Willis Towers Watson PLC (WTW) 2015 Q2 法說會逐字稿

(Operator Instructions)

Today's conference is being recorded.

If you should have any objection you may disconnect at this time.

It is now my pleasure to introduce your first speaker today, Mr. Peter Poillon, Director of Investor Relations.

Thank you, Sir.

You may begin.

Thank you.

Welcome to a second quarter 2015 earnings conference call which is be hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings.

A webcast replay of the call along with a slide presentation to which we'll be referring, can be accessed through our website.

If you have any questions after the call, my direct line is +1-212-915-8084.

Please note that we may make certain statement relating to future results which are forward-looking statements that 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, 2014, 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.

Welcome and thank you for joining our quarterly conference call.

With me today are; John Greene, our Chief Financial Officer; Nicolas Aubert, CEO of Willis GB; Todd Jones, CEO of Willis North America; and Tim Wright, CEO of Willis International.

I am pleased with our quarterly results.

We've reported earnings growth up 46% and underlying earnings growth up 21%.

We don't report an organic earnings metric but on an organic basis, we realized a very solid result with 200 basis points up positive spread and we achieved all of that in a quarter where, as we expected, we had more modest organic revenue growth than we expect for the rest of the year.

This is a quarter where we really see the three pillars of our strategy in action.

So, as I've been doing over the past two quarters, I would like to open with a review of the key components of our value creation strategy.

First, we aim to drive organic profit and cash flow growth to our diversified portfolio of risk advisory, brokerage, and human capital and benefits businesses.

While the first pillar of our strategy aims to achieve annual mid single digit organic revenue growth, we have always been clear that growth will not be spread evenly throughout the year.

And, in fact, as I said, we anticipated this quarter's more modest organic top line result.

I'll talk about the organic results in some detail in a few moments.

The second pillar of our strategy is focused on M&A activity.

We seek to acquire firms that complement our existing business mix and that fit culturally.

We then work alongside our acquired businesses to create value through stronger revenue performance and improved cash flow.

This strategy is evident in our current quarter results as our underlying commissions and fees grew nicely in the mid single digits.

We continue to execute on this strategy.

During the quarter, we closed on the acquisition of an 85% stake in Miller Insurance Services.

We also announced the acquisitions of smaller, very specialized businesses such as; Evolution Benefits Consulting in the US, Carsa Consultores in Mexico, and Elite Risk Services in Taiwan.

Next, of course, you know that we expect to close on acquiring the 70% of Gras Savoye that we don't already own by the end of the year.

And we are truly excited about the proposed merger with Towers Watson that we announced last month which we believe will be transformational.

As we described in a presentation we filed with the SEC on July 13, we expect that revenue, cost and tax synergies will drive incremental value totaling more than $4.5 billion as a combined entity by 2018.

We are confident that each of these transactions will contribute to our underlying growth and meaningfully improve shareholder value.

Our third strategic pillar is the transformation of current service and our financial performance through our operational improvement program.

Our improvement in this area is the most evident in our financial results.

As I mentioned earlier, we achieved a very healthy 200 basis points of positive spread between organic commissions and fees growth and organic expense growth for the quarter.

This performance, combined with a positive spread we achieved in the first quarter, gives us confidence we will achieve an even better organic spread in the full-year 2015 than the 130 basis points we originally targeted.

So, we have increased our annual spread target for the year to 200 basis points.

We promised you a detailed update on the operation improvement program this quarter and John will take you through this shortly.

But let me steal some of his thunder by saying we are on or ahead of schedule on all of the important metric targets that we set at the beginning of the program back in April of last year.

Our progress has been strong enough that we are now confident to raise our targets for savings in 2015 and most importantly, for the annualized savings that this program will drive from 2018.

Continued execution of the three pillars of our strategy, organic growth, inorganic growth, and operational improvement with cost control will drive improved EBITDA, cash flow and ultimately, shareholder value.

Let me know turn to the quarter in more detail starting with the discussion about Willis International.

Our International operations achieved underlying commissions and fees growth in excess of 25%, another outstanding result that includes the significant impact on the segment's revenues derived from the acquisitions of Max Matthiessen, Charles Monat and the IFG pension and benefits businesses over the past 12 months.

On an organic basis, International had another very strong quarter, growing 7.1% led by Latin America and China.

And once again we saw a good performance in the developed market of Western Europe, especially in Germany and Sweden.

Eastern Europe, led by Russia, grew low double digits.

We expect International to continue to drive strong revenue growth for the Group in 2015.

Let's now take a look at Willis North America.

The North American segment achieved organic growth of 2.5%.

We saw mid single digit growth from our largest practice, Human Capital, which is encouraging.

However, while surety revenues grew solidly in the quarter, our construction industry revenues declined modestly.

