Willis Towers Watson Public Limited Company (WTW) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 4 2013 Towers Watson Earnings Conference Call. My name is Sally, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Aida Sukys, Director of Investor Relations. Please proceed.

Good morning. Thank you, Sally. Welcome to the Towers Watson earnings call. I'm here today with John Haley, Towers Watson's Chief Executive Officer; and Roger Millay, our Chief Financial Officer. Please refer to our website for this morning's press release. Today's call is being recorded and will be available for replay via telephone for the next 2 weeks by dialing (617) 801-6888, confirmation number 63669286. The replay will also be available for the next 3 months on our website. This call may include forward-looking statements within the meaning of Section 21 of the Securities and Exchange Act of 1934 that involves risks and uncertainties. For a discussion of forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking results, investors should review the Forward-looking Statements section of the earnings press release issued this morning, a copy of which is available on our website at www.towerswatson.com, as well as other disclosures under the heading of Risk Factors and Forward-looking Statements in our most recent Form 10-K and our other 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. During the call, we may discuss certain non-GAAP financial measures, such as adjusted EBITDA, adjusted net income and adjusted earnings per share. For a discussion of these non-GAAP financial measures, as well as a reconciliation of these non-GAAP financial measures under Regulation G to the most closely comparable GAAP measures, investors should review the press release and the accompanying financial tables we posted on our website this morning. After our prepared remarks, we will open the conference call for your questions. Now I'll turn the call over to John Haley.

