Willis Towers Watson PLC (WTW) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Willis Towers Watson fourth-quarter 2015 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Aida Sukys, Director of Investor Relations for Willis Towers Watson.

Please begin.

Thank you very much.

Welcome to the Willis Towers Watson earnings call.

On the call today are John Haley, Willis Towers Watson's Chief Executive Officer; Dominic Casserley, Deputy CEO and President; Roger Millay, our Chief Financial Officer; and John Green, the Willis Group CFO prior to the merger.

Due to the weather conditions on the US East Coast we are in different locations today, so please bear with us if there are any delays on the line.

Please refer to our website for last night's press release.

Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing 855-859-2056, conference ID 35564917.

The replay will also be available for the next three months on our website.

This call may include forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 involving risks and uncertainties.

For a discussion of forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking results, investors should review the forward-looking statements section of the earnings press release issued yesterday, a copy of which is available on our website at WillisTowersWatson.com, as well as other disclosures under the heading of Risk Factors and Forward-looking Statements in the Willis Group's most recent Annual Report on Form 10-K and Towers Watson's most recent Annual Report on Form 10-K and in other Towers Watson and Willis filings with the SEC.

Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call.

Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events.

During the call we may discuss certain non-GAAP financial measures.

For a discussion of the non-GAAP financial measures as well as reconciliations of the non-GAAP financial measures under Regulation G due to the most closely comparable GAAP measures, investors should review the press release posted on our website.

Please bear with us, as the content we will be discussing on this call today is lengthy but is rather important as we transition from reporting our legacy earnings to those of Willis Towers Watson.

We will be providing information on the most recent integration efforts, reporting the results of our two legacy organizations and providing details regarding Willis Towers Watson's capital allocation strategies and, finally, providing 2016 guidance for the combined Company.

After our prepared remarks we will open the conference call for your questions, which may have to be limited today.

Now I will turn the call over to John Haley.

Thanks very much, Aida.

And good morning, everyone.

I'm very excited to be conducting our first Willis Towers Watson conference call.

In fact, this call actually represents the union of three historic organizations: Willis, Towers Watson and Gras Savoye.

Gras Savoye is a leading insurance broker in France with a strong presence in Africa, the Middle East and part of Europe, became part of Willis on December 29, 2015.

The merger of Willis and Towers Watson was completed as of January 4, 2016.

We are now an organization of more than 39,000 colleagues serving more than 120 countries, 90% of the global Fortune 500, 85% of the US Fortune 1000 and more than 20,000 middle-market clients.

Before we review our results today, I would like to provide an update on our integration efforts.

While the merger was official as of January 4, you may recall our integration planning has been underway since July 2015.

We recently brought together more than 200 of our global leaders for a formal kickoff of Willis Towers Watson in London during the second week of January.

The purpose of the meeting was to talk about the vision for the Company and have our leaders help execute that vision upon their return home.

I left that meeting with a few overall impressions.

The shared values of our Companies, the collaboration between colleagues and the focus on client relationships were all stronger than I anticipated when we announced this merger back in June.

There were a couple of interesting aspects to the meeting.

One was to see the enthusiasm of leadership but also hear about the excitement taking place in the local offices.

Within days of closing the merger, many of our colleagues in the local markets took the initiative to reach out to each other, start learning the product and service offerings of the legacy organizations and discuss how to respond to RFPs utilizing the best resources of the newly combined organization.

The early feedback was loud and clear.

The level of collaboration was quite extraordinary and the level of excitement was more than we could have expected.

It's unusual during the early stages following a merger for people in the newly created organization to grasp the long-term power behind the transaction.

From the feedback I received, our colleagues around the globe understand the power this union will create in serving our clients and are more enthusiastic about the vision than we could have hoped.

While we are in the early days of this journey, we all appreciate the hard work ahead of us in making our long-term vision a reality.

So for now we will continue to focus on our integration roadmap, which includes clearly defined revenue, expense and tax synergies, and appreciate that continued collaboration at the local market level will ultimately contribute to our success.

Now let me provide an update on the synergy plans.

We've articulated three areas of revenue synergies over the last seven months: penetrating the private healthcare exchange middle market, building relationships in the large corporate P&C business and utilizing Willis and Gras Savoye's strong multinational relationships and brokerage network for global benefit solutions.

I'd like to take a few minutes to discuss these integration efforts more specifically.

I think you will see our extensive, intense integration planning helped jumpstart our efforts very quickly after the close of the deal on January 4.

A number of our midmarket sales colleagues were in Buffalo during the week of January 25 for an intensive go-to-market training program for the active employee healthcare exchanges.

This initial training session for the midmarket private healthcare marketing sales force was quite successful.

This group will continue to work with the exchange solutions leadership to provide training to the broad midmarket sales distribution network.

We have been fortunate to secure a win with our first Willis Towers Watson midmarket exchange client and look forward to continuing to strengthen our midmarket reach.

Turning to the large account US P&C integration efforts, now that the merger has closed, our account directors, the broking and industry leads, are aggressively working with our target clients to build on our strong relationships and address their P&C needs for 2016 and beyond.

We had our first significant win at the end of January.

While this wasn't a joint sales effort, the client worked with and highly respected both legacy organizations.

The client cited that the merger of Willis Towers Watson was viewed as a positive factor in assessing the RFP.

This is a great example of a significant client relationship getting stronger.

Now let's turn to the efforts in the global benefit solutions.

We've recently won two client projects as a direct result of expanding our country footprint and owning the distribution network.

We are seeing a strong pipeline of RFPs and have the ability to respond to opportunities that we just couldn't in the past.

