Willis Towers Watson Public Limited Company (WTW) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Towers Watson Fourth Quarter Fiscal Year 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to introduce your host for today’s conference, Aida Sukys, Director of Investor Relations. Ma’am, you may begin.

Good morning, thank you. 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 tomorrow by dialing 404-537-3406, conference ID 92166490. The replay will be available for the next three months in our website. This conference call shall not constitute an offer to sell or a solicitation of an offer to sell or a solicitation of an offer to buy any securities nor shall there be any sales of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration of qualifications under security of law of any such jurisdiction. No offer of security shall be made except by means of a prospectus meeting the requirement of Section 10 of the Securities Act of 1933 as amended. In connection with the proposed merger of Towers Watson and Willis, Willis plans to file with the SEC, a registration statement, on Form S-4 in connection with the transaction. Willis and Towers Watson plan to file with the SEC and mail to the respective shareholders a joint proxy statement prospectus in the connection with the transaction. The registration statement and the joint proxy statement perspectives will contain important information about Willis, Towers Watson, the transaction and related matters. Investors and securityholders are urged to read those registration statements, the joint proxy statement/prospectus and the other related documents carefully when they’re available. Investor maturity holders will be able to obtain free copies of the registration statement, the joint proxy statement/prospectus and other related documents filed with the SEC by Willis and Towers Watson through the website maintained by the SEC at www.sec.gov or by visiting the investor relation sections of Wills or Towers Watson website at www.willis.com or www.towerswatson.com. 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 net income or 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 2015 and review our guidance for the first quarter of fiscal 2016 and also provide some context for the full-year fiscal 2016. We ended the year with the same strong momentum we’ve seen in each quarter throughout this fiscal year. Reported revenues for the quarter were $888 million, an increase of 1% over the prior-year fourth quarter reported revenues, up 7% on a constant currency basis and up 6% on an organic basis. Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures. Our adjusted EBITDA for the quarter was $180 million or 20.3% of revenues. The prior-year fourth quarter adjusted EBITDA was $169 million or 19.2% of revenue. Continued strong topline results and the focus on cost efficiencies have helped drive EBITDA margins. For the quarter, diluted earnings per share from continuing operations were $1.28 and adjusted diluted earnings per share were $1.51. We’re very pleased with fourth quarter results and this record setting fiscal year, it’s been rewarding to see our long-term growth strategy take hold and gain momentum. The record revenue growth, EBITDA margin and EPS results we’ve seen this year are a testament to our unwavering commitment to our clients and continued focus on our long-term growth strategy TW 2020. We’ve building towards this strategy is a couple of ways through acquisitions and by developing a culture of innovation. We focus many of our acquisitions since the creation of Towers Watson with an eye towards this framework. EMB, a provider of premier consulting and software solutions to the insurance industry and Aliquant, a health and welfare benefits administration solution provider were added shortly after the creation of Towers Watson. We then acquired Extend Health through which we entered the retiree exchange market and Liazon which expanded our capabilities in the active exchange market. This year, we added Saville Consulting and Acclaris to our portfolio. Saville Consulting adds market leading assessment tools which enhance our already comprehensive suite of HR solutions and advisory services. Mostly recently, we acquired Acclaris, a technology and services provider for consumer driven healthcare which will enhance our health and welfare administration and active exchange products. Acclaris will also broaden our distribution channel through white-labeling technology and service offerings to other benefits administrators and provide a platform for future innovation. We’ve also successfully developed a culture of innovation with the structured approach to bringing great ideas to the market. We've been able to deliver solutions such as bulk-lump sum, the UK master trust and global healthcare brokerage by encouraging collaboration and rewarding innovation. Innovation is an important component of the TW 2020 strategy and that allows us to take the best ideas from our associates to keep ahead of trends and meet the needs of our clients. Fostering this environment helps create more value for our clients, an interesting and challenging work environment for our associates and ultimately, value for our shareholders. While the concept of innovation seems straightforward, it requires discipline and hard work to ensure success. Our management team and associates have done a great job in both assessing acquisition opportunities that enhance our long-term growth strategy and developing solutions that meet our client needs and deepening those relationships. The proposed merger between Towers Watson and Willis will accelerate our TW 2020 strategy. As we invest in developing a more robust suite of products and solutions, a key to maximizing revenue and earnings growth is the penetration of both the large and mid-markets. While Towers Watson has deep penetration in the large market, Willis brings a great brand name and distribution network in the US middle market. We believe that not only will Willis Towers Watson deliver on the cost, tax and revenue synergies that we’ve already discussed, but we’re also excited about the prospects the merger will have to strengthen the culture of innovation and continued operational efficiencies. Needless to say, we’re very excited about the long-term prospects this merger presents. Now, let's look at the performance of each of our segments. As a reminder, the results for the Benefits and Exchange Solutions segments have been updated to reflect the expansion of the Exchange segment. Please refer to our 8-K filed with the SEC on September 16, 2014 for a historical quarterly view of the impacted results. On an organic basis, Benefits revenues increased 3%; Exchange Solutions increased 25%; Risk and Financial Services decreased 2% and Talent and Rewards increased 15%. All of the revenue results discussed in this segment detail in guidance will reference constant currency, unless specifically stated otherwise. For the quarter, the Benefits segment had revenues of $473 million. Retirement revenues increased 1%, led by increased client work in EMEA and offset by a slight decline in North America. Health and Group Benefits revenues grew by 7%, primarily driven by plan management consulting and special projects. Technology and administration Solutions revenues increased by 3%. Much of the growth continues to be related to changes in UK retirement legislation, which led to increased administration work in special projects. In North America, we have a number of large pension administration projects, which will go live throughout FY16. As a reminder, revenues