Thanks, Aida. Good morning, everyone, and thank you for joining us. Today, we'll review our results for the fourth quarter of fiscal 2013 and our guidance for the first quarter of fiscal 2014, as well as discuss some of our high-level expectations for the full year of fiscal 2014. Reported revenues for the quarter were $875 million, an increase of 6% over prior year reported revenues and up 4% on an organic basis. On a constant currency basis, revenues increased 7%. Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures. Our adjusted EBITDA for the quarter was $169 million or 19.3% of revenues. The prior year fourth quarter adjusted EBITDA was $161 million or 19.5% of revenues. For the quarter, diluted earnings per share were $1.16, up 27% and adjusted diluted earnings per share were $1.36, up 9%. We're pleased with the overall results this quarter. While we've had some challenges in this difficult economic environment, the overall performance of the underlying business was strong. As we look at our accomplishments this fiscal year, a number of key milestones stand out from both an operational and market perspective. This year marked the official end of our merger and integration efforts with the completion of the implementation of the finance and HR ERP system. We accomplished the implementation on budget, on time and achieved our synergy goals. We enhanced our client development group outside of the U.S. to better align our organization with our multinational and global clients and expanded our global footprint into rapidly developing markets such as South Africa, India and Russia. We also had some great successes in the market this year. We led the market in helping companies with the derisking activities related to bulk lump sum projects; increased membership in the Retiree exchange by more than 80% during fiscal year 2013, exceeding our expectations on both revenues and profits; and launched OneExchange, our integrated health insurance exchange solution for active employees. We can't talk about our success this year without mentioning the integration of Extend Health as it more than exceeded our expectations. The underlying client service cultures of Extend Health in Towers Watson were very much alike, and the value proposition of the Medicare exchange was immediately recognized by our consulting businesses. The acquisition of Extend Health helped reposition our company into a high-growth area with outstanding results. It was also the catalyst for launching OneExchange. We've been very pleased with the response we've received from our national carriers, our clients and prospects. We've just completed a great sales season for the OneExchange offering for the 2014 enrollment season. Two clients will be utilizing our active exchange, and we expect that we'll be providing coverage to approximately 40,000 lives. Another very large employer will be utilizing our access exchange with plans to cover approximately 30,000 lives. We've been extremely pleased with the continued market demand for our ExtendRetiree offering. Last year, we enrolled more than 145,000 lives, and we anticipate the fall 2014 enrollment season to be even stronger. We'll also be offering our own 6,500 U.S. employees and their family members health care benefits through OneExchange this enrollment season. We're very proud of the OneExchange offering. Our consultants have worked closely with our national carriers in designing health care options that align closely with our clients' needs. As I look back at our accomplishments this year, I'm extremely proud of our associates. The teamwork they've shown in working through the ERP implementation and working across lines of businesses, developing thoughtful and holistic solutions for our clients has been exciting to see. This is exactly the culture we had hoped to foster as we form Towers Watson. On behalf of our senior leadership, I'd like to thank our associates for a great year. Now let's look at the performance of each of our segments. On an organic basis, Benefits grew 5%, Risk and Financial Services decreased by 5% and Talent and Rewards grew 2%. On a pro forma basis, Exchange Solutions grew 89%. For the quarter, the Benefits segment had revenues of $494 million. Benefits segment revenues were up 5% on a constant currency basis. All geographic regions showed solid revenue growth. Retirement revenues increased by 6% on a constant currency basis with 6% growth in both the Americas and EMEA regions. Valuation work deferred from the third quarter, as well as some bulk lump sum projects helped drive revenue growth in the U.S. this quarter. Higher commissions from Germany and legislative issues in Ireland helped drive revenue growth in EMEA. We did not expect the volume for bulk lump sum projects to be as high in FY '14 as it was in FY '13 and the work related to legislative issues in Ireland was completed as of June 30. Technology and Administration Solutions increased by 10% on a constant currency basis, primarily due to new client work in the U.K. and Germany. Health and Group Benefit were roughly flat on a constant currency basis as the refocusing of resources on designing and building an active employee health care benefit exchange dampened project activity. Going forward, the Benefits segment should show low single-digit growth, led by Technology and Administration Solutions and with Retirement experiencing more challenging comparables. Now let me turn to Risk and Financial Services. For the quarter, the Risk and Financial Services segment had revenues of $186 million. Revenues were down 5% on a constant currency basis, driven by Risk Consulting and Software. Risk Consulting and Software revenue declined by 14% on a constant currency basis. This line of business incorporates both software and consulting and the offerings posted very different results this quarter. Software revenues, which comprises about 17% of this line of business, increased by 9% on top of 17% growth in the FY '12 quarter 4. Consulting services, on the other hand, saw a sharp decline in discretionary client projects this quarter in EMEA. Consulting revenues were also down in the Americas, primarily due to a strong comparable when compared [Audio Gap]. Globally, clients continue to be cautious with discretionary spending and there's very little M&A work in the insurance space at this time. Brokerage revenues grew by 8% on a constant currency basis. Revenue increases were driven by strong renewals and new business wins. Investment had 5% constant currency growth, led by the Americas. All its regions experienced growth this quarter. We continue to feel confident in the investment pipeline. Overall, we believe that Risk and Financial Services has moved into a more challenging environment. We anticipate discretionary spending continuing to affect the Risk Consulting and Software line of business. However, we see the investment business continuing to deliver strong growth. Now let's move on to Talent and Rewards. For the quarter, the Talent and Rewards segment had revenues of $132 million, with revenues up 2% on a constant currency basis. The increase was driven by Rewards, Talent and Communication and the Data, Surveys and Technology lines of business. Rewards, Talent and Communication's revenue growth was driven by demand for communications work related to health care reform and other benefit changes in the Americas. Data, Surveys and Technology revenue growth was primarily related to software implementations in the Americas. Executive Compensation revenues were flat on a constant currency basis. Increased regulatory and governance activity in EMEA drove an increase in demand, which was offset by some slowness in Asia Pacific and the Americas, which is in a steady environment. We're seeing a pickup in several of the practice areas, including Data, Surveys and Technologies, with strong demand for technology solutions. The second half of the fiscal year is generally seasonally slower for Talent and Rewards. And last, I'd like to move to the Exchange Solutions segment. For the quarter, the Exchange Solutions segment had revenues of $35 million. On a pro forma basis, assuming we owned Extend Health for the entire fourth quarter of fiscal year 2012, revenues grew by 89%. A strong enrollment season and a higher-than-expected retention rate helped drive membership levels to approximately 400,000. These factors contributed to exceeding our FY '13 revenue estimates. We feel very confident in the Exchange Solutions business and completed another very successful selling season. We had a strong fourth quarter and successful fiscal year. I'm excited about the engagement levels of our associates and what that means for the long-term future of our business. Now I'll turn the call over to Roger.