Merging the Towers Watson technology and products with the Willis and Gras Savoye distribution network and strong brands has given us an immediate strength and presence in the global benefits space.

We also announced post-merger cost synergies of $100 million to $125 million and tax savings of approximately $75 million annually.

On the cost front, corporate leaders provided their business cases, identifying specific synergies they will be accountable for achieving over the next three years.

The real estate and IT infrastructure portion of the cost synergy planning is most advanced at this stage.

We also feel more confident than ever that our tax savings goals will be achieved.

All of the integration and synergy activities I just mentioned also give us great confidence in our ability to achieve the 25% EBITDA margin target by the end of our three-year integration process in 2018.

Finally I would like to address the client response, which has been very gratifying.

We've had a number of wins, as I've highlighted above, and our clients' openness for discussion and a combination of joint marketing efforts in the first month has been very positive.

I also had the opportunity to speak to many CEOs at the World Economic Forum last month.

The response to offering integrated solutions to enhance organizational performance by managing both risk and people was well received and the discussions were very engaging.

Now we will review the full and fourth-quarter 2015 Willis and the quarter ending December 31, 2015 or second-quarter FY2016 Towers Watson results.

We will also provide 2016 guidance for Willis Towers Watson.

As we discuss segment margins or operating margins, please note the metrics include different items for each of the legacy companies.

The Willis margins include intangibles and discretionary compensation.

The Towers Watson margins exclude both intangible and discretionary compensation.

Now I will turn the call over to Dominic Casserley.

Thanks, John.

Let me reiterate what John said in his opening comments.

With the merger completed, we are very excited about the potential for the combined business.

We are very pleased with the progress we've made to date on integration, the enthusiasm with which our colleagues are approaching the integration and the reaction from our clients.

Now turning to legacy Willis's results, the Company reported another solid quarter that concluded a year of significant financial and operational achievements.

Throughout the year we faced some volatile market conditions and we have performed in spite of them.

Earnings per diluted share for the fourth quarter were $1.09 on an underlying basis as we once again generated solid underlying commissions and fees growth of 9.5%, driven by strong organic growth and the contributions of our strategic acquisitions.

Our underlying profit was held back by interest and amortization costs associated with the Miller acquisition, which produces most of its profits in the first half of the year, and also by slightly lower earnings of associates.

So we believe that the nearly 10% growth of our underlying EBITDA in the quarter gives a clearer read on the performance of the business.

On an organic basis, CNF growth was a very strong 4.8% for the fourth quarter.

For the full year it was 3.3%, representing the fourth consecutive year of mid-single digit organic CNF growth and consistent with our stated annual goal for this metric.

Through our focus on the execution of the operational improvement program and other initiatives, our organic expense growth rate was well below our revenue growth rate, and we once again exceeded the upgraded 200 basis point commitment we made in July 2015.

The result was another quarter of organic operating margin expansion, the fifth in a row.

As has been the case all year, our performance in the fourth quarter was the result of our focus on and execution against our three-pillar strategy.

Generating organic growth through our diversified business is the first of these pillars, and our strong performance is evident in the numbers I just discussed.

I will briefly walk through the source of this growth at a business level in a moment.

Our second pillar is our targeted M&A strategy.

The quarter saw progress on several fronts, including the continued successful involvement with Miller and the completion of our acquisition of Gras Savoye in December as expected.

Overall, our acquisition program made consistently strong contributions to our growth throughout the year, as seen in our underlying CNF growth in the fourth quarter.

The third and final strategic pillar is the execution of our operational improvement program.

Once again, the IP exceeded our expectations in the fourth quarter, generating $49 million in cost savings.

During the third quarter call, I told you that our performance for the nine months gave us confidence in our ability to drive further improved spread for the year, and I am pleased to say that we have again exceeded our target.

So let me provide you with a bit more detail about how we achieved this performance in the quarter as well as provide some overall expectations for 2016.

Willis International finished the year on a strong note, as expected.

Underlying revenue growth was 11.4% as Max Matthiessen and the IFG pension and benefits business continued to contribute to the segment's performance.

On an organic basis, International revenues rose 9%, demonstrating its continued solid momentum.

Latin America led the way again with double digit growth.

We couldn't be more pleased with International performance in 2015.

The business turned in excellent growth and profitability despite significant challenges in key geographies.

With the addition of Gras Savoye, we expect 2016 constant currency revenue growth in the 50% range, while we expect organic growth in the mid- to high single digits.

In Willis North America, organic revenue growth was 1.9%.

The segment saw strength in several industry practices, including double-digit growth in construction and real estate and hospitality as well as mid-single-digit organic growth in the human capital practice.

Underlying revenue growth for the quarter was -0.6%, reflecting our decision to divest a number of smaller non-core businesses.

Looking at 2016, all else being equal, we anticipate another solid year of revenue growth and margin improvement.

Now let's turn to Willis capital wholesale and reinsurance.

CW&R generated underlying CNF growth of 30.3%, driven by the contributions of Miller insurance services.

Organic revenue declined 3.7%.

Within this organic result Willis Re and our key programs businesses continued to grow well.

These areas of growth were more than offset by a decline in our fine arts, jewelry and [specie] business.

For the coming year, we expect CW&R reported growth to be in the midteens as Miller placed through the earlier quarters.

Organic growth is expected to be in the low to mid-single digit range in 2016, assuming we do not see any significant further deterioration of reinsurance rates.

Finally, Willis GB ended the year with an excellent performance as our strategic efforts began to gain traction.

Organic revenue growth was very strong in the quarter at 8.3%.

Underlying CNF growth was 9.4%.

Our restructuring efforts drove a decrease in cost in the quarter, and this in turn drove another quarter of profit expansion for the segment.

