Welcome, and thank you for standing by. [Operator Instructions] Today’s conference is being recorded. If you should have any objection, you may disconnect at this time..

It is now my pleasure to introduce your first speaker for today, Mr. Peter Poillon, Director of Investor Relations. Thank you, sir. You may begin. .

Thank you. Welcome to our second quarter 2015 earnings conference call, which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings. A webcast replay of the call, along with the slide presentation to which we will be referring, can be accessed through our website.

If you have any questions after the call, my direct line is +1 (212) 915-8084..

Please note that we may make certain statements relating to future results, which are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those estimated or anticipated..

These statements reflect our opinions only as of today’s date, and we undertake no obligation to revise or publicly update them in light of new information or future events.

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2014, and subsequent filings as well as our earnings press release for a more detailed discussion of risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website..

Also, please note that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release and slides associated with this call..

I'll now turn the call over to Dominic. .

Welcome, and thank you for joining our quarterly conference call. With me today are John Greene, our Chief Financial Officer; Nicolas Aubert, CEO of Willis GB; Todd Jones, CEO of Willis North America; and Tim Wright, CEO, Willis International..

I am pleased with our quarterly results. We reported earnings growth up 46% and underlying earnings growth up 21%.

We don't report an organic earnings metric, but on an organic basis, we realized a very solid result with 200 basis points of positive spread, and we achieved all of that in a quarter where, as we expected, we had more modest organic revenue growth than we expect for the rest of the year.

This is a quarter where we really see the 3 pillars of our strategy in action. So as I've been doing over the past 2 quarters, I would like to open with a review of the key components of our value creation strategy..

First, we aim to drive organic profit and cash flow growth through our diversified portfolio of risk advisory, brokerage and human capital and benefits businesses.

While the first pillar of our strategy aims to achieve annual mid-single-digit organic revenue growth, we have always been clear that growth will not be spread evenly throughout the year, and in fact, as I said, we anticipated this quarter's more modest organic top line results. I'll talk about the organic results in some detail in a few moments..

The second pillar of our strategy is focus on M&A activity. We seek to acquire firms that complement our existing business mix and that fit culturally. We then work alongside our acquired businesses to create value through stronger revenue performance and improved cash flow.

This strategy is evident in our current quarter results as our underlying commissions and fees grew nicely in the mid-single digits. We continue to execute on this strategy. During the quarter, we closed on the acquisition of an 85% stake in Miller Insurance Services.

We also announced the acquisitions of smaller, very specialized businesses such as Evolution Benefits Consulting in the U.S., Carsa Consultores in Mexico and Elite Risk Services in Taiwan..

Next, of course, you know that we expect to close on acquiring the 70% of Gras Savoye that we don't already own by the end of the year. And we are truly excited about proposed merger with Towers Watson that we announced last month, which we believe will be transformational..

As we described in a presentation we filed with the SEC on July 13, we expect that revenue, costs and tax synergies will drive incremental value, totaling more than $4.5 billion as a combined entity by 2018. We are confident that each of these transactions will contribute to our underlying growth and meaningfully improve shareholder value..

Our third strategic pillar is the transformation of client service and our financial performance through our Operational Improvement Program. Our improvement in this area is the most evident in our financial results.

As I mentioned earlier, we achieved a very healthy 200 basis points of positive spread between organic commissions and fees growth and organic expense growth for the quarter.

This performance, combined with the positive spread we achieved in the first quarter, gives us confidence we will achieve an even better organic spread in the full year 2015 than the 130 basis points we originally targeted. So we have increased our annual spread target for the year to 200 basis points..

We promised you a detailed update on the Operational Improvement Program this quarter, and John will take you through this shortly. But let me steal some of his thunder by saying we are on or ahead of schedule on all of the important metric targets that we set at the beginning of the program back in April of last year.

Our progress has been strong enough that we are now confident to raise our targets for savings in 2015 and most importantly, for the annualized savings that this program will drive from 2018..

Continued execution of the 3 pillars of our strategy, organic growth, inorganic growth and operational improvement with cost control will drive improved EBITDA, cash flow and, ultimately, shareholder value..

Let me now turn to the quarter in more detail, starting with the discussion about Willis International.

Our International operations achieved underlying commissions and fees growth in excess of 25%, another outstanding result that includes the significant impact on the segment's revenue derived from the acquisitions of Max Matthiessen, Charles Monat and the IFG pension and benefits businesses over the past 12 months.

On an organic basis, International had another very strong quarter, growing 7.1%, led by Latin America and China. And once again, we saw a good performance in the developed market of Western Europe, especially in Germany and Sweden. Eastern Europe, led by Russia, grew low double digits.

We expect International to continue to drive strong revenue growth for the group in 2015..

