Willis Towers Watson PLC (WTW) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second-quarter 2016 Willis Towers Watson earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Aida Sukys. Ma'am, please begin.

Thanks, Howard. Good morning. This is Aida Sukys, Director of Investor Relations at Willis Towers Watson. Welcome to the Willis Towers Watson earnings call.

On the call today are John Haley, Willis Towers Watson's 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 404-537-3406, conference ID 49073928. 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 statements, investors should review the forward-looking statements section of the earnings press release issued this morning, 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 our most recent annual report on Form 10-K and quarterly report on Form 10-Q and in other Willis Towers Watson 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 to the most directly 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 second quarter of 2016 and provide updated guidance for the full year of 2016. We'll also provide consolidated 2016 and certain pro forma 2015 financial results.

Our segment results for this quarter are presented based on the new Willis Towers Watson structure. We provided historical Willis Towers Watson segment information in an 8-K filed on July 14, 2016.

We're pleased with our performance this quarter in a business environment that had some challenges. Reported revenues for the quarter were $1.95 billion, which includes $31 million of negative currency movement on a pro forma basis. Adjusted revenues, which includes $26 million of deferred revenues, were up 11% on a constant-currency basis and 5% on an organic basis. Commissions and fees were up 3% on an organic basis.

Net income attributable to Willis Towers Watson for the quarter was $72 million, as compared to the prior-year pro forma net income of $114 million. Adjusted EBITDA for the quarter was $406 million or 20.6% of adjusted revenues, as compared to the prior-year pro forma adjusted EBITDA of $401 million or 22.1% of adjusted revenues.

The second quarter is a seasonally weak quarter due to the low level of renewals for some lines of business, primarily related to Gras Savoye and Miller, where they had very strong renewals in the first quarter. Portions of the consulting and administration businesses also have weaker performance in the second quarter of the calendar year due to seasonality.

Adjusted EBITDA for the first half of 2016 was $1.077 billion or 25.4% of adjusted revenues, as compared to pro forma adjusted EBITDA for the first half of 2015 of $979 million or 25.6% of adjusted revenues. Due to the seasonality quarter-over-quarter, we believe the first half of calendar 2016 is a more meaningful indicator of performance.

For the quarter, earnings per diluted share for $0.51, and adjusted diluted earnings per share were $1.66.

Before moving on to the segment results, I'd 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're making very good inroads in the three areas of revenue synergies we've outlined in our previous communications: global healthcare solutions, the midmarket healthcare exchange, and the US large-market P&C sector. We've won another nine global healthcare solution clients, and the pipeline continues to look very strong.

Turning to the midmarket exchange, we've won a number of new clients, with approximately 70,000 eligible lives for implementations this year and continue to see the pipeline build. To provide some context to the 2017 wins, Willis, acting as our channel partner last year, sold approximately 9,000 lives for all of 2016.

Lastly, in the US P&C large-company space, we've been awarded 10 new projects so far this year.

We're certainly off to a strong start, but we continue to believe that our revenue synergies will be much more heavily weighted to 2017 and 2018. As we've mentioned last quarter, most of these wins will not have a significant impact on our 2016 financial results. However, we're very pleased with the progress to date.

Now moving on to the tax and cost synergies, we continue to be on track to achieve our original goal of a 25% tax rate a full year ahead of schedule. We continue to expect to exceed this goal longer term.

We originally estimated merger cost synergies of $100 million to $125 million by the end of 2018, and believe we're on track to achieve this goal. As noted last quarter, we plan to save about $20 million in calendar 2016, with an exit run rate of about $30 million.

Next, I'd like to move to the operational improvement program, or OIP. Incremental savings from the OIP were approximately $97 million from the second quarter of 2015. We incurred an incremental $16 million of restructuring cost in this same time period.

We plan to spend approximately $165 million in 2016 and remain committed to saving $325 million by the end of 2017. OIP continues to be on track. We'll have more detailed information regarding margin impact at our Analyst Day in September.

Now let's look at the performance as well as our revenue and margin expectations of each of our segments. On an overall constant-currency basis, commissions and fees for Human Capital & Benefits increased 3%; Corporate Risk & Broking increased 9%; Investment, Risk & Reinsurance increased 7%; and Exchange Solutions increased 47%. All of the revenue results discussed in the segment detail and guidance reflect commissions and fees constant-currency, unless specifically stated otherwise.

Okay, so now let's look at each of the segments in more detail. Turning to Human Capital & Benefits, or HCB, HCB generated growth of 3% driven primarily by the Gras Savoye acquisition.

On an organic basis, commissions and fees were flat. Retirement commissions and fees were up slightly due to strong demand in Great Britain, which was offset by the expected decline in the US revenues with the decreased demand for bulk lump-sum project work. Talent & Rewards commissions and fees were down, as the number of M&A transactions and special projects slowed year-over-year.