Thanks, John, and good morning to everyone. I'd also like to add that I'm pleased with our fourth quarter results, which topped off a year of great accomplishment for Towers Watson. John noted many of these accomplishments, but I'd like to acknowledge 2 items that stand out for me: the successful completion of the implementation of the global ERP system; and the aggressive billing and cash collection effort, which allowed us to fully offset the receivable reserve challenges experienced in fiscal '12. The success of these efforts highlights the culture of teamwork and passion for delivering results that cascades throughout our organization in all aspects of our daily work, be it consulting projects or internal initiatives. I'd like to express my thanks to all of our associates who worked so diligently this year in helping us achieve this success. Now let's turn to the financial review. As a reminder, our segment margins are before consideration of discretionary compensation and other unallocated corporate costs, such as amortization of intangibles, resulting from merger and acquisition accounting costs. For the quarter, the Benefits segment had a 34% NOI margin, completing a year of record profitability. Risk and Financial Services had a 15% NOI margin. This is primarily a result of our top line challenges in the Risk Consulting and Software line of business, but we did incur some unplanned initial restructuring costs this quarter as well. Talent and Rewards had an 11% NOI margin in what is seasonally a softer quarter for them. Exchange Solutions had a 51% NOI margin. Net income attributable to controlling interests for the quarter was $83 million, adjusted net income was $97 million. The tax rate for the quarter was 34%, a bit below our forecasted rate of 35% to 36%. Moving to the balance sheet. We continue to have a strong financial position. At June 30, we had $461 million in cash available for our use. For fiscal '13, our free cash flow was $453 million as compared to $192 million for fiscal 2012. The year-over-year increase of $261 million or 136% was mainly a result of the collection of client receivables and the wind down of the IT and ERP system projects, resulting in lower integration costs and fixed asset purchases. We had no borrowings outstanding from our credit facility at the end of the quarter. We paid down the $135 million balance that was outstanding at the end of last quarter. During this quarter, we did not purchase -- repurchase any shares. Now let's review our guidance for fiscal 2014. Today, we'll provide you with fiscal year 2014 first quarter guidance, as well as some context for our full year fiscal 2014 outlook. As a reminder, we'll provide full fiscal year guidance at our Analyst Day on September 20. One note before we review our Q1 guidance. Starting July 1, we've aligned our segment receivables reserving methodology with our GAAP reserving methodology in an effort to better align management reporting with GAAP reporting. This is also a step to streamline our accounting process as part of the completion of the ERP deployment and our focus on process improvement. This does not have an impact on the fiscal year '13 quarterly or annual total company results, but does have a minor impact on fiscal year '13 segment reporting. In order to put fiscal year '13 segment revenues on the same basis as our new fiscal year '14 reporting, we estimate that fiscal year '13 quarterly revenues would fluctuate less than $10 million, negatively or positively, and the margin impact for the smaller segments may differ by 1 or 2 percentage points. On an annual basis, we estimate that the total segment revenue impact would be less than $5 million, and margin changes would be negligible. Year-over-year segment analysis going forward will incorporate the new reserving methodology for both fiscal '14 and fiscal '13. We'll provide quarterly and annual schedules that reconcile the impact of the new segment reserving methodology at Analyst Day. For the first quarter of fiscal 2014, we expect revenues will be in the range of $850 million to $870 million. On a constant currency basis, this correlates to a growth rate of 3% to 5%. We expect adjusted diluted earnings per share to be in the range of $1.15 to $1.20. Our EBITDA margin is expected to be around 18%. Please note that due to the completion of the integration efforts, we'll no longer be making adjustments to our EBITDA measure for reporting purposes. For the first quarter, our guidance assumes an average exchange rate of USD 1.50 to the British pound and an average exchange rate of USD 1.30 to the euro. For the first quarter, we expect the income tax rate to be around 35%. There are potential onetime adjustments, which could conclude in the first quarter and significantly lower this tax rate. We expect average diluted shares outstanding to be about 71 million. GAAP diluted earnings per share will continue to be lower than our adjusted diluted earnings per share. However, this difference will continue to narrow somewhat now that the formal integration and transition period is complete. There will no longer be an adjustment for transaction and integration expense or merger-related stock-based compensation. Going forward, we'll continue to adjust for amortization of merger accounting intangibles and meaningful acquisition-related stock-based compensation. Now we'll review our fiscal year 2014 first quarter guidance for the segments. We expect constant currency revenue growth in the Benefits segment to be in the low single digits. As John noted, the Retirement business faces very strong comparables in fiscal '14 due to the bulk lump sum activity in fiscal '13. The NOI margin for Benefits is expected to be around 30%. Next, in the Risk and Financial Services segment, we expect constant currency revenue to decline by the mid-single digits. We expect the NOI margin to be in the mid-teens. We expect margins to be increased during the year as Risk Consulting -- Risk Consulting Services realizes the benefit of steps it has and continues to take to realign their businesses to reflect the current marketplace. In the Talent and Rewards segment, we expect constant currency revenue growth to be in the 2% to 5% range. We expect the NOI margin to be in the low to mid-20% range. Lastly, in the Exchange Solutions segment, we expect revenue growth of around 145%. The prior year first quarter included a deferred revenue -- write-off of $6 million, which was required by GAAP purchase accounting rules. We expect the NOI margin to be in the low single digits. As a reminder, Exchange Solutions' profitability is seasonally low in the first half of the fiscal year, particularly in a year like fiscal '14 where they have very significant enrollment activity. For fiscal year 2014 overall, we're expecting the levels of organic growth and EBITDA margin to be similar to fiscal year '13. Our comparables will be a bit challenging in the first half of the year in the Benefits segment due to the prior year performance of the Retirement business and in the Risk and Financial Services segment due to the performance of investments. While the economy appears to be stabilizing in Europe, we continue to manage that geography with caution. We're also cautious about potential economic slowdowns in Asia and particularly in China. As John mentioned, we continue to see some very positive momentum in Exchange Solutions and expect our Retiree exchange to maintain that momentum. We've been very pleased with the initial interest level for OneExchange. Overall, I'm pleased with our performance for the quarter and the year. It was a year of challenges, whether it was completing integration, consulting in the dynamic landscape of the Affordable Care Act or facing an uncertain global economic environment. As John mentioned previously, it took a great deal of teamwork to produce these strong results given these challenges. While not all the challenges are behind us, they've made us a stronger company, and we're well positioned for long-term growth and even greater successes. Now I'll turn it back to John.