Let's now take a look at Willis North America. The North American segment achieved organic growth of 2.5%. We saw a mid-single-digit growth from our largest practice, human capital, which is encouraging. However, while surety revenues grew solidly in the quarter, our construction industry revenues declined modestly.

This was not a surprising result as we saw strong construction growth in the prior year quarter with 2 very large onetime projects that we called out on our earnings call a year ago.

Rate headwinds in North America increased a bit during the quarter as weakening rates in property more than offset the slightly improved to flattening rates noted in casualty. .

Now onto Willis Capital Wholesale and Reinsurance. This segment includes Willis Re, Willis Capital Markets & Advisory, our wholesale business, including Miller, and Willis Portfolio and Underwriting Services, which encompasses our programs business.

On an underlying basis, CW&R revenues were up 3.6%, benefiting from revenues generated by recent acquisitions, including 1 month of Miller Insurance Services and a full quarter of SurePoint Re. However, the segment's organic commission fees were down 2.3%. Now our reinsurance business is by far the biggest business within CW&R.

On an organic basis, reinsurance commission fees declined low single digits in the quarter. Very strong growth in Specialty Re and modest growth in International Re were more than offset by a decline in North American Re. This result in North American Re was not unexpected.

You may recall that last quarter, we highlighted there was about $8 million of positive timing in our first quarter CW&R results that would negatively impact our second quarter results. That was all North American Re business.

Adjusting or normalizing for that $8 million of revenue timing, the reinsurance business would have reported mid-single-digit organic growth relative to the prior year quarter. Obviously, this has no impact on full year growth for the segment, but it did have a meaningful impact on the quarter's results..

Willis Capital Markets & Advisory delivered its second consecutive quarter of strong performance, driven by capital raising and advisory mandates completed during the quarter..

And finally, I'd like to discuss Willis GB, which comprises our Great Britain-based specialty and retail businesses. Willis GB's organic commissions and fees decreased 2.3% in the quarter. The segment's performance reflects mid-single-digit declines in retail and P&C lines, partially offset by good growth in financial lines.

Willis GB, as you know, by now is in the midst of an operational turnaround. Nicolas Aubert and the team are focusing their improvement efforts on developing deep client relationships in the large corporate space while continuing to improve services to midsized corporates.

The Willis GB segment had done a terrific job of managing its expenses during the turnaround process, actually reducing its expenses by mid-single digits and driving improved margins even as its revenues have been challenged. We are optimistic for the outlook for Willis GB..

So overall, for the group, we saw good performance in the quarter in which we fully anticipated some revenue headwinds. To compensate, we successfully managed underlying and organic performance through strong execution of our operational improvement and cost management initiatives.

And as you likely saw in last night's release, I reiterated our top line mid-single-digit organic growth expectations for the full year. As we look forward, we expect that the timing of our pipeline of project-related revenues and strong retention of ongoing revenues will drive solid top line growth in our full year results.

So we expect stronger top line performance over the final 6 months of the year, while we also remain very focused on costs..

Now I'm going to ask John to take you through the numbers in a bit more detail.

John?.

Thank you, Dominic. Good morning to those on the call. I'll be working off the second quarter slide deck, which is available on our website..

On Slide 3, you see our EPS walk. As Dominic mentioned earlier, Willis grew underlying earnings by 21% in the quarter, driven by underlying revenue growth of 5.3%, coupled with an execution of our cost management initiatives and a lower tax rate.

The underlying tax rate in the quarter was about 22%, which compares to about 31% last year, with the decline driven primarily by a methodology change in the second quarter of 2014 related to the way we recognized the U.S. tax charge to be in line with profits earned to date rather than on a straight line basis.

We also recorded a small reduction in tax provisions in the current quarter following the successful outcome of tax audits. We believe that a mid-20s tax rate for the full year is appropriate, but it will be dependent on the mix of business over the remainder of the year..

On the left side, you see last year's adjusting items. A reminder, these items included a revaluation of net assets denominated in Venezuelan bolivars and an increased valuation allowance on our deferred tax assets..

On the right side, the adjusting items we're calling out this quarter, the largest are $0.15 related to restructuring charges associated with our Operational Improvement Program and $0.06 of M&A transaction costs for Miller Insurance Services, Gras Savoye and Towers Watson.

The transaction costs were $14 million in the quarter and are reflected in reported results, not underlying expense because they are unrelated to the ongoing normal operation of our business..

Before we move on to the next slide, I'd like to comment on foreign exchange. During our call -- during our last call, we indicated that if rates remained where they were as of March 31, FX would pressure our full year EPS between $0.10 and $0.13.

This quarter, the combination of translational and revaluation FX resulted in a benefit of about $0.02 to our bottom line. Year-to-date, foreign currency movements have negatively impacted our bottom line by about $0.13. Looking forward, if rates remain roughly where they were at June 30, we expect the $0.10 to $0.13 range to be good estimates..