Health & Benefits services continued to see strong demand among the US large companies. And as I mentioned earlier, the global benefits solution business has strong momentum. Technology and administration solutions, or TAS, continued to produce solid results due to increased project and call center demand.

We continue to have a positive outlook for the HCB business for the rest of 2016. The demand for bulk lump-sum projects and one-time annuity purchases has been picking up, and we expect greater activity for the second half of the calendar year.

Talent & Rewards generally has easier comps and a promising data services pipeline. We also continue to expect growth in the Health & Benefits and TAS businesses.

Turning to Corporate Risk & Broking, or CRB, commissions and fees grew 9% from the prior year largely as a result of the Gras Savoye acquisition. On an organic basis, commissions and fees grew by 1%.

In North America, commissions and fees were down slightly after a strong first quarter. Retention levels were strong, but we experienced lower levels of new business as compared to last year.

Great Britain produce solid results as the P&C and financial lines led our growth. The International region had modest growth despite a challenging quarter for both China and Brazil. Western Europe had solid organic results given the environment, and Iberia was particularly strong, growing mid-single digits as a result of new business.

We expect CRB to show growth in the second half of the calendar year. We've seen some slowdown in the emerging markets, but generally we see a good pipeline around the globe, even if it is a bit softer than a year ago. While we don't believe the North America new business level show any secular change in the market, we'll continue to monitor this closely.

Now to Investment, Risk & Reinsurance. Commissions and fees grew 7% for the quarter, driven by the acquisition of Miller Insurance Services, which is performing in line with our acquisition assumptions.

Organic commissions and fees declined 4.5%, primarily due to a continued decline in demand for risk consulting projects, lower demand for investment advisory services, lower profit sharing on certain insurance contracts, and a slowdown in capital markets. Capital markets commissions and fees are closely tied to the number of insurance-related M&A transactions, and we've seen a significant slowdown in transactions year-over-year.

Reinsurance commissions and fees were flat, as the international market and the specialty business did quite well but new business was soft in North America.

We anticipate some growth in the second half of the year as comparables get a bit easier for the IRR segment, and we may be seeing a slight increase in demand for reinsurance due to the recent losses noted by many of the carrier' this past quarter. However, we expect most of the market headwinds related to this segment to continue for the rest of the calendar year.

As discussed in the last earnings call, JLT paid a $40 million settlement in quarter 2 related to the fine arts and jewelry team departure. The settlement was included in IRR's total revenues as other income. This item has not been adjusted out of GAAP earnings, and this is consistent with historic practice.

Lastly, Exchange Solutions followed up the strong first quarter with another outstanding quarter, with commissions and fees of $154 million, an increase of 47%. On an organic basis, the Exchange Solutions segment grew by 43%.

Driven by record enrollments, our retiree and access exchange revenues increased 48%, and the other Exchange Solutions businesses increased 44% and 36% on an organic basis. Increased membership and new clients drove the revenue increases.

Our health and welfare administration business is growing primarily as a result of the unprecedented new business won over the last two years.

I'd also like to provide some comments regarding the selling season for the 2017 enrollment period. We had a strong selling season and expect to enroll over 300,000 retirees and active employees onto our exchanges. In the retiree space, a little over 100,000 retirees are expected to enroll for 2017.

Now, we had a record enrollment last year as a result of the state of Ohio, and we did not anticipate duplicating the 2016 enrollment levels. While we aren't enrolling the retirees in a large state or municipality this year, we continue to feel confident in this market in the long term. However, we would also expect that the enrollments in this market will have some volatility from year-to-year.

In the active space, we sold approximately 200,000 lives, with one client opting to enroll for 2018. We anticipate enrollment growth of approximately 80% to 100% year-over-year.

I previously mentioned the success we've had in the midmarket in the very short time since the merger. I'd add one comment to my previous statements regarding the midmarket environment. It appears that the adoption rate in the midmarket has accelerated, and we feel that this is sustainable.

We continue to see strong interest from the large market, and we've had some success in winning a few large clients, but the pace of adoption continues to be slower as these organizations are still taking more time to make decisions. We can't predict the inflection point in this market, but the value exchanges provide to both the employee and employer is quite impactful, and we continue to expect the large market to be a significant part of the overall exchange market.

We expect the second half will be strong, but we will not have any significant off-cycle enrollments this year, so the second-half commissions and fees growth rates will be lower than we've seen year-to-date. In the exchanges other, we continue to add new administration clients but have strong comparables in the fourth quarter, so we would expect commission and fee growth rates to normalize for this line of business as well.

I'm encouraged by the quarterly results, the strong collaboration we're experiencing at a grassroots level, the commitment to the integration efforts, including the revenue synergies, and of course the continued focus on our clients. I'd like to thank all of our colleagues for their hard work in helping shape this organization for long-term success. Now I'll turn the call over to Roger.

