talk about that change and where the company is going, we're happy to have Dominic with us. We've got a kind of a Q&A format, as you can see. I've got a whole bunch of questions, but if you have questions, we definitely want to hear from you as well.
If you have questions, and I'll pause every once in a while to see if you have any, just raise your hand, we'll get you a mic, and you can feel free to ask them. I'll start with kind of a bigger picture question and say, 2014 was a busy year for you and for Willis. Got back to the M&A game. You implemented your organizational improvement plan. Looking back on 2014, how do you feel about the year, and how do you feel about the business today?
Yeah, I think we feel very good about the business today. During 2013 and 2014, we took a whole series of steps to put in place sort of our three-part value creation strategy, which is around organic profit growth. Very carefully targeted acquisitions, which we believe as part of Willis, we can create value from them. Third, this operational improvement program to which you alluded. We think these three elements working together will drive cash flow and therefore shareholder value. We've started to see good progress in our organic performance. As everybody knows who follows our market, these are interesting times in our market. There are some significant headwinds in parts of where we compete, but despite that, we continue to deliver mid-single digit organic growth, which is what we have said we would do, and we feel comfortable about that.
In any particular quarter, one part of our business may be stronger than another, and we saw that in our fourth quarter recently. That will be uneven between the businesses. Overall, we feel comfortable about mid-single digit growth. We saw our serious expense management initiatives we took to enable us to produce a margin. I'll talk further about that in a second. On acquisition, we did two significant acquisitions in 2014. Bought a company called Max Matthiessen in Sweden and announced, we have not yet closed, but we're going to buy 85% of Miller in London. Those are significant, again, very targeted acquisitions, which again, where we believe we bring something special to the party, and that those businesses can flourish as part of the Willis family.
Third, this operational improvement program, which is about really changing the operating structure of our middle and back office over a three-year period. It is a very disciplined program, and we started to see it bearing fruit again in the fourth quarter. We're confident about how it can help us drive our overall margin and therefore cash flow in 2015 and onward. We feel very good about where we are.
Let's talk about this operational improvement program. It's obviously a pretty notable change for parts of the business.
Talk about the key components of the plan and maybe some of the challenges that are involved in implementing it.
The key drivers, we announced that we believe it can deliver $300 million of run rate savings by the time it's finished with building impact towards that over time. The three key elements of that, there are some other smaller ones, but the key three elements of that $300 million are operational redesign, right? Basically making some of our processes more common and more uniform and simpler, faster, and cheaper as a result. Second, moving a large number of roles from high-cost locations to lower-cost locations. That is particularly going to gather pace in 2015. Third, rationalizing how we use our real estate. We've even given out some metrics on square footage and number of desks that people have, which those ratios we believe will gradually improve over time.
The combination of those things and some other items, but those are the three key drivers, we believe will drive significant improvement in the productivity and costs of our middle and back office. This is, by the way, about improved customer service as well as lower cost. What are the risks? There are, of course, the usual change risks. One of the biggest risks is trying to go too fast. That's why this is a three-and-a-half-year program, which began effectively in April, late spring last year. We have taken a lot of time planning, communicating, developing the program, and putting in place the first big wave of activity, which is in 2015. We did actually produce in 2014 actions which on a run rate basis save over $30 million.
2014 was really a planning year and putting in place all what we need to do. 2015 onwards is where we start to see the program really accelerate. We have been very careful to take our time, to sequence, to plan so that we can do this successfully.
Have all the steps been identified? Do you have the roadmap entirely set for the next three years? Is it a case of we're going to start here, we'll probably find some more, and we'll figure it out as we go?
I think the best way of thinking about this is, imagine you were renovating a house. You might get general architectural plans when you began for all the 25 rooms in this huge house that obviously only Jay you could afford, but the rest of us can dream. You have this nice house, you've got 25 rooms and you have a general plan for how it's going to be done. You know broadly what you're going to do. In 2015, you are really focusing on six of the rooms.
During 2014, we went into great detail on those 6 rooms, right? Towards the second half of 2015, we will be planning the next 6 rooms for 2016, right?
Right.
We have a general plan. We know where the opportunities are. We have had those opportunities tested multiple times, so we know they are real, right? The very detailed planning takes place a few months before you start to actually start painting or whatever you use to detail.
I assume too, sticking with your analogy, as you finish off one room, you will learn what went well and did not go well in that room, and it might inform you as you design and plan other rooms.
Indeed. That is right. One of the things we have done from day one is to say we do not want to do this by ourselves. We have brought in a partner who has done this many, many times before to work with us so that we know we can have all of their learnings of having done this many, many times, right from day one.
Yes, of course we'll all learn, what we're doing is not rocket science. Okay? We want to make sure we leverage the expertise of people who've been there, done that, right? To make sure the common errors we avoid.
