Good day, ladies and gentlemen, and welcome to the Quarter 4 2014 Towers Watson Earnings Conference Call. My name is Matthew, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Ms. Aida Sukys, Director of Investor Relations. Please proceed, ma'am.

Good morning. Thank you, Matthew. 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 92596640. The replay will also be available for 1 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 involves risks and uncertainties. For a discussion of forward-looking statements and the risks and other factors that may cause our 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 in 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 table 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 2014 and review our guidance for the first quarter of fiscal 2015 and provide some context for the full year of fiscal 2015. As a reminder, the Brokerage business has been reported as discontinued operations in our current financial statements. The sale was finalized on November 6, 2013. In our third 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 fourth quarter results we'll be discussing today. We will begin reporting on the newly expanded Exchange Solutions segment as of the first quarter of fiscal 2015. Reported revenues for the quarter were $879 million, an increase of 5% over the prior year fourth quarter reported revenues and up 4% on a constant currency basis and up 3% 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; $169 million or 19.2% of revenues. The prior year fourth quarter adjusted EBITDA was $161 million or 19.3% of revenues. For the quarter, diluted earnings per share from continuing operations were $1.17, up 4%, and adjusted diluted earnings per share from continuing operations were $1.34, up 2%. We're very pleased with the fourth quarter results and ending our fiscal year on a positive note. Every region reported revenue growth in the fourth quarter. This was a challenging year from an economic and operational basis. Global economic conditions continue to provide an uncertain operating environment, and we undertook a number of initiatives to help build the foundation…

Well, thanks very much, John, and good morning to everyone. I also want to add my thanks to our associates for their accomplishments during fiscal '14. As John noted earlier, we've asked the team to take on a lot this year to help position us for long-term growth and strong profitability and they did it in a challenging economic environment. I believe that the investments we made this past year, while also achieving our profitability goals, have positioned us for strong future growth and value creation. Now let's turn to the financial overview. 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. 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 didn't impact the fourth quarter reporting. For the quarter, the Benefits segment had a 31% NOI margin. On a year-over-year comparison, margins were down slightly due to strategic growth investments. Resources were added as a result of new benefits administration assignments, health care consulting projects to build our OneExchange Active platform and to enhance the global Health and Group Benefits offering. Some of these costs transitioned to the expanded Exchange Solutions segment as of July 1. Risk and Financial Services had a 24% NOI margin. RFS showed strong profitability, with the Risk Consulting and Software margins returning to historical levels in the second half of the fiscal year following the restructuring of this business. Talent and Rewards had an 8% NOI margin in what is a seasonally softer profitability period. And Exchange Solutions had a 37% NOI margin. This margin is…

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

[Operator Instructions] And your first question comes from line of Shlomo Rosenbaum.

I just want to clarify some of the numbers that went out in terms of expectations for the various exchanges, kind of a housekeeping, making sure I got that right. So for fiscal year '15, you're expecting 800,000 on the Retirees and then 300,000 on the Actives. I'm just trying to get to where you're getting the 1.2 million from.

Yes, so what we said, Shlomo, is at this point in the selling season, we've locked down business that would equate to an increase of 200,000 in the retiree count. So that would be up to -- from 600,000 to 800,000. And then in the Actives business, 300,000, kind of same thing. The outlook is for 300,000 additional lives, which would take you up to, I think we said at least 425,000. So that's how you get to the 1.2 million plus the 4,000 for access.

Okay. And then what's -- just in the last 6 months, if I look at the difference in the covered lives, it looks like the Actives were basically flat. Does that have to do with all of the seasonality that's involved in that? Like the increase looks to be about 40,000 in the Retirees and then just flat in the rest of the business. Can you give us some color around that?

Yes. I mean, I don't know that it was totally flat. I mean, we did have the off-cycle in the larger market and a little bit of an increase in Liazon. So I think there was a little bit of growth that's shown, but I haven't really looked at it from a quarter-over-quarter point of view. But there are still off-cycles coming in. In fact, I believe we have one coming in on July 1. So there's-- as we've said, still, most of the growth, particularly in Actives, comes with the annual enrollment period that you'd see on January 1, but there is some off-cycle activity.

Okay, very good. Then just a couple other questions. Just looking at the competitive environment on the exchanges, how would you guys say you'd fared in terms of winning deals versus the competition success rate? Historically, you guys have gotten about 70% on the Retirees. Has that changed a lot? Can you just give us some color there?