This was not a surprising result as we saw strong construction growth in the prior year quarter with two very large one-time projects that we called out on our earnings call a year ago.

Great headwinds in North America increased a bit during the quarter as weakening rates and property more than offset the slightly improved to flattening rates noted in casualty.

Now, onto Willis Capital Wholesale and Reinsurance.

This segment includes Willis Re, Willis Capital Markets and Advisory, our wholesale business including Miller, and Willis portfolio and underwriting services which encompasses our programs business.

On an underlying basis, CW&R revenues were up 3.6%, benefiting from revenues generated by our recent acquisitions including one month of Miller Insurance Services and a full quarter of SurePoint Re.

However, this segment's organic commissions fees were down 2.3%.

Now, our reinsurance business is by far the biggest business within CW&R.

On an organic basis, reinsurance commission fees declined low single digits in the quarter.

Very strong growth in the Specialty Re and modest growth in International Re, were more than offset by a decline in North American Re.

This result in North America Re was not unexpected.

You may recall, that last quarter we highlighted that there is about $8 million of positive timing in our first quarter CW&R results that would negatively impact our second quarter results.

That was all North American Re business.

Adjusting, or normalizing, for that $8 million of revenue timing, the Reinsurance business would've reported mid single digit organic growth relative to the prior year quarter.

Obviously, this has no impact on full-year growth for the segment but it did have a meaningful impact on the quarter's results.

Willis Capital Markets and Advisory have had a second consecutive quarter of strong performance driven by capital raising and advisory mandates completed during the quarter.

And finally, I'd like to discuss Willis GB which comprises our Great Britain based specialty and retail businesses.

Willis GB's organic commissions and fees decreased 2.3% in the quarter.

The [same] performance reflects mid single digit declines in retail and PNC lines, partially offset by good growth in financial lines.

Willis GB, as you know by now, is in the midst of an operational turnaround.

Nicolas Aubert and the team are focusing their improvement efforts on developing deep client relationships in the large corporate space while continuing to improve services to midsize corporates.

The Willis GB segment has done a terrific job of managing its expenses during its turnaround process, actually reducing its expenses by mid single digits and driving improved margins even as its revenues have been challenged.

We're optimistic for the outlook for Willis GB.

Overall for the Group, we saw good performance in a quarter in which we fully anticipated some revenue headwinds.

To compensate, we successfully managed underlying and organic performance through strong execution of our operational improvement and cost management initiatives.

And as you likely saw in last night's release, I reiterated our top line mid single digit organic growth expectations for the full-year.

As we look forward, we expect that the timing of our pipeline of project related revenues and strong retention of ongoing revenues will drive solid top line growth in our full-year results.

We expect stronger top line performance over the final six months of the year while we also remain very focused on costs.

Now, I'm going to ask John to take you through the numbers in a bit more detail.

John.

Thank you, Dominic.

Good morning to those on the call.

I'll be working off the second quarter slide deck which is available on our website.

On slide 3, you see our EPS log.

As Dominic mentioned earlier, Willis grew underlying earnings by 21% in the quarter driven by underlying revenue growth of 5.3% coupled with execution of our cost management initiatives and a lower tax rate.

The underlying tax rate in the quarter was about 22% which compares to about 31% last year with the decline driven primarily by a methodology change in the second quarter of 2014, related to the way we recognize the US tax charge to be in line with profits earned to date rather than on a straight line basis We also recorded a small reduction in tax provisions in the current quarter following the successful outcome of tax audits.

We believe that a mid-20s tax rate for the full year is appropriate but it will be dependent on the mix of business of the remainder of the year.

On the left side, you see last year's adjusting items.

A reminder, these items include a reevaluation of net assets to [nominated] Venezuelan Bolivars and an increased valuation allowance on our deferred tax assets.

On the right side, the adjusting items we're calling out this quarter, the largest are $0.15 related to restructuring charges associated with our operational improvement program and $0.06 of M&A transaction costs for Miller Insurance Services, Gras Savoye and Towers Watson.

The transaction costs were $14 million in the quarter and are reflected in reported results, not underlying expense, because they're unrelated to the ongoing normal operation of our business.

Before we move on to the next slide, I'd like to comment on foreign exchange.

During our last call, we indicated that if rates remained where they were as of March 31, FX would pressure our full-year EPS between $0.10 and $0.13.

This quarter, the combination of translational and reevaluation FX resulted in a benefit of about $0.02 to our bottom line.

Year-to-date, foreign currency movements have negatively impacted our bottom line by about $0.13.

Looking forward, if rates remain roughly where they were at June 30, we expect that $0.10 to $0.13 to be a good estimate.

By the way, there have a few questions about the $23 million in other income in the current period that compared to $3 million of other expense last year.