Willis GB is positioned for further revenue and profit momentum in 2016.

So, all in all, a good quarter and a great year and a positive outlook for 2015.

Now, before I hand the call over to John Green, I would like to take a moment, given this will be John's last conference call with us, to thank him for his very significant contributions as the CFO of Willis.

He has brought a very high level of corporate finance and day to day discipline to the Company and has been a critical partner with the businesses and our technology and operations leaders in driving outperformance of the operational improvement program.

He has been at the center of our processes relating to Miller and Gras Savoye, and he did this all while helping Willis execute on our game changing merger with Towers Watson.

So from me and all of us at Willis, thank you very much, John.

With that, I now turn it over to John to discuss the Willis financials in more detail.

Thank you, Dominic, for those comments.

It has been a team effort throughout and a pleasure working with you, the team and the Board.

Good morning to those on the call.

I will be working off the fourth-quarter slide deck, which is available on our website.

Starting on slide 5, underlying earnings for the quarter were flat with last year at $1.09 per diluted share.

Our underlying revenue growth and cost management efforts drove an increase in operating income.

The prior-year comparison is challenging because, as you may recall, in the fourth-quarter 2014 there was a $12 million gain from a portfolio sale.

Removing this, underlying EPS would have been up approximately $0.13.

The other $0.09 of declines in the quarter reflect increased amortization expense from acquisitions and slightly lower earnings from associates as we prepare Gras Savoye for full consolidation.

On a reported basis, our results reflect adjusting items that, in total, reduced earnings by $1.44 per share.

The adjusting items in the quarter included a gain of $0.85 per share from the remeasurement of the previously held equity interest in Gras Savoye and cost of $0.64 of M&A transaction-related expense, primarily related to the merger with Towers Watson, $0.61 for a litigation provision, $0.45 of restructuring charges associated with our operational improvement program, $0.39 related to the devaluation of the Venezuelan bolivar we have written down the operation to $3 million on a booked basis -- and finally, $0.20 related to a valuation allowance on deferred tax assets.

The fourth-quarter impact of currency headwinds was a negative $0.19 per share.

Adjusting for share count, this was roughly $0.05 more than the guidance provided, largely driven by further declines in the euro.

The $0.61 provision I mentioned relates to previously disclosed litigation surrounding the Stanford Financial Group.

Accounting standards require us to take into account a variety of factors in setting up the provision.

To give one example, in cases where the expected costs of retracted litigation are significant it is not unusual to have discussions with the plaintiffs from time to time, where it makes sense for the Company.

There are numerous other factors and we believe we are appropriately provided for.

But to be clear, we continued to dispute the allegation in the strongest terms and to defend ourselves vigorously.

Nothing has changed in that regard.

Please note that, because this is pending litigation, we are not in a position to comment on details.

On slide 6 a brief summary of the operational improvement program -- you can see here that we continue to make progress against the program's objectives.

The OIP generated $49 million in cost savings in the fourth quarter.

For the year, cost savings totaled $112 million, 40% ahead of our $80 million target.

Recall that this target was increased in July from our original $60 million guidance.

We achieved a higher savings while spending 10% below our prior expectations.

We are on track to deliver our increased annualized run rate cost savings target of $325 million.

In summary, the OIP is achieving everything we hoped for.

Slide 7 focuses on organic metrics.

As you can see from the charts, the combination of our solid organic revenue growth and our focus on cost management is driving strong organic margin performance.

We are very pleased with the consistent improvement in organic spread.

The graph on the left shows the spread between organic commission and fee growth and organic expense growth has reached a new high of 280 basis points in the fourth quarter.

This marks the fifth consecutive quarter of expansion in organic spread.

For the year we achieved a spread of 240 basis points.

The impact of this can be seen on the graph on the right.

Organic EBITDA has grown $12 million or 6.7% over the same period last year.

Finally, turning to slide 8, at the end of last year we provided a scorecard that laid out some of our medium-term goals and progress against them.

I am pleased to say that we have delivered against all of these commitments.

We generated mid-single-digit organic CNF growth of 3.3% for the year.

We achieved an improvement in organic spread of 240 basis points for the full year, well ahead of our 200 basis point target.

Full-year underlying EBITDA grew by over 9%, which we view as a good proxy for the cash flow of legacy Willis.

On the cash flow front, we have had an important development with our UK pension.

We concluded negotiations with the pension trustees.

The result was the removal of the contingent funding requirements tied to EBITDA and buybacks and reduced noncontingent deficit contributions.

Deficit contributions for 2015 were $75 million.

In 2016 they were reduced to $53 million.

For 2017 and forward they will be $22 million or $37 million, depending on progress towards deficit elimination.

This is a nice pickup in cash flow while providing protection for the members of the pension plan.

Now, before I hand the line over for the last time, let me say how much I have enjoyed working with all of you on the call.

I'd also like to wish John, Dominic and Roger every success.

I look forward to watching Willis Towers Watson deliver shareholder and customer value.

Now let me pass the call over to Roger to take you through the Towers Watson's results for the second quarter.

Roger?

Well, thanks, John.

And good morning, everyone.

I'd like to start by saying that I'm thrilled to participate on the first earnings call for Willis Towers Watson with John, Dominic and John Green.

I think we're going to do something special here.

As a longtime CFO and finance professional, the vision of helping clients find opportunity and create value through enhanced management of risk and people really resonates.

And I'm looking forward to what we're going to do for our clients in the marketplace.

Turning to results, we are very pleased with the financials delivered by Towers Watson for the quarter.

Reported revenues were $950 million, a decrease of 1%.

This includes $42 million of unfavorable currency movements.