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

[Operator Instructions] First question comes from the line of Ato Garrett.

I had a question on -- you're looking at the pension liability and how that changed Q-on-Q. We thought that might actually come down a little bit further given how some of the assets have performed and the increase in discount rates. I was wondering if you can shed any more light on that.

Well, I mean it came down quite a bit and so we did have good asset performance and, the discount rate is up. And I guess I can't say much more than where we landed reflects those changes. The other thing I will say is that the balance of funding overall for the plans has also driven up the asset side of the balance sheet and so that is in -- reflects one of the changes in other assets. So perhaps that's a part of -- in that mix, a part of what's not -- you're not seeing relative to what you hope for.

Okay. And also relating to the related expense given -- the changes in the related expense relating to the increase in discount rate, is that going to have any impact on the '14 margins?

Well, it will drive pension expense down for fiscal '14 relative to '13. And it's not enough to drive kind of order of magnitude change in the margins, but that is a benefit that we have going into the year.

And that can be offset by a reevaluation of our expected return on investment, too.

The next question comes from Ashwin Shirvaikar.

I guess, my question is -- I guess, my first question is with regards to the Benefits business. I know on a year-over-year basis the bulk lump sum business creates a tough comp challenge. Having said that, could you talk about sort of the longer-term potential from that trend because it seems to be quite a significant source of potential long-term upside?

Yes, I think that's right, Ashwin. And as you know, we were very cautious about just projecting too much from the big blip up we had in the middle of the fiscal year as a result of all the bulk lump sum activity, but did say that we thought there was -- that this was something that would be a feature of landscape and we would see more employers looking to do this in the future. We still think that. I think we are -- we're still seeing projects -- we're still selling projects today, bulk lump sum projects, and there is an underlying level of activity that is still there. It's not nearly as high as it was in the second or third quarter, but there is still bulk lump sum project work. We're continuing to see employers do that even today. And I think as market conditions fluctuate, I think we'll see some -- maybe even see some spikes up in future years.

So you see that more as a response to market fluctuations then?

Well, I think that helps is what happens. But I mean I think the fact that we're seeing an underlying basis of bulk lump sum projects even occurring in, say, this quarter and moving forward gives you an indication that it's an activity that's probably here to stay for a while. And if conditions are particularly ripe in the quarter, you might see a blip up.

