Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Towers Watson Earnings Conference Call. My name is [Tisha], and I will be operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Aida Sukys, Director of Investor Relations. Please proceed.

Thank you. Good morning, everyone. 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 week by dialing 617-801-6888, confirmation number 22806507. The replay will also be available for one week on our website. This call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve 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 up for your questions. Now, I'll turn the call over to John Haley.

Good morning, everyone, and thank you for joining us. Today, we will review our results for the third quarter of 2014 and our guidance for the remainder of the fiscal year. First, as a reminder, the brokerage business has been reported as discontinued operations in our current financial statements. The sale was finalized on November 6th. Last quarter, we announced the expansion of our Exchange Solutions segment, which will combine all of our OneExchange resources as well as the health and welfare administration work under one segment. There's no impact from this action to the FY'14 third quarter reporting we will be discussing today. We anticipate reporting on the newly restructured Exchange Solutions segment as of July 1st to align with the start of FY'15. Reported revenues for the quarter were $905 million, an increase of 1% over the prior third quarter reported revenues and up 1% on an organic basis and constant currency basis. Our organic growth rate adjust for changes in foreign currency exchange rates, acquisitions and divestitures. Our adjusted EBITDA for the quarter was $183 million or 20.2% of revenues. The prior year third quarter adjusted EBITDA was $173 million or 19.3% of revenues. The quarter three FY'14 EBITDA margins continue to expand while absorbing investments in Technology and Administration Solutions, Health and Group Benefits and OneExchange. Approximately $6 million of restructuring costs were also incurred this quarter. Discretionary compensation was also adjusted downward for the quarter to align with the operating results. On a broader basis, we continue to focus on streamlining costs across the organization and realigning cost to optimize future growth. For the quarter, diluted earnings per share from continuing operations were $1.39, up 19% and adjusted diluted earnings per share from continuing operations were $1.59, up 10%. Americas revenue growth came in as…

Thanks, John. Good morning, everyone. While it's been difficult to anticipate the global economic climate and the fluctuations in quarterly pipeline, I agree with John's comments regarding the stability of the business and share his enthusiasm for our various growth initiatives. We have taken on a lot in the past year and are building a solid foundation for future growth. Turning to the financial overview, I'll remind you that 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. Also, as a result of our decision to exit the reinsurance brokerage business, we continue to reflect activity related to brokerage as a discontinued operation. As noted by John earlier, the expansion of the Exchange Solutions segment did not impact the third quarter report. While much of the segment leadership and staffing transitions have been completed, we expect to start reporting on the expanded Exchange Solutions segment at the beginning of fiscal year '15. For the quarter, the Benefits segment had a 33% NOI margin. They were able to sustain the strong margin level despite several million dollars of investments targeted for the OneExchange active build out, preparing for the new administration implementations and building out of the global health and group benefits platform. Benefits also absorbed $4 million of severance costs. Risk and Financial Services had a 30% margin. RFS showed strong profitability with the Risk Consulting and Software business building its margin over last year as a result of their recent restructuring. Talent and Rewards had a 9% NOI margin and what is seasonally a softer profitability period for them and Exchange Solutions had a 30% NOI margin while absorbing the planned losses for Liazon this quarter and maintaining higher staffing levels as…

Thanks, Roger, and now we will take your questions.

(Operator Instructions) Your first question comes from the line of Shlomo Rosenbaum from Stifel. Please proceed.

Hi, guys. Thank you very much for taking my questions this morning.

Good morning, Shlomo.

Good morning. John, just from what you are seeing internationally and I know you have done a lot of travel as well. What do you think is behind some of the project work hold back in EMEA and Asia on the re-scoping as it comes back? I am seeing other companies', unrelated industries, but project type of work actually starting to come back better in Europe. I was wondering is there something in particular about what you guys are doing or something about the specific geographies you can talk to.

No. I don't think there's anything specific about that. Although, I do think particularly in Talent and Rewards, Shlomo, the general pattern is, when there's an economic downturn of course, we tend to see projects first delayed somewhat and then sometimes a lot of cancellations of the project never get resumed. We see a big pick up in our particular type of work in Talent and Rewards with the economy starts to grow robustly and I think what we've seen so far in EMEA is more mediocre growth. The mediocre growth is, we can see some mediocre type of growth ourselves in the things, but I don't think we will see the really robust growth until the economy becomes a somewhat stronger.

Then just kind of general economic related trends is what you are…

I think it's just generally. Again, it's the sort of pattern that our industry follows.

Okay. Then just in Exchange Solutions, I mean, they had exceeded the margin targets that you guys put out over there despite some of the things that you talked about having higher headcount and can you talk a little bit about that, because revenue was in line. Is there something that you're doing over there that's particularly tight or restructuring?

