Good day, ladies and gentlemen, and welcome to your Willis Towers Watson Q1 Fiscal Year 2016 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 would now like to introduce your host for today's conference, Ms. Aida Sukys, Director of Investor Relations. Ma'am, you may begin.

Thank you and good morning. Welcome to the Willis Towers Watson earnings call. On the call today are John Haley, Willis Towers Watson's Chief Executive Officer; and Roger Millay, our Chief Financial Officer. Please refer to our website for the press release issued earlier today. Today's call is being recorded and will be available for replay via telephone through Monday by dialing 855-859-2056, conference ID 95282409. The replay will also be available for the next three months on our website. This call may include forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 including risks and uncertainties. For a discussion of the forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking results, investors should review the Forward-Looking Statement section of the earnings press release issued this morning, a copy of which is available on our website at willistowerswatson.com, as well as other disclosures under the heading of Risk Factors and Forward-Looking Statements in our most recent Annual Report on Form 10-K and in other Towers Watson and Willis filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as the date of this earnings call. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we may discuss certain non-GAAP financial measures. For a discussion of the non-GAAP financial measures as well as the reconciliations of the non-GAAP financial measures under Regulation G, to the most direct comparable GAAP measures, investors should review the press release and supplemental slides we posted on our website. After our prepared remarks, we'll open the conference call for your questions. Now, I'll turn the call over to John Haley.

Thanks, Aida. Good morning, everyone. Today, we'll review our results for the first quarter of 2016 and provide some guidance for the full year of 2016. We'll provide consolidated 2016 and certain pro forma 2015 financial results for this quarter. Our segment results for this quarter are presented based on the legacy Willis and Towers Watson structure. We anticipate providing consolidated segment results for the second quarter of 2016 during our August earnings call. Before we review our first quarter 2016 results, I'd like to say how pleased I am to see the focus and excitement our colleagues have brought to the marketplace and the collaboration that's taking place at all levels of the organization. I want to thank all of our colleagues for the spirit they've shown to-date and all of the hard work that's keeping us on point for achieving our long-term goals. We're pleased with how we performed this quarter. Reported revenues for the quarter were $2.2 billion, which includes $53 million of negative currency movement on a pro forma basis. Despite the currency headwinds, adjusted revenues, which include $32 million of deferred revenues, were up 16% on a constant currency basis and 1% on an organic basis. Our adjusted EBITDA for the quarter was $671 million or 29.6% of adjusted revenues. The prior year first quarter pro forma adjusted EBITDA was $579 million or 28.8%. The growth in adjusted EBITDA is primarily due to the acquisitions of Miller and Gras Savoye. Miller and Gras Savoye produced most of the profits in the first half of the calendar year. Income from operations for the quarter was $326 million or 15% of revenue. The prior year first quarter pro forma operating income was $369 million or 18%. Adjusted income from operations for the quarter was $646 million or…

Thanks, John, and good morning to everyone. I'd like to first reiterate John's comment on the great collaboration we're experiencing in Willis Towers Watson. The level of engagement I've seen from the operating committee members to colleagues around the globe has been tremendous. It really is an exciting time to be part of Willis Towers Watson, and based on the foundation being created now, I look forward to a very successful future. Before moving to the performance of the legacy Willis segments, I'd like to add more color around John's comments regarding the adjusted diluted earnings per share for the first quarter. I'd also like to discuss a couple of noteworthy adjustments to earnings, which were highlighted in the press release today. There were two significant positive impacts to adjusted diluted earnings per share. First, our adjusted tax rate came in at 19%, which was lower than our forecast due to the seasonal strength of our profitability this quarter. We expect higher tax rates in the coming quarters, particularly in those quarters with seasonally lower operating profit. Second, our outstanding weighted average diluted share count came in lower than expected due to the merger closing four days into the quarter. This lowered our average diluted share count to approximately 136 million; the current outstanding diluted shares are approximately 138 million. Now, let me turn to the reconciliation of segment operating income to income from operations, which was highlighted in our press release this morning. Most of these adjustments are self-explanatory, but I thought there were two items which perhaps needed some additional explanation. First, amortization of $126 million represents the intangibles amortization, which is excluded from the legacy Towers Watson segment results. In addition to this, there is $35 million of amortization expense reported in the legacy Willis segment results.…

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

Thank you. [Operator Instructions] And our first question comes from Ryan Tunis of Credit Suisse. Your line is open.