Well, I'll give a couple of comments, Shlomo, this is Roger, and John may have some as well. I guess it's fair to say, one, that this was the first full year across the board of full competition and I think we fared quite well. There is more volume now, so I think it's a little more difficult to follow on a case-by-case basis. But I think what we ran through here really highlights, I think, what happened in the market. We've won and we mentioned Northrop Grumman in the comments. We've won some really good accounts on the Retiree business and feel really good about the forward momentum in the Retiree business, and we're happy to announce the success in the public sector with the state of Rhode Island. In the Actives sector, the Liazon business, the activity through the brokers, has been very robust and I would say exceeded our expectations when we were looking at the acquisition and so we're very pleased there. And with the larger accounts, as we said, the decision-making cycle is longer, but we feel good about the resonance of our offerings there, and the sales cycle for 01/01/16 continues right out of the cycle that we had for 01/01/15. So I think we're doing well and winning, at least, our share.

Yes. I mean, I think I agree with all of that, Roger. I guess the only thing I would add is on the Actives, particularly the bigger ones, what we've seen is that, in general, when we haven't won a case, it's because it's been pushed off for a decision for later. I think there were 2 cases where they went to a competitor instead, and in both cases, they were already existing clients for administration of the competitor. So we haven't lost anything that was really sort of a jump ball like that for that. So we feel pretty good about where we stand and our ability to compete in that market. On the Retirees, there was one big case this year that went to a competitor, but when you look at all that we've brought in, the aggregate of that is even larger than that case. So I think we still got over 50% of the market this year, which was really quite an accomplishment given that we didn't get the one big case. So again, we feel pretty good about our value proposition there.

Okay, great. And then just last question. If I take the expectation for revenue growth on the exchange for next quarter and I kind of normalize it by pulling out the $28 million that's going to be reallocated from the Benefits business, looks like the revenue is going to step down a little bit sequentially, maybe like $4 million -- to $4 million. Why would that happen?

I'd have to look at that from a sequential point of view. I mean, we wouldn't expect that, Shlomo, so we'd have to get into some of the underlying assumptions there. I mean, we wouldn't expect any kind of robust sequential growth, but we wouldn't expect a decline. So we'd have to take it personally [ph] here.

Your next question comes from the line of Andre Benjamin.

I first wanted to see if there was any update to how you're thinking or your level of investment that you made and capacity to add enrollees for both Active and Retiree and how that compares to how you're talking about the anticipated pickup. And could you confirm whether that capacity is a number of lives covered or just the number of employees?

Yes, if I followed your question correctly, and I think this is going to -- how I'm going to answer it anyway, but you're talking about how we think about adding the capacity, and I would say that it's not necessarily at this point -- while it anticipates business that has already been signed, we don't have a specific number that we're positioning ourselves for. So I think to walk through how we've thought about it, really, since a year ago or so, as we start to position the business for the 01/01/15 enrollment period, particularly for Actives, we wanted to establish a platform that could handle robust volume and across-the-board large accounts and the whole span of the market, when we got into Liazon. So the view is to really simultaneously fill both the sales pipeline, as well as the capacity to handle that market development at a level that we could handle what comes along. And I think as we've talked about it, there was a focus on 01/01/15 but also thinking about 01/01/16, and that was bolstered, I would say, by the success that we had in the client discussions, as we discussed earlier, that the client discussions, relative to our offering, relative to the ability to save money, were very constructive. And the interest level is there, talking about even out to 01/01/16. So I think that's really it. We don't -- we want to have a foundation that serves clients very well. We're very attentive to the pressure and stress that the business goes under to do the annual enrollment period. And we want to be positioned to handle that well, whatever comes along.

And the follow-up, is there anything different that you're hearing from new customers versus customers that signed up previously? How much of those are going for the self-insured versus fully insured option? And then I know you're not going to commit to any kind of multiyear view, but just trying to get a sense of how many people would you say are in that bucket of companies or lives that are looking at it actively, but don't want to be that first mover or couldn't finish their work, et cetera?

Yes, I mean, I think -- look, we see a -- we've seen a tremendous amount of interest in the exchange model, but there are a lot of folks that don't want to be a first mover, or as we said, it could be some other things, they need a little more time to socialize a change within the organization or some more time to commit to some of the financial projections, et cetera. So I think we -- we're encouraged by all of the interest and activity in that, but we don't -- we can't really offer, I think, any projections as to what's likely to happen there. I think we're not seeing anything really different in terms of the -- our new clients versus our existing clients. We see the same kind of interest and exchanges for the same reasons and not really any difference by the time when they've adopted it.