Thanks, John, and good morning, everyone. I'd also like to add my thanks to our colleagues for all their hard work.

Prior to the merger, in a previous call I talked about the unique opportunity we had to create a powerful organization which would be stronger than what we could have achieved as individual organizations. Now that we're into our eighth month of integration, I'm happy to say that we're seeing clear development of these merger synergy focus areas.

We have confirmation that the enhanced global footprint and large market relationships are having a positive impact on our global benefit solutions business. We're seeing some early success in utilizing the US midmarket distribution network for our healthcare exchange, and we've had some early wins in the large-market P&C space.

And our cost rationalization efforts are bearing fruit. There's still a lot of hard work ahead of us, but seeing the collaboration among our colleagues and the market activity make me optimistic that we are creating the powerful organization that we envisioned.

Now for our financial results. As a reminder, our segment margins are before consideration of unallocated corporate costs such as amortization of intangibles, restructuring costs, and certain integration expenses resulting from mergers and acquisitions. The segment results include discretionary compensation.

Income from operations for the quarter was $136 million or 7% of revenues. The prior-year second-quarter pro forma operating income was $170 million or 9.4% of revenues.

Adjusted operating income for the quarter was $357 million or 18.1% of adjusted revenues. In the prior-year quarter, pro forma adjusted operating income was $347 million or 19.2% of adjusted revenues.

Income from operations for the first half of 2016 was $462 million or 11% of revenues. The prior-year first-half pro forma operating income was $553 million or 14.5% of revenues.

Adjusted operating income for the first half of 2016 was $1 billion or 23.7% of adjusted revenues. And the prior-year first-half pro forma adjusted operating income was $884 million or 23% of adjusted revenues.

During the quarter, we recognized a net $6 million currency gain, as shown in other nonoperating income. This gain is driven by the reversal of a currency loss recognized on certain balance sheet positions in the first quarter.

The GAAP tax rate for the quarter was 21%, and the adjusted tax rate was 25%.

Before we discuss the segment operating margins, I'd like to remind you that we provided recast segment operating income for the prior periods in the 8-K we filed on July 14, 2016. Additionally, our segment margins are calculated using total segment revenues.

For the second quarter, the operating margin for the Human Capital & Benefits segment, or HCB, was 15% as compared to pro forma 20% last year. Commission and fee declines in Talent map Rewards and quarterly timing in the midmarket Health & Benefits business and in incentive costs drove the second-quarter margin lower than the prior year. As a reminder, the North America midmarket Health & Benefits business placed a greater number of their policies in the first quarter this year, depressing the second-quarter results.

For the first half of 2016, the HCB segment operating margin was 24% as compared to 26% in 2015. We anticipate the HCB segment margin to be in the low 20% range for the year.

For the second quarter, the Corporate Risk & Broking segment, or CRB, had a 19% operating margin as compared to a pro forma 22% in the prior year. For the first half of 2016, the CRB operating margin was 19% as compared to 17% last year.

As a result of the heavy weighting of commissions and fees for Gras Savoye in the first quarter, the seasonality of the quarterly margin has changed as well. We anticipate CRB's operating margin to be around 20% for the year. The team is focused on balancing the expense base against the current revenue environment in order to drive margin enhancement.

For the quarter, the Investment, Risk & Reinsurance segment, or IRR, had a 25% operating margin. The margin included the $40 million JLT settlement relating to the fine arts and jewelry team departure. Without the legal settlement, IRR's operating margin would've been 17% for the second quarter or flat year-over-year.

The increased margin was a result of the legal settlement and the Miller acquisition, which were partially offset by the decline in commissions and fees in the risk consulting and software and investment businesses. Inclusive of the legal settlement, we expect the IRR segment margin to be around 20% for the calendar year.

Exchange Solutions' operating margin was quite strong at 20% as compared to 8% in last year's quarter. For the first half of the calendar year, the Exchange Solutions segment operating margin was 22% as compared to 11% last year.

For the quarter, the retiree and access exchanges led the segment with a 45% operating margin, with margins being flat to down for all other lines of business. We continue to invest in the actives exchange. Margin on the administration business is generally soft for several quarters as new clients come on the platform.

For 2016, we expect the Exchange Solutions segment margin to be in the midteens. As a reminder, margins are seasonally higher in the first half of the calendar year as compared to the second half of the year, due to our enrollment season. Costs built up prior to the open enrollment, but commissions and fees are recognized over the year once the policies become effective, which is typically January 1.

Moving to the balance sheet, we continue to have a strong financial position. During the quarter, we successfully issued our first public Euro bond, a EUR540 million six-year issuance.

This transaction completed our debt restructuring plan for the year. A portion of the bond proceeds were used to pay off the remaining balance on the $1 billion term loan facility we entered into in November 2015.