are deferred during the implementation of these projects. The demand for pension administration continues to be strong. As a result of the strong revenue growth from bulk-lump sum work in FY15, we expect that the Benefits segment will have flat to low single digit revenue growth during FY16. For the quarter, the Exchange Solutions segment had revenues of $98 million, an increase of 31%. Our Retiree and Access Exchange revenues increased 30%, due to an increase in membership base and a strong annual enrolment season. The other exchange solutions businesses increased 33% and 16% on an organic basis. Components of this line include health and welfare administration, active exchanges and consumer directed accounts. Health and welfare administration grew 6% as a result of strong special project work and an increase in administration activity. A number of ongoing implementations are expected to go live as of January 2016. Active exchanges grew by 88% or almost $3 million as a result of increased membership. We ended FY15 with approximately 1.2 million members on our one exchange platform. Before getting into the sales season, I’d like to take a step back and reflect on the development of the exchange business. A lot has been accomplished in a relatively short amount of time. We acquired Extend Health at the end of FY12. During FY13, we introduced the self-insured platform of one exchange active and one exchange access, a service to help companies optimize subsidies available to their employees through the public exchanges. During FY14, we acquired Liazon, adding fully funded healthcare options, ancillary benefits and robust group of channel partners. To put further contrast around the pace of adoption, as of June 2013, we had approximately 400,000 members on OneExchange Retiree and about 40,000 covered lives representing two beta clients on the Active OneExchange platform. We had also provided OneExchange Access advisory services to three early adopter organizations. As of June 2015, we had almost 1.2 million members on the OneExchange platform and had provided OneExchange Access services to more than 30 clients. We strongly believe we have the most comprehensive exchange offering in the market for businesses of any size and their eligible participants from part-time to full-time employees and pre- and post-65 retirees. Now let’s turn to the current sales season and I will provide some color around the development of the 2016 and 2017 pipelines as well. We anticipate a record annual enrolment period for January 1, 2016 with approximately 220,000 retirees enrolling this year versus approximately 160,000 enrolled as of January 1, 2015. Sales activity will continue into the second half of the FY16. In the Active space, we finalized sales from approximately 100,000 eligible employees for the 2016 annual enrolment season. This time last year we had approximately 30,000 eligible employees scheduled for the annual enrolment period in addition to a large off-cycle enrolment which occurred in the spring of 2015. The sales to-date reflect approximately 70% sold directly by our associates and 30% by the brokers’ channel. Sales efforts in the midmarket will continue through October, so these enrolment numbers will continue to grow. The broker channel will continue to sell and enroll members throughout the year as many small companies can implement off-cycle enrolments. It’s still too early to provide a count for total fiscal year enrolments. We’ve also contacted with 33 new Access clients for this enrolment season. As we look at the 2017 annual enrolment sales activity, the large market, as defined as organizations with more than 20,000 employees, comprise a more significant portion of the current RFP activity than we saw during the 2016 selling season. However, it’s early in the selling season and although it is a bit of uptick in large company activity, we believe the midmarket will continue to be a strong driver of exchange growth as this market builds. We will also have our first client utilizing all three OneExchange platforms Retiree, Access and Actives. One of our objectives is to utilize our strong relationships and the high satisfactory levels of our retiree clients as we focus our marketing activities in the Actives business. We remain confident in the long-term growth in each of the lines of business in this segment and expect strong growth in FY16. For the quarter, Risk and Financial Services had a revenue decline of 2% due to softness in EMEA and the Asia Pacific regions. Risk Consulting and Software revenues decreased 1%. The Americas region experienced revenue growth, but that increase was offset by declines in EMEA and Asia Pacific. The EMEA decline was anticipated due to a very tough comparable as FY14 quarter four growth rate was at 14%. The pipeline from the Americas and EMEA has been somewhat stronger this past quarter. Asia Pacific may continue to be soft in the near term. Investment revenue decreased by 3%. Revenue growth in the Americas and Asia Pacific was offset by EMEA revenue declines. By way of comparison, in quarter four of FY14, EMEA revenue increased by 12% as a result of timing of the payment of performance fees. We're seeing more robust pipeline for delegated investment services across all regions. The Risk Consulting and Software and Investment businesses are expected to have moderate revenue growth for fiscal year ‘16. Next, let's move on to Talent and Rewards, which delivered very strong results for the quarter. The Talent and Rewards segment had revenues of $145 million, an increase of 17%. Executive Compensation revenues were up 11% with continued strong market momentum carrying over the last three quarter. Transaction work drove revenue growth in the Americas and long-term incentive and regulatory changes drove revenues in Asia-Pacific. Data service and technology revenues increased by 25%. Revenue continue to be driven by strong demand for HR software. We also saw strong demand in North America and EMEA for employee engagement surveys. This is the first sale season, where we are fully utilizing our new technology platform and we’re very pleased with the results. We’ve expanded market share and 40% of our new contracts are multiyear, up from around 20% to 25% just a year ago. Results in this line of business also include our Saville Consulting Acquisition. Rewards, Talent and Communication revenues increased 14%, led by double-digit revenue growth in the Americas and EMEA regions. The growth in the Americas was due to a combination of large transaction and business transformation-related projects, communication work related to healthcare plants and increases in sales compensation support. Revenue growth in EMEA was focused on talent management and transaction work. The environment continues to look very positive for the Talent and Rewards segment but as a result of the strong FY ’15 revenue growth, we expect mid-single digit revenue growth in FY ’16. However, if transaction activity continues for the year, we would expect [Technical Difficulty] higher growth. We had another great quarter and simply an outstanding year. I’d like to thank all of our associates for the dedication and continued client focus and to think our clients for allowing Towers Watson the privilege of being your trusted advisor. Before turning the call over to Roger, I’d like to welcome to Dean Mason, the CEO of Acclaris, who will continue to lead the consumer directed account business and all of the Acclaris associates to Towers Watson. We’re very excited to have them join our team. Now, I’ll turn the call over the Roger.