By the way, there've been a few questions about the $23 million of other income in the current period. That compared to $3 million of other expense last year.

When looking at those amounts on an underlying basis, meaning adjusting out the Venezuelan revaluations and gains on sales of operations in each period, the underlying values were $18 million of income in 2Q '15 and $9 million of income in 2Q '14. Those amounts represent the revaluation FX in the respective periods.

So there was a $9 million or $0.03 per share increase in revaluation FX period-over-period. As you know, we rebased our prior year measures for current period FX movements, so the year-over-year growth and underlying EPS is not affected..

Turning to Slide 4. As a reminder, the difference between reported and underlying revenue for each segment is foreign currency movement. And the difference between underlying and organic is a net impact from acquisitions and disposals.

Quarter-over-quarter, foreign currency movements negatively impacted our revenues by about $59 million, reducing the group's underlying commissions and fees down by more than 6.5%..

Dominic described the drivers for each of the segments earlier, so I'll just add these points. International's robust underlying results reflect the impact of the 2014 acquisitions, which, together, added about $40 million to revenue in the quarter. Similarly, CW&R's results reflect the impact of its recent acquisitions.

Together, those acquisitions added about $10 million to revenues in the quarter. Finally, North America's underlying results reflect revenue lost from divestitures of several low-growth, noncore businesses as we've mentioned on prior calls. The divestitures reduced revenue by approximately $15 million versus the prior year quarter..

Let's turn to our total expenses on Slide 5. What I think really stands out on this slide is in the middle of the page. We reduced our organic expenses by $3 million or about 40 basis points. Let's put that in perspective.

Just a year ago, we reported expense growth of over 6% in a negative spread to revenue growth, and you have to go back a long number of years to see negative expense growth in our business. So this is a great result and a success for the share across the company.

It reflects the continued execution of the Operational Improvement Program and strong cost management initiatives outside the program across the organization. That performance, paired with our organic C&F growth, resulted in a very solid positive organic spread of 200 basis points.

This follows on 170 basis points of positive spread in the first quarter..

Underlying expenses in the quarter were $765 million, up $37 million or about 5%. As you can see from the slide, $40 million is growth from acquisitions, so again, negative expense growth in this quarter from an organic standpoint..

Reported expenses were $817 million and include $38 million of restructuring charges related to the Operational Improvement Program, which include termination benefits, parallel run costs and professional fees..

Slide 6 takes you through salary and benefit expense, the largest component of our expense base. Once again, this is a very solid story. Organic S&B was up just $2 million or 40 basis points to $528 million. As a reminder, a year ago, our S&B grew 6.4%. You can also see that underlying S&B grew $27 million or 5.1% to $560 million.

However, $25 million of that growth is associated with our net acquisition..

Focusing back on the organic growth in the quarter, it reflects a 1.7% increase in organic headcount as well as inflationary pressures in Latin America and other markets impacted by inflation or currency devaluation..

Our S&B expense in the quarter includes a $15 million decrease from pension expense, driven by actuarial gains from changes in assumptions and the actions we took in the first quarter to freeze pensionable salaries in the U.K. defined benefit plan..

Looking at the makeup of the organic FTEs in the bottom half of the slide, you can see that we are benefiting from moving resources from higher-cost onshore locations to lower-cost offshore centers. Higher-cost FTEs have declined by 500, while offshore lower-cost FTEs have increased by 800..

Turning to Slide 7, which focuses on organic metrics. The key takeaway here is that we've made substantial improvements. On the left side, you see the trend in organic spread, that is the pace of revenue growth versus expense growth.

We've made significant progress in managing our expense growth to the point where it is now solidly below our revenue growth. This trend began in the fourth quarter last year and has continued into this year. That is a key driver of improved margins and our goal of improving EBITDA and cash flows..

On the right side, you can see clearly the positive impact on organic EBITDA. Steady revenue growth and positive operating improvements are driving high single-digit EBITDA growth. And as you would expect, these improvements flow through to our operating margins, as shown at the bottom of the slide..

We promised you an update on the Operational Improvement Program. Slide 8 highlights the updates to the program's financials. We announced the program in April 2014, a multiyear initiative designed to enhance our client service to create operational efficiencies and invest in new capabilities for our growth.

We are now roughly 1/3 of the way through the program's time line, and we're pleased to report that it's proceeding better than we anticipated. At our last update, we estimated that we could drive about $16 million of gross savings in 2015.

Following completion of the program planning activities and year-to-date delivery, we now expect in-year gross savings of $80 million. 2014 and '15 projects will deliver annualized cost savings of more than $180 million when complete in 2016. So 1/3 of the way through the program, we see 60% of the original estimate of the annualized savings.

This is encouraging, to say the least..

And given the strong progress, as you might expect, we're updating our estimates. Starting again with 2015, we originally forecasted at least $60 million of savings with associated cost of $130 million. As I just mentioned, we now believe we will achieve savings of $80 million with restructuring cost of $140 million.

