Towers Watson & Co. (TW)

September 14, 2012 10:00 am ET


John J. Haley - Chairman, Chief Executive Officer and President

Carl Hess - Director of Investment Consulting for North America

Mark Maselli

Bryce A. Williams - Head of Exchange Solutions Business Segment

Roger F. Millay - Chief Financial Officer and Vice President

Gene H. Wickes - Managing Director of the Benefits Business Segment

Paul G. Morris - Managing Director of EMEA

Julie J. Gebauer - Managing Director of Talent & Rewards

Patricia L. Guinn - Managing Director of the Risk & Financial Services Business Segment

Miriam Connaughton

James K. Foreman - Managing Director of North, Central and South America Regions

Gordon L. Gould - Head of Corporate Development Unit


Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division


John J. Haley

Good morning, everyone, and thanks for joining us for our 2012 Analyst Day. We're glad to have you all here with us. And we're excited to tell you about our plans for the coming year.

Let's see, before we get started, I have to remind you that we'll be making some forward-looking statements today and our actual results may be different than expected. In this presentation, we'll be using non-GAAP measures, which we believe are relevant for evaluating our operating results.

So this is the agenda for today and we're going to take a bit of a break from the traditional way we've done the Analyst Day. And instead of going through and providing a segment by segment profile, what we're going to try and do is give you a deeper look into some of the types of works we're doing. And we hope to give you, in that way, a little more context to our plans in the guidance and highlight some of the innovative new areas that we're working on. So this is the agenda for today. Let me start out by introducing the Towers Watson leaders who are here today. Some of them will be speaking, and some of the others you'll get to speak with at lunch. We have here our 3 segment leaders: Gene Wickes, who heads our Benefits segment; Patricia Guinn, who heads our Risk and Financial Services; and Julie Gebauer, the leader of Talent and Rewards. We have 2 of our regional leaders, Jim Foreman who heads the Americas; and Paul Morris from Europe, Middle East, Africa; and then we have Roger Millay, our CFO.

We also have with us today leaders from some of the most innovative and fast-growing parts of Towers Watson. They'll be giving you insight into the areas and some idea as to why we're so excited about the potential opportunities there. Carl Hess is going to be speaking on de-risking trends. Mark Maselli is going to be speaking on Health and Group Benefits; Bryce Williams, on our new segment, Exchange Solutions; and Ravin Jesuthasan, on Talent Management; Miriam Connaughton, our U.S. West division leader for the Client Development Group and David Dow, the LOB leader for TAS and EMEA, are also in the audience. And they'll be available for any questions that you might have and they'll also be with us for lunch.

So we're going to try real hard to keep to the schedules so we have plenty of time for questions at the end.

Let me get right into this. So first of all, FY '12. Overall, we had a very pretty good FY '12. We had 5% revenue growth and we had overall profit growth. We made some strategic acquisitions that are going to allow us to grow into adjacent complementary markets and are going to help position us for the future.

We also experienced some challenges this year. We saw a softening market in EMEA, we saw some cyclical slowing in some of our business. And of course, we saw some impacts from our ERP deployment stabilization activities in North America. Despite all these market challenges, for example particularly in EMEA, we had a stronger than expected performance in the region.

When we step back and look at where we're headed for fiscal 2013, we see a lot of signs indicating continued growth and the strengthening of our business, and we hope to give you a flavor for some of that today. We have strong positioning in the marketplace, we have good client relationships, we have experienced management and then we hope to see additional benefits from potential acquisitions. Roger's going to talk about this in more depth when we get to the FY '13 guidance.