Thanks, John, and good morning to everyone. I’ve a few initial points to make before getting into the financial results. First, I want to add my thanks to our associates for a truly outstanding year. We should all be very proud of Towers Watson’s record-breaking financial results and of the great strides we’ve made towards our TW 2020 strategy. Bottom line, it was a great year. So, here is a big virtual high five to the team. Second, I want to echo John’s earlier statement regarding the Willis merger. I’m really excited about the opportunity in front of us. This is a transformative event that will create value for our associates, clients, and shareholders. The cost savings, tax and revenue synergies that we’ve focused on in the transaction economics are only the beginning of the story. Towers Watson, created by a merger of equals, brought us financial strength and flexibility, a top pool of talent and a vehicle to take our best ideas to market. I believe we found a similar opportunity in partnering with Willis, where together we’ll build a stronger Company and create more value for stakeholders than we could as two separate companies. Finally, I also want to welcome the Acclaris team. I’m excited about the market opportunity this acquisition brings to Towers Watson. This breaks us into the fast growing health savings account administration market as well as other consumer-driven accounts. Now, for the financial results. 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 NOI margin was really strong at 36%, up from 33% last year. The revenue growth in Retirement and Health and Group Benefits and cost management, particularly in EMEA drove the margin increase. The EMEA margin increased by 60% in the fourth quarter of fiscal ’15 as compared with the fourth quarter of fiscal ’14 as a result of increased utilization, the impact of centralized operations and restructuring. This was another really impressive quarter from the Benefits team. Exchange solutions had a 15% NOI margin as compared to 23% in last year’s fourth quarter. One exchange retiree led the segment with the 44% NOI margin. The profitability was driven by an increased membership base. Margin was a big softer in Q4 year-over-year as the seasonal hiring process began a bit earlier than normal in preparation for the upcoming very large annual enrolment period. The segment margin also reflected continuing investments in enhancing the OneExchange active products and services, both in the large and mid-market updating reporting requirements mandated by the ACA and new client transitions. Risk and Financial Services had a 23% NOI margin. While segment revenues declined slightly, strong cost management and the risk consulting and software line of business, kept the profit margin relatively flat. Talent and Rewards had an 18% NOI margin as compared to 8% margin in the fourth quarter last year. Just as we experienced in the previous two quarters, strong revenue growth combined with tight expense management resulted in strong margin growth. Just one final note on the full year fiscal 2015 results. More than 70% of the revenue growth fell directly to the bottom line, which helped Talent and Rewards post a record 26% NOI margin, a great year for the T&R team. Net income attributable to common stockholders for the quarter was $89 million. Adjusted net income was $105 million. The tax rate for continuing operations for the quarter was 32%. The year-end tax rate came in as forecasted at 34%. This tax rate represents a more normalized rate than in fiscal 2014, when the rate was at 28% due to favorable tax settlements and non-recurring items. Moving to the balance sheet, we continue to have a strong financial position. At June 30, we had $815 million in available cash and short-term investments. This is at a peak point of on balance sheet cash for us as we pay our annual bonuses in September. Virtually all of the available cash and short-term investments are outside of the US. Free cash flow continued to be very strong at $502 million for the fiscal year as compared to $391 million in fiscal 2014, a 28% increase. For the fourth quarter, our free cash flow was $280 million as compared to $219 million in the fourth quarter last year. Free cash flow strength for the year was driven by our strong business results and year-over-year bonus differences. Going forward, we continue to anticipate free cash flow to be in the neighborhood of adjusted net income. In addition to our term loan, we had $70 million of borrowings outstanding on our credit facilities at the end of the quarter. The proceeds were primarily used to acquire Acclaris. In the fourth quarter, we repurchased approximately 261,000 of our shares for about $34 million under our $300 million share repurchase authority. For the fiscal year, we repurchased approximately 640,000 more shares than in fiscal 2014. We have a $154 million remaining on the current