So we expect to deliver about $20 million of additional in-year savings for an additional $10 million of expense. That's the trade-off we're happy to make..

You'll also see in this slide that the program turns cash positive in 2016 and will generate additional positive cash flows as time progresses. Looking further ahead, we are now targeting cumulative savings of $490 million for the entire program with a total cumulative cost of $440 million.

This compares favorably to our target of at least $420 million of savings against $410 million of costs. Once again, a nice way to think about that is we expect to drive an additional $70 million of savings for an additional cost of $30 million..

And finally, upon completion of the program, we now anticipate reoccurring annualized savings of $325 million, up from our previous target of $300 million..

Turning to Slide 9. The top table breaks out the $325 million in detail by work stream. As you might expect, about 75% of the savings is related to workforce location and operational excellence, meaning moving support roles to lower-cost centers and role reductions related to operational efficiencies.

The remaining savings come from real estate optimization, IT saves and a small amount from procurement..

In the lower table, you can see our operational metrics are also proceeding well. At the inception of the program, our ratio of FTEs in higher-cost geographies to lower-cost centers was 80:20. Today, it's 75:25.

We are also making progress on reducing our real estate footprint as both the ratio of square footage or real estate per FTEs and ratio of desk per FTEs are improving. It is relatively earlier in the program, and there's still a lot of work to be done, but we fully anticipate meeting our new goals..

So that's an overview of the quarterly results and the Operational Improvement Program. Let me conclude by stating that we believe that we are well positioned to achieve our stated goals for 2015 and deliver profitable growth going forward..

With that, I'll hand it back over to Dominic. .

Thank you, John. Let me summarize with a few brief comments. These are exciting times for everyone here. We generated strong performance in the second quarter and first half of the year. Faced with an uneven broader market and some anticipated headwinds, we executed against our strategy and effectively managed our costs.

Our organic performance continues to be solid, leading us to increase our guidance to 200 basis points of positive spread. Meanwhile, our execution as it relates to both our M&A and our operational improvement continues to be strong.

After closing a number of successful transactions in 2014 that are adding to our performance this year, we have embarked upon and are delivering against a still more ambitious strategy in 2015..

We further strengthened our position as a premier London specialist broker with our acquisition of Miller Insurance, while our pending acquisition of Gras Savoye expands our geographic presence and exposure to our multinational client base.

And of course, there is a proposed merger with Towers Watson, a transformational transaction that will create significant opportunities for growth and value creation. In each case, we have identified a transaction with a strategic partner who brings synergies in client service and operations across geographies.

I am confident in our ability to succeed in each of these endeavors. We've done all of this while successfully executing on our Operational Improvement Program.

As John discussed today, we've made excellent progress towards our goals, and as a result, we've raised our cost saving targets for the program to $325 million, the majority of which will fall to our bottom line earnings. We are unlocking significant value through this effort, and we remain focused on its continued success..

We've navigated a challenging first half well and are positioned for success both in the near term and in the long term. I am very proud of our teams and their hard work. And I know they will continue to drive execution through to completion..

Let me now turn to our transformational agreement with Towers Watson. As I have just articulated, we're making great progress on our stand-alone plans. We believe, however, that combining our strengths with those of Towers Watson and adding $4.5 billion of synergies that we see for the new company creates even stronger medium-term performance.

And in fast-changing and consolidating health and property casualty industries, we believe the new Willis Towers Watson will be extremely well positioned for the long term..

Let me now turn it back to the operator, and we can take your questions. .

[Operator Instructions] And our first question today comes from Kai Pan from Morgan Stanley. .

The first question, on the recent management departures at Willis Re, I just wonder what's the impact on the organic growth as well as benefits on the expense side from those departures.

And do we expect more of those turnovers, especially now you have announced the merger with Towers Watson, maybe created some uncertainty at the management layers?.

So let me take that. Obviously, Willis Re is a fantastic business, continues to perform very strongly, had organic growth in the first half of the year and continues to perform strongly. It is flattery actually that we are starting to see in 1 or 2 departures to other firms, reflecting the strengths.

I can assure you that we are replacing those people with very high-quality replacements. We've already taken steps to do that. We are very focused on our clients. Our retention rates remain extremely strong, and we're optimistic for the outlook for Willis Re, absolutely.

And John Cavanagh and his management team are very focused on driving the business performance.

As to the reaction to Towers Watson, the reaction within Willis Re is the same as it has been across the whole Willis, which is that it is seen as a fantastic opportunity for our organization and that the combination has been greeted with great happiness and excitement by our staff, including our staff at Willis Re. .

And then if I can just add, Kai, on the expense piece, it's not creating a material change to the expense base whatsoever. A few of the notable departures were on garden leaves, which means we continue to pay salary. And those who weren't, we're going to reinvest and make sure we get the right people in place. So no real change to expense base. .