Hey, thanks. Good morning. I guess just taking a step back, I mean your comment that your view on organic over the full year is a bit muted based on what you saw in the first quarter, just hoping you could talk a little bit about the areas looking out over the rest of the year, where your expectations may be a little bit muted relative to where they were.

Yeah. I mean, certainly, as you look across the legacy segments of both firms, there were areas that came in a little bit softer and I think the legacy Towers Watson RFS segment is one of those pieces. As we mentioned, the Talent and Rewards business came in softer than we expected, and we're not seeing the kind of project activity that we saw there last year. And then International within legacy Willis and the CWR segment is a little bit softer. So I think those are all the areas that we're a little bit off where we expected. We do think that some of the elements there are timing in nature, so perhaps you might look at our guidance and be surprised that we're not a little bit more muted. But we think that in Asia, we mentioned Asia and International, there were some deals that didn't come in, in the first quarter, but we see them coming in later in the year. And also, as I mentioned, there were, in a couple segments, there were some tougher comparables that don't repeat later in the year. So we think a little bit muted is the way to look at it.

Okay. Thanks. And I just had a follow-up on the treasury action and the tax guidance. We saw the press release reiterating the $75 mill. I mean it seems like the – I also appreciate it's not really an inversion, but of the $75 mill, should we think about that predominantly coming from inter-company debt, or are there other – to what extent's the $75 mill dependent on the inter-company interest versus other forms of tax planning and just redomestication?

Yeah. I think, broadly, we were focused on efficiency of capital structure and efficiency of inter-company arrangements as we structure the legal entity setup for the merger. We do have inter-company debt there of course, and that is one of the elements that drives our tax efficiencies. And we're mindful of other opportunities and continue to work on it. So – and I think as we mentioned in our press release and discussion a month or two ago, given that our merger was closed in January and the new treasury regulations came out in April, we're very comfortable with the sustainability of our structure and the tax synergies that we mentioned.

Thanks for the answers.

Thank you.

Our next question comes from Michael Nannizzi of Goldman Sachs. Your line is open.

Thanks so much. I guess just a follow-up on Ryan's question in a second on the regs. But just looking at overall organic, we can focus more on Willis for the moment. In margins, when I look at peers, margins are in the mid 20%s, organic growth has been running, you know, 3%, 4% here recently, so your organic was negative adjusting for items or flattish. Margins sound like you're kind of – if we take the International and North America, in the aggregate, looks like you're looking at mid-teens margins. Why is that? Because I would guess – obviously, those margins that you're talking about are excluding the operational improvement program and other adjustments. What is that delta and how should we think about what Willis can do to try and close that gap?

Well, thanks, Michael. Look, I think this goes back to the overall merger strategy and setup and what we're implementing. I can't really comment on the margin gap that you just articulated, but it doesn't sound all that dissimilar to what we were thinking about when we set the 25% EBITDA margin target for the overall company. We think there's opportunity there. We think that OIP is clearly a great asset to have as we move towards that target, and is producing real results. So we do think as you look at some comparables that there's opportunity to enhance margin, and we're on the case. So I think that's the margin piece. I would say broadly, and maybe John wants to comment on this a little bit relative to our past experience, but when you look at the growth results here versus other players in the market, first, legacy Willis was moving the last couple years organically in that 3% to 4% range. There were some headwinds this quarter. Some of those were again timing in nature, including the pipeline adjustment that we talked about which was probably worth about 0.5 point of growth. So I think you consider the overall merger activity and you look at comparables and I think, again, we're confident in improved growth, organic growth as we go through the year, and while – again, a little bit muted, we think we're in an okay place here as we start the year.

