Willis Towers Watson PLC (WTW) 2016 Q1 法說會逐字稿

Welcome to your Willis Towers Watson Q1 FY16 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Aida Sukys, Director of Investor Relations.

Ma'am, you may begin.

Thank you and good morning.

Welcome to the Willis Towers Watson earnings call.

On the call today are John Haley, Willis Towers Watson Chief Executive Officer; and Roger Millay, our Chief Financial Officer.

Please refer to our website for the press release issued earlier today.

Today's call is being recorded and will be available for replay via telephone through Monday, by dialing 855-859-2056, conference ID 95282409.

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 and Litigation Reform Act of 1995, including risks and uncertainties.

For a discussion of the 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 this morning, a copy of which is available at our website at willistowerswatson.com, as well as other disclosures under the heading of Risk Factors and Forward-Looking Statements and our most recent annual report on Form 10-K 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 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 the reconciliation of the non-GAAP financial measures under Regulation G to the most direct comparable GAAP measures.

Investors should review the press release and supplemental slides we posted on our website.

After our prepared remarks, we'll open the conference call for your questions.

Now I'll turn the call over to John Haley.

Thanks Aida.

Good morning, everyone.

Today, we'll review our results for the first quarter of 2016 and provide some guidance for the full year of 2016.

We'll provide consolidated 2016 and certain pro forma 2015 financial results for this quarter.

Our segment results for this quarter are based on the legacy Willis and Towers Watson structure.

We anticipate providing consolidated segment results for the second quarter of 2016 during our August earnings call.

Before we review our first quarter 2016 results, I'd like to say how pleased I am to see the focus and excitement our colleagues have brought to the marketplace and the collaboration that's taking place at all levels of the organization.

I want to thank all of our colleagues for the spirit they've shown to date and all of the hard work that's keeping us on point for achieving our long-term goals.

We're pleased with how we performed this quarter.

Reported revenues for the quarter were $2.2 billion, which includes $53 million of negative currency movement on a pro forma basis.

Despite the currency headwinds, adjusted revenues which include $32 million of deferred revenues, were up 16% on a constant currency basis and 1% on an organic basis.

Our adjusted EBITDA for the quarter was $671 million, or 29.6% of adjusted revenues.

The prior-year first quarter pro forma adjusted EBITDA was $579 million, or 28.8%.

The growth in adjusted EBITDA is primarily due to the acquisitions of Miller and Gras Savoye.

Miller and Gras Savoye produced most of the profits in the first half of the calendar year.

Income from operations for the quarter was $326 million or 15% of revenue.

The prior-year first quarter pro forma operating income was $369 million, or 18%.

Adjusted income from operations for the quarter was $646 million, or 28.5% of adjusted revenues and for the prior-year quarter, was $540 million or 26.8% on a pro forma basis.

For the quarter, earnings per diluted share were $1.75 and adjusted diluted earnings per share were $3.41.

Roger will address the adjusted EPS in more detail later in the call.

I'd also like to provide an update on three areas of integration: revenue synergies, cost synergies and tax savings.

First, let's discuss the revenue synergies.

We recently updated our revenue tracking tools and plan to have more detailed revenue synergy updates by the third quarter.

However, as I travel to the various offices and see firsthand the collaborative sales efforts and hear about our market success, it's clear our colleagues are not waiting for a top-down integration mandate or reporting tools to go to market.

We're making very good inroads in the three areas of revenue synergies we've outlined in our previous communications: global healthcare solutions, the mid-market healthcare exchange, and the US large market P&C sector.

We've won another three global healthcare solution clients and the pipeline looks very strong.

Turning to the mid-market exchange opportunities, we've won nine new clients for the 2017 enrollment season and continue to see the pipeline build.

Lastly, in the US P&C large company space, we were awarded all the P&C lines for a multi-billion dollar construction organization.

We're also seeing some success in areas we didn't fully appreciate prior to the merger.

As an example, we were recently awarded the global P&C business for a large multi-national based outside of the US.

The sales team incorporated the knowledge of the Company from both legacy organizations, so that we could tailor a solution that was in line with the client's needs.

The client noted that our strong collaboration and the depth of our analytical capabilities set us apart from the competition and help us look at the prevailing risk and data issues from a very new and different perspective.

Within just four weeks of bringing Willis Towers Watson together, we were able to come together as a single global team and radically change the way the client viewed Willis Towers Watson.

We also experienced a win recently with a French multinational in an area where we have no formal revenue synergy targets, Gras Savoye had a long-standing relationship with this client in healthcare and property & casualty.

Joining forces with the Gras Savoye relationship team was a team of Talent and Reward consultants who were hired for pay grading project.

This is a great example of a full array of services we can now provide our clients.

While these early wins may not have a significant and immediate financial impact, we're very pleased with the progress we've made towards our revenue synergies.

These wins are further proof of the strong cultural alignment of the merged organizations and perhaps most importantly, these wins demonstrate that when we put client needs first and help them succeed, we will succeed.

Seeing the overall level of sales activity we've had to date, I'm more confident than ever about our achieving our 2018 revenue synergy objectives.

Now, moving to the cost and tax synergies.