When looking at those amounts on an underlying basis, meaning adjusting out the Venezuelan reevaluation and gains on sales of operations in each period, the underlying values were $18 million of income in Q2 2015 and $9 million income in Q2 2014.

Those amounts represent the reevaluation FX in the respective periods.

So there was a $9 million or $0.03 per share increase in revaluation FX period over period.

As you know, we rebate our prior year measures for current period FX movements.

So the year-over-year growth in underlying EPS is not affected.

Turning to slide 4. As a reminder, the difference between reported and underlying revenue for each segment is foreign currency exchange and the difference between underlying and organic is a net impact from acquisitions and disposals.

Quarter over quarter, foreign currency movements negatively impacted our revenues by about $59 million, reducing the Group's underlying commissions and fees down by more than 6.5%.

Dominic described the drivers of each of the segments earlier, so I'll just add these points.

International's growth plus underlying results reflect the impact of the 2014 acquisitions, which together added about $40 million to revenue in the quarter.

Similarly, DW&R's results reflect the impact of its recent acquisitions.

Together, those acquisitions added about $10 million to revenues in the quarter.

Finally, North America's underlying results reflect revenue lost from divestitures of several low-pro non-core businesses as we mentioned on prior calls.

The divestitures reduced revenue by approximately $15 million versus the prior-year quarter.

Let's turn to our total expenses on slide 5. What I think really stands out on this slide is in the middle of the page.

We reduced our organic expenses by $3 million or about 40 basis points.

Let's put that in perspective.

Just a year ago, we reported expense growth of over 6% and a negative spread to revenue growth.

And, you have to go back a long number of years to see negative expense growth in our business.

So this is a great result and a success to be shared across the Company.

It reflects the continued execution of the operational improvement program and strong cost management initiatives outside the program across the organization.

That performance, paired with our organic C&F growth, resulted in a very solid positive organic spread of 200 basis points.

This follows on the 170 basis points of positive spread in the first quarter.

Underlying expenses in the quarter were $765 million, up $37 million or about 5%.

As you can see from the slide, $40 million is growth from acquisitions.

So again, negative expense growth in this quarter from an organic standpoint.

Reported expenses were $817 million and include $38 million of restructuring charges related to the operational improvement program which include termination benefits, parallel run costs, and professional fees.

Slide 6 takes you through salary and benefit expense, the largest component of our expense base.

Once again, this is a very solid story.

Organic S&B was up just $2 million or 40 basis points to $528 million.

As a reminder, a year ago, our S&B grew 6.4%.

You can also see that underlying S&B grew $27 million or 5.1% to $560 million.

However, $25 million in that growth is associated with our net acquisition.

Focusing back on the organic growth in the quarter, it reflects a 1.7% increase in organic head count as well as inflationary pressures in Latin America and other markets impacted by inflation or currency devaluation.

Our S&B expense in the quarter includes a $15 million decrease in pension expense driven by actuarial gains from changes and assumptions and the actions we took in the first quarter to free pensionable salaries in the UK defined benefit plan.

Looking at the makeup of the organic FTEs in the bottom half of the slide, you can see that we are benefiting from moving resources from higher costs onshore locations to lower cost offshore centers.

Higher cost FTEs have declined by 500 while offshore, lower cost FTEs have increased by 800.

Turning to slide 7 which focuses on organic metrics.

The key takeaway here is that we've made substantial improvements.

On the left side, you see the trend in organic spread.

That is, the pace of revenue growth versus expense growth.

We've made significant progress in managing our expense growth to the point where it's now solidly below our revenue growth.

This trend began in the fourth quarter last year and has continued into this year.

That is a key driver of improved margin and our goal of improving EBITDA and cash flows.

On the right side, you can see clearly the positive impact on organic EBITDA.

Steady revenue growth and positive operating improvements are driving high single digit EBITDA growth.

And as you would expect, these improvements flow through to our operating margin as shown at the bottom of the slide.

We promised you an update on the operational improvement program.

Slide 8 highlights the updates to the program's financials.

We announced the program in April 2014, A multi-year initiative designed to enhance our client service, create operational efficiencies and invest in new capabilities for our growth.

We are now roughly one-third of the way through the program's timeline and we're pleased to report that it's proceeding better than we anticipated.

At our last update, we estimated that we could drive about $60 million of gross, gross savings in 2015.

Following completion of the program planning activities in year-to-date delivery, we now expect in-year gross savings of $80 million.

2014 and 2015 projects will deliver annualized cost savings of more than $180 million when complete in 2016.

So one-third of the way through the program, we see 60% of the original estimate of the annualized savings.

This is encouraging to the say the least.

And given the strong progress, as you might expect, we're updating our estimates.

Starting again with 2015, we originally forecasted at least $60 million of savings with associated costs of $130 million.