We also reinitiated our stock buyback program in June. Through August 1, we've repurchased $100 million or approximately 805,000 shares. We anticipate repurchasing another $200 million by the end of December for a total repurchase of $300 million for the 2016 calendar year.

Free cash flow was $265 million this quarter and $335 million for the first half of the year. Free cash flow is generally expected to build through the year.

Now let's review our guidance for fiscal-year 2016 for Willis Towers Watson. We expect to incur approximately $150 million to $175 million for integration and transaction related items. Our deferred revenue add-back adjustments were completed in the June quarter. Integration and transaction related expenses and restructuring costs will continue to be adjusted from our GAAP measures.

In fiscal 2016, we expect reported revenue growth to be around 7% and constant-currency revenue growth to be around 10%, with the primary drivers being the Miller and Gras Savoye acquisitions and the Exchange Solutions segment. We're bringing organic revenue growth guidance down to a range of 2% to 3%.

Although the second-quarter organic growth was quite solid at 5% overall and 3% for commissions and fees, we continue to see headwinds and lag where we expected to be. This new range reflects the market environment we've seen in the first half with some expectation of slightly improved commission and fee organic growth in the second half due to pockets of improved business momentum and areas of better sequential and year-over-year comparisons.

We continue to expect GAAP operating income margin to be around 8% and adjusted operating income margin to be around 20%. We believe the various cost-reduction programs underway will allow us to keep this margin in line with previous expectations.

In calendar 2015, pro forma GAAP operating income margin was 10.5%, and pro forma adjusted operating income margin was 19.3%.

The GAAP tax rate for the year is expected to be in the 10% to 11% range, and the adjusted tax rate is expected to be in the 23% to 24% range.

We expect GAAP diluted EPS to be in the range of $2.48 to $2.68; adjusted diluted EPS is expected to be in the range of $7.60 to $7.80, which is down from the previous guidance of $7.70 to $7.95. Guidance assumes average currency rates of $1.38 to the pound and $1.11 to the euro.

Overall, I'm very pleased with the integration efforts, including the early wins that relate to our revenue synergies, the focus on margin growth, and our continued progress in streamlining and reporting. Now I'll turn it back to John.

Thanks, Roger, and now we'll take your questions.

(Operator Instructions) Greg Peters, Raymond James.

Good morning, and thanks for hosting the call and taking our questions. I have three areas I'd like to focus on: competitive positioning, the OIP, and EBITDA guidance.

First on competitive positioning, could you provide some additional color around how you see where the Company is, considering the recent results from some of your peers and what looks to be some of the challenges you reported, like in legacy Towers Watson in the second quarter?

Yes. Let's see, focuses specifically on the legacy Towers Watson there, I think we see some challenges in Talent & Rewards, as I mentioned. Specifically, that's -- that is obviously the most economically sensitive of our businesses there and tends to go up and down. As we've seen a cutback on M&A and on some other projects, that has impacted where we are.

We don't feel that we're losing out, necessarily, to the market at all. I just think we see the market as being a little bit slower.

We do feel pretty good about -- that we think we'll see a little more of a pickup there. We have easier comparables, and we also see maybe a slightly improved pipeline for the second half of the year.

So while it's down, we don't feel that we're losing any market share, and we feel that we continue to be well positioned there.

I think in the risk consulting and software and in the investment part of the business, those are both ones that have seen some challenges in the last couple of years really, and I think we continue to see them undergoing some challenges.

Now the risk consulting and software is not one that our major competitors really have, so we don't have any direct comparables there. But we do see a decline in a lot of the risk consulting projects.

The software piece of that business is doing relatively well, but the consulting part of the business we're just seeing less of an appetite for that among our clients. And I would say that, again, it's not so much that it strikes us that we're losing market share there, as that we just see the market being softer than it had been.

In the investment part of the world, we don't run the Funds of Funds, and so we don't have a direct comparison again to some of our competitors. But we are seeing a decline in some of the consulting projects around that, and so we're seeing more of a focus to some of our delegated investment, which I think is the growth area that we see. But a large part of our business has been consulting, and we do see some softness there.

If I look at the rest of the businesses, whether it's legacy Willis or legacy Towers Watson, yes, I think we see some ups and downs. I think in general we're within a percent or so of where the market is going -- with the maybe exception of Exchange Solutions, which has just had a fantastic first half of the year.

Great color. Thank you. On the OIP -- oh, go ahead.

Yes, I think --

Yes, I just wanted to circle back on your comments on OIP. I know you previously said that you're on track to get the $325 million savings, but I know that a lot of it's been spent or invested so far.

Can you give us an update on what you might expect to harvest in savings over the next two years, of that $325 million?

Yes. That's a subject of intense study by us right now. And I think, Greg, we'll really be -- we're really targeting next month when we have the Analyst Day to present a detailed analysis of that.