We announced post-merger cost synergies of $100 million to $125 million and tax savings of approximately $75 million annually, with these objectives achievable over a three-year post-merger and integration period.

We budgeted $20 million in cost synergies for 2016, with an expected run rate of approximately $30 million of annualized savings and fully expect to meet our overall savings objectives by the end of 2018.

We should ultimately exceed our tax goal of $75 million of annual tax savings.

As a side note, regarding the recently-issued Treasury roles, our outside advisers and tax group reviewed the Treasury regulations thoroughly and we feel confident these regulations will not impact our current or longer-term tax savings.

I'd also like to address the legacy Willis operational improvement program, or now what we'll refer to as the OIP.

We continue to see this program as an important factor in achieving a 25% adjusted EBITDA margin objective by the end of 2018.

We'll continue to provide color on the program and highlight savings, but we'll focus on the margin impact rather than the spread between revenue and expense growth.

Incremental savings from the OIT were -- OIP, excuse me, were approximately $94 million as compared to the first quarter of 2015.

The momentum of continuing savings will be sustained throughout the year.

We continue to be committed to saving $325 million by the end of 2017.

This quarter, we incurred about $25 million of restructuring costs and overall, we'll spend approximately $140 million in 2016.

This program continues to be on track to meet all of its financial objectives.

One significant step taking place this month is the restructuring of mid- and back-office colleagues in Great Britain.

As a reminder, much of the program is focused on streamlining processes and moving office and administrative functions to lower-cost locations.

Great Britain was one of the first regions to adopt the OIP and now entering the last phase of the project.

They're on track to obtain their saving goals on schedule and on budget.

We continue to believe that the majority of the Company OIP savings will drop to the bottom line and we're driving internal accountabilities to ensure that happens.

We will have more detailed information on margin impact during our Analyst Day in September.

Now I'll review the first quarter 2016 legacy Towers Watson segment results and outlook and Roger will provide the legacy Willis results and provide updated 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 amortization, cash incentives and some of the restructuring costs, whereas the Towers Watson margins exclude amortization of tangibles resulting from merger and acquisition costs and discretionary compensation.

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

On an overall constant currency basis, Revenues and Benefits increased 1%; Exchange Solutions increased 57%; Risk and Financial Services decreased 4%; and Talent and Rewards decreased 9%.

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

So let's look at each segment in more depth, starting with Benefits.

For the quarter, the Benefits segment had revenues of $486 million, which represents a 1% increase as compared to a 5% pro forma revenue increase in the first quarter of 2015.

Retirement revenues decreased by 2%; Health and Group Benefits revenues grew by 8%; and Technology and Administration Solution revenues were up 8%.

We don't anticipate any special demand for actuarial Consulting services in 2016.

Demand is expected to be good for Healthcare Consulting, and Technology and Administration is expected to go live with many client implementations throughout the year which will drive additional revenues.

We expect Benefits 2016 revenue growth will be in the low single-digit range.

Benefits had an NOI margin of 36%, and we continue to expect this segment to be in the mid-30% range for calendar 2016.

Exchange Solutions had an outstanding quarter, with revenues of $152 million, a pro forma increase of 57%.

On an organic basis, the Exchange Solutions segment grew by 48%.

Driven by record enrollments, a Retiree and Access Exchange revenues increased 47% and the other Exchange Solutions businesses increased 73% and 49% on an organic basis.

Increased enrollments and new client revenues drove the revenue increases.

Our consumer-directed accounts practice also contributed approximately $9 million in revenue this quarter.

We believe the increase in lives will continue to support good growth for the rest of 2016, but we don't expect much off-cycle work during the calendar year.

We have increased revenue growth expectations from low to mid-20% to a high 20% range for calendar year 2016.

Exchange Solutions had a 30% NOI margin as compared to 21% in last year's first quarter.

The Retiree and Access Exchanges line of business led the segment with a 48% NOI margin.

For 2016, we expect the Exchange Solutions segment margin to be in the high teens.

As a reminder, margins are seasonally higher in the first half of the calendar year as compared to the second half of the calendar year.

For the quarter, Risk and Financial Services had revenues of $144 million, a pro forma decline of 4%.

Risk Consulting and Software revenues decreased 5% due to a softness in EMEA life consulting and a general softness in demand in the Americas.

Investment revenue decreased by 2%, primarily driven by revenue declines in EMEA, as demand softened for Advisory Services.

The Risk and Financial Services segment is expected to have low single-digit revenue growth for calendar year 2016.

We recently invested in senior marketing staff and the pipeline appears to be greater than at this point last year.

We anticipate the impact of our marketing investments to impact revenues in the second half of the year.

In addition, the prior-year comparables for investment aren't as tough.

Risk and Financial Services had a 23% NOI margin and we expect to manage the business to achieve mid-20% margins.

Now let's move on to Talent and Rewards, which had revenues of $124 million, down 9% on a pro forma constant currency basis and down 6% on a pro forma organic basis as compared to the prior-year quarter which experienced 15% revenue growth.

Executive compensation revenues were down 1% as compared to 11% growth in the first quarter of calendar year 2015.

Data Surveys and Technology revenues decreased by 15%.

We saw a 4% decline on an organic basis as compared to a strong comparable of 9% revenue growth in the first quarter of calendar year 2015.