share repurchase authority. However, due to the pending merger with Willis, we have suspended our share repurchase program for the time being. Now, let’s review our guidance for fiscal year 2016. Today, we'll provide you with the first quarter guidance, as well as some context for our full year fiscal 2016 outlook. This guidance excludes the HR service delivery practice, any potential impact of ongoing tax examinations and any impact of the merger with Willis. For example, items related to the Willis merger will be excluded from our adjusted EBITDA and adjusted EPS measures. These items could include legal costs, bankers’ costs, integration costs, tax related matters and other merger and integration related items. These costs could be material as we work through to the closing of the merger. For the first quarter of fiscal 2016, we expect revenues will be in the range of $870 million to $885 million. On a constant currency basis, this correlates to a growth rate of 5% to 6%. Reported growth is expected to be in the flat to 2% range as we lose about $40 million of revenue year-over-year due to the strengthening of the US dollar based on our currency assumptions. Our EBITDA margin is expected to be in the range of 19.0% to 19.5%. We expect that adjusted diluted earnings per share to be in the range of $1.30 to $1.35. This includes a year-over-year negative impact due to currency translation of approximately $0.04. Average diluted shares outstanding are expected to be around 69.3 million. We expect the first quarter of our fiscal 2016 income tax rate to be in the 34% to 35% range. Our first quarter guidance assumes an average exchange rate of $1.55 to the British pound and $1.10 to the euro. GAAP diluted earnings per share will continue to be lower than our adjusted diluted earnings per share. Now we will review our first quarter guidance for the segments. We expect the Benefits segment constant currency revenue to be in the range of flat to low single-digit decline when compared to Q1 fiscal ‘15 revenues. The bulk-lump sum projects drove revenue growth of 9% in the Americas in the first quarter of fiscal ’15 creating a strong comparable for the segment. The NOI margin for Benefits is expected to be in the low-30% range as a result of a top line bulk-lump sum related slowdown. Next in the Exchange Solutions segment, we expect low to mid-30% constant currency revenue growth. We’ve begun the hiring of seasonal workers earlier than in past years in anticipation of the upcoming strong retiree annual enrolment season. We want to ensure we maintain our high quality standards which is a key differentiator in the retiree marketplace. We will also continue to enhance our exchange products and user tools and prepare for growth in the Health and Welfare Benefits Administration. We expect the first quarter NOI margin for Exchange Solutions to be around 10%. As a reminder, Exchange Solutions profitability is seasonally low in the first half of the fiscal year as we incur all the costs of the annual enrolment period in the first half, but only recognize revenue on a monthly basis starting with the effective date of the policy. Next, in the Risk and Financial Services segment, we expect constant currency revenue growth of flat to low single digits. We expect the NOI margin to be in the mid-20% range which historically has been in the mid-teens in the Q1. In Talent and Rewards, we expect mid-to-high single-digit constant currency revenue growth as we see continuing momentum in the pipeline. Higher levels of growth are dependent on the continuation of transaction driven activity. We expect the NOI margin to be in the mid-to-high 20% range. As a reminder, margins in this segment are seasonally higher in the first half of the fiscal year. Let's step back now for a comment on the full year for fiscal 2016. I would like to reiterate that this commentary excludes any impact from the Willis merger. Overall, we expect mid single-digit constant currency revenue growth which includes continuing momentum in comparison to the very strong fiscal ‘15 results. We expect our adjusted EBITDA margin to continue to be at the current record run rate of around 21%. Adjusted diluted EPS from continuing operations is expected to increase in the mid single digits, but slightly below the level of constant currency revenue growth as we expect around a $0.12 negative currency impact based on our foreign currency assumptions. We expect capital expenditures to be around our historical average. This guidance assumes an average exchange rate of $1.55 to the British pound and an average exchange rate of $1.10 to the euro. In closing, it's been a great quarter and fiscal year. While we see some headwinds for FY16 in currency translation and a decreased demand relative to bulk-lump sum, we feel positive about the underlying business and the momentum we are seeing in the market. Now I'll turn it back to John.