But I think that it's safe for us to say that I think we're changing a little bit -- well, no, we're changing a lot the focus of OIP to say what we're concerned with is not what the cost reduction is. What we're concerned with is what the margin improvement is. So we'll be prepared to address that next month.

Perfect. Just I'm going to use that to dovetail into the EBITDA issue. It looks like the guidance is just a tad lower than where it was before. I'm curious if that changes the calculation or the calculus on the debt and the rating agency discussions.

And more importantly, ultimately we're trying to reconcile EBITDA with your longer-term target. I think it was 25% by the end of 2018. So any color there would be helpful.

Yes, I'll let Roger address that.

Yes, just to the first question, no impact on any rating agency matters at all. And in terms of the goal, as John said, we will be talking about the levers to get to the goals by 2018, and we're still focused on that and creating the structure internally to drive to that.

Great. Thanks for the color.

Bob Glasspiegel, Janney.

Good morning. A quick question on the reinsurance organic guidance, just making sure. We knew about the JLT settlement when you gave the prior guidance; so I assume we're not factoring any lost revenues from departures in the revised lower guidance. It's other factors that you cited.

Yes, I think that's right. Of course there is a lot to IRR, and John already talked about the legacy Towers Watson risk and financial services piece. There's no revision in that guidance related to the departure of the fine arts and jewelry team, or no change at all really with respect to that matter.

Just clarifying that you don't look to see any significant revenue loss from the departures. You can replace that with new hires, or is that a mild --?

No, what I'm saying --

No, that's already in there is what we're saying. It was already in there previously.

Right, right. And what is the revenue impact from the departures? Is it material?

I think it's about $10 million. Is that right?

Somewhere in that neighborhood.

Or is it about $20 million a year -- $20 million revenue.

Yes, yes. $20 million, about $20 million.

Okay. That's helpful; thank you. The free cash flow operations in the quarter was roughly $300 million from your cash flow statement. What were the big drivers in improvement there in the quarter?

Well, I mean I think it's -- so if you're looking sequentially, of course, we paid incentive comp in the first quarter. So for --

I was looking more year-over-year. It was $300 million versus $70 million.

Yes, versus even $7 million, I think. When you're looking at the comparative cash flow statement, that's just the legacy Willis cash flow statement. So the biggest difference is really the consolidation of the companies and the free cash that's been added as a result of the merger.

There weren't any significant items in and out that distorted the operating trend to cash flow?

No. I mean it's -- no, just the performance of the business and what you would expect in the June quarter from the legacy Towers Watson business. So no distortion.

Thank you.

Elyse Greenspan, Wells Fargo.

Hi, good morning. First question, in terms of your guidance, what are you including for currency on earnings for the back half of the year? And also what was the currency impact in the Q2? And what had you been assuming for currency, I guess, in your prior earnings guidance?

Yes, I mean I think that's the rates -- I don't have the rates in the prior. Obviously, the pound is down; the euro is about the same. I think it was -- I think we're at $1.11 and it was $1.11.

Offhand -- I don't have it. Are you asking for what the rates are that are assumed in the second half?

No, I'm just asking what bottom-line impact on EPS are you expecting in the second half of the year.

Yes. We'll have to get back to you on that, Elyse. We don't have that at our fingertips.

Okay. Do you know what the currency hit was in the Q2 on earnings?

It was about $31 million.

Okay, great. Then in terms of the margin, just going back into the EBITDA margin for this quarter in particular, so if you back out the JLT gain you probably get close to about 400 basis points of deterioration when you look to last year. I know you said that there is some seasonality from some of the legacy Willis acquisitions.

But can you just go into more detail, I guess, on what -- outside of just those two acquisitions -- is really driving the margin deterioration? And how I guess you expect that to flip as you move -- expect margin improvement in the back half of the year and as you go towards that 25% target.

Yes. That's why we gave you the six-month margins. For six months, the margins were either slightly up or about the same as last year, so that illustrates the seasonal timing impact.

It's really, as we said in the first-quarter call, the Gras Savoye revenues came in -- about 70% of their revenues came in in the first quarter, so there is extreme seasonality that drove that. Again, as we said in the script, we think the six-month margin numbers are more indicative of where the Company is.

Okay. Then on the organic, the outlook for the risk and brokerage business for the second half of the year, it's implying some level of improvement versus half-year 1. I'm just curious how you think about that business evolving on an organic basis, especially as you look to legacy Willis, the results there.

You get a little bit tougher comps in the second half of the year. So what's driving the organic improvement, in your mind?

This was in IRR you're asking about?

No, CRB.

Yes.

In CRB.

Yes, it does imply a little bit better second half. There are some areas where there is a pipeline that supports that growth level. There are areas where the difficulty in the first half or even the first quarter won't be repeated.

For instance, we talked last quarter about the South Stream project that was a one-time write-off. There are also areas where seasonality of growth actually in the last couple years has been stronger in the second half.