As I just mentioned, we now believe we will achieve savings of $80 million with restructuring costs of $140 million.

We expect to deliver about $20 million of additional in-year savings for an additional $10 million of expense.

That's a trade-off we're happy to make.

You also see that in this slide that the programs turns cash positive in 2016 and will generate additional positive cash flows as time progresses.

Looking further ahead, we are now targeting cumulative savings of $490 million for the entire program with a total cumulative cost of $440 million.

This compares favorably to our target of at least $420 million of savings against $410 million of cost.

Once again, a nice way to think about that is, we expect to drive an additional $70 million of savings for an additional cost of $30 million.

And finally, upon completion of the program, we know anticipate reoccurring annualized savings of $325 million, up from our previous target of $300 million.

Turning to slide 9, the top table breaks out the $325 million in detail by work stream.

As you might expect, about 75% of the savings is related to workforce location and operational excellence; meaning, moving support roles to lower cost centers and roll reductions related to operational efficiencies.

The remaining savings come from real estate optimization, IT saves and a small amount from procurement.

In the lower table, you can see our operational metrics are also proceeding well.

At the inception of the program our ratio of FTEs and higher cost geography to lower cost centers was 80/20.

Today it is 75/25.

We're also making progress on reducing our real estate footprint as both the ratio of square footage or real estate per FTEs and ratio of desks per FTEs are improving.

It is relatively early in their program and there's still a lot of work to be done but we fully anticipate meeting our new goals.

That's an overview of the quarterly results and the operational improvement program.

Let me conclude by stating that we believe that we are well-positioned to achieve our stated goals for 2015 and deliver profitable growth going forward.

With that, I'll hand it back over to Dominic.

Thank you, John.

Let me summarize with a few brief comments.

These are exciting times for everyone here.

We generated strong performance in the second quarter and first half of the year.

Faced with an uneven broader market and some anticipated headwinds, we executed against our strategy and effectively managed our costs.

Our organic performance continues to be solid leading us to increase our guidance to 200 basis points of positive spread.

Meanwhile, our execution as it relates to both our M&A and our operational improvement, continues to be strong.

After closing a number of successful transactions in 2014, that are adding to our performance this year, we have embarked upon and are delivering against a still more ambitious strategy in 2015.

We further strengthened our position as a premier London specialist broker with our acquisition of Miller Insurance while our pending acquisition of Gras Savoye expands our geographic presence and exposure to a multinational plan base.

And of course, there is our proposed merger with Towers Watson, a transformational transaction that will create significant opportunities for growth and value creation.

In each case, we have identified a transaction with a strategic partner who brings synergies and client service and operations across geographies.

I'm confident in our ability to succeed in each of these endeavors.

We've done all of this while successfully executing on our operational improvement program.

As John discussed today, we've made excellent progress towards our goals and as a result, we've raised our cost savings targets for the program to $325 million, the majority of which will fall to our bottom line earnings.

We are unlocking significant value through this effort and we remain focused on its continued success.

We've navigated a challenging first half well and are positioned for success both in the near-term and in the long-term.

I am very proud of our teams and their hard work and I know they will continue to drive execution through to completion.

Let me now turn to our transformational agreement with towers Watson.

As I've just articulated, we are making great progress on our standalone plants.

We believe however, that combining our strengths with those of Towers Watson and adding $4.5 billion of synergies that we see from the new company, create even stronger medium-term performance.

And, in fast changing and consolidating health and property casualty industries, we believe the new Willis Towers Watson will be extremely well-positioned for the long-term.

Let me now turn it back to the operator and we can take your questions.

Thank you, Sir.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Good morning and thank you.

First question on the recent management departures at Willis Re, I just wonder what is the impact on the organic growth as well as benefits on the expense side from those departures?

And do we expect more of those turnovers especially now you have announced the merger with Tower Watson and maybe created some uncertainty and imagined layers?

Let me take that.

Obviously, Willis Re is a fantastic business, continues to perform very strongly, had organic growth in the first half of the year and continues to perform strongly.

It is flattery actually that we are starting to see one or two departures to other firms reflecting the strength.

I can assure you that we are replacing those people with very high-quality replacements.

We've already taken steps to do that.

We're very focused on our clients, our retention rates remain extremely strong and we're optimistic for the outlook for Willis Re absolutely.

John Cavanagh and his management team are very focused on driving the business performance.

As to the reaction to Towers Watson, the reaction within Willis Re is the same as it's been across the whole of Willis, which is that this is scene as a fantastic opportunity for our organization and that the combination has been greeted with great happiness and excitement by our staff including our staff within Willis Re.

And then, if I could just add Kai, on the expense piece, it's not creating a material change to the expense base whatsoever.

A few of the notable departures are on guarded leave which means we continue to pay salary and those who aren't, we're going to reinvest a make sure we get the right people in place.