Okay, thanks, Roger, and now we will take your questions.

[Operator Instructions] Our first question comes from Ashwin Shirvaikar with Citi. Your line is open.

Thank you, guys, and congratulations on a good solid quarter.

Thanks, Ashwin

My first question was if you could help us size the bulk lump sum revenue and profit impact for fiscal 2015, and it seems like your view is that, that is not sustainable at the same level. So if you can go into sort of the pipeline and the reasons why you think it might not be sustainable.

Sure, Ashwin, I’ll give some numbers on that one and John may have some additional context. I would say at this point, demand is looking a little bit stronger than probably we’ve said on calls the last couple of quarters, but still not at the level going into 2016 that we had in fiscal 2015. So we ended fiscal 2015 at somewhere around $70 million or $75 million of revenues, it looks like fiscal 2016 might be around half of that or so. And the run rate for the quarters maybe at more or like in the first couple of quarters here, more in the $10 million to $15 million range versus in the around $30 million or so per quarter in the first half of fiscal 2015. So I think overall it’s kind of in the first half of fiscal 2016 about half the run rate last year.

Yeah, I guess the only other thing I’d add to that Ashwin about the projections is, and we’ve really been saying this for several years now is that this is a business that has a lot of granularity to it. So you will find particular quarters and particular years where you’ll see revenues spike up and then they will return back. So when you look at what we are projecting in fiscal 2014, we – the revenues we’re projecting for fiscal 2016 are a little bit above where we were -- for bulk lump sums are just a little bit above where they were for fiscal 2014. The outlier is that fiscal 2015, we had one of these big spikes up. We expect to continue to see that periodically. There will be years where there is just a lot of lump sum activity. In this last year, there were concerns with the new mortality table, the particular dynamics of where lump sum interest rates are versus the accounting interest rate. So those things can impact it, particular year-to-year basis.

Okay. Also I had a question on the exchange business. You’re clearly hiring for greater demand and if you could get into sort of the dynamics of that with regards to breaking out the demand for December, I mean, January versus the rest of the year, because I think your comment with regards to sizing for fiscal year, but if you can break it out into first half versus second half?

Well, I will let Roger talk a little bit about that in terms of some of the specifics there. But I guess what we just mentioned in the beginning, as I mentioned particularly, when you look at the retirees, we have 220,000 retirees we expect to enrol this year. That is an enormous gain over what we had last year and so it’s going to require a big spike up in our capabilities. Now, one of the things that we’ve been – we are pretty proud of is the fact that we’ve been able to manage this growth and be able to plan for this kind of growth and do without having any hiccups with our clients. So that’s one of the reasons, we have had great success in this market is we do have a good process about bringing people in and administering them sufficiently. But Roger, you may want to talk about the specifics of the hiring.

I am not totally sure, Ashwin, I apologize exactly what you focused on. So I will just highlight, as John said, so the numbers were 220,000 incremental for retiree 1/1/16 versus 160,000 1/1/15. So that’s going to spike up revenue obviously in the second half of the year quite a bit more than it was in the second half of fiscal 2015. For actives, it looks like we are running about twice the level that we were, may be not quite twice the level we were at this point for signups for 1/1/16. So we have good momentum, but as you say, it’s focused on driving revenue growth in the second half of the fiscal year.

Got it. Just a clarification on that, should we assume that these projections do not include any changes you can effect in to the Willis channel once that acquisition or once that merger closes?

Yes, that's correct.

Okay. Because those would be positive changes that you can do to compensation and such to drive behavior and demand, right?

Yeah.

But all these projections are done on a stand-alone basis.

Okay, got it. Understood. Congratulations and all the best. Thank you.

Thanks, Ashwin.

Thanks, Ashwin.

Thank you. Our next question comes from Jason Anderson of Shlomo. Your line is open.

How are you doing? I’m Ed [ph] for Shlomo here from Stifel. So, sorry guys. Just a question on the - -a little more detail on the -- you mentioned in Exchange business, the 1Q16 margin accelerated higher, could you maybe give us some color on exactly maybe a little bit more detail on what that impact is versus prior year?