So while it's not a big pickup, there are several factors that drive that expectation.

Okay. Then one last question if I may. You guys started repurchasing stock probably a little bit earlier than we were expecting. Yet I noticed in your guidance the share count stayed the same. How come? (multiple speakers)

Yes, we have this odd phenomenon based on the merger close that, because it closed on January 4 actually -- and talking plus 1 million shares here. But the count was a little bit lower than the real run rate coming into the merged Company in the first quarter.

So we're now on the path where, given the share repurchases we talked about and now that the timing has normalized, we'll be seeing downward impacts to the share count.

Okay. Thank you very much.

Quentin McMillan, KBW.

Hi. thanks very much, guys. I just wanted to ask about the operational improvement program. John, thank you; it seems like you're going to give, obviously, a lot more color at the upcoming Investor Day, so look forward to that.

But can you just clarify something? It seems that you just said you're not focused on the cost-reduction but what the margin improvement is. Am I reading correctly to assume that you are thinking that revenue synergies and top-line boost from potential gains from the operational improvement are what you now are focusing on, and that the underlying expense savings are not necessarily what's going to drive the margin improvement?

No, no. That wasn't what I meant to say. What I meant to say was that we don't see getting a cost reduction by itself as the -- we don't see that as the end game. What we see as the end game is getting margin improvement.

So what we want to look at, at the OIP, is to say: How does this result in margin improvement? And that's going to be what our focus is.

Okay, great; appreciate that. Then second question for you, John. People are now looking out to your own compensation metric of [10-10] in 2018 as the longer-term guidance. I know you guys haven't necessarily put that out there, but that's what some are talking about.

So I just wanted to lay out a baseline of holding the macro flat. If we live in an environment with a 2% GDP, the 10-year stays around 2%, inflation is constant, and the P&C rates stay in this negative a couple hundred basis points maybe: is that an environment where you feel confident that you're going to be able to drive towards that 10-10 number in 2018? Or is there something that maybe needs to break to the upside for you to reach that?

No, look. I think one of the things we knew when we were putting together Willis and Towers Watson was that the first year we would have some puts and takes and it would be a little bit messy. And we were in some ways in a difficult environment.

But frankly, all the different possibilities that are there from the merger, whether it's revenue synergies, cost synergies, tax synergies, whatever, we think all of those things provide tremendous upside. So I continue to be bullish about the prospects.

And as I told investors from the beginning, this is a three-year project for us. It's one of the reasons why we put together the compensation plan the way we did and focused on those metrics. And I continue to be positive about hitting them, so I'm still focused on that.

Great. If I could just -- very quickly for the guidance in terms of the 2% to 3% organic growth, are we assuming that that $40 million is in the total organic growth number? The 2% to 3% you are giving is total, it's not commissions and fees organic growth? So the $40 million JLT will be in there?

That's right. That's right; it's total revenue.

Okay. Thanks very much, guys.

Dave Styblo, Jefferies.

Hi, good morning; thanks for the questions. Just want to talk about the areas of weakness and get a better understanding of what you guys think is under your control versus what's market-related. We heard a lot of threads between China, a soft M&A markets, some discretionary spending that happens by employers for legacy Towers business. It seems predominantly market-related; but I just want to get a sense of the potential improvement, not so much for this year but also next year, in terms of what you think you can do to change and improve the organic growth profile of the Company.

Yes. Let me just talk about that at an overall level there. I think, as you mentioned, when I was responding to the question about the legacy Towers Watson I said, to the extent we see some areas that are underperforming, we have a sense that it's the market and not so much specific things going there. One of the things that makes it a little bit difficult is in some of those areas, like risk consulting and software, we don't have natural competitors that are public companies to look to, to see what the market is.

But our overall sense is just that the market is down there. And we've been through this; we see some ups and downs. We have areas like our own Talent & Rewards that are very heavily dependent on the economy overall. So we see those going on.

We have similar areas like that in -- from the legacy Willis part of the business. So when we look at the capital markets area there, that's a small area but it's one that is very sensitive to the amount of insurance-related M&A transactions that are going on.

For comparison, last year there was $110 billion in M&A transactions in the insurance space. So far this year there's been $10 billion; that's a pretty big difference, and it's one of the reasons why that has contributed to a decline in the IRR this year.

I think when we look at it, there's a couple areas where we are trailing the market. I think if we look at our Corporate Risk & Broking and if we look at the reinsurance, we're a little bit lower than the market there. I think in both cases we look at those as it may be in some cases a portfolio effect.

So for example, I think the International, which has been the real source of growth for Willis versus the market over the last several years, that's the area that's particularly down this year. So that may affect us more than some of our competitors.

But I think it's safe to say that we're probably a percent or so below them this year. We don't see anything that's structural. We think that some of that is related to just some goings-on in the business that we expect to reverse themselves, and we expect to be growing at about the level of the market or better in 2017.