I'd just add a couple of things to that. One is, certainly, we've gotten some great response from the couple of beta clients that we had in the large company self-insured market. So that's been, I think, heartening and validates, I guess, our competitive proposition. As you look at the self-insured versus fully insured, certainly, in the small and medium market and through the brokerage network, 90% of the volume or so has been in the fully insured market. We have positioned some direct sales of the self-insured product onto the Liazon platform. So I think while it's difficult to sort through exactly what the future is going to look like, it really feels like what were -- our offerings are resonating. But again, there are competitors in the market who have their own sales propositions and clients are having to sort through that. But again, we feel good about where we are and our offerings.

Your next question comes from the line of Tobey Sommer.

You made a comment about market share kind of aligning with existing benefit and administration providers. Do you think in the health care exchange business, ultimately, that, that is how the market share will shake out?

No, we don't necessarily think that that's the case. Although I think the point about that, Tobey, was to say whoever has -- if somebody already has the work for a client, they have a bit of an advantage going in there. We would be more concerned about losing a client that was where somebody didn't have that advantage than to losing to somebody where they had that advantage.

Understood. In terms of your Rhode Island win, was your recent affiliation with The Segal Group integral in that? And are there prospects for you to continue to penetrate the public market?

No, we're working on a couple of sales with Segal right now, although we don't have anything really to update about that. But the state of Rhode Island was one that we had been pursuing before.

Back to your earlier question. The majority of the exchange clients enrolling during fiscal '15 are actually new clients to Towers Watson.

For us, yes.

So that would be kind of additive, if you were to think of it from a market share perspective, of your existing Benefit business?

That's correct.

Okay. In terms of the general move within health care towards consumer-directed health care, what are you seeing in terms of changes in either the elections of the individuals on the exchange? Or any kind of comments you could make about the move towards kind of high deductible plans, for example, would be helpful.

Yes, I don't think we have any analysis that we're really ready to share at this time around election rates or trends there. That is something that we'll be looking at and trying to understand how that's going to impact things going forward. But we don't have anything to say right now.

Is there any change to your pricing either on the expectations in terms of either the Retiree or the Actives side?

I just think...

You want me...

Yes.

No, maybe in average revenue per member, that we're still, for Retirees, still saying the 250 to 300 range is what we expect going forward. As we look at Actives, more like the 225 or so to 240 kind of range is what we're looking at going forward.

And part of that is related to the -- we're not doing a breakdown between Liazon and the TAS self-insured. So that's why the overall range averages up to that, Tobey.

Okay. So it's not a change in kind of underlying pricing?

No, it's reflective of how the mix has changed now.

Okay. Last question for me, you said you're having kind of longer discussions and dialogues with kind of larger employers about the move to exchanges. At this point, you probably have a bunch of deferrals of answers, but -- as you describe it. Do you actually have any affirmative kind of yeses and people who are signing up already for next year's enrollment?

No, we don't have that, Tobey, but what we have is the 01/01/2016 sales season has already started. So we are actively engaged with people in talking about that, and particularly folks who thought seriously about 01/01/2015, or at least thought to varying degrees of seriousness about 01/01/2015, are now deciding to turn their attention to 01/01/2016 very early so that they'll be able to make timely decisions.

Your next question comes from the line of Paul Ginocchio.

This is actually Ato Garrett on for Paul Ginocchio. First, I just want to get a sense about large client enrollment potential. Do you think there's a chance for any large clients to come on later on this year to help add to enrollment on the exchange?

Well, as we said, we do have one large client that is going to come on as of April 1, 2015, so in the remainder of the fiscal year. It's -- we don't really expect any other large clients to come in during the remainder of the fiscal year. There theoretically could still be time for somebody to decide to do that and we could implement it. But as a practical matter, we think the activity -- as I mentioned during the remarks, we don't anticipate the same kind of off-cycle enrollments among the Actives as we've seen among the Retirees, so we don't expect that to be as big a phenomena anyway. And then in addition, it's a little late. We would have seen some people if there were some big ones coming on. So not for the remainder of this fiscal year. We think we pretty much know them.