Revenues increased by 3% on both a constant currency and organic basis.

Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures.

Our adjusted EBITDA margin continued to be strong at 21.6%.

Net income attributable to common stockholders for the second quarter of fiscal 2016 was $11 million, a decrease from $110 million for the prior-year second quarter.

The current quarter results include approximately $81 million of transaction and integration costs.

Adjusted net income attributable to common stockholders for the quarter of fiscal 2016 was $120 million, a decrease from $122 million for the prior year's second quarter.

The normalized tax rate for the quarter was 30%, which excludes the tax cost of repatriating overseas cash used to fund the Towers Watson shareholder special dividend.

Stepping back from the final two quarters for Towers Watson, on a fiscal year-to-date basis we achieved 5% constant currency revenue growth, a stabilized adjusted EBITDA margin of around 21% and adjusted net income of $223 million versus $215 million.

We are very pleased with our results and business momentum.

Now let's look at the performance as well as our revenue and margin expectations of each of Towers Watson's segments.

As a reminder, our segment margins are before consideration of discretionary compensation and other unallocated corporate costs, such as amortization of intangibles resulting from merger and acquisition accounting cost.

On an overall constant currency basis, revenues and benefits were flat, exchange solutions increased 41%, risk and financial services decreased 1% and talent rewards was flat.

All of the revenue results discussed in the segment detail and guidance will reference constant currency unless specifically stated otherwise.

Now let's look at each segment in more depth.

For the quarter, the benefits segment had revenues of $467 million.

Retirement revenues decreased by 3%.

Health and group benefits revenues grew by 15%.

And technology and administration solutions was up 2%.

There are more than 15 pension administration projects which will go live throughout fiscal year 2016.

Revenue for these projects is recognized as the systems are delivered to the client.

We expect benefits 2016 revenue growth will be in the 2% to 3% range, as it was in 2015.

We anticipate the benefits segment margin to be in the mid-30% range for calendar 2016.

For the quarter, risk and financial services had revenues of $145 million, a decline of 1%.

Risk consulting and software revenues decreased 2% and investment revenue decreased by 1%.

The risk and financial services segment is expected to have low to mid-single-digit revenue growth for calendar 2016.

Risk and financial services had a 25% NOI margin.

The margin decreased as compared to fiscal year 2015, primarily due to the revenue decline.

We expect the RFS segment margin to be in the mid-20% range for 2016.

Next let's move on to talent and rewards, which had revenues of $175 million, flat on a constant currency basis and up by 2% on an organic basis, as compared to the prior-year quarter, which experienced 11% revenue growth.

Executive compensation revenues were up 7% as compared to 6% revenue growth in the second quarter of fiscal 2015.

Executive compensation has had good momentum over the last several years, due to the focus on executive pay around the globe.

Data surveys and technology revenues decreased by 6%, driven by the disposition of our HR service delivery business, and declined 1% on an organic basis as compared to a strong compared of 10% revenue growth in the second quarter of fiscal 2015.

As mentioned last quarter, compensation surveys were delivered ahead of schedule as compared to last year.

So it's best to compare the first half of fiscal years 2016 and 2015.

For the first half of the fiscal year constant currency revenue growth for DST was 5% and organic revenue growth was 9%.

Rewards, talent and communication revenues increased 2% as compared to 14% growth in the prior year's second quarter.

We continued to see a positive environment for the talent and rewards segment.

We expect mid-single digit growth for the calendar year 2016.

Talent and rewards had a 37% NOI margin for the quarter.

We expect the talent and reward segment margin to be in the mid-to high 20% range for calendar year 2016.

As a reminder, margins are seasonally higher in the July to December quarters.

For the quarter, the exchange solutions segment had revenues of $132 million, an increase of 41%.

On an organic basis, the exchange solutions segment grew by 33%.

Our retiree and access exchanges revenue increased 24% due to an increase in membership base.

The other exchange solutions businesses increased 64% and 45% on an organic basis.

Components of this line of business include health and welfare administration, active exchanges and consumer-direct accounts.

Drivers included new client and health and welfare administration and active exchanges as well as annual enrollment and ACA reporting requirements and health and welfare administration.

Our consumer-directed accounts practice also contributed approximately $8 million in revenue this quarter.

We met our goal for a strong enrollment season in exchanges.

We expected to add approximately 220,000 retirees this season and ended up exceeding that with more than 240,000 retirees added on a net basis.

On the active side we met our target of adding approximately 100,000 eligible employees.

Stepping back from all the healthcare benefits activity, whether it's consulting, movement into exchanges or administration, the environment is very constructive to growth.

General economic uncertainty, organizations facing cost pressures, regulatory changes and optimizing benefit delivery for employers and employees all support strong momentum for our healthcare benefits-related businesses.

We remain confident in the long-term growth in each of the lines of business in this segment and expect revenue growth in the low to mid-20% range for calendar year 2016.

Exchange solutions had a 15% NOI margin as compared to 13% in last year's second quarter.

The other line of business led the segment with a 21% NOI margin.

For 2016 we expect the exchange solutions segment margin to be in the midteens.

In summary, we maintain our overall Towers Watson expectation of mid single-digit constant currency revenue growth in 2016, which indicates good continuing momentum from a very strong fiscal year 2015 with an EBITDA margin of around 20%.

Before we leave segment results I wanted to note that we will continue to report the legacy segments for the quarter ending March 31, 2016.

We plan to report the new Willis Towers Watson segment structure for the quarter ending June 30.

Prior to releasing the June 30, 2016 results we will file historical pro formas of Willis Towers Watson segment structure.

Now let me turn to capital allocation.