Okay, perhaps you guys can quantify at Analyst Day. Wanted to ask also about visibility into sort of Risk Consulting recovery. And failing a recovery, if results continue to be like this, would you consider strategic options potentially?

No. I think the Risk Consulting and Software, when we look at that, it's got a lot of challenges right now, particularly in Europe. And a lot of that has been affected by the starting and stopping of Solvency II. I think that's been -- that's created a sort of a weariness, I think, among the insurance companies about just a lot of that activity. And as they've stopped it, they haven't turned to other projects. We haven't seen a lot of M&A there either. So all of that has meant that, particularly in EMEA, Risk Consulting and Software, the consulting part of it is facing quite a challenging environment. What we're focused on right now, and we've already taken some initial restructuring steps and everything, but we're focused on getting to the kind of margins we've had in the past. But this is a business that we're committed to and all of our businesses have some ups and downs from time-to-time and we just deal with them.

Okay, understood. Last question, use of cash. You paid down the debt. I guess, you could get one of these notes again for '14 related to comp. But beyond that, I mean what's the use of cash? You did not really do a stock repurchase this quarter, M&A. I mean, could you talk more about that?

Yes, I'd say looking forward, while we don't have anything specific to say right now as we look at fiscal '14, we do see that we have more free cash flexibility and flexibility based on what's on the balance sheet. And that while the ordering of our priorities, emphasizing flexibility per acquisition opportunities remains our first priority, we would expect in fiscal '14 to enhance return of cash to shareholders. But again, nothing specific yet on that.

The next question comes from the line of Shlomo Rosenbaum.

John, it seemed to me that you were a little bit surprised by what happened in RFS in terms of the revenue just not coming in. Was there -- were there projects that you guys had that you were expecting to hit in the quarter even when you guys reported your earnings call last time that just kind of came back to you and were delayed? Can you just give us a little bit more detail on that?

Yes, I think Shlomo, that there were some projects, particularly in Europe that were -- that we had anticipated that didn't go forward with clients. But overall, there just wasn't some -- as much new business coming through either as we thought. As we look at this, we don't think that this is something that is as much a Towers Watson issue as it is a market issue. So in other words, we think the market in EMEA for this type of work is just very slow right now. And as best we can tell, as we look at some of our competitors, they're experiencing similar kinds of issues. So I think it's just the kind of thing we'll have to manage through, but I don't think we're unduly worried about just what our offering is or anything like that. We feel confident in the longer run future of the business.

And if I understand your comments correctly in terms of making sure you have the business to be the size that you want it to be, is this similar to the situation you guys had a few years ago with Talent and Rewards and you just kind of reassessed what the demand was going to be and you kind of planned appropriately. It took a few quarters to work through that?

I think it's exactly like that. That's what -- as I thought about it, Shlomo, that's exactly the way I've approached it.

Okay. And then how much of the Benefits growth was from valuation work that was deferred from the prior quarter into this quarter?

It's a little bit hard to tell. I had asked Gene Wickes, who's the Head of Benefits, for a rough estimate of that and he'd said about 0.75%. So it's in the low -- mid-single-digit millions of dollars probably.

Okay. And then Exchange Solutions seems to be like knocking the cover off the ball. And last week, you guys announced the contract with the CMS. Can you talk about potential addressable population size that's incremental to you through that contract? And anyway you can quantify, I know it's very early stages, but at least some populations that you think are now able to be addressed by you guys?

Well, I think in terms of the populations that we could potentially address, I mean we tend to focus, obviously, on the larger employers. That's where we think we offer the greatest advantage for them. We don't have any really good estimates of exactly how many people we think are going to move into the exchanges or potentially be addressed by those. But we think depending on what kind of movement there is among employers to exchange, we expect to get a large portion of that market. We think we have an extraordinarily competitive offering. And so when we look at what large employers are looking for in the exchange market, we expect to do very well there. The kind of thing we signed with the federal government facilities, that's something that again we think we're a bit of a leader in terms of providing this.

Okay. So it's kind early on is what it sounds like for that?

I think it's early on. I mean, the question is, Shlomo, we have the ability, we believe, to ramp up to as big as the market gets for any of this. We don't think -- obviously, if every employer decided to switch in 2015, we wouldn't be able to handle that but we think the market will develop over time. And we expect to be able to handle a very large portion of the market.

