Tower Watson's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Towers Watson & Co. (TW)

Q3 2012 Earnings Conference Call

May 7, 2012 9:00 am ET

Executives

John J. Haley - Chairman, President, and CEO

Roger F. Millay - VP and CFO

Aida Sukys - Director of Investor Relations

Analysts

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Timothy McHugh - William Blair & Company, LLC

Sara Gubins - Bank of America/Merrill Lynch

Frank Atkins - SunTrust Robinson Humphrey, Inc

Julio Quinteros - Goldman Sachs & Co.

Jeffrey Volshteyn – JPMorgan Chase & Co.

Ato Garrett - Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Towers Watson’s Earnings Conference Call. My name is [Tahisha] and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today Ms. Aida Sukys. Please proceed.

Aida Sukys

Thank you. Good morning. This is Aida Sukys, Director of Investor Relations of Towers Watson. 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, 58909166. The replay will also be available for the next three months on our website. Our website also contains a few slides that are complementary to today’s call. Those slides include certain reconciliation information required by SEC Regulation G.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including statements among others, regarding expected financial and operating performance. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by the important factors set forth in our filings with the Securities and Exchange Commission and in today’s press release, and that consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by federal securities laws. After our prepared remarks, we will open the conference call for your questions.

Now, I'll turn the call over to John Haley.

John J. Haley

Thank you, Aida. Good morning, everyone, and thank you for joining us. Today we will review our results for the third quarter of fiscal 2012 and our guidance for the remainder of the fiscal year. We’re pleased with our results this quarter as we continue to produce solid growth with increased margins.

Reported revenues for the quarter were $902 million, an increase of 4% over prior-year reported revenues and an increase of 5% on a constant currency basis. Our organic growth rate, which adjusts for changes in foreign currency exchange rates, acquisitions, and divestitures, was 4% for the quarter. Our adjusted EBITDA for the quarter was $180 million, up 1% from last year and our adjusted EBITDA margin for the quarter was 19.9%.

Margin was down versus last year’s peak quarterly margin, consistent with our expectations. The third quarter of fiscal 2011 was the first period post merger that each segment experienced organic growth. Workforce alignments had just been finalized as part of the merger and as such much of the revenue growth fell straight to margin.

As we’ve experienced continued revenue growth, it’s become necessary to reinvest back in the businesses to align the workforce for sustainable long-term growth. Adjusted EBITDA excludes transaction integration cost as well as non-cash stock-based compensation arising from the merger.

For the quarter, diluted earnings per share were $0.95, an adjusted diluted earnings per share were a $1.39. Adjusted diluted earnings per share increased 2% over the prior-year. Adjusted diluted earnings per share include a normalized income tax rate and exclude non-recurring other income transaction and integration cost. Non-cash stock-based compensation cost from restricted shares issued in conjunction with the merger and the amortization of merger accounting intangible assets.

The business produced favorable results in light of challenging growth calls due to a strong quarter in 2011. There were added pressures during the quarter, such as the continuing challenging environment in Europe, mixed economic news regarding China and trying to balance the investment strategies to fuel future growth while maintaining margins.

Our management team and by that I mean the management team throughout the organization is doing a great job with continuing to develop product and service strategies that align with our client needs. After all many of our clients are facing the same challenges we see in the economic and legislative environment. I’m confident that the foundation we’re building will provide for solid long-term growth and profitability.

Now let’s look at the performance of each of our segments. All of our segments grew organically this quarter. Benefits grew 3%, Risk and Financial Services grew 2% and Talent and Rewards grew 7%. Revenue growth reflects wins from both new and existing clients.

For the quarter, the Benefits segment had revenues of $520 million. Benefits segment revenues were up 3% on a constant currency basis. The Americas region revenues grew by 6% led by double-digit growth in Health and Group Benefits. Retirement revenues were flat on a constant currency basis. The Americas region revenues increased with continued demand in our pension administration work from new clients and demand for our strategic work.

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