As a reminder, we acquired several consulting and sold our HR service delivery business.

Rewards, Talent and Communication revenues decreased 9% as compared to 23% growth in the first quarter of calendar year 2015.

Talent and Rewards had a 10% NOI margin for the quarter.

The first half of the calendar year is generally soft for this segment.

We see an overall decrease in the number of transactions in the market globally and as a result we anticipate this impacting the segment's top-line results, given that we're lowering our revenue outlook from a mid-single-digit constant currency revenue growth to a low to mid-single digit growth in 2016, with margins in the mid-20% range.

Now I'll turn the call over to Roger.

Thanks, John.

And good morning to everyone.

I'd like to first reiterate John's comment on the great collaboration we're experiencing in Willis Towers Watson.

The level of engagement I've seen from the operating committee members to colleagues around the globe has been tremendous.

It really is an exciting time to be part of Willis Towers Watson and based on the foundation being created now, I look forward to a very successful future.

Before moving to the performance of the legacy Willis segments, I'd like to add more color around John's comments regarding the adjusted diluted earnings per share for the first quarter.

I'd also like to discuss a couple of noteworthy adjustments to earnings, which were highlighted in the press release today.

There were two significant positive impacts to adjusted diluted earnings per share.

First, our adjusted tax rate came in at 19%, which was lower than our forecast due to the seasonal strength of our profitability this quarter.

We expect higher tax rates in the coming quarters, particularly in those quarters with seasonally lower operating profit.

Second, our outstanding weighted average diluted share count came in lower than expected due to the merger closing four days into the quarter.

This lowered our average diluted share count to approximately 136 million; the current outstanding diluted shares are approximately 138 million.

Now let me turn to the reconciliation of segment operating income to income from operations, which was highlighted in our press release this morning.

Most of these adjustments are self-explanatory, but I thought there were two items which, perhaps, needed some additional explanation.

First, amortization of $126 million represents the intangibles amortization, which is excluded from the legacy Towers Watson segment results.

In addition to this, there is $35 million of amortization expense reported in the legacy Willis segment results.

The reporting treatment will be uniform next quarter when we report on the consolidated Willis Towers Watson segments.

Second, as we've described in public filings, relevant parties have agreed in principle to settle the Stanford litigation for $120 million and seek a court-issued bar order against all Stanford-related claims.

We recorded a $70 million provision in the December quarter based on the facts and circumstances at the time; the balance of $50 million was recorded in the first quarter once the settlement amount and terms were agreed.

The settlement will need final court approval which, if granted, may take several quarters.

This is still ongoing litigation, so we're not able to provide more detail beyond what we've already said in our public filings.

Now let me turn to the legacy Willis segment performance.

On an overall constant currency basis, commissions and fees, or C&F for international increased by 84%.

North America increased 3%; Capital, Wholesale and Reinsurance increased by 14%; and Great Britain was flat.

All of the C&F results discussed in the segment detail and guidance reflect constant currency unless specifically stated otherwise.

Now let's look at each of the legacy Willis segments in more depth.

Turning to Willis international.

With the consolidation of Gras Savoye, which contributed $235 million to revenue in the quarter, the top line grew 84% from the prior year.

Gras Savoye's contribution for the quarter was a bit ahead of plan.

On an organic basis, international C&F declined by 5%.

This was driven by weakness in Asia and a cancellation adjustment for a large national resources project.

This cancellation was not related to the economic environment of the energy sector, but was political in nature.

We continued to see strong growth in Latin America, and Central and Eastern Europe, Middle East and Africa.

The segment's operating profit margin was 30% this quarter.

Our outlook for organic C&F growth for the full year is in the mid-single-digit range, with net operating margin in the low- to mid-teens range.

Willis North America had a nice start to the year with organic C&F growth of 4%.

The segment saw strength in all of its core regions across a number of lines of business, most notably Construction, Financial Institutions and FINEX, despite modest pricing headwinds.

The Human Capital Practice also contributed mid-single-digit organic growth during the quarter.

The segment's operating margin of 23% was modestly ahead of our expectations and highlights some of the strategic changes we've been making related to the operational improvement program.

The outlook for Willis North America organic C&F growth continues to be in the low- to mid-single digits with a margin in the high teens.

Now turning to Willis Capital, Wholesale and Reinsurance.

CW&R generated commissions and fees growth of 14%, driven primarily by the contributions of Miller Insurance Services, which contributed $49 million of C&F in the quarter.

Organic C&F declined 3%, primarily due to the year-over-year decline of our Fine Arts and Jewelry business, as a result of the departure of the team of associates to JLT, for which we recently settled litigations as well as a strong comparable in the reinsurance business, which benefited last year by an uplift of $6.5 million on a restructured account.

CWR's operating margin was 46% as this segments business is seasonally rated -- weighted towards the first half of the year.

We expect reported growth to be in the low-double digits, as Miller fully rolls through, fully rolls on through the first half of the year.

Organic C&F growth is expected to be in the low-single-digit range in 2016, assuming we don't see any significant further deterioration of reinsurance rates.

I should note that in our growth guidance for CWR on a commission and fees basis, is lower than the total revenues guidance we provided previously.