That's great. The second question, on your target for this year, the spread of 200 basis points, it looks like the first half, you're already close to 200 basis point spread and the organic revenue growth is going to be stronger in the second half as well as the expense saving you mentioned before will be back-end loaded.

So do you think the guidance -- why the guidance is only 200 basis points?.

Because it's the guidance we've given. We're quite confident of that. When we look out as to how our pipelines are generating, we do see improved revenue growth, as I said in my remarks, for the second half of the year, and we're confident of our cost growth. So therefore, for the full year, we target to 200 basis points.

If we improve upon that, that would be good news. .

Great. Lastly, just on the Towers Watson merger, your recent additional slides on the revenue synergy.

And could you elaborate more how do you arrive those like 3 buckets in terms of the potential revenue synergy?.

So Kai, I think we'd like to focus this call mostly on our second quarter earnings. And obviously, Peter Poillon is happy to take you through some of the detail of that, or others of us, off-line.

But we did outline, I think, quite clearly that we see the exchange business helping to distribute the exchange offering of Towers into the middle market in North America will drive significant increase in our revenues that we see the Towers relationships in the large corporate states in North America helping us to accelerate our already planned investment in the large corporate space and P&C in North America, and we see the opportunities to take some of Towers' capabilities offshore across our larger network.

We have 80 owned countries, they're in 37, is an opportunity to raise revenues there. We're happy to delve in more detail, of course, but given the time we have today, let's just leave it at that. .

Our next question comes from Ryan Tunis with Crédit Suisse. .

I just had a couple quick ones for John, I think. The first one, I guess, is on the M&A transaction-related cost, $7 million in the first quarter, $14 million in the second. Obviously, you're working on the Gras Savoye deal, on Towers.

What's a good quarterly run rate to use there for the remainder of the year and even heading into 2016?.

Yes. So those charges that came through in the first half are probably slightly elevated from a run rate standpoint if you exclude Towers. So maybe a mild reduction on those. And then whatever Towers turns out to be would be incremental. .

Okay. And just on the pension stuff that you did last quarter.

I might have missed it, but what was the expense reduction from that this quarter? And how much of that is cash versus just actuarial amortization?.

Yes. So good question. So year-over-year, the benefit from pension expense is $15 million in the quarter. And we expect the total year credit to be between $60 million and $70 million. Some of -- about half of that is from the change in actuarial assumptions. The other half relates to the freezing.

And what the freezing actually did is lowered the actuarial deficit. So what it's done effectively is positioned us well to be able to revise the cash contributions in the future. That's a conversation that's ongoing with our pension trustees. And we'll give an update on the details of that when we've reached an agreement. .

Got it. And then just lastly, I think I heard you say that Russia and Eastern Europe grew low double digits this quarter.

What's the outlook there in the back half of the year, given the headwinds?.

So let's have Tim Wright, CEO, Willis International, just to respond to that.

Tim?.

So I don't need to tell you about some of the issues in Russia that are very public macroeconomic. But in terms of the impact on our business, we have a fantastic business in Russia. We do a lot of project business because the capital markets have been closed to Russia or partially closed. There's been less project business, less one-off earnings.

And obviously, with the devaluation of the ruble attached to oil prices, there's pressure on the economy more generally. So we anticipated for the year that we would have quite a considerable slowing in our business in Russia. We've actually found in the first half of the year the business has been less bad than what we expected.

And as in Q2, we did have a major project that the team won that helped our earnings and those of Willis GB because that's business that we both do. In terms of the forecast for Eastern Europe, I keep saying it is going to be more pressured in the future, but as the quarters go by, things are less bad than we had originally anticipated. .

Our next question comes from Dan Farrell with Piper Jaffray. .

Just you saw a solid growth in the -- on the organic margin in the quarter, but underlying margin came in only slightly up about 10 basis points. So M&A is clearly still having some impact there, and we have some further M&A going forward.

How do you think about the ability to improve the margin on M&A? And with the other acquisitions coming in 2016, is that still going to be a headwind to overall underlying margins?.

So let me just take that. Just to be clear on our philosophy, we're very focused on cash flow and cash based upon what we spend, right. And some of the businesses we may acquire may actually be lower margin than business we have already in the stable.

But that doesn't matter as long as they drive improved cash flow growth relative to what we paid for them. Let me have John now talk a little bit about how he sees margin evolve. .

Yes, so thanks, Dominic. We calculated about 20 basis points of positive spread on the revenue growth of about 5.3%. The acquisitions that came in this year are -- they're going to be cash flow positive. We like the EBITDA that they are generating. There is some amortization that we're going to likely move to provide a cash EPS to you on this.

So the outlook will, frankly, partly depend on revenue growth and continued execution on our cost management strategies. We feel good about what we bought here over the past 12 months and look to a positive outcome for the remainder of the year. .