No real change to the expense base.

Great.

A second question on your target for this year, the spread of 200 basis points.

It looks like the first half you're already close to 200 basis point spread and the organic revenue growth going to be stronger in the second half as well as the expense saving you mentioned before, will be back end loaded.

Why the guidance only 200 basis points?

Because it's the guidance we've given.

We're quite confident of that.

When we look out as to how our pipelines are generating, we do see improved revenue growth, as I said in my remarks, for the second half of the year and we're confident of our cost growth.

So therefore, for the full-year, we've upped our target to 200 basis points.

If we improve upon that, that would be good news.

Great.

Lastly just on the Tower Watson merger, your recent additional slides on the revenue synergy.

Could you elaborate more on how you arrive at those three buckets in terms of the potential revenue synergy?

Kai, I think we'd like to focus this call mostly on our second quarter earnings and obviously, Peter Poillon is happy to take you through some of the detail on that or others of us offline.

But we did outline, I think quite clearly, that we see the exchange business helping to distribute the exchange offering of Towers into the middle market of North America will drive significant increased revenues.

That we see the Towers relationships in the large corporate states in North America helping us to accelerate our already planned investment in the large corporate space and PNC in North America.

And we see the opportunities to take some of Towers capabilities offshore across our larger network.

We have eight TO countries, they're in 27.

It's an opportunity to raise revenues there.

We're happy to delve in more detail of course but given the time we have today, let's just leave it at that.

I'll follow up.

Thank you so much and good luck.

Thank you.

Ryan Tunis, Credit Suisse.

Thank you.

Good morning.

I just had a couple quick ones for John, I think.

The first one I guess, just on the M&A transaction related cost.

$7 million in the first quarter, $14 million in the second.

Obviously, you're working on the Gras Savoye, deal on Towers.

What's a good quarterly run rate to use there for the remainder of the year and even heading into 2016?

Those charges that came through in the first half are probably slightly elevated from a run rate standpoint if you exclude Towers.

So maybe a mild reduction on those and then whatever Towers turns out to be would be incremental.

Okay.

Just on the pension stuff that you did last quarter.

I might have missed it, but what was the expense reduction from that this quarter and how much of that is cash versus just actuarial amortization?

So good question.

Year-over-year the benefit from pension expense is $15 million in the quarter and we expect the total year credit to be between $60 million and $70 million.

About half of that is from the change in actuarial assumptions.

The other half relates to the freezing.

And what the freezing actually did is lowered the actuarial deficit.

So what it's done effectively, is positioned us well to be able to revise the cash contributions in the future.

That's a conversation that's ongoing with our pension trustees and we'll give an update on the details of that when we've reached an agreement.

Got it.

And then just lastly, I think I heard you say that Russia and Eastern Europe grew low double digits this quarter.

What's the outlook there in the back half of the year given the headwinds.

So let's have Tim Wright, CEO of Willis International just respond to that.

Tim?

So I don't need -- hi, Ryan.

I don't need to tell you about some of the issues in Russia that they're a public macroeconomic.

But in terms of the impact on our business, we have a fantastic business in Russia.

We do a lot of project business because the capital market's been closed to Russia or partially closed.

There's been less project business, less one-off earnings and obviously, with the devaluation of the ruble attached to oil prices, there's pressure on the economy more generally.

We anticipated for the year that we would have quite a considerable slowing in our business in Russia.

We've actually found in the first half of the year, the business has been less bad than we expected.

And as for Q2, we did have a major project that the team won that's helped our earnings and those of Willis GB because that's business that we both do.

In terms of the forecast for the rest of the year, I keep saying it's going to be more pressured in the future, but as the quarters go by, things are less bad than we had originally anticipated.

Thanks so much, guys.

Dan Farrell, Piper Jaffray.

Hello.

Thank you.

Good morning.

You said the solid growth on the organic margin in the quarter but underlying margin came in only slightly up, about 10 basis points.

M&A is clearly still having some impact there and we have some further M&A going forward.

How do you think about the ability to improve the margin on M&A?

And with the other acquisitions coming in 2016, is that still going to be a headwind for all underlying margins?

Thank you.

Let me just take that just to be clear on our philosophy.

We're very focused on cash flow and cash base from what we spend.

Some of the businesses we may acquire may actually be lower margin than the business we have already in the stable.

That doesn't matter as long as they drive improved cash flow growth relative to what we paid for them.

Let me have John now talk a little bit about how he sees margin of all.

Thanks, Dominic.

We calculated about 20 basis points of positive spread on the revenue growth of about 5.3%.

The acquisitions that came in this year are going to be cash flow positive.

We like the EBITDA that they are generating.

They raise some amortization that we're going to likely move to provide a cash EPS deal on this.