Right. I think when we hear about a plan like this, we're always focused on the cost savings.
Yep.
as you rightly said, organic growth.
Yep
is part of this plan.
Absolutely.
How important is organic growth, one, but more importantly, what are the drivers? How do you drive organic growth in an environment that, frankly, may not be best suited to grow significantly, certainly in parts of the world?
I talked about the fact that we have multiple growth engines. There are lots of screaming headlines in all the insurance press about what's going on in the reinsurance market, particularly around CAT. You've got to be careful, by the way, it's not even the reinsurance market. It's quite specific, right?
Growth engine, we operate around the world. We serve companies from SMEs all the way through Fortune 50, right? A broad range of clients across a range of property and casualty and benefits needs. We have a significant benefits business and growing. The acquisition of Max Matthiessen was all around the benefits arena. We have a broad range of revenue sources. If you think of us geographically, we do operate in some markets where the businesses we are in are just growing. Right? Like it or not, for instance, you will see headlines about slowing growth in the developing markets. Actually, the growth of our market is a combination of how much insurance are companies buying. Well, let me tell you, many of the cases, they're just under-insured. There's natural growth, however the economy is performing.
There is the performance of the economy, and then there is how much are they using brokers. That can be a changing dynamic as well. You get this triple whammy of underlying economic growth, increased penetration of insurance, and then increased penetration of brokerage of insurance.
Surprise, surprise, we've seen in a number of our emerging markets continuous double-digit revenue growth. My response to our managers, who are doing a wonderful job in building Willis' position market share, is that is fantastic performance, terrific, but your market has sort of been growing at that rate too, or around it.
Right.
Those dynamics are in play. That's one driver. We are seeing our benefits business grow nicely in a number of markets. The underlying drivers of demographic change, demand for healthcare, et cetera, drive a lot of that. We're basically in modern benefits. We're not in defined benefit actuarial activity. Right? We're not really in that business, which is a lot of what is the base of some of the other firms. We're in defined contribution and healthcare, basically, which I like to describe as more modern benefits activities, and those are growing nicely. Even in, take a market like the Eurozone. We have managed to grow nice mid-single digit rates in the Eurozone because we just have very good franchises, and we've been taking market share as far as we can tell.
When you add all that up and many other elements of what we do, and by the way, our reinsurance business grew last year despite everything else. When you add all that up, we're comfortable that we can deliver mid-single digit growth.
Talking about reinsurance, you look at brokerage stocks historically, go way back, they certainly have traded with the pricing cycle.
Arguably, the pricing cycle is not as pronounced as it was.
Absolutely right.
historically.
Yep.
Reinsurance, clearly we're seeing some pressure.
Yep.
In CAT, definitely. Even outside of CAT.
Yep
You hear about it. Outside of reinsurance, what are you seeing from a pricing standpoint? Is it just very flattish?
Yep. We plan on the basis that We're not going to see a hard cycle, right? That's how we think about our planning. Therefore, at the coal face, working with clients, we could just add more and more value. That's the implication of that. That being said, when people ask me about pricing, I have to ask them, "Well, what are you asking about?" Mostly people say when they talk pricing, they're actually talking about how do you see pricing in the North American P&C middle market, right?
Right.
Okay. Well, that is part of our business, an important part of our business. How do I see pricing in the Australian market? How do I see pricing in the South Africa market? We are very diverse. All I'm telling you is that when we look across the full range of all those, with ups and downs, our basic approach is just assume it's flat until we have enormous evidence to the contrary. Obviously in re, in CAT, there is overwhelming evidence it's soft.
Yeah.
For any one moment, some markets may be up, some markets may be down.
Right. Outside of organic growth, obviously M&A is starting to play a role in the company. Let's talk about the most recent acquisition, Miller announced acquisition.
Yeah.
Not everyone is familiar with it. Just give us a quick background on Miller and more importantly, the strategic rationale for doing this deal.
Yeah. It's specific to the London market, where there is a vibrant but changing market of what is called wholesale. Wholesale is basically a group of people who sit in London, and their clients are other brokers, right? They're not generally corporations. They're other brokers. You have a broker in a market, in a country who needs to use the Lloyd's market, and they will go via one of these wholesale brokers. Miller is widely regarded as the best. Well, we think it's the best player in that market. We came together mutually and decided that together we could be more successful, or we could help them grow that opportunity. For us, it's strengthening Willis' position, the Willis family's position in that wholesale channel into London. We will continue to serve clients directly into London via the Willis brand name, right?
Where the clients come to us and they want to insure in London, they'll be able to do that.