This results from the fact that the earlier guidance included the anticipated impact of the $40 million settlement with JLT, which will be recognized in the second quarter as other income in total revenues.

This item will not be adjusted out of GAAP earnings, consistent with the historic practice.

We expect operating margin to be in the low 20% range.

Finally, Willis GB C&F growth was flat for the quarter.

The cancellation adjustment for the large natural resources project mentioned earlier also impacted Willis GB.

Organic C&F declined 2%; excluding the impact of the natural resources project, organic growth would have been up approximately 2%.

The segment's reported operating margin was 14%, modestly lower as compared to the prior year, driven by the project-related revenue decline and some one-time expense adjustments.

We continue to have a positive outlook for the business and these one-time revenue and expense events which occurred this quarter are not indicative of our future outlook.

Our outlook for organic C&F growth is in the low-single-digit range with margin in the high 20% range.

Moving to the balance sheet, we continue to have a strong financial position.

We issued $1 billion of US dollar notes in March; $450 million at 3.5% with a maturity date of September 2021; and $550 million at 4.4% with a maturity date of March 26.

We expect to go to the Euro market for an additional $600 million to $800 million.

Being in the market recently and finalizing the timing of our refinancing, we expect our interest charges to be approximately $200 million for the year 2016.

The proceeds from the dollar offering were used to repay our $300 million public note, which matured in March, repaid the $400 million US tranche of our one-year bank note, and reduced the outstanding balance in our revolving credit facility.

Let me turn now to capital allocation.

As we mentioned during the last earnings call, we expect to have a capital allocation approach focused on flexibility while maintaining an investment-grade rated balance sheet.

On a Moody's basis, this equates to a threshold of approximately 3.5 times debt to EBITDA.

Currently our Moody's debt to EBITDA ratio is around 3.7 times.

We expect this to self-correct over the next several quarters, as our restructuring expenses decline, merger-related cost reduction programs are implemented, and profits increase.

We believe we have several hundred million dollars of capital allocation flexibility for the second half of the year.

As always, we'll weigh the benefit of potential acquisitions versus repurchasing shares.

We prefer to do good acquisitions and after that, love to share buybacks, consistent to maximizing shareholder returns.

Free cash flow was $70 million this quarter.

Free cash flow is expected to generally improve through each consecutive quarter during the calendar year.

This quarter, we paid approximately $500 million in incentive compensation, which included the normal pay cycle for former Willis colleagues and a partial year bonus for former Towers Watson associates.

Additionally, we contributed approximately $40 million to our defined benefit pension plans.

Now let's review our guidance for FY16.

We'll continue to incur various merger and integration-related costs.

These costs will continue to be material as we work through the integration period, and we expect them to be an approximately the $150 million to $170 million -- I'm sorry, $175 million range for 2016.

The level of spending will depend on how quickly we move through some of the integration activities.

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

In FY16, we continue to expect constant currency revenue growth to be in the low double digits, with the primary drivers being the Miller and Gras Savoye acquisitions.

For purposes of segment guidance, we'll use commissions and fees which excludes other revenue.

As noted previously, a legal settlement of approximately $40 million will be posted to other income in the second quarter.

As we guide to overall Company performance, we'll use total revenues, which includes fees and commissions and other revenues.

We continue to expect organic revenue growth to be in the mid-single digits, but based on the first quarter results, our expectations are a bit muted versus the beginning of the year.

Adjusted operating income margin is anticipated to be around 20%, an increase from our previous guidance of around 19.5%.

In calendar 2015, adjusted operating income was 19.1%.

The adjusted tax rate is expected to be in the 23% to 24% range; the current GAAP rate of approximately 7% is due to a number of factors, but the main driver is related to the valuation of intangibles as a result of purchase accounting.

The amortization of the intangibles is somewhat front-end loaded and the current GAAP rate will not be sustained over time.

We continue to expect adjusted EPS in the range of $7.70 to $7.95 based on average currency rates of $1.43 to the Pound and $1.10 to the Euro.

While we've maintained our overall revenue growth projections, the first quarter has dampened the range of this growth.

Our leadership team is aligned and committed to manage expenses, as needed, to achieve our 2016 adjusted EPS goal.

Once again, we have many moving pieces related to the merger and integration, but I'm extremely pleased with how things are progressing.

Our intent is to continue to streamline reporting over the next several quarters and provide a clear line of sight to our operations and results.

Now I'll turn it back to John.

Thanks, Roger.

And now we'll take your questions.

Thank you.

(Operator Instructions)

And our first question comes from Ryan Tunis of Credit Suisse.

The line is open.

Hi, thanks.

Good morning.

I guess just taking a step back, I mean, your comment that your view on organic over the full year is a bit muted based on what you saw in the first quarter.

Just hoping you could talk a little bit about the areas, looking out over the rest of the year, where your expectations may be a little bit muted relative to where they were.

Yes.

I mean, certainly, as you look across the legacy segments of both firms, there were areas that came in a little bit softer and I think the legacy Towers Watson RFS segment is one of those pieces.

As we mentioned, the Talent and Rewards business came in softer than we expected, and we're not seeing the kind of project activity that we saw there last year.

And then international, within legacy Willis, and the CWR segment is a little bit softer.