Okay. And then just one additional question. Underlying income on an aggregate basis only up about 6%. Is part of that being impacted by the timing in reinsurance of the $8 million? Can you remind us of the margin with that.

Was that sort of pure profit in both segments? Or was there a margin associated with that $8 million?.

Well, there's always some costs associated with transactions, right, because there's incentive comp plans that pay based on the revenue generated or a view of EBITDA generated. So certainly, there was some amount of cost.

And the first bit of your question, could you repeat that in terms of what we're looking for?.

I'm thinking about the delta, the 8% -- I'm sorry, the 6% growth in underlying income. You had about 21% growth in EPS. Obviously, some of the difference is tax rate and FX. But it doesn't seem to be all that I am wondering, if we think about that, if sort of the timing of the revenue as well. .

Yes. Certainly, there is definitely the timing in place. So Dominic highlighted the one significant transaction, I think it was about $8 million. And most of that would flow right through down. There'd be some carved out for incentive compensation. .

Our next question comes from Michael Nannizzi from Goldman Sachs. .

Just a couple here. I guess, John, sorry to go back to income piece, but if I pull that $23 million out of my model, just from a mathematical standpoint, that impacts my operating earnings.

So I'm just trying to understand, I get the year-over-year comparison, but is that or is that not in the $0.58?.

Yes. So it's -- we stripped out the impact of FX. And you'll note that there was the Venezuelan bolivar revaluation in the prior year, which was 14, it was $1 million in the current year. And then there is some additional FX that gets stripped out. So the $0.58 is effectively without the impact of the FX. .

So -- okay. So if I take that $23 million out, I see that as having about like a $0.09 impact.

Is that -- so I guess just to reiterate, is it -- a little bit more than that, is the sort of the $23 million is not or is in the $0.58?.

Yes. So we stripped out FX out of the underlying. So maybe what I'll suggest we do is you and Peter and I, if necessary, get together after the call and walk through how we rebased the prior year to take into account the FX, and create a true comparison of underlying performance. .

Okay. Okay. That's fine, I guess. And then on the Operational Improvement Program, can you talk -- you mentioned it being cash neutral in 2 years. I thought that I remember that there was some proportion of the cash savings that would get reinvested and some proportion that would be cash.

Is that right? And can you sort of talk about -- I'm just trying to get an understanding of like what -- when did that break even from a cash standpoint?.

Yes. So what we're seeing here, and I referenced the slide, we're seeing in 2016 an estimated spend. So restructuring charges are about $140 million, and we expect savings to be about $150 million. So the savings will be embedded in the results. The spend of $140 million will be consistent with what the spend was in the prior year.

So if you look at the savings versus the $140 million restructuring charges, you get positive cash flow. .

All right. Okay. So the -- but all of the savings are then straight cash? I mean, everything is coming down the cash -- there won't be any reinvestment of those savings so... .

It's Dominic here. Let me explain this, right. From the point of view of the program, the program is going cash positive as of 2016. Totally separately, totally separately, we then decide whether we see incremental revenue growth opportunities over and above our baseline that we would decide to reinvest in.

That's a separate decision to the Operational Improvement Program. Do not bundle them together. So the simple point is the Operational Improvement Program goes cash positive in 2016. If we then decide to take some of those savings and reinvest in revenue generating opportunities, that's a different decision. .

Got it. Okay.

And then lastly, looks like you raised some debt in the quarter, was that done in anticipation of just liability management, retiring some debt that's coming due? Or was there a purpose to that additional debt raise, if I'm reading that correctly?.

Yes. There was a purpose. So we closed Miller on May 31, and we used the revolving line to fund some of the cash expense related to that transaction. .

Our next question comes from Sarah DeWitt with JPMorgan. .

On the organic growth, if you back out from the unusual items that you called out like the construction projects a year ago and the timing differences, what was the organic growth ex unusual items in the quarter?.

Yes. So it would be about 2.5% to 3%. .

Okay.

And then as we look forward, how much of a tailwind from these future project-related revenues should we be thinking about in the back half of the year?.

Well, we said -- it's Dominic here. We said -- I said that we expect stronger performance in the second half of the year, and we are sustaining our mid-single-digit organic revenue growth forecast for the full year. .

Okay.

But you won't quantify those project-related revenues?.

That's correct. .

Okay. Great.

And then separately, from the Towers Watson merger, now that it's been several weeks, could you just talk about the feedback that you've received internally and externally? And then are you getting any pushback from the Towers Watson shareholders looking for different deal terms or higher dividend given that the merger was priced below the current stock price at the time it was announced?.

Obviously, I can't comment on what the Towers Watson shareholders are saying. I can tell you that our communities, our clients are excited about this, and our mutual clients are excited about it. Our staff are very excited about it. As I said, across the whole range of our businesses are excited about the client service opportunities it creates.