The outlook will frankly, partly depend on revenue growth and continued execution on our cost management strategies.

We feel good about what we've bought here over the past 12 months and look to a positive outcome for the remainder of the year.

Okay.

Thanks.

Just one additional question.

Underlying income on an aggregate basis only up about 6%.

Is part of that being impacted by the timing in reinsurance of the $8 million?

And can you remind us of the margin with that?

Was that pure profit in both segments or was there a margin associated with that $8 million?

There's also some costs associated with transactions because there's incentive comp plans that pay based on the revenue generated or the view of EBITDA generated.

So certainly there was some amount of cost.

And the first bit of your question, could you repeat that in terms of what were you looking for?

I'm thinking about the delta, the 8% -- I'm sorry, the 6% growth in underlying income, about 21% growth in EPS.

Obviously some of the difference is tax rate and FX but it doesn't seem to be all of it.

I'm wondering if we think about that if it's the timing of the revenue as well?

Certainly there was definitely the timing play.

So Dominic highlighted the one significant transaction, I think it was about $8 million.

And most of that would flow right through down.

There would be some carve out for incentive comp as I said.

Okay.

Thank you very much.

Michael Nannizzi, Goldman Sachs.

Just a couple here.

John, sorry to go back to the income piece but if I pull that $23 million out of my model from a mathematical standpoint, that impacted my operating earnings.

I'm just trying to understand.

I get the year-over-year comparison, but is that or is that not in the $0.58?

So we strip out the impact of FX.

And you'll note that there was the Venezuelan Bolivar revaluation in the prior year which was 14.

It was $1 million in the current year and then there's some additional FX that gets stripped out.

So the $0.58 is effectively without the impact of the FX.

So if I take that $23 million out I see that is actually having about a $0.09 impact.

So just to reiterate.

Is a little bit more than that.

So the $23 million is not or is in the $0.58.

So we strip out FX out of the underlying.

Mike, maybe what I'll suggest we do is, you and Peter and I, if necessary, get together after the call and walk through how we base the prior year to account the FX and create a true comparison of underlying performance.

Okay.

That's fine I guess.

On the operational improvement program.

You mentioned it being cash neutral in two years.

I thought that I'd remembered that there was some proportion of the cash savings that we get reinvested and some proportion that would be cash.

Is that right and can you talk about -- I'm just trying to get an understanding when does that breakeven from a cash standpoint?

What we're seeing here and I referenced the slide, we're seeing in 2016, an estimated spend, so restructuring charges of about $140 million and we expect savings to be about $150 million.

The savings will be embedded in the results.

The spend about $140 million will be consistent with what the spend was in the prior year.

If you look at the savings versus the $140 million restructuring charges you get positive cash flow.

But all of the savings are then straight cash?

Everything is coming down the cash?

There won't be any reinvestment of those savings?

This is Dominic, here.

Let me explain this.

From the point of view of the program, the program is going cash positive as of 2016.

Totally separately, we then decide whether we see incremental revenue growth opportunities over and above our base plan that we will decide to reinvest in.

That is a separate decision to the operational improvement program.

Do not bundle them together.

The simple point is the operational improvement program goes cash positive in 2016.

If we then decide to take some of those savings and reinvest them in revenue generating opportunities, that's a different decision.

Got it.

Okay.

And then lastly, it looks like you raised some debt in the quarter.

Was that done in anticipation of just liability management retiring some debt that's coming due?

Or was there a purpose to that additional debt raise?

If I'm reading that correctly.

Thanks.

There was a purpose.

We closed Miller on May 31, and we used the revolving line to fund some of the cash expense related to that transaction.

Got it.

Okay great.

Thank you.

Sarah DeWitt, JPMorgan.

Hello, good morning.

On the organic growth, if you back out some of the unusual items that you called out like the construction projects a year ago and the timing differences, what was the organic growth ex unusual items in the quarter?

It would be about 2.5% to 3%.

Okay and as we look forward, how much of a tailwind from these future project related revenues should we be thinking about in the back half of the year?

It's Dominic.

I said that we expect stronger performance in a second half of the year and we are sustaining our mid single digit organic revenue growth forecast for the full-year.

Okay.

But you won't quantify those project related revenues?

That's correct.

Okay.

Great.

Separately, on the Towers Watson merger, now that it's been several weeks, could you just talk about the feedback that you've received internally and externally?

And then, are you getting any push back from the Towers Watson shareholders looking for different deal terms or a higher dividend given that the merger was priced below the current stock price at the time it was announced?

Obviously, I can't comment on what the Towers Watson shareholders are saying.

I can tell you that our communities, our clients are excited about this and our mutual clients are excited about it.

Our staff are very excited about it, as I said, across the whole range of our business and excited about the client service opportunities it creates.

And obviously, we've been talking to our investors and getting very positive feedback.