Roger, do you want to?

Yes. I mean, I think maybe a little bit of it is where the investment in the actives exchanges fell, so as we mentioned a good portion of that fell on the benefits segment. I can't think of anything else. I think in Liazon that the spending was post-acquisition was pulled back a bit and that contributed there as well, but it really was about the pattern and kind of location as we were looking at integration and establishing the foundation where the spending fell.

Okay. Then just overall demand on the exchange side, I mean, clearly you guys have been bullish for a while on that and it looks like there's good trends. Are you seeing the trends continuing along the path that you discussed? Last quarter, getting better, getting you know not necessarily is good, just from an underlying demand perspective in terms of indications of interest and potential people getting to deals in the next, say, six months or so?

Yes. I mean, you know, Shlomo, this is one of the most difficult things we have ever had forecast in the sense there's tremendous interest that employers have about this and we actually feel somewhat more confident about predicting what the pickup in exchanges might be five years from now than we may do one year from now, because we are in the exact path that follow to go whether people will weigh the year to adopt it. Since it's broken into these evenly things like the everybody is going to attempt to go January 1st all the time that's where the bulk of them are going to go. It tends to move just abruptly from one year to the next, so I think we still feel very good, we still very bullish, but we just can't give you a projection at the moment as to what even January 1, 2015 is going to look like.

Okay, then just a housekeeping item. In the cash flow statements the cash receipt from consolidated variable interest entities does that have to do with the fund of funds that you were talking about. Is there a…

Exactly. That's the fund of funds.

Okay. Great. Thank you very much.

Your next question will come from the line of Paul Ginocchio from Deutsche Bank. Please proceed.

Thanks. John, you are kind enough to give us commentary about the Liazon sales pipeline. Can you give us any general commentary or specific commentary on active and retiree? Then second, the follow-up on the six new clients in TAS. Do any of those clients have anything to do with your client wins in exchange? Thanks.

Yes. First, I was dealing with the second first, Paul. No. Those are different clients that we have won. Those are not exchange clients. The selling season is really still underway for even the retirees and the actives for the exchange market. Some of the Liazon ones we've already had the commitments immediately, and while we have had some so far on the other parts of the actives, it's not enough that we feel like there's any kind of a complete picture that we have. We really won't have good information on that until - for the big clients it's the end of June and July, or end of June, beginning of July and the retirees are probably are going to run about the same timeframe. Then even from Liazon, where we can compared them to where we were last year at this time, we still have the selling season that's going to extend well into fiscal 2015 for us.

Okay. Maybe just ask one more follow-up. As you add to this 50,000 between the fiscal fourth-quarter and fiscal first-quarter, how do those kind of split between the two quarters?

We don't have that.

We don't have that.

Spread, I mean, it is spread.

It is spread, but the bulk of it is I think into the next fiscal year, but there's some that will definitely fall in the fourth quarter. We just don't have that unfortunately, Paul.

No problem.

Your next question will come from the line of Andre Benjamin from Goldman Sachs. Please proceed.

Hi. Good morning. First question, in your press remarks you said that the investment exchanges have been a bigger distraction than expected. In what way is it so a bigger extraction? Are you just having more people working on exchange or is it something else? Given the negative surprise, how should we think about handicap in that going forward?

This is Roger. Hi, Andre. Just to add there, I mean, it's just been difficult to predict given the fairly significant organizational transitions that we've been making the last couple of quarters how that would play out. That was certainly a factor in the December quarter and we knew it would be a factor in the March quarter. Just didn't know how to size it, so again I think the key point that came out in the script is that you we are through a lot of that and are now anticipating much more stable kind of environment going forward.

You said you have made a fair amount of progress on the restructuring. The cost trends have been pretty favorable over the last few quarters. Could you just give some - clearly, you have some of your cost embedded in your guidance for the fourth quarter, but as we think about next year should we see any further steps down? Should we assume that we are pretty flat from here? How should we think about the actual spending levels going forward?

Yes. You know I would just say from my perspective, we do have a lot of work and focus going on, on the cost side and really have for the past 12, 15 months or so. I call it the notable restructuring activities which really we have been targeting talking in these calls, talking about the severance, expected severance levels. That's virtually behind us as I mentioned. There's another $2 million of cost expected in the fourth quarter, but the two larger ones in retirement and RCS are completed, so we will of course get benefits from that going into the September and December and March quarters next year when we are comparing back to periods before those restructurings. Otherwise, we do have, we're calling it continuous improvement efforts going on that just continues to target cost tightly and I don't have any numbers, but I would expect that will see some benefit from that next year as well.