First, as an overall framework, we will continue to emphasize a capital allocation approach focused on flexibility to balance value-creating acquisitions with meaningful and consistent return of cash to shareholders, all in the context of maintaining an investment grade-rated balance sheet.

We set an annualized dividend rate of $1.92 a share, which equates to a payout roughly equal to the prior aggregate of the two legacy companies.

We feel that the resulting yield of about 1.7% and payout ratio of about 25% positions the Company appropriately.

We have some refinancing to do this year of the legacy Willis maturities and arrangements that were structured for the mergers.

We expect to begin in the near term to go to market for $1.5 billion to $2 billion of debt to push out our maturity profile and free up some additional capital flexibility.

As our financial policy and investment approach is further defined, we expect further clarification of our approach in the April Board meeting.

We are planning to have an analyst day in September which will provide more in-depth guidance and business strategy.

However, in the meantime we will continue to provide results on the merger-related revenue, cost and tax synergies on a quarterly basis.

We will also continue to report the impacts of the operational improvement program and other significant matters that arise in relation to the integration efforts and our business momentum.

Now let's review our overall guidance for fiscal year 2016.

Due to purchase accounting rules, deferred revenues were not transferred to the merged Company.

This impacts the exchange, software and administration businesses by approximately $75 million in total.

We will also be incurring transaction-related costs such as legal costs, bankers costs, integration costs, tax costs and other merger- and integration-related items.

These costs will continue to be material as we work through the integration period.

Both deferred revenues and transaction integration-related cost will be adjusted from our GAAP measures.

In fiscal 2016, we expect constant currency revenue growth in the low double digits with the primary drivers being the Miller and Gras Savoye acquisitions.

We expect our organic revenue growth to be in the mid-single digits.

Adjusted operating income margin is anticipated to be around 19.5%, an increase from 19.1% in calendar 2015.

The tax rate is expected to be in the mid-20% range.

We originally expected to achieve this level by the end of 2017.

We were able to generate more potential tax benefit than expected in the merger structuring.

However, it is still too early to say how quickly the full impact will flow through to the accounting results.

We expect fiscal 2016 adjusted EPS to be in the range of $7.70 to $7.95, based on average currency rates of $1.45 to the pound and $1.12 to the euro.

The dollar has strengthened against many currencies since the S-4 projections were compiled in May.

Due to the currency headwinds we anticipate approximately $0.15 of negative impact to adjusted EPS on a year-over-year basis, which is incorporated in the guidance.

In finishing up, I want to acknowledge that there's a lot of complexity here for investors.

But I want to reiterate that we are very pleased with the way the two legacy companies have come together and we think we are off to a quick start to delivering enhanced value for clients, colleagues and shareholders.

Now I will turn it back to John.

Thanks very much, Roger.

And now we will take your questions.

(Operator Instructions) Kai Pan, Morgan Stanley.

First, congratulations on the merger closing as well as best wishes for John Green.

My first question is on your guidance.

If you look back in November, you have 8-K that you lay out to your forecast for individual two business.

What has changed since then in terms of your outlook for the two individual business and what is incorporated in your forecast specifically on buybacks and tax benefits as well as the cost synergy?

Thank you, Kai.

So first, as you step back from the S-4 projections, which were done in that April to May timeframe of last year, really on the aggregate basis the biggest difference relates to foreign currency.

And you could actually see it if you go back to the Towers Watson earnings call in, I don't know, the 8th or so of May last year, the pound guidance at that point was the $1.57 and the euro guidance was $1.20.

If you adjust for that to our guidance now, overall for the legacy companies we'd lose about $0.25.

So you could add $0.25 to the range and equate back to the legacy Company guidance.

In terms more broadly of the items that we would add to that guidance from the S-4 projections, the synergy estimates, I think we are largely on track with what we articulated through the whole merger discussion period with revenues coming in more strongly as the years build, with some reasonable spread of cost synergies over the time period.

And then on the tax side, again as I said in my remarks, we had been articulating during that merger discussion period that we didn't think we could get from an accounting point of view to that mid-20% range for the tax rate until the end of 2017.

And again, as I said, the merger structuring came out favorably.

That's what we are guiding for fiscal and calendar 2016.

And so we feel good about our momentum on the tax side.

And on the buyback?

Yes, on balance sheet, thank you for the reminder.

On the balance sheet side and buybacks, we had our first Board meeting just a couple weeks ago now.

Maybe it was even last week.

And we feel good about where we are from a business momentum point of view.

As I said, we do have to emphasize the refinancing.

That will free up some capacity if we have two Companies that generate strong free cash flow, and we are committed to generating strong cash flow return to shareholders as we look again to balance investment [and] M&A.

We will continue to talk about that with the Board in April.

And at that time I would expect that we will have more specific financial metrics that we will be targeting.

But at the moment in this first couple months, first quarter, we will be focused on the refinancing activity.

So just to verify, the buyback is not in your assumption, in your guidance?

Yes.

We did not guide to any share dilution -- share decrease, sorry.

Okay.

Then just on the buyback, you said during the merger process that you would start on buyback six months post-closing as well as you can raise that up to the same leverage as the legacy Willis levels.

I just wonder are you still committed to those.

Yes.

There's no change in our outlook from what we communicated during the whole process.

Again, we do need, as a new Company with our Board, to come to financial policy that's more specific than that, than that line that was in that press release.

And we anticipate doing that in the April timeframe.

So again, we expect to generate strong free cash flow and to have a strong emphasis on return of cash to shareholders over time.

And Roger, maybe I could just add that if you think about what was in that release we said -- we made two points.

One was that share purchases wouldn't start really until the latter half of 2016.