So overall, we're very excited about how this is evolving.

Okay.

Great.

Thanks for the answer.

Cliff Gallant, Nomura.

Good morning.

Good morning.

I'm curious about how -- and there's so much change happening internally at the Company.

I'm wondering how some of your decision making gets affected when you have something like Tower pending out there?

Specifically, I'm wondering about the execution of some of the operational improvement program?

Do you have to change some of your decisions as to of a relocation of people or investing into the Company or secondly, about M&A?

I know part of the ongoing strategy is to buy smaller companies.

We saw recently this PMI deal.

How does that get affected when you have such a large transformational change?

As is normal in any event like this, each side of a transaction like this lines up in the period between announcement and closing, the expected M&A transactions they see, both sales and divestitures.

And as you know, Towers did a divestiture in the last couple of weeks.

So you know in advance the pipeline of potential acquisitions, potential divestitures that each side has and we've exchanged those.

Because they are obviously part of understanding what you're actually going to merge with.

Clearly, so you have to reveal that.

We have a pipeline of things obviously, I can't reveal it to you, that we are engaged in and that the other side is aware of and vice versa.

As to the operational improvement program, we've been very clear all along and the recent update and what John just went through is clear, that we're going to continue to drive the operational improvement program as a program unto its own with its target now of $325 million of savings.

As we bring the two companies together, the one area of overlap we think will exist between the programs, if you like, will be likely $125 million we announced as synergies with Towers and this program.

Maybe in procurement, because obviously we will have some common contracts et cetera.

So that may create actually more opportunity as we look at it.

As you know, procurement is the smallest part of the $325 million as laid out in the slide that John went through.

But let's be clear, we are going to continue to drive the operational improvement program as a discrete program against its targets.

Thank you.

Brian Meredith, UBS Securities.

Yes, thanks.

A couple of quick questions here for you.

First one, John and Dominic, can you talk where the additional expense savings are going to be coming from and is any of that coming from the recent acquisitions that you've made, revalue them and seeing if they can fit in the improvement program?

Brian, most of the savings are actually FT related as a result of relocating work from higher cost locations to offshore locations.

That's really the driver there.

Some role reductions as we simplify processes as well.

That's really where we see most of the additional savings coming from, not only this year but as the program progresses.

Related to the acquisitions, we buy complementary businesses and there's a mild synergies there but very limited.

There is nothing planned for Gras Savoye in terms of synergies in early 2016, largely because they went through their own -- effectively their own operational improvement program in 2014 in the beginning part of 2015.

We feel pretty comfortable about the progress they've made there.

But what about Miller or what about the ones you did in the fourth quarter?

Is there any opportunity to take staff and put support roles in lower cost locations?

So Miller, the front end is very important that that remains independent.

We're looking at back office support and seeing what we can do there.

There was, as I said, mild synergies included when we evaluated the deal, but very mild.

And the other acquisitions, we're going to evaluate them but I won't expect a lot.

We're pretty conservative when we do the evaluation on these and don't build in really aggressive assumptions on cost of revenue.

Basically, Brian, I think the context for your question here is that both the $300 million and $325 million are basically focused on our organic cross space.

Any savings we get, which we of course over time will get from our acquisitions in ways that John described, are over and above what we're talking about here.

Just quickly, John, do we have a free cash flow number for the quarter and how does that compare to last year's second quarter?

So the cash flow from operations is actually down about $70 million.

That's driven by a couple of different things.

One thing to note, is net income for the quarter was roughly equivalent to the cash from operations.

And what we saw quarter over quarter in terms of cash flow, we had some tax and pension timing, some incentives.

And then, working capital actually increased by about $30 million as a result of growth, effectively growth in the business and frankly, not enough traction in terms of receivable management that the business was now focused on.

Okay and just lastly, real quickly, tax rate.

What was the impact of the procurement benefit you had in the quarter on the 22%.

What would the run rate look like?

We guided to mid-20s there.

And I look at it now based on the first and second quarter and I would say somewhere between 23% and 25% and that's a tight range there.

Perfect.

Thank you very much.

Bob Glasspiegel, Janney.

Good afternoon, Willis.

Let me reiterate Brian's desire to maybe have a little bit better disclosure on the cash flow because I share Dominic, your high interest in cash flow as something to evaluate.

And there's a lot of things going through with FX and the timing of your restructuring program.

So more data on that in the chart would be really helpful.

That's helpful.

Thanks.

So I'm getting a lot of feedback from my clients that the Tower Watson shareholder vote isn't a complete lay-up and I understand you're not going to talk about Tower Watson shareholders and how they're treating.

You're saying you think there's a good enthusiasm from both sides which is good to hear.

Do have contingency plans should the shareholders not vote for it?