So I think, you know, those are all the areas that we're a little bit off where we expected.

We do think that some of the elements there are timing in nature, so, you know, perhaps you might look at our guidance and be surprised that we're not a little bit more muted.

But we think that in Asia, we mentioned Asia and International, there were some deals that didn't come in the first quarter, but we see them coming in later in the year, and also, as I mentioned, there were -- in a couple segments, there were some tougher comparables that don't repeat later in the year.

So we think a little bit muted is the way to look at it.

Okay.

Thanks.

And then I just had a follow-up on the Treasury action and the tax guidance.

You know, we saw the press release reiterating the $75 million.

I mean, it seems like the -- I also appreciate it's not really an inversion, but of the $75 million, should we think about debt predominantly coming from intercompany debt, or are there other -- you know, to what extent is the $75 million dependent on the intercompany interest you know, versus other forms of tax planning and just redomestication?

Yes.

I think broadly, we were focused on efficiency of capital structure and efficiency of intercompany arrangements as we structured the legal entity set up for the merger.

We do have intercompany debt there, of course, and that is one of the elements that drives our tax efficiencies; and we're mindful of other opportunities and continue to work on it.

And I think, as we mentioned in our press release and discussion, you know, a month or two ago, given that our merger was closed in January and the new Treasury regulations came out in April, you know, we're very comfortable with the sustainability of our structure and the tax synergies that we mentioned.

Thanks for the answers.

Thank you.

Our next question comes from Michael Nannizzi of Goldman Sachs.

Your line is open.

Thanks so much.

I guess, a just -- I'll follow up on Ryan's question and then a second on the regs.

But just looking at overall organic -- you know, we can focus more on Willis for the moment, in margins, when I look at peers, margins are in the mid-20%s, organic growth has been running, you know, 3%, 4% here recently, so your organic was negative adjusting for items, or, you know, flattish.

Margins, sound like you're kind of -- if we take the International and North America in the aggregate, looks like you're looking at mid-teens margins.

Why is that?

Because I would guess -- I'm -- obviously, those margins that you're talking about are excluding the operational improvement program and other adjustments.

You know, what is that delta and how should we think about what Willis can do to try and close that gap?

Well, thanks, Michael.

Look, I think this goes back to the overall merger strategy and set-up and what we're implementing.

I can't really comment on the margin gap that you just articulated, but, you know, it's -- it doesn't sound all that dissimilar to what we were thinking about when we set the 25% EBITDA margin target for the overall Company.

We think there's opportunity there.

We think that OIP is, clearly, a great asset to have as we move towards that target, and it's producing real results.

So, you know, we do think, as you look at some comparables, that there's opportunity to enhance margin and we're on the case.

So I think that's the margin piece.

I would say, broadly, and maybe John wants to comment on this a little bit relative to our past experience, but, you know, when you look at the growth results here versus other players in the market, first, legacy Willis was moving the last couple of years organically in that 3% to 4% range.

There were some headwinds this quarter.

Some of those were, again, timing in nature, including the pipeline adjustment that we talked about, which was probably worth about a 0.5 point of growth.

So, you know, I think you consider the overall merger activity and you look at comparables and I think, you know, again, we're confident in improved growth, organic growth, as we go through the year, and, you know, while -- again, a little bit muted.

We think we're in an okay place here as we start the year.

Okay.

All right.

That's helpful.

I mean, I guess (multiple speakers) --

Roger, I guess I would just -- maybe just to follow up just a little bit of what Roger said.

When we look back as to where Willis had been over the last three years against our main competitor Willis grew at, the revenue growth was actually higher than our main competitors.

We've outlined what we think are some of the specifics for why the growth was somewhat off this quarter, but we don't expect those to be continuing issues.

I see.

I guess -- I mean, I guess my question is sort of looking at, you know, sort of the base broker model and organic growth is, certainly, an ingredient for sustainable margin expansion, you know, and so kind of looking at where you are now, you know, and given the growth has -- had worked against you and maybe even the merger, you know, some of the elements of the merger will ultimately sort of resolve themselves, but maybe there's a period of transition in between.

I'm just trying to figure out, you know, how is that -- and I get the overall EBITDA margins, but if I just look at International and North America, which is comparable to the way others report sort of the brokerage or risk business, you know.

What is that gap and sort of who's the person, the enabler that's going to kind of drive the direction of that margin back towards, you know, that sort of peer group?

Well, I mean, I guess, you know, I'll comment first.

Look, I think that we're very committed to and very focused on our integration activities, completing the OIP program and driving toward the 25% margin, and we believe that, that 25% margin is in the range of what we see competitors achieve.

The team, the operating team and our overall leadership is aligned around that goal, so we will drive towards that goal through our businesses and through our operating leaders.

And so I think -- I mean, I'm not sure exactly what you're getting at in your question, but I think it's the alignment -- you know, again, it's observing what others can do in our market and the alignment with our business leaders that's going to achieve success here.

No, I'm not -- I'm just asking -- my question is just simply to not -- it's just straightforward.

It's just sort of looking at where others with similar platforms are on a margin basis and sort of looking -- so how you guys have been trying to understand how we get from point A to point B, that's all.

That was my only question.