Okay, that's helpful. On the exchanges, just to make sure I square the numbers right, so I think you said 300,000. Was that all for 2017? Because I think there was also a comment about one of the employers or one of the clients was going to be landing in 2018, and wasn't too sure what the impact of that was.

Then also while on the exchanges, should we expect margins to rise consistently from here on out year-over-year as the business starts to scale more? I'm just trying to juxtapose that against comments about continued investments in the active side of the business.

Yes. I think what we had said was we do expect to enroll about 300,000 in total.

And those are not total covered lives, those are just actual employer employees, right?

Well, actually what I should have said is we've sold 300,000 in total that we will be enrolling in both 2017 and one of them that's going to be deferred to 2018. One of the big ones that's deferred to 2018 is about 60,000, so it's a big case that is deferred.

Got it; okay. And then lastly, just on bridging the EPS a little bit, I guess $0.13 decline at the midpoint; certainly I would imagine it's the organic growth is driving the vast majority of that. Are there any one-timers on the positive side? Whether that be FX, because I think the way the currency moves that actually benefits your earnings; although my understanding is you also have some hedges in place. Not sure if that mitigates it.

But is there a bit of a bridge you could provide us so we have a clearer understanding of the $0.13 drop at the midpoint?

Yes. I think as Roger said we'll get out some more detail on the actual currency effects and everything. I think we do have some hedges which take about, I don't know, 70% or 75% or so of the difference there. It's something like that.

Yes. Specifically the pound sterling is pretty much offset when you take the hedges into consideration. I think the big driver, as you said, of the downgraded guidance is the organic growth expectation.

Yes. And I think if you look at it, look, in the first quarter we had revenue growth. Initially we had said it was going to be in the mid-single digits, and we said it was going to be muted; and so then we were in the lower end of that. That's because it was down to about 3% to 4%. Now we're looking at it and saying actually it's probably going to be closer to 2% to 3%.

So we wanted to come out with some specific numbers this time, but I think that's the overall effect. We have gone back and done a -- and Roger alluded to this -- we've gone back and done a reforecasting exercise to look at what are reasonable revenue growth expectations. We feel pretty comfortable about that 2% to 3%. We think that's a pretty good number.

Okay, thank you.

Tim McHugh, William Blair and Company.

Thanks. Just to follow up on the exchange, two questions. One, I guess -- sorry, I was a little confused. The 300,000 includes the 60,000 that's deferred into next year?

That's correct. Yes. Sorry, Tim. We were talking -- the 300,000 is the total we sold. And this client has signed up for 2018 already, so we've already done that. But it does include everything, yes.

Then the 80% to 100% growth, what piece was that referring to?

That was the enrollment growth in the active space year-over-year.

Not including the 60,000 because that will take effect in --

That's correct, not including the 60,000. We'll still have the 80% to 100% growth.

Okay. On the retiree side, I get you're not going to have an Ohio every year. But how do you feel competitively you held up?

Were there just not opportunities? Or was there any change in the competitive dynamics in terms of competing for some of the larger retiree opportunities?

No change in the competitive dynamics. There was not any big case like the Ohio case or even one any remotely close to that this year. So, yes, we feel like we continue to have by far the strongest offering in the retiree exchange space.

Okay. Then last question, just turnover. Where has it trended year-to-date, I guess? More so, I guess besides just the overall turnover number, any sense of how meaningful the turnover is, I guess, in terms of key individuals.

Yes. I think overall, frankly, the turnover has been lower than I would have expected. We were running I think for last year or so a little over 10% involuntary turnover, and we're actually running just under 10% now, which -- I used to think in terms of when we were in just the consulting area, whether it was Watson Wyatt or Towers Watson, I used to think of maybe 10% to 12% voluntary turnover rate as being about the right level. And I think there's probably more turnover in the brokerage market generally, so I would have expected that to be somewhat higher.

So I think coming in at just under 10% -- we're at 9.8% or something like that now -- is a little bit lower than I'd expected. So that's where we feel about that overall.

When we look at the -- there is obviously seasonality. So we noticed this in the old Towers Watson days: you get more turnover after you've just paid bonuses than you do there. We continue to see that; no particular changes there.

And I think when we look at specifically where we've had some competitors try to target some of our individuals, one of the things we do is we prioritize those. We don't to necessarily try to respond to every raid on an employee like that, and we target the ones that we think are the real high-value employees.

We've been very successful at that, and we've continued to hold on to the ones that we really wanted to.

Okay, great. Thank you.

Mark Marcon, RW Baird.

Good morning and thanks for taking my question. With regard to the Exchange Solutions, can you just talk about that midmarket pipeline and what your expectations would be for continued sales through the balance of this year that can go into effect in 2017? And then I have a follow-up question on a different area.