And I think we are saying yes, that's still correct.

And the other is that, as you said, we were going to be out there.

We were targeting the investment grade rating and we are probably going to be using cash to buy back shares as much as we could, consistent with that.

We do want to be able to do any attractive acquisitions, but frankly, in the first year or year and a half of this merger, any kind of significant acquisition would have to be really exceptional for us to pursue that.

We're going to be focused on bringing the three organizations together that we already have.

So that will probably free up more cash for share buyback.

That's great.

I'll stop here.

Thank you so much for all the answers.

Mark Marcon, R.W. Baird.

Good morning and congratulations on the completion.

I have two series of questions.

One is it sounds like there's a lot of enthusiasm with regards to the integration at the early stages.

Wondering if you can talk a little bit about retention trends within Willis and what you are seeing there in terms of internal producers.

And then, secondly, I was wondering on the earnings guidance, when we think about the cash flows, can you talk about some of the meaningful considerations that we should think about with regards to the cash flows relative to the adjusted EPS in terms of pension contributions, any sort of restructuring costs, CapEx, etc., just so that we think about what's the cash flow going to look like for 2016 as well?

Let me address the first part of that two-part question about [enthusiasm] retention within Willis.

As I said, I echoed what John Haley said about the level of enthusiasm within the organization overall.

And within legacy business, I can tell you it is extremely high.

We've had no retention issues.

Actually, I was being briefed only yesterday that we are almost seeing the opposite.

We are starting to see a number of people from other organizations who have been involved in the brokerage world starting to -- turning up at our doors and very, very intrigued and excited about what this new platform can do and be a platform for their careers.

So at this point we are feeling very comfortable.

In terms of free cash flow, and certainly as you point out there are a lot of things moving their, we don't have a formal forecast for free cash flow at this point.

But I think you actually alluded to a number of the factors to be considered.

So as we have looked at that and stepped back, one, I think it's fair to say if you look over the last couple years that you have two legacy companies that demonstrated the capability to deliver somewhere in the range of $400 million to $500 million of free cash flow.

Certainly, there are going to be integration costs.

We do know that we have the costs related to the operational improvement program that will still flow through.

So we are dealing with those elements of planning.

We will expect as we move into the next quarter's call that we will have more specific forecasts.

But that's really how we are thinking about the free cash generation capability of the Company right now.

Just as a follow-up -- it does sound like the pension contribution is probably going to be less in 2016, relative to 2015 on the Willis side.

And I would imagine CapEx, on the whole, is probably not going to shift too much.

Is that correct?

Yes.

Maybe I'll make some overall comments and then John Green can reiterate on the Willis pension contributions.

We don't expect on the Towers Watson side any meaningful change one way or the other on pension contributions.

If you look at the momentum from CapEx, there are no big new programs coming in.

And potentially, when you get into these periods of a lot of change in the Company, you tend not to see a big change because people are focused on integration.

So I don't anticipate anything in those elements.

But, John Green, if you could comment on the Willis side?

Yes, I'd be happy to.

So in terms of pension contributions, we can expect on the Willis side reduction between $20 million and $30 million.

In terms of CapEx for the year, it came in at about $140 million for the Willis legacy business.

And frankly, that's $10 million to $15 million higher than it has been historically.

So there might be some opportunity on the cap ex side, depending on what level of appetite the management team has for investment.

Great, thank you very much.

Dan Farrell, Piper Jaffray.

Thank you very much.

I had a question on the brokerage organic margin.

You show expansion there in the quarter.

But given what looked like a pretty strong organic growth number and also quite a bit of expense savings coming through, it didn't seem like as much may have fallen to the bottom line or it seemed like a lot got put back into the business for investments.

Can you talk a little bit about that?

And then can you talk a little bit about how you think about your operating leverage next year, given that the incremental increase in expenses looks like it slowed in 2016 and then ramps up again in 2017?

Thank you.

Okay, I'll take a shot at that question related to Gras Savoye, and others are welcome to join in, in (technical difficulty) [the next conference].

So in terms of the margin performance there, we can expect a lower level of overall margin for Gras Savoye versus the organic margin.

And largely, that has to do with some opportunities both on the expense side as well as further penetrating larger clients.

So when you adjust for the difference in French GAAP to US GAAP, you get to a margin of about 16%, and that compares to Willis around the 20% range.

So there would be some overall dilution to the margin.

But if you go back in terms of the rationale for the deal and how we paid for it, it had to do with the EBITDA that the business was throwing off.

There's also going to be some increased amortization, which -- obviously, that's not going to impact the cash flows but certainly will impact the overall margin rate.

Okay, thank you.

And then just a clarification, if I could, on the deferred revenues.

And I apologize if I didn't understand this in your comments.

In the guidance table, you label that as nonrecurring.

But that's coming from technology and other businesses that would be generating some revenue there going forward.

So how do you think about that versus what you will do in 2017?

And then is there any expense associated with that because it looks like it's coming through at 100% margin?

Yes.

So I'll apologize on behalf of us accountants for this complexity.

But it's all accounting.

So we, in our businesses that are really administration service-oriented, we spread revenue.

We collect the cash up front and spread the revenue over a time period.

And that's impact exchange solutions and the administration revenues, particularly.

So the way that comes in is we put up the cash that comes in on the balance sheet and amortize it into revenue over the service period and the contract period.

When you do purchase accounting, that's an asset that is assigned a zero value.

So you write it off, even though, in the flow of those contracts with clients, that is revenue that was earned and as you go forward in that business, it's indicative of the trend of revenue.

So as we looked at it from an adjusted earnings point of view -- and I would also add there's no cost associated with it.