And obviously, we've been talking to our investors and getting very positive feedback. So overall, we're very excited about how this is evolving. .

Our next question comes from Cliff Gallant with Nomura. .

I'm curious about how -- and there's so much change happening internally at the company. And I'm wondering how some of your decision making gets affected when you have something like Towers pending out there. And specifically, I'm wondering about the execution of some of the Operational Improvement Program.

Do you have to change some of your decisions as to -- about relocation of people or investing into the company? Or secondly, about M&A, I know part of your ongoing strategy is to buy smaller companies. We saw recently this PMI deal.

How does that get affected when you have such a large transformational change?.

So as is normally, in any event like this, each side of a transaction like this lines up in the period between announcement and closing. The expected M&A transactions, they see both sales and divestitures. And as you know, Towers did a divestiture in the last couple of weeks.

And so you know in advance the pipeline of potential acquisitions, potential divestitures that each side has, and we have exchanged those, because they are obviously part of understanding what you are actually going to merge with or close with, so you have to reveal that. So we have a pipeline of things.

Obviously, I can't reveal it to you that we are engaged in and the other side is aware of and vice-versa.

As to the Operational Improvement Program, we've been very, very clear all along, and the recent update and what John just went through is clear that we are going to continue to drive the Operational Improvement Program as a program onto its own with its target now of $325 million of savings.

As we bring the 2 companies together, the one area of overlap, we think, will exist between the programs, if you like, the $125 million we announced as synergies with Towers. And this program may be in procurement because, obviously, we will have some common contracts, et cetera. So that may create actually more opportunities as we look at it.

But as you know, procurement is the smallest part of the $325 million, as laid out in the slide that John went through. But let's be clear, we are going to continue to drive the Operational Improvement Program as a discrete program against its targets. .

Our next question comes from Brian Meredith with UBS Securities. .

A couple of quick questions here for you.

First one, John, Dominic, can you talk where the additional expense savings are kind of be coming from? And is any of that coming from the recent acquisitions? Did you make -- kind of revalue them and seeing if they can fit it in the improvement program?.

Yes. So Brian, most of the savings are actually FTE related as a result of relocating work from higher-cost locations to offshore locations, and that's really the driver. There's some role reductions as we simplify processes as well.

So that's really where we see most of the additional savings coming from, not only this year but as the program progresses. Related to the acquisitions, we buy complementary businesses, and there is mild synergies there but very limited.

And there's nothing planned for Gras Savoye in terms of synergies in early 2016 largely because they went through their own -- effectively their own Operational Improvement Program in '14 and the beginning part of '15. So we feel pretty comfortable about the progress they've made there. .

Yes, but what about Miller or what about the one you did in the fourth quarter? Is there any opportunity to take staff and put support roles in lower-cost locations?.

So Miller, the front end is very important that, that remains independent. We're looking at back-office support and seeing what we can do there. There is, as I said, mild synergies included when we evaluated the deal, but very mild. And the other acquisitions, we're going to evaluate them, but I wouldn't expect a lot.

We're pretty conservative when we do the evaluation on these and don't build in really aggressive assumptions on cost of revenue. .

Basically, Brian, I think the context for your question here is that the -- both the $300 million and $325 million are basically focused on our organic cost base, right? So any savings we get, which we, of course, over time will get from our acquisitions in the way that John described are over and above what we are talking about here. .

Excellent.

And then just quickly, John, do we have a free cash flow number for the quarter? And how does that compare to last year's second quarter?.

Yes. So the cash flow from operations is actually down about $70 million. And that's driven by a couple of different things. One thing to note is net income for the quarter was roughly equivalent to the cash from operations.

And what we saw quarter-over-quarter in terms of cash flow, we had some tax and pension timing, some incentives, and then working capital actually increased by about $30 million as a result of growth -- effectively growth in the business and, frankly, not enough traction in terms of receivable management that the business is now focused on. .

Okay. And then just lastly, just real quickly, tax rate.

What was the impact of the kind of procurement benefit you had in the quarter on the 22%? What would kind of the run rate look like?.

So we guided to mid-20s there. I look at it now based on the first and second quarter, and I would say somewhere between 23% and 25% range. .

Our next question comes from Bob Glasspiegel with Janney. .

Let me reiterate Brian's desire to maybe have a little bit better disclosure in the cash flow because I shared, Dominic, your high interest in cash flow as something to evaluate. And there are a lot of things going through with the FX and the timing of your restructuring program. So more data in that in the chart would be really helpful. .

That's helpful, thanks. .

So I'm getting a lot of feedback from my clients that the Towers Watson shareholder vote isn't a complete layup, and I understand you're not going to talk about Towers Watson's shareholders' and how they're treating it per se. And you think there's a good enthusiasm from both sides, which is good to hear.