Through Miller, we'll be able to serve other brokers through this wholesale channel. We had some of that business in Willis today. We're transferring some of that into Miller, and they had some direct business which they're transferring over to us. What we see is an opportunity to strengthen our position in this wholesale channel into London. It's particularly interesting because as clients become more sophisticated and more demanding, there is clear evidence of consolidation in that wholesale channel. A move to quality of both those brokers as they seek with whom to work, and talent. We believe that Miller, supported by us with the heft of us behind them, can become absolutely the place that people want to trade with, and where talent wants to go.
Is there some sort of conflict, though, with a retail broker having a wholesale broker?
We have wholesale activities inside Willis. Historically, if you go back 30 years, Willis was basically a wholesale broker, right?
Right.
If you go back in time. Not that far, as I say, 30 years or so. There is existing within all the large firms, a mixture of retail and wholesale. In fact, what we are doing is making the wholesale part more distinct and easier for our counterparts just to see. That's why we have created the fact that the partners of Miller will continue to own 15% of the company, have significant self-governance in driving of the business themselves. It'll operate very much independently from Willis and be able to trade as a wholesale partner.
Sticking with the M&A theme. You've got, I think about two and a half months to make a decision on Gras Savoye.
Yep.
My question is, what is the process that the company and I guess the board is going through to form an opinion on how to approach this?
Yeah. This is obviously a significant decision for us. Gras Savoye is a relatively large company. It has close to 4,000 employees. It operates across multiple different markets. Our decision, to be clear to everybody, is a decision between buying the 70% we don't own or deciding not to do that, which then will raise issues about what does then Gras Savoye do. The process we're going through is the process you'd expect us to do in any situation, with the twist that we have much more information. We sat on the board of Gras Savoye because of our 30% stake for a long time. They've been a trading partner with us for many years. We serve clients together. We know them very well, and they know us. Right.
This is a very long-term relationship, we're going through the usual processes of understanding the medium term, which is obviously this is a long-term decision, so we've got to understand what the medium-term outlook for the underlying economies and again, the underlying insurance and insurance brokerage markets, right? Be careful to distinguish those. What the underlying demand is for the benefits market in France, Belgium, bits of Eastern Europe, and of course, the very attractive franchise they have in Africa. We're looking at that, modeling the economics, modeling potential synergies, comparing that to how much we think we might pay to understand whether we're creating value here. This is a very disciplined process. What I can tell you is we do have the added, slightly distinct situation that we know this company extremely well, right?
We really do have insights on what's driving their economics.
Given the potential for purchase of the rest of Gras Savoye, given the Miller deal.
Can we assume that any material share repurchase is kind of off the table?
As I said on our call yesterday, we put in place, and this is only the second year of doing it, to be fair, a program which is very clearly delineated, which is that we will repurchase shares in order to offset share creep, if you will, share count creep from the exercise of employee stock options. We did that in 2014, and we've announced that we think we have to do about $175 million of stock repurchases to do that in 2015. That's our program, and that's what we've committed to for 2015, and it's the underlying philosophy we have. Until we get to thinking that we want to change that's what we're going to do.
As far as other. By the way, if you have questions, please raise your hand. I don't mean to monopolize the dialogue. As far as other deals.
What kind of deals might you be interested in?
I hope our philosophy has started to become clearer to people. Two things have to be true. First of all, we want a sustainable value-added position in the marketplace of that entity, right? It's got to have a value proposition and a client base and a proposition to talent that we can see can create medium-term value. They tend to be specialized situations, right? We have avoided just buying bulk. Secondly, these are people businesses, so the people better want to join Willis. We largely have been avoiding auctions where the people on the other side of the table are saying, "Today it's Aon." "Oh, no. The rumor is Willis has outbid them." "No." I mean, what basis is those people to join that organization and feel loyalty to the institution?
The transactions we've done have been exclusive negotiations, taken a long time, where the other side has decided, "You know what? We do need to become part of a larger institution, and Willis is the one we want to join." Because otherwise, confidence that the people want to stay.
Right.
Build their careers there. It's specialization, and it's all about talent. We try to avoid shotgun weddings, auctions suddenly coming up. Unless there's some compelling reason why we think the other side is going to naturally migrate to Willis as the obvious choice, we don't take part.
I would suspect that given the pressures in the business, smaller intermediaries must be finding it increasingly difficult, especially on the benefits side, where you need real skills and investments to compete. Are you seeing more companies willing to talk to you about potentially coming on board?
Yes, we are. I think the Max Matthiessen transaction in Sweden is a good example of a fantastic firm. I realize sitting here, it seems a long way away, but Max Matthiessen is a spectacular franchise in one of the most advanced benefits markets in the world. It so happens the Swedish economy has developed very advanced technology around benefits. I think Max Matthiessen, in an economy which is very open and has many global companies, was starting to find that those companies, while hugely admiring Max Matthiessen, did want it to be able to serve them globally. Becoming part of Willis, and by the way, again, we had a working relationship with them for many years beforehand, was a natural evolution of the Max Matthiessen business.