Okay; fine. That's helpful. I mean I guess when you --

Yeah, Roger, I guess I would just – maybe just to follow-up just a little bit of what Roger said. When we look back as to where Willis had been over the last three years against our main competitor, Willis grew – the revenue growth was actually higher than our main competitors. We've outlined what we think are some of the specifics for why the growth was somewhat off this quarter, but we don't expect those to be continuing issues.

I see. I guess, I mean, I guess my question is sort of looking at sort of the base broker model and – I mean organic growth is certainly an ingredient for sustainable margin expansion. And so kind of looking at where you are now and given the growth just sort of worked against you and maybe the merger, some of the elements of the merger will ultimately sort of resolve themselves, but maybe there's a period of transition between. I'm just trying to figure out how is that – and I get the overall EBITDA margins, but if I just look at International and North America which is comparable to the way others report sort of the brokerage or risk business, what is that gap and sort of who's the person, the enabler that's going to kind of drive the direction of that margin back towards that sort of peer group?

Well, I mean, I guess I'll comment first. Look, I think that we're very committed to and very focused on our integration activities, completing the OIP program and driving to the 25% margin, and we believe that, that 25% margin is in the range of what we see competitors achieve. The team, the operating team and our overall leadership is aligned around that goal. So we will drive towards that goal through our businesses and through our operating leaders. And so I think, I mean I'm not sure exactly what you're getting at in your question, but I think it's the alignment. Again, it's observing what others can do in our market and the alignment with our business leaders that's going to achieve success here.

I'm not – I'm just asking. My question was just simply to not – it's just straightforward. It's just sort of looking at sort of where others with similar platforms are on a margin basis and sort of looking – so have you guys been trying to understand how we get from point A to point B, that's all. That was my own question. Okay. And then, as far as – just real quick on the amortization, Roger, you mentioned the Willis be – so should we then assume that starting in the second quarter, the amortization charge within Willis, that 35 million or the equivalent of that number in subsequent quarters, will be excluded from the operating income number? Is that kind of what you were implying?

Yeah. That's exactly right. And again, I'll say I guess we feel your pain relative to the differences between the two legacy companies, so that's why we pointed out those numbers as we now move in the second quarter to the new segments and the way we'll talk about them on a consistent basis. All amortization of intangibles will be excluded from adjusted operating earnings. So exactly what you said. And we think that will provide much greater clarity year-to-year. You won't have that M&A impact of intangibles interfering with the clarity of how operating margins are moving. So...

Got it, great. Thank you so much.

Our next question comes from Shlomo Rosenbaum of Stifel. Your line is open.

Hi, good morning. Thank you for taking my questions. John, one of the rationales for the merger was improving the Exchange Solutions trajectory, trajectory improved dramatically actually in the quarter from expectations. Could you talk a little bit more, was it participants that came in better, are you selling more services per client, what's going on over there?

Yeah. So thanks, Shlomo. I think generally all things around Exchange Solutions were really looking pretty positive there. We did benefit from the biggest retiree client we'd ever implemented, and so that added a lot of lives. But we have now as of the middle of last year, we had – we were up to a little close to 1.2 million, just under 1.2 million of total covered lives, from you know 730,000 the year before. We'll be growing that again this year. So the lives are going up everywhere. We are seeing – we're beginning to see some of the increased selling in the midmarket that we had expected. It's still early days for that. And I mean I think when I went through the different revenue synergies I acknowledged, we're seeing these things for the Exchange Solutions and for some of the others, but it's still really early. I mean most of those revenue synergies, we will see them in the back half of the three years, not in the end. I think the important thing from my viewpoint though is how quickly we're starting to at least see some of them come in and it's very encouraging for the long-term trend. I think – so it was really a confluence of different things, but on Exchange Solutions, we're delighted with just the growth in the retirees, in the actives and really across the board there.

Are you going to give us some forecast for this year or are we going to get that in June? I mean historically last few years you've been giving that for – when it was just Towers Watson.