Okay. And then for the clients that you've seen making the transition to the health care exchanges, can you give us some kind of a sense of what level of savings those clients are achieving by transitioning to a health care exchange?

It varies depending on what the starting point is for the client, but 5% to 15% is what we would see most commonly. And when I say it varies depending, it's what their planned design had been and how much they're moping [ph] , but we see everybody getting at least around the 5% savings.

Okay, great. And looking for the additional investments and severance costs that you had in this year, how much of that will you be lapping in fiscal '15?

Well, Ato, I think the severance ended up around $20 million for fiscal '14, probably won't be 0 for fiscal '15. But it will be likely in the single digits, at least from what we're anticipating right now. We're just not anticipating the same level of activity. So that's kind of order of magnitude there. In terms of the investments, I think we'll be giving more specific guidance on the segments looking forward. We talked about the $13 million in the first quarter, which is really the rollover. If you recall, when we acquired Liazon, we talked about being $0.10 to $0.15 dilutive for the fiscal year '15, which are -- '14, I'm sorry, which was a partial fiscal year. And that tended -- effectively, the $13 million for the first quarter is kind of the rollover, that activity plus the expansion that we talked about, particularly for the great sales success we're having in the health and benefits administration. So I think that's the context for now and a little bit more to come in Analyst Day.

Great. And finally, looking at your retiree enrollments, was there anything in particular that contributed to the spike in enrollments?

Great sales success.

Yes, I think we had a very good sales season. We got quite a large number of clients. In contrast to, say, a year ago, when the vast bulk of our retiree enrollments came from one client. This year, we sold a large number of large clients, but it was actually a good number of large clients.

Your next question comes from the line of Sara Gubins.

I'll start on exchange as well. So could you give us any color on how many clients you're adding to the active self-insured exchange? I think you had 2 this past year, as well as Towers Watson. And could you talk about what kind of industries they're in? Is it broad? Is it concentrated?

Yes, I don't know that we have a...

We haven't actually focused that much on the number of clients or any kind of breakdown from them, Sara. So...

Yes, and it fits with kind of what we're saying that now, because the -- there's been kind of a merging of activity between the Liazon platform and the initial TAS-based platform that we had for self-insured, we really look at it as one business right now. Fair to say, I mean, it's in the large kind of self-insured client base. It's like a handful or it's not a huge volume. And the volume, as we said in the notes, the volume was really in the small- to medium-size clients.

Okay. And any -- could you give any color around for those handful of large self-insured exchange clients that you're adding, size of the employee base? Is this like another 20,000 each or bigger than that or smaller?

Yes, I mean, this probably ranges from kind of a mid-single-digit thousands up to maybe, I don't know, 25,000 or 30,000, that kind of range. And kind of the industry is pretty broad based as far as industries, not a really concentration in industries.

Okay. So of those 300,000 new covered lives that you're adding, the majority of that is going into Liazon and then there are a handful of new clients maybe adding up to 1/3 or so of that 300,000 that's going into the self-insured exchange. Is that a fair estimate?

I don't know about the 1/3, but certainly the volume was driven by the small or medium clients with -- on the Liazon platform.

Okay. So that 220 and 240 in pricing that you talked about, can we think of that, on average, as sticking for fiscal '15? Or should we assume that, that comes down more because the shift towards Liazon?

No, that's a good number for FY '15.

Okay. Just switching gears for a minute, could you talk about expectations around discretionary compensation next year?

As you know, generally, we're around the mid-30s as a percent of pre-bonus operating income. That's generally where we stick. It's come down a little bit the last couple of years and there's a bit of a mix shift in the company, but we would expect to just still be in the kind of mid-30s type range.

Yes, I mean, I think it -- there's probably a bigger difference in some ways than it looks because we actually boosted it up last year and then we brought it down a little bit this year. And so there's a bigger difference comparing one year to the next. Roger's right in about that mid-30s level is about where we come out.

Okay. And then just last question. In discussing Talent and Rewards, one comment you made was that clients are bringing some more projects in-house and that some are just not doing bigger projects. For the ones that are bringing them in-house, do you see that as a new trend? Or was that just a couple of projects that they happen to make that decision?

We don't see it as a trend. At least at the moment that's not the way we're seeing it. We think it's an artifact of some of the pressures that clients are feeling right now.

Your next question comes from the line of Tim McHugh.