Yeah. So I mean what's really going on there again the peak ramp up season is the September and December quarters, as we add people for the retiree business and that just has a huge impact. So I think that's the real driver of the margin being 10% in the first half, first quarter. And it was that kind of mid-teens, I believe last year in the comparable quarter and so that's driven again by the large retiree annual enrolment period preparations and perhaps also a little bit by continuing ramping up of the active segment of the market.

Okay, thanks. And then in regards to, it's just maybe a qualitative question here and I'm sorry if you've answered this before at one point in time, but how big of a difference is there in the sales cycle between -- in the Exchange business between the large deals like with the RFPs and then maybe a smaller mid-size deals. I mean I'm trying to figure out the delta there may be and sales cycle, I don't know if you've ever commented on that before.

I think the only comments we’ve made have been really more around qualitative differences, not necessarily quantitative, but I can say this that the sales cycle in the big plants tends to be much longer than the mid-market plants. And they can expand several years at times. So it's just much longer.

Great, thanks. And then one more if I can squeeze in, along those lines and I think you did allude to some commentary on the pipeline, but I'm just wondering maybe you could retouch over again on the pipeline for the large deals in ’16, but then also in particular in ‘17, I just want to make sure I interpreted your comments correctly on ‘17, it's not like maybe you’re inferring, it was a little bit lighter in ‘17 on the large RFP type deals and I know I realized it's early, but maybe you could comment a little further about that?

No. Actually, here is what I was trying to say about that is that right now, we are seeing a -- and it’s right, this is the very beginning of the 2017 activity, but we’re seeing a somewhat higher proportion of large plants in the RFP activity that we saw at this time last year. But then I went on to say even though we are seeing a slightly higher percentage of large plants in the RFPs, a, it's very early, but b, even if this continued, we still think the midmarket is going to be the strong driver of growth in the short run.

Great, thanks for that. I appreciate it.

Thank you. Our next question comes from George Tong of Piper Jaffray. Your line is open.

Hi, thanks. Good morning.

Good morning, George.

Going into the Exchange, NOI margins have been furthered. Does the step down in margins at this quarter end and next quarter reflect only the accelerated pace of hiring or are there other structural changes in mix in the business or other factors that possibly alter your longer-term expectations for exchange margins?

Yes. So first, George, it doesn't alter any long-term expectations. Again, the big drivers as you look at margins over the last several quarters and going into early next year, the biggest impact is the ramp up for the annual enrollment period for retiree and there could be a little bit as well in there on the active side but it’s mainly retiree.

Got it. And on the fiscal 2016 exchange selling season, how did the 100,000 employees that you finalized for enrollment compare with your expectations and can the number sustain at least low-to-mid 30s full-year exchange revenue growth next year?

My comments first is that we’re not talking about guidance for beyond fiscal ’16 at this point. I mean, I think, we would say that there is a nice ramp up for what we see now for 116 for actives versus 115. I think that we’re showing good momentum across the exchanges business and we’re looking to continue that momentum but not giving specific guidance on beyond ’16 at this point.

I mean and I guess George, just maybe, just some – a couple of additional comments there. This was pretty good growth for us, we’re pleased with that growth. We feel like we have a terrific product here that’s well positioned. It probably depends more on how the market develops than on anything and as we’ve seen this is a market that’s susceptible to wide variations in projections as to how fast it’s going to develop. But we continue to be convinced that this is a terrific long-term market and we expect to be a dominate player in it.

Very helpful, thank you.

Thank you. Our next question comes from Dave Styblo of Jefferies. Your line is open.

Hi, good morning and thanks for taking the questions. I just want to -- I’m still a little bit confused about the enrollment guidance, I want to make sure I got it down straight. So the 220,000 that is the growth that you’re expecting from the December quarter to January or end of the March, is that right?

We’re going to enroll 220,000 retirees on January 1, 2016 that’s essentially what that is.

Okay. I think that’s considerably higher I think the last out of point you told us was about 160,000. So can you talk a little bit more about what changed there or what sort of, was that one customer or several customers rolling on with the nature of that growth?

Well, the big bulk of the -- the big part of that growth of course is -- or higher state retirees and that’s -- I don’t know, 60% of that growth or more, two-thirds of the growth is probably due to that one case, of course we did have that case, we’d announced that a long while ago, so we always knew this was going to be a very good season but it’s turned out to be really a great one.

Okay. And then on the active side, I think I heard you say, 100,000 and then more than double that or about double that but again the anchor point for me wasn’t quite clear, where you trying to reference the movement from December to January or a year-over-year comparison for the whole fiscal year, can you flush that out for us again.