Okay. Just a couple of questions for Roger and I'll get off. Free cash flow expectation for fiscal year '14, are there any major pension contributions in cash this year?

Well, we'll continue to make pension contributions. They may be a little bit lower in '14 than in '13. But I think in terms of overall free cash flow, we would say that we should now be in the stabilized post-integration mode of expecting free cash to be somewhere in the neighborhood of adjusted net income.

And then the $160 million sequential step-up in non -- other noncurrent assets, did that have to do with adjustments in the pension assets?

Yes, it did.

And the next question comes from the line of business Tim McHugh.

First, I wanted to go back to some of the comments about the Exchange business and more so the Retiree business. You threw out some numbers there that went by me pretty fast, but I thought you said 145,000 people you added last year to the Retiree. And if I heard correct, you expect to add even more in the upcoming enrollment period. Did I get those things correct?

Yes, you got those correct.

Okay. And then for the active employee options, I guess, can you give us a little more color on the -- I know you won't tell us the names of the clients, but were these existing Retiree clients? Are these people looking at it for the first time and then Exchange Solution first time? I guess just some more color on who you're attracting to the Exchange.

Yes, so if we look at this, we have 3 clients that are the Actives or the Access. The Actives are going to be about 40,000 covered lives. The client that is in the Access has about 30,000 covered lives. We -- 2 of the clients are new to Towers Watson and one was an existing client.

Okay. And as we think about the growth, is 400,000 roughly the right base level for the existing number of enrollment?

Yes, it is. For the Retiree exchange.

Yes.

That's the number, that's right.

Okay. And then just one last question. The impact on the health benefits consulting business, can you elaborate a little bit more, was demand weaker or was it just that you didn't have the supply of people because they were busy, I guess, doing non-billable time helping people think through the exchanges?

Yes, I mean we think we deployed a number of our consultants in HGB on the design of our overall -- the design of OneExchange, in working with the carriers to design how that was all going to operate and then in talking to clients about exchanges and what they might want to consider there. So we saw that, that's one of the reasons we didn't have the same kind of growth in HGB as we've seen in some of the more recent quarters. I think we'll see that occur. We still had very good profitability in HGB of course, so we kept that up. But I think we'll see some of that occurring throughout the remainder of this calendar year and maybe even throughout the remainder of the fiscal year. But the HGB, that part of it is a very big part of the exchanges in really driving a lot of the intellectual capital around that.

So does that mean you would expect -- that you wouldn't expect much growth out of that piece because they're going to continue to -- they have to talk to a lot of clients about this?

It's one of the reasons, yes. As we talked about the growth rate for the benefits overall, that was reflected in there. A little bit lower growth for HGB as a result of that.

The next question comes from the line of Jeff Volshteyn.

Just following up on Extend questions. Can you just, from a high-level perspective, can you help us understand the relative economics of you participating in private and public exchanges as well as some announcements that came out recently that some insurance are leaving federal exchanges? What are some of the dynamics there? If you can just give us a little color, that'd be helpful.

Well, Exchange Solutions is not really -- exchange Solutions is something that offers -- it doesn't deal with the federal exchanges or anything like that. These are where clients come in and are electing to go through our exchange and replace usually their Retiree medical plans. And it's not affected by some of those dynamics.

And then the difference in the economics perhaps between the active and retiree market, are you able to sort of quantify, I know it's early, but what are the directions there and perhaps maybe the selling cycles?

Well, I think the actives are -- will be part of the OneExchange platform that we have. That's what we mentioned we're starting in 2014 -- as of January 1, 2014. We have first few clients we're going to implement for that in 2014, and then we'll be expanding that -- beyond that. The selling season for 2015 has probably already started now, and so we're beginning to talk to clients about what they might want to do there. For the Retiree exchanges, as we mentioned, we've now finished the selling season for 2014 and we're beginning to implement them. We expect to implement more this coming year than we did last year. And so we feel pretty confident about our offerings in both cases.

That's helpful. And just a clarification question on 2014, Roger. Should we think about the amortization adjustment for 2014 to be similar to that in 2013 or there are some changes there?