Okay.

And then as far as, just real quick, on the amortization, Roger, you mentioned the Willis piece, so should we then assume that starting in the second quarter, the amortization charge within Willis, that $35 million or the equivalent of that number in subsequent quarters will be excluded from the operating income number?

is that kind of what you were implying?

Yes, that's exactly right.

And, again, I'll say -- I guess we feel your pain relative to the differences between the two legacy companies, so that's why we pointed out those numbers, as we now move in the second quarter to the new segments and the way we'll talk about them on a consistent basis, all amortization of intangibles will be excluded from adjusted operating earnings.

So exactly what you said.

And we think that will provide much greater clarity year to year.

You won't have that M&A impact of intangibles interfering with the clarity of how operating margins are moving.

So --

Got it.

Great.

Thank you so much.

Our next question comes from Shlomo Rosenbaum of Stifel.

Your line is open.

Hi, good morning, thank you for taking my questions.

John, one of the rationales for the merger was the improving the Exchange Solutions trajectory; the trajectory improved dramatically actually in the quarter from expectations.

Could you talk a little bit more?

Was it participants that came in better, are you selling more services per client?

What's going on over there?

Yes.

So, thanks, Shlomo.

I think, generally, all things around Exchange Solutions were looking pretty positive there.

We did benefit from the biggest retiree client we'd ever implemented, and so that added a lot of lives, but we have now as of -- you know, as of the middle of last year, we had -- we were up to a little -- close to a 1.2, just under 1.2 million of total covered lives, you know, from 730,000 the year before.

We'll be -- you know, we'll be growing that again this year.

So the lives are going up everywhere.

We are seeing -- we're beginning to see some of the increased selling in the mid-market that we had expected.

It's still early days for that.

And I mean, I think when I went through the different revenue synergies, I acknowledged we're seeing these things for the Exchange Solutions and for some of the others, but it's still really early.

Much of those revenue synergies, we will see them in the back half of the three years, not in the end.

I think the important thing from my viewpoint, though, is how quickly we're starting to at least see some of them come in and it's very encouraging for the -- you know, for the long-term trend.

I think -- so it was really a confluence of different things, but on Exchange Solutions, we're delighted with just the growth in the retirees, in the actives and really across the board there.

Are you going to give us some forecast for this year or are we going to get that in June?

I mean, over the last few years, you've been giving that for -- when it was just Towers Watson.

Yes.

You know, generally, we've been doing that.

We'll probably do that; Analyst Day is really when we're going to have some good numbers, Shlomo.

That's what it's been the last year or two.

And the problem is you know is that the selling season, of course, for the middle market runs throughout the year pretty much, but the larger part of the middle market and the large market, it's not over til, really, June or July or sometime there.

So it's a while before we have really good information.

Okay.

And then can you give a little bit more detail on the political item that resulted in a large cancellation impacted two units in Willis; how much was that in itself a factor muting the growth?

And I'm not sure if there's anything that you feel comfortable elaborating on that to get us a little bit more comfortable we're not going to see a recurrence of that.

So let me just say this about that.

As Roger say, it was -- it probably knocked about a 0.5% off the growth rate.

It's something -- it was sort of a one-time event that caused this, we think, but we don't necessarily -- this is the kind of thing that we might even see this reversed in the remainder of the year, so we -- you know, we're not banking on that, but that's not impossible.

Okay.

It was about $10 million, Shlomo, so --

In total for both units?

Yes, split 50/50 for the two

And then for the whole year, the impact would it be expected to be $40 million?

No, no, no.

That -- this is separate matter (multiple speakers)

No, no.

(multiple speakers) It's a one-time $10 million.

One-time $10 million.

So it's a 0.5% of --

I think there's a $10 million for the whole year, yes.

Okay.

So the muted growth for the year is not specifically from, you know, an inordinate amount from this one contract?

You know, I think the muted growth is really a reflection of an overall mosaic of what's going on, and I think what Roger, I think, was trying to paint is a picture that looks like this.

We have some specific items that we can see that caused some issues here and like the pipeline and so we see that.

Whether -- even if it doesn't come back, it's not going to be a repeat during the rest of the year, so, you know, we're sort of past that in some respects there.

When we look at it -- and you saw particularly when I was going through the legacy Towers Watson, we had some very tough comparables from a year ago.

You saw a little bit of that when Roger was going through the legacy Willis things.

The comparables get easier as we go through the year.

So we're not saying that everything is going to, you know, pick up to exactly where it might have been, but overall, we're not feeling that down beat about the growth, which will if -- we think it will be a little bit lower than we thought going into the year, but we're not -- we're -- it's not necessarily that far off.

If you don't mind, just can you bridge for us what gets better in the second half because we're going from 1% growth to mid-single digits which most people would think is 4% for the whole year or above.

What gets a lot better, is it just the comps get that much easier or -- and therefore we have a lot better comps or is there something else in the numbers that are going to get better?

I think partly, the comps get better.

I mean, if you look at some of the -- let me just give you one example.

If you look at the some of bulk lump sum work of -- that was very heavy in the first quarter of calendar 2015, and, you know, faded off somewhat in the remainder of the year.

Yes.

Maybe Shlomo, just a few other things that we might have mentioned.