Yeah, so what we were saying there is, we finalized sales for about a 100,000 eligible employees for the 2016, the full annual enrollment season for 2016. And then to put that in context, this year, this time last year, we had about 30,000 eligible employees, which were scheduled for this annual enrollment period leading up to January 1, 2016 but then we also did have one large off cycle which occurred in the spring of 2015. So if I add the large off cycle which is in the spring of 2015 to the 30,000 we had there, than we’ve probably more than -- we’ve probably about doubled.

Right, okay, I can see that. So, the margin profile as you guys are trying to ramp up the business obviously, you talked a little about the drag earlier on. How do you continue to see this play out over time, I know early on you thought it might look like segment margin profits consistent with that business but it’s going to be I’m sure having a lot of noise and investments early on. At what point, do you expect the margins to sort of stabilize out a little bit more and reach a more normalized run rate and ultimately, what do you think that those gets you now that we’ve fast forwarded a few more months and quarters into the exchange movement here?

Well, I think what we’ve always said is that we’re -- the margins we’re projecting for the exchange business are about the same as the whole rest of the business. Now, people can make arguments that indeed if we can skip this business to really scale, they could be higher. Of course, we also think exchanges are a dynamic business and we may be continually making investments in them. So, we are in the projection of margins being about the same as for the rest of the business. We’ve still never met an investment that we didn’t like in this business and so, we’re continuing to do that. So, we’re not projecting anything more than that. We do recognize that particularly it’s more sensitive to the retirees than to anything. The actives tend to be a more mechanized system but the retirees, we have to hire an enormous number of call center folks each year when we bring in a large new base of retirees. So, as long as we’re continuing to grow and we get them, we’re delighted about that. We’ll take the fact that we have to invest in them for the long run profit that they generate. But we’re looking forward to continue and grow the retirees for a number of years more.

Sure. I guess it doesn’t surprise me because as you -- correct me, if I’m wrong, but the first year that you bring somebody on, is it even accretive for a retiree because it’s the labor-intensive and the cost of acquisition must be pretty high. So, let’s bring those folks on a walk them through, signing up for the first time and then after that isn’t a little bit more [indiscernible] from years two and beyond for the period that they’re on there?

That’s correct. That’s what happens. It’s that -- that first year and it’s really that first -- it’s that quarter, although sometimes like we started ramping up earlier this year as Roger was saying, but it’s the period leading up to January 1 when we have to train and we hire and train and certify all of our associates that are going to be helping the retirees to enroll and that’s a labor-intensive business.

Okay. And then just the last one. So, moving over to the risk and financial services, I know you guys talked a little bit more of a stabilization and the teams are being flat to moderately up I think on a constant currency basis for the first quarter after declining several quarters, can you just elaborate and talk a little bit more about what might be either improving or at least getting less worse in the components of that business?

Yeah, I think we’ve been saying through a few quarters that it seems like the RFS business has stabilized either around breakeven in terms of growth or low levels of growth. There are elements of that segment, in the two lines of business in that segment, where we’re seeing [Technical Difficulty] growth software side, in risk consulting and software, and in the delegated and fund side of investment but kind of core traditional more consulting-oriented business really isn’t seeing any catalyst growth right now. And so, that’s what’s behind the guidance for the first quarter. We expect them to be a little bit better than they were overall in fiscal ’15, but we’re not seeing anything at the moment that would drive big bump there.

Yeah, I mean, I would just say also that we went through a restructuring with risk consulting and software the year before last and -- year and a half ago I guess, right, something like that, and I’ve actually been extraordinarily pleased with the way that whole line of business has responded. As Roger mentioned, the margins were kept at a comparable basis and although the revenues did increase 1% here, I mean as we said, that’s the EMEA region, which is a very big region for risk consulting and software had 14% growth for the prior year. So, that was quite a tough comparable. But I think we feel like the restructuring that we’ve done there has really positioned us for good growth and good profitability going forward and we’re very pleased with the performance.

Great, thanks. If I can squeeze in, sorry, one last one, so, initially you were talking about fiscal year EBITDA guidance sustainable around 20% and now I think you had mentioned around 21%, what's the change in improvement that you are seeing there to drive that level up a little bit?

So, we did caution I remember for this last quarter, the quarter before that that after the very strong margin performance that we had in the first half of the year that we are kind of saying don't count on that. But as we looked at our momentum going into fiscal ‘16 and the revenue momentum continues to be good. I mentioned a little bit earlier that the bulk-lump sum activity is turning out to be a bit higher than we thought a quarter or two ago. So, overall, the activity that we've had to manage productivity in the company which has gone well in addition to now continuing solid revenue growth going into fiscal ‘16 gave us confidence that we were going to continue at that about 21% level.

Great. Thanks for the question.

Thank you.

