Willis Group Holdings plc (WSH) reported its first-quarter 2011 adjusted net income from continuing operations of $1.28 per share, beating the Zacks Consensus Estimate by 7 cents. Results are ahead of $1.27 earned in first-quarter 2010. Adjusted net income from continuing operations was $223 million, up 3% from $216 million in the prior-year quarter.
The beat may likely be attributable to higher commissions and fees.
Adjusting for an operational review charge of $69 million or 39 cents, gain on disposal of operations of $4 million or 2 cents per share and Make-whole amounts on repurchase and redemption of Senior Notes and write-off of unamortized debt issuance costs of $124 million or 71 cents per share, the company reported earnings of $34 million or 34 cents per share, compared with $204 million or $1.20 per share in the prior-year quarter.
Operational Performance
Total revenue at Willis in the quarter was $1.008 billion, up 4% year over year. The improvement was driven by an increase in commissions and fees. Revenue fell slightly short of the Zacks Consensus Estimate of $1.010 billion.
Commissions and fees increased 4% year over year in the quarter due to strong performance at Global and International segments. However, the North America segment reported lower commissions and fees.
Investment income of Willis in the first quarter declined 11% from the year-ago quarter.
Total expense increased 15% year over year to $770 million. An increase in salaries and benefits coupled with an increase in operating expense led to the overall climb.
In the quarter under review, adjusted operating income was $331 million, up 6% from $313 million in the prior-year quarter.
Operating margin expanded 60 basis points largely driven by solid growth in organic commissions and fees and favorable foreign currency movements, somewhat muted by higher salary and benefit expense.
Segment Update
Global: Reported as well as organic growth in commissions and fees increased 8% in the quarter under review. Operating margin was 48.5%, expanding 240 basis points driven by strong growth in commissions and fees and favorable foreign currency movements, partially offset by investments to fund growth, including higher incentive compensation.
North America: Commissions and fees declined 2% including an organic decline of 1%. Operating margin contracted 160 basis points due to lower commissions and fees, including lower legacy HRH contingent commission.
International: Commissions and fees increased 7% year over year while organic growth was 6% in the quarter. All regions performed strongly with double-digit growth in Latin America, Asia, Eastern Europe and South Africa. Operating margin contracted 240 basis points as growth in commissions and fees was more than offset by investments to fund growth, including increased headcount and higher incentive compensation.
Financial Update
The cash and cash equivalent balance of Willis at quarter end was $432 million, up 37% from $316 million at the end of 2010.
Long-term debt increased 13% to $2.43 billion from 2010 end.
The board of directors declared a quarterly cash dividend of 26 cents per share. The dividend will be paid on July 15, 2011 to shareholders of record as on June 30, 2011. The annualized dividend is $1.04 per share.
Looking Forward
Willis will review all businesses to align them with its resources and growth strategies. As a result, it expects to incur pre-tax charges of approximately $130 million in 2011. Also, the company expects the operational review to result in cost savings of approximately $65 million to $75 million in 2011, reaching annualized savings of approximately $95 million to $105 million beginning in 2012.
Peer Comparison
Marsh & McLennan Companies Inc. (MMC), which competes with Willis Group, reported its first quarter adjusted operating earnings of 56 cents per share, in line with the Zacks Consensus Estimate but a nickel higher than 51 cents reported in the year-ago quarter. With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top-line growth in all lines of businesses and higher investment income, partially offset by higher operating and tax expenses.
Our Take
With Willis recording new business growth along with high client retention and expanding operating margins by virtue of cost reduction, we expect the company to post solid results with economic recovery gaining pace.
Willis Group acquired 22.5% of the equity in Amabubesi Consulting Services, a specialist employee benefits consulting business and a part of the Amabubesi Group, a South African investment company. South Africa offers excellent long-term growth potential as it continues to grow. This acquisition, therefore, will further strengthen its position in South Africa as well as enhance Willis’ employee benefits business supported by its expertise and extensive global resources.
We maintain a “Neutral” recommendation on Willis over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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