Yeah. Generally, we've been doing that. We'll probably do that Analyst Day is really when we're going to have some good numbers, Shlomo. That's what it's been the last year or two. And the problem as you know is that the selling season of course for the middle market runs throughout the year pretty much. But the larger part of the middle market and the large market, it's not over till really June or July or sometime there. So it's a while before we have really good information.

Okay. And then can you give a little bit more detail on the political item that resulted to large cancellation impacted both two units in Willis, how much was that in itself a factor of muting the growth? And I'm not sure if there's anything that you feel comfortable elaborating on that to get us a little more comfortable we're not going to see a recurrence of that.

So let me just say this about that. As Roger said, it was – it probably knocked about a 0.5% off the growth rate. It was something -- it was sort of a one-time event that caused this we think, but we don't necessarily -- this is the kind of thing that we might even see this reversed in the remainder of the year. And so we're not banking on that, but that's not impossible.

Okay.

It was about $10 million, Shlomo. So...

In total for both units?

Yes, split 50/50 too.

Yeah.

Yeah.

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

No, no, no. That – this is a separate matter.

No, no. It's a one-time $10 million comp, no.

Yeah. That – yeah.

One-time $10 million. So it's 0.5% of...

I mean that's the $10 million for the whole year, yes.

Okay. So the muted growth for the year is not specifically from – inordinate amount from this one contract?

I think the muted growth is really a reflection of an overall mosaic of what's going on, and I think what Roger I think was trying to paint is a picture that looks like this, we have some specific items that we can see that caused some issues here and like the pipeline and so we see that. Whether – even if it doesn't come back, it's not going to be a repeat during the rest of the year, so we're sort of past that in some respects there. When we look at it, and you saw particularly when I was going through the legacy Towers Watson, we had some very tough comparables from a year ago. You saw a little bit of that when Roger was going through the legacy Willis things. The comparables get easier as we go through the year. So we're not saying that everything is going to pick up exactly to where it might have been. But overall, we're not feeling that downbeat about the growth. We think it'll be a little bit lower than we thought going into the year, but we're not – we're – it's not necessarily that far off.

If you don't mind, just can you bridge for us what gets better in the second half? Because we're going from 1% growth to mid-single-digits which most people would think is 4% for the whole year or above. What gets a lot better? Is it just the comps get that much easier, and therefore, we have a lot better comps or is there something else in the numbers that are going to get better?

I think partly the comps get better. I mean I think if you look at some of the – let me just give you one example. If you look at some of the bulk lump sum work that was very heavy in the first quarter of calendar 2015 and faded off somewhat in the remainder of the year.

Yeah. I mean maybe, Shlomo, just a few other things that we might have mentioned, I think we're – we think that investment will do better the rest of the year than it did in the first quarter just based on the pipeline that we see. One of the things that I think we alluded to, we haven't really discussed in the Q&A here is the impact in Talent and Rewards of the sale of the human resource service delivery business, so we'll lap that at some point this year. Talent and Rewards, I think the headline numbers make it look worse this quarter than it really is. And there – I guess John said, there are some tough comparables from projects they had going on at this time last year that we won't repeat. And then you do have again some of the timing things we mentioned before. So I think again we've gone through each of the business lines, looked at them closely and we do think that this kind of muted view of mid-single-digit organic growth is really what our momentum reflects at this point.

Okay. Thank you very much, guys.

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

Hi there. Good morning and thanks for the questions. Maybe I'll move off organic growth for a minute and just talk a little bit more about EBITDA which I think did come in pretty strong, both on a dollar basis and the margin side. So can you maybe flesh out a little bit of what happened in there, what sort of cost synergies and why you're able to sort of keep a higher EBITDA despite the top line being a little bit more challenging right now? And then maybe how do we think about that trajectory going forward?