Thank you.

Your next question will come from the line of Tim McHugh from William Blair. Please proceed.

Yes. Thanks. First, Roger, I guess following up on the comment about you will get a benefit next year. I know you probably even budgeted next year, but is it fair for us to think about those costs kind of, if not going away, I guess, revenue offsetting them such that they're not a drag? Then, John, maybe long-term, can you give us some sort of perception on kind of the international Health and Group Benefits, brokerage rollout what's kind of a three to five-year target for what type of contribution we might hope to get from that as you scale that up?

I am not sure, Tim. I am sorry, I am not sure I understood your question although perhaps it was around actually the severance costs as a revenue offsetting those costs and so I wasn't saying that we were expecting more severance into next year. I was saying the cost savings that have come in the March and June quarters will give us a benefit in the early quarters next year, because the costs are out and we will be comparing back to year when they were in. Does that help?

That's fair. I wasn't sure if you are saying the investment spending you are describing would go away next year.

Okay. Sorry, so now I understand your question. Look, in all the areas, so the areas where and I guess, they were noted broadly in the press release and in the dialogue, but the investment spending related to the level of cost that we are carrying in the retiree business, because we are having success in the off cycle enrollments since smoothing out the enrollment process. That is something that is more of a seasonal cost analysis, so if you look at it then you wouldn't expect if we continue to have success there as you wouldn't expect to have as much of a buildup perhaps relatively in the third and fourth quarter, so that that may be more of a seasonal pattern as opposed to overall cost, but certainly the revenue levels offset those investments in retiree. John is going to talk about the global health and group benefits, but that's an investment to drive revenue the future same as the OneExchange active build, so in general again as you say we have not given guidance, but you the investment spending we expect to continue and it's going to drive revenues.

Yes. First of all, let me just say this, we anticipated a good reaction to the announcement of our global healthcare brokerage business, in fact the strength of the reaction I think surprised us and so we have gotten very good feedback about that. We have not done any estimates of a couple of years out of where we will be. I think, we will be in a position to talk. Clearly, when we give the guidance for next year, we will be talking about what it will be doing for next year, but that will be at Analyst Day in September, we will be in a position then to give you some thoughts about how this might develop over the next few years.

Okay. Then on the lump sum marketing, I guess, generally the retirement practice. I guess, can you give us a little more color. I guess, it sounds like the pipeline is improving their, but is that usually calendar year end when we will see that? I guess, a little more color in terms of how the pipeline is improving there and when we will see it in the numbers?

I think that it was certainly the first big spike in the bulk lump sums occurred at a calendar year end and in part that occurred because of the interest arbitrage that we had there. As we look at things this coming year, we are expecting to see them spike up, although not back the levels that we saw at the end of, I guess, it was what? Calendar '12, when we did that. We do think, we are going to see an uptick in selling off pension liabilities through annuity purchase or other type of the plan termination capabilities, so we do think annuity purchases are something we are going to see more of in addition to the bulk lump sums. The quarter four bulk lump sum revenue that we have, we think is going to be flat to slightly ahead of what was it was in quarter four of FY'13. Then I think, we are probably expecting to see a little bit of the pickup through the end of the year, so we will be doing better on a comparable basis through the end of the calendar year. The only other thing I would say, Tim, is just that there's another driver there that I am not sure we factor in, and maybe this may drive things even a little further, which is the PBGC premium increase. The premiums are going to increase by 50% by 2016 and that's going to be another impetus for bulk lump sums.

Okay. Then the last question I guess just, you were asked about the selling season I guess in terms of the magnitude of the pipeline I know it's still early in the selling season, but what's your perception of the market share competition relative to the RFPs out there? Do you feel any different about what clients are looking for, how your how your products stack up in your ability to, I guess, earn your fair share of the RFPs that are coming on?

Yes. We feel pretty good about our ability to do that. Now, I think what you might see is there are if organizations convert existing health and welfare administration clients to exchanges may appear that [summer] get a bit of a head start in terms of that, but the vast bulk of them are out there for open competition and we feel pretty good about our chances there.

Okay. Great. Thank you.

Your next question comes from the line of Tobey Sommer from SunTrust. Please proceed.

Thank you. When you help a customer de-risk may be through bulk lump sum or some other mechanism, does your business opportunity for generating revenue working with those pension liabilities decline or are you able to generate some ongoing revenues from that customer still as well as the insurance company or whoever may buy the assets in the case of an outright sale?