Boy, I would say broadly, on the amortization of the intangibles, I would expect it to be similar. To be honest with you, I haven't specifically looked at that. As we get into the next few years, we probably will start to see some of the specific intangibles that we're amortizing. They didn't all have-- they do not all have the same lives, so some will start to drop off, but I don't think there's a significant drop in '14. But I'd have to go back and look at that more specifically if that was important.

Let me perhaps rephrase it, your indication of margins, EBITDA margins, to be similar, is that on a GAAP basis or adjusted basis?

Well, so yes, and I'll apologize for the intricacies I suppose of our P&L. But one of the key points I think that I said is that there will no longer be adjustments that will affect the EBITDA line. So EBITDA is for fiscal '14 is GAAP EBITDA. Because the main adjustments integration costs and the stock-based compensation, those both ended in fiscal '13.

The next question comes from the line of Tobey Sommer.

Curious how you would see a little bit higher interest rate environment impacting the business?

I think the one thing you think about with the higher interest rate environment is pension plans get better funded. And there's some question as to does that lead to more settlements or maybe there's some more bulk lump sum. The lump sums are a little bit cheaper. I think, one of the things that happens though is that even though the -- it's really the opportunity cost of what happens versus offering lump sums versus what you could do if you kept the money yourself. So I'm not sure if that changes a real lot. But we might see a little bit more in the bulk lump sum issue.

Roger, what do you think the opportunity is to improve the tax rate? And where we might be able to get it in a few years?

Yes, where the tax rate has been and will be going has been very dependent on specific integration type activity that gives the opportunity to drive the rate down. So for those of you who have been watching closely, and I recognize maybe not everybody watches taxes all that closely, but we have seen a nice gradual decent in what we expected for the steady state tax rate over the past year, maybe 1.5 years. We think that will continually -- we'll continue to gradually see that decline in the steady state into the next couple of years, I guess, I'd say. Legacy Watson Wyatt had run, I don't know, I'll say, and this is without specifically looking at it, but maybe around 33% or so. That's something that we had early on in the integration had hoped that we could get the rate down to that level. But we seem to be on our way, but we're not ready to say that that's an achievable steady rate. One of the problems, of course, with the tax rate is you have kind of a steady state underlying rate and then every year, you have one-off things that either push that up a little or push it down. So this year's rate was a little lower, this year being fiscal '13 because we did have, if you recall, in the second quarter, a positive adjustment as a result of the consolidation of legal entities in Australia. Don't know if we'll have another item like that or if we'll have an item that pushes the other way next year. Other than, as I said in my remarks, there are some items kind of maturing here in the September quarter that give pretty significant upside actually to the tax rate. So long way to say volatility, but over the next couple of years, we continue to hope for some gradual continued improvement.

One question on the exchange business. You mentioned that the selling season for 2015 has already started, perhaps for the OneExchange in terms of conversations. Is that earlier than it had been when you first focused more exclusively on retirees, or is that a similar sort of time line to how conversation evolved headed into the selling season?

No, what I was referring to is that, obviously, implementations are close for 2014 at this point. So any discussions you have now of necessity have to be for 2015.

The next question comes from the line of Mark Marcon.

I'd like to ask a little bit more about the Exchange Solutions. So you've obviously had very strong growth there. We've got a ton of questions with regards to Exchange Solutions, so despite the fact that you've done a couple of presentations on it, it's still not well understood. As it relates to the Retiree side, can you talk little bit about what you've seen thus far as you brought clients on board? Can you talk about whether or not you're bringing entire clients en masse in terms of if you sign the client if all of their retirees switch over all at once, or are they coming over in segments? And you gave us a projection for this first quarter, but can you give us a sense for what sort of investments you're making in that area that would give us a sense for when we have the next step up?

So, let's see, I guess what I'd say about the -- first of all, when we bring the clients on, generally we're bringing on all of their retirees. Although if you have clients that have different populations like we've talked with clients about bringing on their hourly employees different than the salaried as sometimes they're covered by different plans, so that might occur. But generally, we're bringing them on all at once. I'd say there's 2 things that have -- we've seen from this. One is the very high quality in the deliverables. We have -- what we got with that Extend Health brought to us when we joined our organization and what we have now in extend solutions -- Exchange Solutions is extraordinary quality processes that really drive the whole process. And that resulted high levels of satisfaction among the employers -- among the retirees and then hence among the employers. One of the things that's great about us is we could use any one of our clients as a reference for other clients. So that's something that we're really proud of, and it's something that we look to take forward as we expand this. We've had -- we had some pretty high growth projections when we brought Extend Health into the family here and we've exceeded those. It's going to be -- I don't think we're going to continue to grow at 89%, so we'll see that coming down somewhat. But we have, by far, the largest share of the market here, and we actually think we can expand on that.