Yeah. I mean I think, again the trajectory that we expect from an EBITDA margin point of view and I won't say necessarily every quarter, but given our focus, we expect gradually improving EBITDA margins. For this quarter particularly, one thing, and we mentioned it just briefly in the script that was a little bit stronger than our forecast and led to some of the margin enhancement again versus what we expected is Gras Savoye came in stronger in the first quarter than expected. Some of that was just due to some revenue accounting comparability between the two firms. So we haven't changed our view on the full year for Gras Savoye, and they're coming in nicely. But it did give some acceleration into the first quarter. I think otherwise, OIP savings are flowing in. I think the team was attentive and you might recall if you follow both the legacy companies, there was cost activity going on as we entered the merger in both companies. And we're seeing a benefit of that, so I think otherwise there's disciplined operating activity going on. I mean we did mention again and it is unfortunate with the project cancellation that we mentioned earlier, but when you look at the two parts of legacy Willis that were furthest advanced in the OIP program, both North America and GB are seeing a benefit now in their margins of OIP. Unfortunately in GB, because of the cancellation, it's not as visible as it otherwise would have been.

Okay. And maybe...

And, Roger, just I guess the other – and to make sure we're clear about this that the – quarter one and quarter two to a lesser extent are seasonally strong for EBITDA, so – and for margins, and that's true in a lot of the legacy Willis segments. It's certainly true in the Exchange Solutions, which is quite heavily weighted that way. So, while we expect to have strong margin performance throughout the year, the strongest part of it is this first quarter and to a lesser extent the second quarter.

Sure. Okay. Maybe you can also talk about the OIP and are you sticking to sort of the gross savings target that was originally out there? I think it was $150 million – excuse me, $150 million for this year. If that's the holding, can you tell us what you expect the net savings to be because I think thus far sort of on the legacy Willis side we've seen the growth savings come, but a lot of it was being put back in. So I'm wondering when the inflection point comes where shareholders get a chance to see more of the return of those growth savings hit the bottom line.

Yeah. So I think – look, the OIP is one of the single most important things we're focusing on right now is to make sure that those savings do indeed drop to the bottom line. And it's a – it's one of the major focuses of the operating committee, is to make sure that we see those go through. And we're going to be looking very, very carefully at any reinvestment and try to maximize the amount that drops through. We'll probably – I think I mentioned earlier, we'll be able to give you more color around that as – at the Analyst Day in September. But that is one of the two or three major focuses of the organization at this point.

Okay. And then, lastly, maybe getting back to your capital deployment plans, I know there was sort of a commitment to start to repurchase shares in the second half of this year. It sounds like maybe a little bit more balanced of keeping some dry powder for M&A. Can you talk about what sort of you expect your share repurchases to look like? I don't think at this point you have an authorization, so maybe you could remind me about that. And also, if you want to touch upon the free cash flow outlook, I think we were hoping to get a little bit more visibility on that as you think about things with the – not only for this year but going forward over the next couple of years as those one-time expenses roll off and what you think your underlying free cash flow power can be in a couple of years.

Yeah. Okay. So thanks very much. Let me just start off addressing that. So, look, when we – we didn't mean to signal any change from anything we've said before. What Roger was saying is we expect to have a few hundred million dollars available in the second half of the year which is I think always what we had talked about. This formulation that we said that what we want to do is maximize shareholder return. Generally, if we can find a very attractive acquisition, that's the – that's probably the way we could do that best, and we would – we're always looking to do that. But as a practical matter, there's no way we're going to do any kind of really major acquisition in the first year or year-and-a-half of this merger. We have work to do there, even a more modest acquisition. If there was something that was a unique property that if we didn't buy it now there wouldn't be an opportunity to buy one like that in the future, we might consider something like that. But in general, we're going to have higher standards for doing any acquisitions. But our overall approach has always been acquisitions are first, but we have some high standards for doing that. So it's hard to find them. And then after that, we want to return the cash to shareholders. I think the – our free cash flow is going to be the major source of how we can do that, and we're looking to, in general, deploy a lot of our free cash flow over the coming years to be doing share repurchases. We don't need any kind of a specific authorization from the board. We don't need any new authorization. We have about $500 million authorization that already exists. And so whatever we would be thinking about doing this year, we're already set for that.