Yes. What happens, Tobey, is when we do the bulk lump sums or we do the annuity purchase with an insurance company or whatever, the liabilities that are associated with that, once we have the transaction all completed, we don't tend to have any further revenues that we get from them. Now, there's an enormous spike up in revenues to get the transaction accomplished, but what we find is that the total revenues for the pension plan that the pension plan is still continuing, in particularly in the case of let's say when you are paying off, bulk lump sums and you are cashing out some retirees, you are cashing out terminated vested, you are not really shortening the expected lifetime of the pension plan, so even for a closer frozen plans running on as long as it would have anyway, because you settled the near-term liabilities not longer-term ones and things like doing the annual valuations for accounting purposes or for other regulatory purposes, all of those kinds of things continue. In the case of a plan termination of course that's a totally different thing. Then we lose all the revenues associated with that, but we haven't seen much in the way of plan terminations.

Thank you. Switching gears to the healthcare exchange, I understand that assessing near-term demand when a customer is actually a pull the trigger could be difficult, but given that you need to ramp up licensed insurance agents, I would imagine you have a better handle on your internal capabilities to handle enrollments or kind of throughput, what kind of throughput are you building your capability for this year's enrollment versus last year's?

Now the retirees or where we need to ramp up with all of the agents and there is I think two things that have been occurring over the years. One is, we have just gotten better every year at ramping up the agents and the amount by which we've expanded things to deal with the enrollment period in October through December, that's gotten bigger every year and I think we have just learned from that and got much better at it. Last year, we did over 150,000 retirees and this year we could handle at least that plus more. In addition to the normal way of just being able to handle more and getting better at it each year, we've also had the effect this year of the off cycle enrollments and the off cycle enrollments are absolutely critical to us really having the capability to handle enormous surges, because what the of cycle enrollments do is allow us to keep our most experienced agents, and when we look at productivity, the productivity of the most experienced agents is a couple times that of the newer agents and so that's what really gives us the flexibility and capability.

Thank you. Regarding off cycle enrollments, is there any change in the pricing structure for those kinds of customers or is it really customers taking advantage of less risky operational periods for enrollment?

It's the latter. There is no change in the pricing, but they probably get a little more attention than they might otherwise. Certainly, you have the full resources available there.

Thank you. Last two questions for me. Any expectations for changes to commission rates in the Healthcare Exchange and the various flavors that you offer and do you have an expectation for changes to premiums in 2015? Thank you.

I think, we don't expect really any change in the actives, commissions or anything like that. The OneExchange access, the one where we link up to the public exchanges those are fee-for-services with the possibility of commissions. The CMS commissions are expected at 70% of private market commission, so that's the one change we could see there, but that's a relatively small part of the overall exchange business.

Thank you.

Otherwise in the flow…

Otherwise, I think, broadly the answer is no.

Yes. We don't expect any changes.

Thank you very much.

Your next question will come from the line of Mark Marcon from Robert W. Baird. Please proceed.

Good morning. Your really senior consultants in a number of different practice areas have been going out and talking to a ton of clients on the healthcare exchange. You mentioned earlier, you might feel more confident about giving projections about five years as opposed to one out, just because of the dynamics in terms of the decision processes for the various benefits managers at these companies and what they're trying to consider. As you think about that five-year opportunity, can you refresh us in terms of how you are thinking about that opportunity in terms of the addressable markets? You have given us some stats in the past. I was wondering if you could update that.

Yes. Sure. By the way and first of all I should say it's the decision-making process is somewhat attenuated with the with the benefits folks, but only thing is that when you are thinking about going to exchanges, that's really something that involves the [sea] sweet too and that's what makes the decision a little bit longer and a little bit more uncertain from our point of view as to when it will exactly be made. I don't think, when we are dealing with this, it's not an issue about the overall enthusiasm for doing it, but I do think we are a little less certain as to exactly which year it's going to fall into. That really more the issue, but just thinking about five years from now, I mean, I think we have had McKinsey and Accenture both did studies of the market and they came out at about $35 million, $40 million, $45 million, something like that in the five to seven year period. That would be the number of employees on the active exchanges. As we think about that, there's about 120 million in private employment in the U.S. and that's where we think the bulk of that will come from in those first five years, so if we take let's say 40 million, 40 million out of 120 million. That's an adoption rate of about a third. For employers with more than 100 lives, that's two-thirds of the market, so that's then two-ninths of the market in total there that comes to about 27 million people and if we got a quarter of that, that would be about 6.75 million and we would probably add in some from the less than 100 lives, so maybe 1 million more so, maybe 7.75 million, so I would say 7.5 to 8 million is some kind of a rough estimate.

7.5 million to 8 million kind of four years out?

Five years out.

Five years out. Okay. Great. Then.