And remind me on whether the breakup fee accrues to you if the shareholders do vote it down.

I'm going to deal with the first part of your questions.

We are very focused on this transaction.

We're highly excited about it.

In fact, we just spent some time doing preliminary integration planning and going off toward the opportunities that exist.

Both in client service, talent attraction and thinking through some of the cost and another opportunities.

We're well underway on that.

That being said obviously, as part of being an attractive part of the transaction is our stand-alone plans are robust and going forward.

And Bob, if I could just add, plan A is the merger with Towers and plan B is the merger with Towers.

We haven't even considered any breakup fee at this point.

There's one in the contract but it's really not even relevant to talk about at this point.

I'm just asking a contractual question on whether it accrues to you if the shareholders voted down but you don't know whether that's the case?

Will get back to you, Bob.

Okay, appreciate it.

Thanks.

Thomas Mitchell, Miller Tabak.

With Chubb and ACE getting together and some other companies increasing their consolidation, I know that the customer is the buyer of insurance.

But do see this consolidation as affecting the markets in a way that would require you to bulk up your capabilities in order to deal with what might be a shrinking number of qualified markets for your clients to purchase from?

I'll answer the question.

We definitely see a lot of evolution in both the healthcare markets, and you've seen a lot of movement there in the last few weeks, and in the property and casualty markets.

We have been investing in preparation for those changes.

We saw them coming.

So all of our investments in analytics, in data management are all about increasing the quality and depth of our time service to our corporate plans and to our insurance plans.

So we were not taken by surprise by this.

Our strategy has reflected that.

Our excitement, part of our excitement about the merger with Towers Watson is that it enables us to accelerate all those moves we've already been taking because we absolutely believe that in the way in which these markets are evolving.

An advisor, broker and solutions provider will need to have deep capabilities across a range of industries and a big pool of analytic capabilities.

That was what we were investing in on a standalone basis and Towers Watson enables us to accelerate that.

And we think it will be important in this evolving world to have that depth and range of capability.

That's good.

Thank you very much.

Thanks.

Meyer Shields, KBW.

Thanks, good morning.

In terms of the impact of acquisitions, if I'm getting this right, there was $51 million of revenue and $49 million of expenses in the quarter.

So it seems like the margins on the companies are really low.

Is there any seasonal impact on that?

Is that not representative of their future contribution?

So there's amortization of intangibles that are impacting those new transactions.

And when -- there's a second piece that's playing as well.

Some of the businesses have had lower margins than what Willis has enjoyed but generating super cash flows.

We obviously pay in terms of the deal price based on the net cash flows generated.

So we're comfortable with the economics on the deal.

And over time what you'll see is improving margins as a result of reduced amortization and then the mild cost synergies we talked about.

We're comfortable with it.

And as I mentioned earlier, I think it will help the analyst community when we begin to break out cash EPS and frankly, it will align with how Towers does it as well.

So that works in many regards.

I think there's another point here, is that some of these businesses have seasonality to them.

So that you really only see the full effect of the impact upon us when you see how they perform during the course of a full year.

Okay, that's helpful.

But the $49 million then includes the incremental intangible amortization.

Is that right?

Yes.

Okay.

Maybe this was better offline but I'm trying to understand the interaction between the $18 million revaluation and any impact on, let's say the EBITDA margin.

Is that something you can go through now?

I think it would be better Meyer if we take that offline quite honestly.

We're just about at 9:00 here and we'll walk through it.

It's better if we walk through it after the call I think.

Okay.

Fair enough.

Think you.

Mark Hughes, SunTrust.

Very quickly, the merger related expenses, in the segment breakout, were those included in the corporate segment or were those split among the divisions?

The merger expenses for Towers were included in the corporate segment.

If there's a transaction that's specific to a particular segment, they get left on a, call it, a reported basis in those segments.

And then, when we show performance on an organic basis, we strip those out.

Thank you very much.

Thank you and at this time I'm showing no further questions.

Great.

Thank you very much everybody for your participation in this call.

We're very excited about the outlook.

Let me just close with the following, the story of this quarter is strong execution on our strategic initiatives driving results and building the platform for acceleration in future earnings.

We saw solid organic growth in our businesses and drove margin expansion despite the headwinds in the period and remain confident in our projections for mid single digit organic growth and our ability to convert this growth into profits.

The excellent progress to date on our operation improvement program allowed us to increase our expectations of what it would produce this year and importantly, in the long run.

And our M&A strategy continues to deepen and strengthen our offerings globally.

So we're focused on continuing to execute, excited about the opportunities we're creating for the Willis business today and committed to making the merger with Towers Watson the transformational value creating event we expect it to be.

Thanks for joining us today we look forward to speaking with you next quarter.

This does conclude today's conference.

Thank you so much for joining.

You may disconnect at this time.