Yes. I don't have right off at my fingertips here, Mark, the relative numbers for the second half. But the midmarket is different than the large market in that you can continue to have sales that occur up until almost the November time frame and still implement them. But by far the bulk of it will occur in the first half.

So I don't have all at my fingertips whether it's like 80% occurs in the first half or -- it's probably something like that. But we'll get you those numbers.

I would think it's safe to say, though, that the bulk of the sales have already occurred by far, although there will be some continuing. I think I made a comment in the script to say that we look at the midmarket as saying that it's accelerated and that we feel that that's sustainable. That's based on our talking with clients, our seeing what's happening to the pipeline.

So I don't think we're expecting to see -- we've had a terrific first half of the year in terms of selling this. We're not predicting any decline in the second half as a result of that. We think we're going to continue to see the midmarket being an important source of new business.

Can you talk just about the existing clients in terms of their experiences, what client retention rate you're currently running? What are the savings that you are currently experiencing?

Also, to what extent do you think the ACA, all the work that went into getting ready for 1094s, 1095s may have distracted people from putting in place exchanges for this year?

I think in terms of the overall savings, we can see that vary significantly. It can vary based on the specific geographical distribution of the employers. It can vary based on what kind of plan they are coming from, whether they already had a plan that, for example, had high deductibles or what other features they might have already had built into it.

Generally, we look at saving between 5% and 15% for the employer. Although often what will happen is the employers will probably give about two-thirds of that back to -- or about one-third of that back to the employees and keep about two-thirds. So when they make the exchange it's a win-win for both the employer and the employee in terms of the cost aspect of that. That's been something that we've seen since the beginning, and we're not seeing any change in that overall.

I think in terms of the adoption rate, it's hard to say exactly what -- whether people are distracted by some of these other ACA things. I tend to think that that's not the case.

I think we have seen, as I said, the midmarket pick up. In fact if you're thinking about employers that might be distracted more, you might think that actually it's the smaller one that would have more of those distractions. So I don't think that's what we're really seeing there.

I do think we're seeing the natural conservatism of larger organizations continue to be a factor in the marketplace. But we are seeing the smaller ones adopting it somewhat more enthusiastically than they did even a year ago.

Great. Then can you just comment with regards to your UK business? Bank of England just took down their growth forecast. So to what extent do you think the UK, your overall portfolio of UK businesses, are cyclically sensitive?

Yes. I think the whole impact of Brexit -- of course we did that call the other day -- or I guess it was last month after Brexit and went through that. And I would say that we really don't have any change in views or necessarily guidance from then to now.

When we look Brexit, I think it's a hodgepodge of both pluses and minuses. And when we look at our overall exposure, for example in Corporate Risk & Broking, the overall CRB revenue exposure is about 7% of our revenues. So it's not like we see that that is the biggest deal in the world.

If markets were to move from London to elsewhere, it's not clear that we're disadvantaged by that. In fact, we might even be advantaged depending on where it were to move to. So I think there's nothing that we see now that we say this is necessarily a problem for us.

I think even at the senior levels of our Company, we have differing views as to the impact of Brexit overall. Some of us have -- I've been relatively relaxed about the notion of Brexit. Some other people are more concerned about that.

But I think overall we don't see the movement of the B of E today isn't anything that was unexpected, and I don't think it changes our overall guidance.

Great. Thank you.

Okay. I think we'll take one more question.

Kai Pan, Morgan Stanley.

Thanks so much for fitting me in. Just on the free cash flow usage, how much do you plan on spending on deleveraging the balance sheet and merger and acquisitions as well as buybacks? Is that -- can you spend most of your -- would rating agencies have issues for you spending most of your free cash flow on return to shareholders?

A number of angles in there. Maybe just to hit the last one, everything that we're doing has been part of the communications with the rating agencies. So we've been managing that in parallel, and there are no issues there.

With respect to the usages ultimately of free cash for the year, as we've said we expect another couple hundred million of share repurchases at this point, and we continue to evaluate that quarter-to-quarter based on how the Company performs. So that's where we are for right now.

Are you considering any deleveraging or like are there going to be any -- on the merger front as well?

No, I think as we -- we're in the same mindset that we talked about I think last quarter, which was stabilizing the rating agency metrics around the level that support our current rating. There are a lot of angles to the rating agencies' calculations, but it doesn't imply significant deleveraging.

Okay; that's great. Last one if I may, it's just like press a little bit further Quentin's earlier question. If organic growth is going to be slower than you currently expected going forward, are there other levers you can pull on the expense side, will enable you still be able to achieve your $10-plus by 2018?

Well, I don't know, I'd --

I think, look -- we think that -- we have plans to get to the $10-plus level even with modest organic growth. So we remain confident about hitting that.

That's great. Thank you so much for the questions.

Okay; thanks a lot. Thanks, everybody else, for joining us this morning and I look forward to talking to you at Analyst Day in September.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.