By the way, let me just be clear, Mark, that assumes that the overall numbers are right for that McKinsey and Accenture have.

Yes.

Okay.

Then is it your sense that the way things are tracking and the enthusiasm that you are hearing that's that seems approximately to be on track?

I think those numbers are as reasonable as anything I have seen. I am not sure I would want to sign my name to any specific projection, but those projections are probably as good as anything as I have seen.

Okay. Then with regards to the retiree side, you've articulated before out of the 6 million private post 65, 80% plus that still feels a reasonable range, right?

I'm not sure on the source of an 80%-plus. I do think it's a market that will eventually get reasonably well penetrated, but I am not sure what timeframe it would be to get to 80%. When you think about that, that would have to be a pretty big uptick it to get there over four or five years.

Okay. Can you talk a little bit about Segal and what the opportunity is on public side?

Yes, so they are premier consulting firm in this space. They are very well respected. We have very high regard for them, they are probably the premier player in the public sector space and we are going to be working with them the same way we have to with Fidelity, where we have this partnership and we will go out to market to exchange services. They do the kind of retirement consulting that we do for plans in the U.S. They do it for the public sector.

Got it. Any sense in terms of whether or not that market has the potential to loosen up. I have heard about one's statements probably going to change in addition to the ones you have mentioned in the past?

I guess, what I would say about the public sector is, I think they are probably generally not going to be the ones who were necessarily jumping right way at doing this. They will probably be a little bit slower to take it up than the private sector, but I think there are terrific opportunity for the future, so I think the exchanges make a lot of sense for rough public sector plans.

Great. Then lastly, can you just talk a little bit about Longitude and how we should think about that impacting both, near-term and longer term revenue?

I think that's going to be one that we will a lot like I got the question earlier about the global healthcare brokerage and we had said we didn't expect any - and so as a result the margins were a little bit lower and it's back to what we talked about before the pressure in EMEA and Asia.

Okay. Fair enough. I know you discussed cost before going into the fiscal year '15, I know you are not giving guidance yet, but how does next year fit in with a longer term growth expectations? Is there anything that has changed from the last few quarters that is altering your outlook on fiscal year '15? Thanks.

I think the short answer to that is no. Now, as you mentioned, we will be giving guidance for next year in a couple of months, but there has nothing occurred that's we say gees this is something we are going to factor in as we do the guidance, nothing like that.

Thank you guys.

Your next question will come from the line of Ashwin Shirvaikar from Citi. Please proceed.

Hi, this is Phil Stiller on for Ashwin. I guess, I wanted to start with the discretionary comp. You guys have obviously protected the margins using that lever this year, which is - consistent with what you have done in the past. Just wondering as we think about next year if you return to a more normalized revenue and profit performance, should we expect that payout to snap back up and hit the margins next year?

Yes. I think when we when we look at the discretionary comp, we tend to have this in the broad range. It's in the high 30% is what we do, and when we are having better years, we try to get that into the very high 30s, closer to 40% and when we have more difficult years, we tend to keep it more down around the 36%, 37% range, so it's not a big swing that we do, but I think when we have better years, we would hope to get closer to the 38% to 39% range.

Okay. That's helpful. Then I guess, in the past you guys had mentioned Easter impacting the revenue a bit moved the timing of Easter from the billing day perspective. Just wondering if that had any impact in the third quarter and if that's impact the fourth quarter results or guidance?

There are a couple of things like that that we decided not to go into. I mean, Easter actually shifted the quarters this year. We actually had our target in the Americas, but frankly we think we could have lost some revenue due to the weather, which really caused quite a number of days that we had are very largest offices closed, but we decided not to try to get into parsing each of those events.

Okay. Makes sense. Then the last question, you have obviously had a lot of tax benefits so far this year. Seems like the guidance for the fourth quarter's is back to a more normalized rate, but I know you guys have been working on reducing the tax-free longer term, so is there any update in terms of the longer-term expectations for the tax rate?

I mean, I would say that we have had some success obviously. We continue to work on lowering what the tax rate will be over the next couple or three years and have some visibility to doing that. On the other hand at the moment, we are growing more robustly in the things that we haven't placed for growth in the next couple years are more in the U.S., in a high tax country, so probably this range of 34%-ish is a decent modeling number for right now. Although, again, we hope things fall in place where we can continue to push that down.

Okay. Great. Thank you.

Ladies and gentlemen, that is it for the Q&A portion. I would now like to turn the call back over to John Haley for any closing remarks.

Okay. Thanks very much for joining us this morning and we look forward to reviewing our fourth quarter results with you in August.

Ladies and gentlemen, that would conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.