Thank you. Our next question comes from Tim McHugh of William Blair. Your line is open

Thank you. I guess I just want to ask on the exchange business. You made the comment that you don’t -- it's too early in the season to give guidance for the next fiscal year, but in the prior two years you’ve given a number, so I guess what’s different this year versus in the past?

Hey, Tim, and maybe John will add some comment. I think you are referring to the fact that we said last year, either at this time or at the analyst day that we were targeting to have 1.2 million lives. And so that was the number at that time and while we are targeting, I think at this point this year we did have better visibility into some off-cycles. Last year John mentioned that we had a larger client that was coming in. I think it was April 1 as I recall. And then I think we also knew we had a larger retiree off-cycle in the second half of the year. I think we knew that at this point. So we felt like we had better visibility last year and we are probably also a little bit more tuned right now to what the kind of actual cycle of knowing what’s coming in in the broker channel and the smaller and mid-sized active. So we don't have the visibility now. We have visibility to the sales season and what’s going on for 1/1/16.

Okay. And can you give a sense, the 320,000 active, can you directionally help us with how much of that is Liazon versus I guess the jumbo market at this point?

Yeah, I mean as we’ve said I think in prior quarters, we really don't have that breakdown because we do have – we used Liazon for both direct, sub-directed direct business as well as the broker channel. And so we view the channel as kind of fungible, so I don't have a number here and I don't think we're really providing that breakdown going forward.

Okay. And then I guess on the – I guess, you got asked on the exchange margin I guess about kind of long-term do you still -- what you think, but I guess just the math on the profitability of the retiree exchange that you gave, it implies that you're probably losing money and I guess the prior few quarters implied the same thing on the active exchange at this point. Can you talk about when you would expect that piece just to become profitable versus really the long-term target margin, but just when would it move from losing money to being profitable as you look forward?

Yeah, I will just say that from my point of view, we are still anticipating a ramp up in that business and we are investing consistent with that. We don't have a specific target out there at this point, but certainly we will respond with our investment based on the top line volumes that we see. So we are “investing”. We are showing losses in the active business now and you can see that very clearly, it's pulling the margin of the business down. But we certainly target as that business ramps up and towards the kinds of projections that are out there, that will head to breakeven in that period and towards the profit levels that John talked about.

Okay, thank you.

Thank you. Our next question comes from Mark Marcon of Robert W. Baird. Your line is open.

Good morning and thanks for taking my question. My first set of questions relates to the Exchange Solutions business and then I have a broader strategic question. With regards to Exchange Solutions, in this past quarter, can you give us a sense for how Acclaris ended up impacting the margin and how it will impact the margin in the first quarter?

Yes. I think of course, it's quite small and it came in during the quarter. As I recall, there is a few million of revenue and maybe no real impact to adjusted diluted EPS. I think there was a little bit of positive NOI as I recall, but small numbers.

Okay. And then with regards to the broker channel, any feedback at all from your non-Willis brokers in terms of their participation going forward, any sort of tone that you’ve heard there?

It's very early obviously, Mark, here, I mean we have a large number of regional brokers and we don't think there is really any impact from this deal for them. With some of the larger ones, we’re in discussions and we don't -- we’ll just see how that -- there is nothing to report at the moment.

Okay. And then with regards to the 100,000 active that are in the pipeline, can you indicate what percentage of those might be from larger companies, say more than 1000 or I mean more than 10,000 employees. I'm not expecting you to name any brands, but are there any name brand companies in there?

Well, there are certainly companies whose names you would recognize and I characterize it as there are a few above that 10,000 cut-off, but the volume is more kind of small and midmarket business.

So kind of developing the way you expect it, where basically the small mediums are showing the faster adoption, but you are getting a higher number of large companies as well. Is that fair?

Yeah. I think that's fair.

Okay, great. And then a larger strategic question, and I ask this with all respect because I recognize that I don't know anywhere close to what you know about the insurance business and the insurance brokerage business, but are there any sort of developments that could occur at Willis, whether it’s turnover, whether it’s softening in the P&C market, whether it’s alternative investment displacement, any sort of developments that would cause you to have any sort of second thoughts with regards to proceeding with the acquisition or maybe adjusting what the exchange rate is?

So, I think generally, this is really a call to talk about our results and our guidance here and so we really don't want to get into anything with the Willis merger that we have there. But I will say, we've sort of put something in the script just to comment on this. We are very much looking forward to this merger. We think it's a good thing and we remain committed to it.

Okay, I appreciate that. Thanks.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to John Haley for closing remarks.

Okay, thank you very much everyone for joining us this morning and just one final note. We’re not going to be having an Analyst Day this year due to the pending merger with Willis, but we do look forward to reviewing our first quarter results with you in November. So long and thanks for joining us.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program. You may all disconnect. Everyone have a great day.