I think -- we're -- we think that investment will do better the rest of the year than it did in the first quarter just based on the pipeline that we see.

One of the things that I think we alluded to, we haven't really discussed in the Q&A here is the impact in Talent and Rewards, of the sale of the Human Resource Service Delivery business, so we'll lap that at some point this year.

Talent and Rewards, I think the headline numbers make it look worse this quarter than it really is, and there -- I guess, as John said, there were some tough comparables from projects they had going on at this time last year that won't repeat.

And then you do have, again, some of the timing things we mentioned before.

So I think, again, we've gone through each of the business lines, looked at them closely and we do think that this kind of muted view of mid-single-digit organic growth is really what our momentum reflects at this point.

Okay.

Thank you very much, guys.

Our next question comes from Dave Styblo of Jefferies.

Your line is open.

Hi there.

Good morning, and thanks for the questions.

Maybe I'll move off organic growth for a minute and just talk a little bit more about EBITDA, which I think did come in pretty strong, both on a dollar basis and a margin side.

So can you maybe flush out a little bit of what happened in there?

What sort of cost synergies and why you're able to sort of keep a higher EBITDA despite the top line being a little bit more challenging right now, and then maybe how do we think about that trajectory going forward?

Yes.

I think, again, the trajectory that we expect from an EBITDA margin point of view and I won't say, you know, necessarily every quarter, but given our focus, we expect gradually improving EBITDA margins.

For this quarter, particularly, one thing, and we mentioned it just briefly in the script, that was a little bit stronger than our forecast and led to some of the margin enhancement, again, versus what we expected is Gras Savoye came in stronger in the first quarter than expected.

Some of that was just due to some revenue accounting comparability between the two firms.

So we haven't changed our view on the full year of Gras Savoye and they're coming in nicely.

But it did give some acceleration into the first quarter.

You know, I think otherwise, OIP savings are flowing in, I think the team was attentive and you might recall that if you follow the -- both the legacy companies, there was cost activity going on as we entered the merger in both companies.

And we're seeing a benefit of that, so I think otherwise there's disciplined operating activity going on.

I mean, we did mention, again, and it is unfortunate with the project cancellation that we mentioned earlier, if you look at the two parts of legacy Willis that were the furthest advanced in the OIP program, both North America and GB are seeing a benefit now in their margins of OIP.

Unfortunately, in GB, because of the cancellation, it's not as visible as it otherwise would have been.

Okay.

And Roger, just I guess the other thing, to make sure we're clear about, is, you know, quarter one and quarter two, to a lesser extent, are seasonally strong for EBITDA.

So -- and for margins, and that's true in a lot of the legacy Willis segments.

It's certainly true in the Exchange Solutions which is, you know, quite heavily weighted that way.

So while we expect to have strong margin performance throughout the year, the strongest part of it is this first quarter and, to a lesser extent, the second quarter.

Sure.

Okay.

Maybe you can also talk about the OIP and are you sticking to sort of the gross savings target that was originally out there?

I think it was $150 million -- excuse me, $150 million for this year.

If that's the holding, can you tell us what you expect the net savings to be?

Because I think thus far sort of on the legacy Willis side, we've seen the growth savings come, but a lot of it was being put back in.

So I'm wondering when the inflection point comes where shareholders get a chance to see more of the return of those gross savings hit the bottom line?

So I think, look, the OIP is one of the single most important things we're focusing on right now is to make sure that those savings do indeed drop to the bottom line.

And it's a -- it's one of the major focuses of the operating committee is to make sure we see those go through.

And we're going to be looking very, very carefully at any reinvestment and try to maximize the amount that drops through.

We'll probably, I think I mentioned earlier, we'll be able to give you more color around that as -- at the Analyst Day in September, but that is one of the two or three major focuses of the organization at this point.

Okay.

And then lastly, maybe getting back to your capital deployment plans, I know there was sort of a commitment to start to repurchase shares in the second half of this year.

It sounds like maybe you're a little bit more balanced of keeping some dry powder for M&A.

Can you talk about what sort of do you expect your share repurchases to look like?

I don't think, at this point, you have an authorization, so maybe you could remind me about that.

And also, if you want to touch upon the free cash flow outlook, I think we were hoping to get a little bit more visibility on that as you think about things with the -- not only for this year, but going forward over the next couple of years as those one-time expenses roll off and what you think your underlying free cash flow power can be in a couple of years?

Okay.

So thanks very much.

Let me just start off addressing that.

So, look, when we -- we're -- we didn't mean to signal any change from anything we've said before.

What Roger was saying is, we expect to have, you know, a few hundred million dollars available in the second half of the year which is, I think always what we had talked about.

This formulation that we've said, you know, that -- what we want to do is maximize shareholder returns.

Generally, if we can find a very attractive acquisitions, that's the -- that's probably the way we could do that best, and we would -- we're always looking to do that.

But as a practical matter, there's no way we're going to do any kind of, really, major acquisition in the first year or year-and-a-half of this merger.

We have work to do there.

Even a more modest acquisition, if there was something that was a unique property that if we didn't buy it now, there wouldn't be an opportunity to buy one like that, you know, in the future, we might consider something like that.