That's great. And is your sense of the addressable market as it relates to the Retiree side any different than what you thought it was a few months ago? And how quickly that addressable market would get converted over to Exchange Solutions? How has that evolved?

No, I think the addressable market is not really any different than we thought it was to begin with. I do think one of the things that -- this is a business where if you get a large client in a year or 2, it can make a significant difference. So we think there's an underlying growth rate that we can get year after year. And then if you get a big client on top of that, it really bumps it up. And that's what's happened in each of the last couple of years is we've had a few big clients, extra big clients, come in that have really helped us. And I think -- but I do think there's a good size underlying growth rate that will continue.

Great. And then it sounds like on the active side, it sounds like things have evolved a little bit faster than what you initially indicated. Can you talk a little bit about what's going on there in terms of having 3 clients that are signing up in one form or another?

No, I think we're really pleased with that because it's about the right level for us to make sure. As I mentioned, one of the things we're committed to is making sure that we continue with the high-quality deliverable, and with very high satisfaction among our clients. So these are 3 good-sized clients that we can work on delivering them to, and we think that it will provide a great base for us to expand from in the future. And of course, we're doing it for ourselves, too.

Sure. And then can you talk a little bit about the CapEx for this coming year relative to the last fiscal year? Obviously, you've gone through the integration with the Towers Perrin side, so that's all set, but it sounds like you're expanding quite a bit here.

Yes, I don't -- we'll talk about that, more specifically, in September at Analyst Day. But I don't expect any significant increase at this point over what we had in fiscal '13. Probably a little bit higher, but not as high as it was in fiscal '12.

Great. And then 2 quick ones, with regards to Risk Consulting and Software there, is it your sense that because of the fits and starts on Solvency II that, that situation is likely to continue for the foreseeable future and therefore we just need to rightsize it? Or is it -- do you sense that eventually that will get streamed out and demand will come back?

I think it's a little bit in between those, Mark. I think -- I do think that eventually demand will get back and we'll get through that. But as I mentioned, we've already looked at some -- we've already taken some initial restructuring steps. And so we need to make sure we have things aligned to what the business is right now and as we develop it in the future. So we feel -- we still continue to feel very good about the long run prospects of this business, but we need to make sure we're at the right place at the current stage, too.

Great. And then lastly, on HBP, what's the impact on the employer mandate of the Affordable Care Act being delayed by 1 year? Are you -- did you staff up and then now we're -- it's going to be a little bit slower, or do you think it just drags up the process even longer and provides more consulting opportunities?

Yes, we actually don't think that's going to have a significant impact at all on our clients or any of our projections.

The next question comes from the line of Sara Gubins.

This is Brian in for Sara Gubins. So quick question on Technology and Administration Solutions. Can you just describe just the general client work, have you been seeing several clients and what type of work and kind of the duration? Are we talking longer-term projects or more shorter-term work?

Yes, so I think in the U.S., the kind of work we do for Technology Administrative Solutions tends to be around both pension and health care plans. In the U.K., it tends to be more -- in Germany, it tends to be more pension related. In all cases, most of the work is multi-year contracts, so 3 to 5 years, probably 5 years is maybe a little more common, but it's somewhere in that range.

Okay, sounds good. And then with regards to Exchange business, I mean, I know you talked about it a few times. But just to clarify, were you guys seeing any kind of loss of business in the aggregate from people who were kind of delaying projects because they were looking and considering your Exchange versus others? And just any kind of thoughts around that process?

There are other exchanges? So no, we haven't seen anything. We haven't seen anything like that. I think -- this is a growing field, so it's not like we're seeing anything like that.

And now, I'd like to turn the call over to John Haley for closing remarks. Thank you.

Okay. Thanks, everyone, for joining us this morning. We look forward to seeing you at Analyst Day on September 20 and reviewing our first quarter results with you in November.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you.