Most of the time today is going to be spent talking about performance, but let me first talk a little bit about some of the recognitions that Towers Watson has received. And we like to look at these -- when we went out to market after bringing Towers Perrin and Watson Wyatt together as the Towers Watson brand, we always worry a little bit about that, about coming out with a new brand and everything. But we found that we are actually quickly able to establish ourselves as a leader in the marketplace. In December 2011, we are recognized as one of America's Greatest Brands by the American Brands Council. We were ranked #1 in the Diversified Outsourcing Services category on Fortune magazine's list of the World's Most Admired Companies, that's back in March of 2012. For the second year in a row, we were named in the Global Outsourcing 100 Lists by the International Association of Outsourcing Professionals. Again, that was in March of 2012. This is also significant. We actually don't play in the HRO space, but we provide our outsourcing services for a customized approach, but we were still on that Global Outsourcing 100 List. Our newly acquired Extend Health received 2 first-place awards from Coventry Health Care, Inc. for exceptional customer service performance. And at Towers Watson, we had firsthand knowledge of Extend and the quality service that they provide because we've been working with them for a long time being their largest referral partner prior to our acquisition.

Finally, Towers Watson Risk Consulting and Software, won the Transaction of the Year in the 2011 Insurance Day London Market Awards. And that was for the acquisition of EMB, and this award recognized synergies between the 2 organizations, particularly in respect to London insurance market.

So let me just touch briefly on some things that drive our business. We have a lot of factors that do drive it. I got them listed here. I'm not going to go through all of them in detail, but I do want to highlight just a couple of examples. But first of all, anything that provides additional complexity or uncertainty, or any kind of complication is really a benefit to any consulting business, and in particular, ours. So legislative issues such as the health care reform, say-on-pay, amendments to the Pension Protection Act or Solvency II, all of these things helped build demand for our services.

Unit capital, that we have here, is a critical issue. Our employment market illustrates how important really capital is to our clients who depend on finding and retaining top talent in order to meet their growth needs. De-risking has made some news lately, with Ford and General Motors offering lump-sum payments to their retirees, and GM selling off some of their pension liability. Again, Carl Hess is going to talk a little bit more about that later. The new legislation regarding contribution changes, which was just past July 6, 2012. And these kind of modifications to existing regulations about CFOs and the C-Suite to look at options to help balance their balance sheets. We actually took advantage of some of the Exchange that [indiscernible] when he goes through [indiscernible], but it's also the kind of thing that we consult with our client.

So our strategy for continued growth. This morning, I'm going to talk about our plans for FY '13. That's the real focus of this session. And as we think about FY '13, there are 2 objectives we're talking about. One is growth, and the other is innovation. And in both cases, these are things that we're looking to respond to client needs and strategize about how Towers Watson is going to develop into the future. As you can see here, the notion is our strategy is focused on profitable growth. And we really have a three-pronged approach to our profitable growth. One is the organic part, where we're looking to increase our market penetration, where we're looking at developing a lot more in emerging markets. Emerging markets are an area where we feel we've done pretty well, but we also feel there's a lot more that we could do. It's an area that we see a special interest to growth and [indiscernible] will talk a bit more about that in his presentation. And as we

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we's tend to be very much focused on what we call our target market. And we looked at organizations that are of a size and complexity that we can have good economic relationships with them. We invest a lot in our people, tools and processes so it doesn't make sense for us to be working for smaller organizations, or for -- even for large organizations, so much on smaller projects. We need one that actually tests the people and you get the benefit of all the investments we do. So we tend to look very much at that target market and measure and reward people for assignments there.

The inorganic one, we've -- first, we did the Extend Health acquisition in the last year. That's a real good example of something that we think will pay off quite handsomely in the future. And it's the kind of acquisition that we like a lot because it's got a great cultural fit. The Extend Health people are ones that, as I've mentioned, we've known for a long time by them being our referral -- by us being a referral partner for them. We knew they were people that shared our values and that had a common approach to client service and to the market. Strategically, it fits with a great adjacency to what we did, the business that we understood, the value proposition because we've been working with our clients to choose Extend Health. It's a business that we understood what you needed to do to be successful in. So again, that great strategic fit there. And then finally, we also want to look for acquisitions where there's a good financial return on that. Roger and Bryce are going to talk a little bit about that later. But we expect to get a good financial return on Extend Health. And I think we're -- that's the same kind of thing we'll be applying as we look at potential future acquisitions.

