Willis saw strong organic growth in Q2 2014 that beat analysts' expectations, but that was more than offset by increased expenses, resulting in what analysts at Nomura called a “messy miss” for the broker.
Willis reports total Q2 revenue growth of $935 million, or 5.1% growth over Q2 2013. Organic growth was 4.5%, ahead of Nomura's 2.7% estimate and Sterne Agee's 4% estimate.
But expenses climbed 8.9% to $787 million in the quarter. Willis says the increase was primarily driven by investment in new hires since the end of Q2 2013. “The resulting business performance reduced second-quarter earnings by approximately $0.04 per diluted share compared to the same period last year,” Willis says.
earnings were also reduced by “non-operating items” such as adverse foreign-currency movements, non-cash tax adjustments and a charge related to Willis' Operational Improvement Program.
All told, net income in the quarter was $47 million, down from $105 million in 2013's second quarter.
CEO Dominic Casserley says in a statement, “A number of non-cash and non-operating items significantly reduced our reported earnings this quarter, but that should not detract from the performance of our business.”
He adds, “Willis grew revenues strongly in many of its businesses and even saw modest growth in reinsurance where the market faces significant rate pressure. This is a testament to our diversified strength across geographies, sectors and business lines and reflects the cumulative investments for growth we have made, including in the second half of last year, in revenue-producing talent and client-service and risk-management capabilities.”
Nomura analysts Clifford Gallant and Mathew Rohrmann expressed disappointment in Willis' underlying operating margin of 16.1%, and also listed “lots of noise” as a drawback to the Q2 results. The analysts explain, “Tax adjustments, foreign-exchange and currency adjustments and the beginning of costs associated with the operational efficiency effort.”
However, they list the organic growth as a plus and say expense comparisons should ease.
Sterne Agee analyst Dan Farrell concurred, noting that while the stock reaction “will be weak, we do think year-ago expense comparisons begin to ease going forward.”
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