That is an example of a great company who saw its future better positioned as part of a global firm.
Any questions in the audience? We've got some mics, so you just raise your hand. Let's take a look forward, 2015. You gave some guidance, if we can call it, on your revenue and cost growth in 2015. I guess first, why don't you summarize that for everyone, then I've got some follow-ups.
Yeah. I mean, one of our questioners on the call said, "This is new, you're giving guidance." Actually, it's not that new. Back in the summer of 2013, we gave some medium-term guidance about mid-single digits and what margin or spread between revenues and costs We hope to achieve. Really all we've done is update that specifically for 2015. What we said was we believe that in 2015 we can deliver mid-single digit revenue growth and a 130 basis point gap between organic revenue growth and organic cost growth. That's the result of the many things we've been talking about. Our organic revenue platform, our natural cost management, and the gathering pace of the impact of the operational improvement program. Those things together, we believe, enable us to do that. It doesn't talk about the impact of the acquisition, right? Because it's an organic story.
Just that in the organic base, that's what we see the opportunity to do. We also said that more of that spread between revenues and cost growth would be seen in the second half of the year than in the first half.
That surprised me, by the way, when I read that, only because you had discussed this in, again, as you said, in the summer of 2013, that was a medium term, as I recall.
Yep
forecast or guidance
Yes.
That didn't necessarily come to pass in the near term.
It did not.
The time frames, obviously different, given that, were you somewhat hesitant to start putting yourself out there with more specific guidance for a shorter period of time?
Yeah. We talked about it quite a lot internally and felt that given what we've made during the end of 2013 and 2014, we had not delivered in 2014 on that medium term. If I was sitting in the shoes of all your friends here and you'd start to say, "Well, what was that worth?" Right? We did feel to reassure the market that we hadn't lost sight of that, what we said, and that we had the specific investments and actions we'd taken during 2014 will deliver in line with what we talked about, was important. That's how we thought about it. Let me be clear what we're not doing. We are not getting in the business of quarterly earnings guidance.
Right.
Given the nature of our business, at the edge is volatile. Projects get delivered or don't get delivered either side of a quarter, and it can make the difference between bigger numbers or smaller numbers in a particular quarter. It's not a smart thing to do. That we will not be doing.
Got it. Audience questions? What about currency? I mean, obviously it's got to present potentially a headwind.
It works both ways, actually. First of all, we deliberately deliver two sets of numbers, at least to the market. One is our reported numbers, which has currency effects in them, and then our underlying numbers, which smooth out currency effects and enable people to see how the business is performing without the effect of currency. We often point people to look at how the underlying numbers are. When we look at the reported numbers, which have the currency in them, it works two ways. Obviously, the strength of the U.S. dollar affects the translation of some of our revenues in other currencies, of course, right? By the way, a lot of the costs associated with those revenues may well be in that currency too.
Right.
You get some offset there. The one it works the other way on is where we have a revenue and cost mismatch in our business, structural mismatch in our business, is in fact in London, where, because of Willis's history, we just have a particularly large business. There, a lot of our revenues are in $. It's the way the market prices. It prices in $, but obviously a lot of our costs are in GBP. Actually, GBP weakness versus the $ helps the reported numbers there, as you can see. Because the $ are the $, but the costs start to be less in $. In fact, during 2013 and 2014, some of our currency headwind in our reported numbers was that those GBP appreciated. Actually, hard to remember now, but GBP appreciated, right?
That actually affected our numbers because when translating to $, those GBP costs became larger and larger. That's why we find it useful to point you all to our underlying numbers. We're now talking about $ strength. Only two years ago, we were talking about $ weakness, right?
Right.
These things just move back and forth, and the underlying numbers give you a better sense of how the business is actually doing.
Yeah. As far as people, you've made some significant investments in people-
Yeah, we have
over the past two years
Yeah.
That's critical to growing a business.
Yeah.
As you look forward, are you where you need to be? Are there still holes? Are there still posts that you now want to put a new person in?
No. We're moving. The whole industry, and Willis, we believe, at the forefront, is moving up the value chain in terms of the value we add to our clients. That involves investments in people. We are committed to continue to do that. That's why the operational improvement program is so important because through the improvements in both, as I said, client service and cost of our middle and back office, not only does a lot of that drop to the bottom line, enables the 130 basis points we've talked about for 2015, but it also gives us room to continue to invest in the front office.
Right.
We have to do that, and we are committed to do that. First of all, as I said, in more analytics, more capabilities to serve our clients. Also, you want us to continue to invest in Latin America, in Asia, et cetera, right? Those are growing markets where we've got to continue to build our position.
Absolutely. That wraps it up. Great conversation. Thank you very much.
Good.
Please join me in thanking Dominic. Thank you.