I guess, just wanted to follow up maybe on Sara's question a bit. I mean, you said you weren't sure about the 1/3 that you -- she mentioned in terms of the percentage of, I guess, the active enrollments, the 300,000 coming from the self-insured or kind of the jumbo market. Can you give us a rough percentage in terms of how much is the large market versus small mid-market?

Well, the reason that I said I wasn't sure about the 1/3 is because I don't really have a number. So really no. I mean, you know what, again, just kind of reiterating, certainly, the majority is driven by the small- and mid-market, but we don't have a specific number, a breakdown there.

Okay. And is there anything that you saw, I guess, in the enrollment season that, especially for the jumbo market, given it seems the small and mid-market is certainly doing well, but for the jumbo market, is there anything that, I guess, changed your view of client adoption, that it was taking longer than you expected or there wasn't as much interest? I know you've kind of hedged that people may take long to make decisions, but I guess just as you step back from it, do you feel any differently at this point than you did 6 to 9 months ago about the exchange business?

Yes, that's a pretty good question. I guess, when you deal with the question of interest, I think the interest is every bit as high as we had anticipated it would be. I think it did take -- it is taking longer to make decisions than we had thought it would. In retrospect, maybe we should have anticipated that it would take a little bit longer just given how complex of these things are and given how complex they are for an organization to get -- particularly a big organization, to get their arms around it and to do it. But I think -- I don't think there's anything that has caused us to fundamentally question our overall thinking as to this is going to be a big business or anything like that. No, I don't think there's anything there.

Okay. I guess -- and then just two, to ask about the margin comments for the year, you talked about kind of $13 million of investment in Q1 in the exchange business. Does that lessen throughout the year? Or are there other factors? It sounds like, while you're not expecting margin improvement in Q1, you expect a fair amount or a decent amount for the year. And so I guess, what -- is there anything different in the, I guess, the remaining 3 quarters versus Q1?

Yes. I would say, Tim -- so the $13 million doesn't necessarily lessen. What will happen is that revenue will come in. So margins -- and we'll give, again, more specifics at Analyst Day. But margins, as the year goes by, margins will be enhanced.

Okay. And I guess one last question. The comment around revenue growth for this year, I think you talked about expecting to see a pickup in lump sum work. How much of a, I guess, how much of a contributory factor is that? Are you expecting a significant surge like we saw the last few years? Or is it more just a return to kind of normal level? Trying to understand if it's providing a big boost or just normalizing, I guess.

I think it's somewhere in between. I think we had some bulk lump sum work this year, but it was a big step-down from the year before. We think this is a small step-up from this year. So a help to us, but not what it was 2 years ago.

Your next question comes from the line of Jeff Volshteyn.

I know we're running late here so I'll be efficient. Just following up on Sara's question, let me try to ask it another way. When you look at 2015 enrollments, do you expect the majority will come from brokers or directly from the direct channel?

The majority will come through brokers.

Okay, okay, that's helpful. Looking at Access, I recall there were technical challenges with public exchanges as far as how to get people on those exchanges. Where does this stand now? And can you just give us a little more color on the Access business?

Do you want to...

I mean, I think the Access business, there still is -- while we're still actively discussing that with clients, because of the uncertainties about the public exchanges and I think the full kind of network of the public exchanges, there's still uncertainty about how much volume we'll see go through that. So ultimately, it still seems to be an attractive part of our offering, but we're not anticipating a big impact in fiscal '15.

Yes, I mean -- and I think the, as Roger says, the Access is something that is not a big part of what we do. We do like having it to round out the whole notion of OneExchange. We've had good feedback from our clients about the Access product, particularly given the difficulties of working with some of the public exchanges.

That's helpful. And a final question for me, on the health consulting business. You had strong results this quarter. How should we think about it going forward as it shifts into the Exchange bucket, so to speak? And will we be able to use the historical comparisons on an apples-to-apples basis?

Well, I mean, I think I would say this: we have remained committed to maintaining a very strong consulting business in the Health and Group Benefits. Even if exchanges grow to be quite big, we expect there will be a lot of clients out there that will be looking to use our health care consulting services. So we're committed to maintaining them. I mean, I do think though that if there's a big shift to exchanges, then clearly it won't be apples-to-apples.

Ladies and gentlemen, I would now like to turn the call over to John Haley for the closing remarks.

Okay. Thanks very much, everyone, for joining us this morning. We look forward to seeing you at Analyst Day on September 19 and reviewing our first quarter results with you in November.

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.