Do you have contingency plans should the shareholders not vote for it? And remind me on whether the breakup fee accrues to you if the shareholders do vote it down?.

So I'm going to deal with the first part of your question. Look, we are very focused on this transaction.

We're highly excited about it that we just spent some time doing preliminary integration planning and going after a lot of the opportunities that exist both in client service, talent attraction and thinking through some of the costs and other opportunities. So we're well underway on that.

That being said, obviously, as part of being an attractive part of transaction is our stand-alone plans are robust and going forward. .

And then, Bob, if I could just add, Plan A is the merger with Towers, and Plan B is the merger with Towers. So we haven't even considered then any breakup fee at this point. Maybe just one in the contract, but it's really not even relevant to talk about at this point. .

I was just asking a contractual question on whether it accrues to you if the shareholders voted down, but you don't know whether that's the case or... .

We'll get back to you, Bob. .

Our next question comes from Thomas Mitchell from Miller Tabak. .

With CIAB and ACE [ph] getting together and some other companies increasing their consolidation, I know that the customer is the buyer of insurance, but do you see this consolidation as affecting the markets in a way that would require you to sort of bulk up your capabilities in order to deal with what might be a shrinking number of qualified markets for your clients to purchase from?.

Well, that's a good question. We definitely see a lot of evolution in both the health care markets, and you've seen a lot of movement there in the last few weeks, and in the property and casualty markets. We have been investing in preparation to those changes. We saw them coming.

And so all our investments in analytics, in data management are all about increasing the quality and depth of our client service to our corporate plans and to our insurance plans. So we were not taken by surprise by this. Our strategy has reflected that.

Our excitement -- parts of our excitement about the merger with Towers Watson is it enables us to accelerate all those moves we've already been taking because we absolutely believe that in the way in which these markets are evolving.

An adviser, broker and solutions provider will need to have deep capabilities across a range of industries and a big pool of analytic capabilities. That was what we were investing in on a stand-alone basis, and Towers Watson enables us to accelerate that.

And we think it will be important in this evolving world to have that depth and range of capability. .

Our last question comes from Meyer Shields with KBW. .

So in terms of the impact of the acquisition, if I'm getting this right, there's $51 million of revenue and $49 million of expenses in the quarter, so it seems like the margin on these companies are really low.

Is there any seasonal impact on that? Is that not representative of their future contribution?.

Yes. So there's amortization of intangibles that are impacting those new transactions. And when we -- there's a second piece that's playing as well. Some of the businesses have had lower margins than what Willis has enjoyed but generating super cash flows. We obviously pay in terms of the deal price based on the net cash flow generated.

So we're comfortable with the economics on the deal. And over time, what you'll see is improving margins as a result of reduced amortization and then the mild cost synergies we talked about. So we're comfortable with it.

And as I mentioned earlier, I think it will help the analyst community when we begin to break out cash, EPS and frankly, it will align with how Towers does it as well. So that works in many regards. .

I think there's another point here is that some of these businesses have seasonality to them, so you really only see the full effect of that impact upon us when you see how they perform during the course of a full year. .

Okay. That's helpful. But the $49 million then includes the incremental intangibles amortization.

Is that right?.

Yes. .

Okay. And then maybe this is better off-line, but I'm trying to understand the interaction between the $18 million revaluation and any impact on, let's say, the EBITDA margin.

Is that something you can go through that?.

Yes. I think it would be better, Meyer, if we take that off-line for answering. We're just about at 9:00 here, and we'll walk you through it. It's better if we walk through it after the call, I think. .

And our next question comes from Mark Hughes with SunTrust. .

Yes, very quickly, the merger-related expenses, in the segment breakdown, were those included in the Corporate segment? Or were those split among the divisions?.

Yes. So the merger expenses for Towers were included in the Corporate segment. If there is a transaction that's specific to a particular segment, they get booked on a call it a reported basis in those segments. And then when we show performance on an organic basis, we strip those out. .

And at this time, I'm showing no further questions. .

Well, great. So thank you very much, everybody, for your participation in this call. We're very excited about the outlook. Let me just close with the following. The story of this quarter is strong execution on our strategic initiatives, driving results and building the platform for the acceleration of future earnings.

We saw solid organic growth in our businesses and drove margin expansion despite the headwinds in the period and remain confident in our projections for mid-single-digit organic growth and our ability to convert this growth into profits.

The excellent progress to date on our Operational Improvement Program allowed us to increase our expectations of what it will produce this year and importantly in the long run. And our M&A strategy continues to deepen and strengthen our offerings globally.

So we are focused on continuing to execute, excited about the opportunities we are creating for the Willis business today and committed to making the merger with Towers Watson the transformational value-creating event we expect it to be. Thanks for joining us today, and we look forward to speaking with you next quarter. .

This does conclude today's conference. Thank you so much for joining. You may disconnect at this time..