And then finally, innovation. We've been working a lot on innovation on opportunities to expand our client base that capitalize on our existing businesses like cross-selling. We have done -- we've conducted several activities to pursue this component in FY '13. We're going to continue with similar moves to reinforce our development into the emerging markets. Of the different opportunities that we see in the marketplace today, there's 4 that we're going to call out that we especially like to talk about today, that's pension de-risking and lump-sum, which is a very important development that affects our Benefits business and also our RFS business. They've actually cut across all of our segments to a greater or lesser degree. U.S. health care and then the consulting and exchange market opportunities that [indiscernible] continue the best within -- in emerging markets.

So let's take a deeper look at some of the growth areas we see. And I'm going to talk a little bit about each of the 4 segments, and where we stand with them. So first of all, revenues in the Benefits segment. They were up 1% last year on a pro forma basis. As organizations sought our help with ongoing benefit cost and risk pressures, an increasingly volatile economy coupled with persistent low-interest environment, and in many countries, a lot of changing regulations. In the Health and Group Benefits area, clients asked our Health and Group Benefits experts to help them efficiently manage their health plans. We responded to multinational companies, sharpened focus on global health and productivity. And we helped U.S. clients reshape their total reward program and make other changes in response to the Patient Protection and Affordable Care Act. This major piece of legislation affects virtually all U.S. employers, and requires them to make decisions that will significantly affect their employees and the bottom line. And we'll develop that a little bit further.

In TAS, revenues increased significantly. Our Technology and Administrative Solutions benefited from [indiscernible] this year. [Audio Gap] We also continue to benefit from the January 2011 acquisition of Aliquant, a U.S. outsourcing and administration company. The EMEA team, in particular, has had a series of strong wins, including securing a retirement fund administration contract with Barclay. That puts us in, really, a place of superb supplier position for this scale of administration. We have the 2 largest outsourced -- private sector outsourcing contract in the U.K. with HSBC and Barclay. And as I mentioned, David Dow, who heads up that operation is here, and if people would like to chat with him or catch him at lunch, I think he'll be glad to tell you more about that. We're particularly excited about, really, what's been a win over just a spring of years in this area.

In retirement, we benefited from steady recurring work with our long-term clients. So there's the environmental pressure, the low interest rates, other pressures on business led to opportunities to help clients manage their risks that's included consulting on pension de-risking, other the DC strategies such as lump-sum distribution and management. We also saw more clients begin to bundle their administration, outsourcing and actuarial services. As I've mentioned, pension de-risking has been big news in the last 6 months or so, with Ford and GM offering their lump-sum benefits to retirees. GM selling off some of their pension liabilities. This is in reaction to new legislation regarding contribution changes just passed on July 6, 2012. We're going to be talking more about this, but this whole de-risking market is one that does require a lot of consulting help and advice and administration, help and advice for employers who want to do this. So it creates lots of opportunities for us. And it's one that we feel we've been in the lead in this area, generally, and we're pretty excited about pursuing these opportunities.

Risk and Financial Services, the segment had 6% revenue growth on a pro forma basis last year. We helped clients tackle a host of changes that were regulatory changes. There was the euro prices and the low-interest environment, M&A activity. And in insurance market

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and the insurance investment firm operating in Europe, the Middle East and Africa and North America to broaden our insurance consulting offering. In investment, delegated investment solutions, which is where we take on a lot more responsibility. We function almost as the Chief Investment Officer, say, for a pension fund. But we are seeing the demand for that growing in both the U.S. and the U.K. Assets under advice for Towers Watson's delegated business are in excess of $50 billion. So in the U.S. alone, the assets under advice using this approach have increased about $5 billion over the last 18 months. Again, we're seeing a lot of that. A lot of investors, but not the very largest [Audio Gap]

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