Again, this is just an accounting matter.

So in order to give the clearest view of what the momentum of the go-forward combined business is, we felt it appropriate and actually necessary for investors to really know what the momentum of the Company is to add that deferred revenue, effectively that amortization, back into the P&L.

It's something that will go away after the first year.

It will actually diminish in impact as the quarters go by this year.

And again, it's just an accounting adjustment.

I know that's something a little different that we deal with on the Towers Watson side.

So certainly we will answer all questions about it.

But it's something that shouldn't be a concern.

Great, thank you very much.

Greg Peters, Raymond James.

Good morning, everyone, and congratulations.

I guess I recognize your organic projections contemplate current market conditions but I was wondering if you could just briefly speak to exposure to things like the energy complex, slowing growth in Asia and the European banks, in light of the recent stock market action.

Yes, I'll start with that just on the legacy Willis businesses.

Obviously, the projections and all the work we've done for 2016 takes into account current market conditions as we see them.

So obviously, as we look out into 2016 we are fully aware of what's going on in the energy space.

And as we've thought about projections for our energy business, we are doing so in the context of current market conditions and energy pricing.

And undoubtedly, we are expecting a bit of a slowdown there.

Asia -- our businesses have been reasonably robust in Asia.

We have seen a bit of a slowdown in China, in the last quarter, and that was affected in our results we just went through.

So they were -- the robust numbers you saw in international were despite a slowdown in China.

And obviously, we've taken that into account in thinking through what we see, even though our Chinese business continues to have great momentum and we are very confident about it.

So, I think my general answer to your question is that we are fully aware of market conditions and the guidance we are giving on how those businesses will perform reflects our present understanding, which is as good as anyone's and yours, of market conditions as they now stand.

And then, Dominic, just one more comment on China.

It's about 1% of the combined groups' revenue.

So the fall off there is not likely to have a large impact in the Willis Towers Watson overall results.

Right.

And what about your view on European banks and what's going on there?

And does that -- there's two sides of the house now, the benefits side and the risk services side.

I'm just curious if there's any take on opportunities and/or perspectives on what's going on there.

I'll talk a little bit about the risk services side.

We have a very robust financial institutions practice which is made up of both the very specific financial lines we have, both in North America and out of GB, and also our overall service to financial services companies.

And frankly, the volatility we are seeing in the banking environment is creating more opportunities for discussions around how we can help them manage their exposures in political risk and other items where we are active in helping financial institutions.

So we are very excited about our financial institutions group as an advisory and solutions providing group.

And I think actually the environment is a very robust one for them.

You have to be innovative to help our clients, but it's a robust environment.

If we want to talk about the benefits side of that, probably John or Roger might want to comment on that.

Yes, thanks, Dominic.

So I think I would just say, and this is along the lines of what Dominic just said, actually for a consulting firm thinking about the benefits and talent and rewards there, there's two things.

One is generally when our clients do well we do better too.

So good economic conditions are good for us.

And the banks are having some volatility right now.

On the other hand, when there's a lot of change that's also a good opportunity for consultants.

And the fact is, the volatility banks are experiencing are providing some opportunities for us to talk about how we can help them manage through that.

So overall I don't think there's a concern from us in terms of that being a big negative impact, but it may actually provide some slight upside.

Thanks for the color on that.

Just one last question for the group or for you, John.

I know you mentioned in your prepared remarks this 25% EBITDA target by the end of 2018.

And I'm just wondering what kind of capital structure you have in mind with that target, that EBITDA target in terms of debt, etc.?

Yes.

So I'll let Roger maybe talk about what we would expect for that capital structure.

But let me just make one point about that.

I think increasingly as we go forward we are going to have -- one of the big areas we are going to be focusing on is our margins.

And so, one of the things you will find us talking increasingly about is how we are making progress towards that 25% margin in 2018 because we see that as one of the significant deliverables.

Roger, do you want to talk about the capital structure?

Yes, sure.

Thanks, John.

Yes, Greg, I don't have anything really to add other than what I said before, that we will be targeting an investment-grade balance sheet as we work through our plans for refinancing here over the next couple months and lead up to the April Board meeting.

We expect to have more specific discussion about financial policy and how we might characterize that from a overall financial metrics point of view, but that's a discussion that's yet to come with the Board.

Fair enough.

Thank you very much for your answers.

Adam Klauber, William Blair.

I think you mentioned one of the key areas of potential synergies is clearly in the benefit exchange consulting.

And you mentioned a couple of key markets.

You have the middle market in the US, the large group market and then potential for international.

On a magnitude and timing basis, could you give a perspective of which ones you think would be larger and more potentially immediate, immediate being not just this year but 2017?

So, I think when you look at the numbers we put out there for the revenue synergies three years out, the biggest range and also potentially the biggest number belonged to the healthcare exchanges, the midmarket healthcare exchanges.

Now, it was a very wide range, $100 million to $400 million.

And the reason for that was just some uncertainty about how fast that market will develop and the particular trajectory it will take.

So we still -- that's the one that offers the largest potential upside there.

And we still feel very good, in fact, I think probably feel even better than ever about the fact that Willis Towers Watson will be able to offer such an attractive market in the midmarket space in the US.

We think that's vitally important and we think the merger has really enhanced our ability to compete there considerably.

The one that we will probably see the fastest ramp-up but it's not as large of potential synergy -- we're talking in the $75 million to $100 million range three years out, but that's the global benefits business.

And part of the recent that that will ramp up faster is we had developed some products to go to market at Towers Watson.

We can immediately link that up with the Willis and Gras Savoye distribution systems, and so we start immediately pulling clients in.

As I mentioned in my prepared remarks, we already had two big wins in January from that.