Our next question comes from Kai Pan of Morgan Stanley. Your line is open.

Yes, good morning. Thank you. Most of my questions have been answered. I just want to touch upon the, so basically, senior management team as well as the producers on the ground, what's the employee morale through the integration process and what's the volunteer in turnover rates?

Okay. So I think one of the things that has gratified the whole management team and the – and our boards, we're discussing with them is the very positive reaction we have had from our colleagues around the world to this merger. And I think unlike some other mergers I've been involved in, in the past where you're -- when you're buying firms where there's a lot of overlap, sometimes there's angst among folks as to what their position is going to be in the new organization. With Willis Towers Watson and the relatively limited overlap we had, we've seen I think more energy and excitement among colleagues at an earlier stage than we ever have before. We are – we have been looking at our turnover statistics. There's nothing out of the ordinary. In fact, if anything, they're a little bit lower than I might have expected. I think that we expect that we'll see normal turnover. I was prepared for turnover, actually, especially maybe last year between announcement and the closing to be a little bit higher than usual. We did not see that, and I think that again goes back to the enthusiasm that our colleagues around the world have had for this.

Okay. That's great. Last question. If you'd talk about what's the foreign currency exchange impact for the quarter as well as the potential Brexit potential impact on your business?

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

Well, yeah. I mean I think it was in the script that there was about $50 million, a little over $50 million of FX impact on the revenue line. I don't know that we gave an EPS impact, but it would be modest. And just to note going forward, you'll note that our guidance on FX is a little bit lower than where the pound and the euro are now. So there's probably a single digit from an EPS point of view, single-digit kind of sense, potential upside if rates stayed the way they are now.

That's great. And then...

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

Yeah.

So just on that, I think, like everyone else, we're following the debate there. And there's – some people are concerned about the impact of some uncertainty in the UK, although I think the uncertainty leading up to the vote is probably as great as anything that they would see too. We see basically some cons and some pros. The London insurance market could see some premium declines accelerate. The insurance centers could move elsewhere. On the other hand, their added complexity in the marketplace is in general something that's good for consulting firms and for brokers. There would be issues around any – if people did move, wiggle entities or capital or staffing that would create opportunities for us, in particular it could benefit CRB and HCP. So I think there would be some – there would clearly be some short-term dislocations. We generally feel that when there are dislocations in the market, it favors companies that are agile and nimble and flexible and we like to think of ourselves that way.

Great. Well, thank you so much for all the answers.

Thank you.

Thank you.

Okay. We're going to take one more question.

And our last question comes from Tim McHugh of William Blair & Company. Your line is open.

All right, Thanks for squeezing me in there at the end. So just some, I guess numbers questions. The – kind of the other revenue part of Exchange you talked about has very strong growth, is that project revenue or is that kind of the addition of new clients, in other words, a recurring type of uplift that we saw in that piece of the business?

Yeah. There's almost no real project revenue in Exchange Solutions. The – it comes from collecting the commissions or other fees paid for the employees, but there's not a lot of special project revenue at all.

Okay. I didn't know.

Yeah, Tim, I just mentioned it's, to some extent maybe the main driver, the continuing success in health and welfare administration business and the new clients as we've been talking about over the last year or so.

Yeah.

Okay. All right.

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

All right. That's why I was asking the question whether I didn't know if the ACA was driving...

Yeah.

...a bunch of change orders or something like that. All right. And then you talked about the seasonality of the acquisitions here more on the legacy Willis side, can you help us at all then with the rest of the year? How much – just because we don't have the history there, I guess in terms of 2Q versus the second half as we think about those businesses, I guess how much maybe first half versus second half typically?

I'm sorry, first half versus second half of?

For Gras Savoye more specifically?

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

Right.

On revenues?

Yeah.

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

Okay. Thanks.

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

Okay. Well, thanks everyone for joining us this morning, and I look forward to talking to you on the Willis Towers Watson Earnings Call in August. So long.

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