But in general, you know, we're going to have higher standards for doing any acquisitions.

But our overall approach has always been acquisitions are first, but we're -- we have some high standards for doing that, so it's hard to find them.

And then after that, we want to return the cash to shareholders.

I think the -- our free cash flow is going to be the major source of how we can do that, and we're looking to, in general, deploy a lot of our free cash flow over the coming years to be doing share repurchases.

We don't need any kind of a specific authorization from the Board.

We don't need any new authorization; we have about $500 million authorization that already exists, and so whatever we would be thinking about doing this year we're already set for that.

Our next question comes from Kai Pan of Morgan Stanley.

Your line is open.

Yes, good morning.

Thank you.

Most of the questions have been answered.

I just want to touch upon the -- so basically, senior management team as well as the producers on the ground.

What's the employee morale through the integration process and what is the volume in turnover rates?

Okay.

So I think one of the things that has gratified the whole management team and the -- and our Boards, we were discussing with them, is the very positive reaction we have had from our colleagues around the world to this merger.

And I think, unlike some other mergers I've been involved in, in the past where you're -- when you're buying firms where there's a lot of overlap, sometimes there's angst among folks as to, you know, what their new position is going to be within the new organization.

With Willis Towers Watson and the relatively limited overlap we had, we've seen, I think, more energy and excitement among colleagues at an earlier stage than we ever have before.

We are -- we have been looking at our turnover statistics.

There's nothing out of the ordinary.

In fact, if anything they're a little bit lower than I might have expected.

I think that, you know, we expect that we'll see normal turnover.

I was prepared for turnover, actually, especially maybe last year between announcement and the closing to be a little bit higher than usual.

We did not see that and I think that, again, goes back to the enthusiasm that our colleagues around the world have had for this.

That's great.

Last question.

If you could talk about what's the foreign currency exchange impact for the quarter as well as the potential Brexit potential impact on your business?

Okay, Roger, do you want to start off with the currency impact?

Well, yes.

I mean, I think it was in the script that there was about $50 million, a little over $50 million of FX impact on the revenue line.

I don't know that we gave any PS impact, but it would -- it was -- it would be modest.

And just to note going forward, you'll note that our guidance on FX is a little bit lower than where the Pound and the Euro are now, so, you know, there's probably a single-digit, from an EPS point of view, single-digit kind of sense, potential upside if rates stay the way they are now.

That's great.

And then --

And so I guess, just on -- sorry, I was going to answer on Brexit.

Yes.

So just on that I think, you know, like everyone else, we are -- we're following the debate there, and there's -- some people are concerned about the impact of some uncertainty in the UK, although I think the uncertainty leading up to the vote is probably as great as anything that they would see to.

We see basically some cons and some pros.

The London insurance market could see some premium declines accelerate, the -- you know, the insurance centers could move elsewhere.

On the other hand, their added complexity in the market place is, in general, something that's good for consulting firms and for brokers.

There's -- there would be issues around any -- if people did move wiggle entities or capital or staffing, that would create opportunities for us, you know, in particular, it could benefit CRB and HCP.

So, I think there would clearly be some short-term dislocations.

We generally feel that when there are dislocations in the market, it favors companies that are agile and nimble and flexible and we like to think of ourselves that way.

Great.

Well, thank you so much for all the answers.

Thank you.

Okay.

Thank you.

We're going to take one more question.

And our last question comes from Tim McHugh of William Blair and Company.

Your line is open.

All right, thanks.

Squeezing me in there at the end.

So just some, I guess, numbers questions.

The -- kind of the other revenue part of Exchange, you talked about, has very strong growth.

I that project revenue or is that kind of the addition of new clients; in other words, a recurring type of uplift that we saw in that piece of the business?

Yes.

There's almost no real project revenue in Exchange Solutions.

The -- it comes from collecting the commissions or other fees paid for the employees, but there's not a lot of special project revenue at all.

Okay.

Tim, I just mentioned, you know, it's, to some extent, maybe the main driver, the continuing success in Health and Welfare Administration business and the new clients, as we've been talking about over the last year or so.

Okay.

But, again, that is good.

Those are usually -- Tim, those are like long-term deals where we'll sign up the client, you know, for a five-year deal or something like that, and every once in a while if there's a big law change, that part of the business might have some a -- special projects, but relatively rarely.

Right.

That's why I was asking the question, where I didn't know if ACA was driving a bunch of change orders or something like that.

All right.

And then you talked about the seasonality of acquisitions here more on the legacy Willis side.

Can you help us at all then with the rest of the year?

How much -- just because we don't have the history there, I guess, in terms of 2Q versus the second half as we think about those businesses, I guess how much maybe first half versus second half typically?

I'm sorry, first half versus second half for --?

For Gras Savoye, more specifically.

It's the Gras Savoye and the seasonality there, Roger.

On the revenues?

Yes.

Yes.

I think, you know, it's certainly over 50%, you know, probably reasonably over 50% in the first half and pretty much all the profit is in the first half.

Okay.

Thanks.

I would now like the turn the call over to Mr. John Haley for closing remarks.

Okay.

Well, thanks, everyone, for joining us this morning, and I look forward to talking to you on the Willis Towers Watson earnings call in August.

So long.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.