So, I think in terms of speed to get to the revenue synergies, I would put that as the most attractive one.

In terms of the largest overall potential, though, it's clearly the midmarket exchanges.

Okay, great.

And then just one follow-up on Willis Great Britain, obviously a very strong quarter and I know you have been working on that for a while.

Was there any one-timers or nonrecurring that pushed that up during the quarter?

And I guess for this year what are the two things you think will drive strength in that segment?

So, I'll give a general answer on strength and then give you specifics on the quarter.

You have heard us talk about Willis GB for a number of quarters now.

And this has been a long-term program.

As you know, it is the great historic strength of Willis where one of our most advanced capabilities sits.

And we have been through a process of modernizing the business to really bring out its underlying great strength in franchises.

And that has been coming to fruition.

Nicolas Aubert joined us at the beginning of 2015 and continued that path and accelerated it, I think, very strongly with a very strong team around him.

And what you are seeing is the fruits of all that work, the fruits of the underlying franchises, which remain very, very strong, and the fruits of the discipline and focus that the team and Nicolas, the leadership of that team, have brought to it.

And that's why I think we're so optimistic about the outlook for 2016, because we have real momentum, both momentum on the topline and momentum on the bottom line.

For the quarter, though, there were just some good wins in the quarter.

That business is subject -- it is a business which had some big transactions and which can move and I now.

And for instance, we had some satellites.

We are the leading player in the satellite business and we had some satellites actually go off and go into orbit, I'm glad to say, in the end of the year.

And that was good news for the business.

Right?

But that's just an example.

We have a fantastic franchise and a great team in that business.

Great, thanks a lot.

Shlomo Rosenbaum, Stifel.

This is Adam in for Shlomo.

Could you discuss operational incentives that are being implemented to drive the exchange sales growth for the Willis broker system?

I'm sorry; that was breaking up.

Could you repeat that?

Sure.

Can you discuss the operational incentives that are being implemented to drive exchange sales growth through the Willis broker system?

Yes.

So look, I think we had -- as I mentioned in my prepared remarks about the sessions we've had in Buffalo, and of course Buffalo is where the liaison part of our operation was headquartered, the training sessions where we brought together all the folks there to go out to the market.

So, we think we've offered them some enhanced capabilities and enhanced training to go out and talk to clients about that.

We have also -- we are in the process of putting in some enhanced compensation programs to encourage people to sell exchanges.

And those are the main things that we are focusing on at the moment.

Okay, got it.

And could you walk us through the key milestones to look for in 2016 in terms of the Willis operational improvement program?

Yes.

You are going to see a continuation of the whole momentum you've seen in 2015 and in 2014.

As you know, we raised our target for what we can achieve to $325 million run rate.

We feel very comfortable about that number.

We are well on track.

And as we said before, in 2016 the program should go cash positive.

That is, the savings we are delivering to the bottom line will exceed the cash costs of the restructuring charges we will have to take in 2016.

So you will see -- on all the fronts you're going to see continued growth on the number of people we have and the ratio we have in legacy Willis, if you like, of people in offshore centers versus in onshore.

We're going to be restructuring a number of processes to make that possible to move ours offshore.

We are continuing to densify our real estate, and that process will continue.

And we will be opening up, by the way, some new offshore centers for non-English-language back and middle office activities.

So we have opened in Sofia to handle some of the European languages.

We've opened the center, another center in China, to handle Mandarin.

So you will see just a continuation of the continued discipline and progress we've announced.

And we stand by all the projections we've laid out.

Okay, great.

Thank you.

Josh Shanker, Deutsche Bank.

I just wanted to follow up on that operational improvement question.

So, if I'm looking at 40 basis points of margin expansion this year, how much of that is being created by the operational improvement program?

How much of that is the Gras Savoye drag and how much of that is coming from the business broadly improving?

This is for -- I'm going to hand it over to -- now, are you talking about 2015 or 2016?

2016, where you are saying you are going from a 19.1% to 19.5%.

I assume there's a big improvement coming from the OIP, but there must be -- and obviously, we talked about the Gras Savoye drag.

Trying to figure out the moving parts and I would think that the margin expansion should be bigger if you overlay the operational improvement program onto the whole Company.

Or maybe I'm thinking about that incorrectly?

I'll start with a generic answer so that Roger can have a little time to think through the components parts.

Look, you've got -- all I can tell you from the legacy Willis piece is that we would expect continued margin expansion as a result of the net result of revenue growth, continued investment in the front line.

Right?

That's when we do the operational improvement program and free up some cost.

Some of it is being reinvested but it's being reinvested in the front office.

So we've got a nice mix between front and middle and back.

And then the reductions in the -- from their operational improvement program, which we forecast would produce, net, and improvement in the margin of all those activities.

So that must be contributing part of the 19.1% to 19.5%.

But I'm going to hand over to Roger to elaborate a bit on that.

Yes.

I think, Dominic, you really hit the nail on the head.

There are multiple influences flowing through.

The Towers Watson margin is staying pretty stable in our outlook.

And you've got the flowthrough.

I think John Green mentioned earlier that the EBITDA margin for Gras Savoye is coming in around the 16% level, which is some several hundred basis points lower than the rest of the Willis organization.

And then you do have some investment or reinvestment of savings.

And offsetting all that is the savings from the operational improvement program.

So I think those are the key influences.

Okay.

Well, thank you, and good luck in the new year.

I'd like to turn the call back over for closing remarks.

Okay.

Look, thanks very much, everyone, for joining us this morning.

And we look forward to talking to you on the Willis Towers Watson earnings call in May.

Have a good day.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.

Good day.