Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2016 Willis Towers Watson Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Miss Aida Sukys. Ma'am, please begin. .

Thanks, Harry. Good morning. This is Aida Sukys, Director of Investor Relations at Willis Towers Watson. Welcome to the Willis Towers Watson earnings call. On the call today are John Haley, Willis Towers Watson's Chief Executive Officer; and Roger Millay, our Chief Financial Officer. Please visit our website for the press release issued earlier today.

Today's call is being recorded, available for replay via telephone through Monday by dialing (404) 537-3406, conference ID 49073928. The replay will also be available for the next 3 months on our website..

This call may include forward-looking statements within the meaning of U.S. Private Securities Litigation Reform Act of 1995, involving risks and uncertainties.

For a discussion of the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking statements, 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 Willistowerswatson.com, as well as other disclosures under the heading of Risk Factors and Forward-looking Statements and our most recent Annual Report on Form 10-K and quarterly report on Form 10-Q and in other Willis Towers Watson 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. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events.

During the call we may discuss certain non-GAAP financial measures. For discussions on financial measures as well as reconciliations of the non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures. Investors should review the press release and supplemental slides we posted on our website.

After our prepared remarks, we'll open the conference call for your questions. .

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

Thanks, Aida. Good morning, everyone. Today, we'll review our results for the second quarter of 2016 and provide updated guidance for the full year of 2016. We'll also provide consolidated 2016 and certain pro forma 2015 financial results. Our segment results for this quarter are presented based on the new Willis Towers Watson structure.

We've provided historical Willis Towers Watson segment information in an 8-K filed on July 14, 2016. .

We're pleased with our performance this quarter in a business environment that had some challenges. Reported revenues for the quarter were $1.95 billion, which includes $31 million of negative currency movement on a pro forma basis.

Adjusted revenues, which include $26 million of deferred revenues, were up 11% on a constant currency basis and 5% on an organic basis. Commissions and fees were up 3% on an organic basis. .

Net income attributable to Willis Towers Watson for the quarter was $72 million as compared to the prior year pro forma net income of $114 million. Adjusted EBITDA for the quarter was $406 million or 20.6% of adjusted revenues as compared to the prior year pro forma adjusted EBITDA of $401 million or 22.1% of adjusted revenues.

The second quarter is the seasonally weak quarter due to the low level of renewals for some lines of business, primarily related to Gras Savoye and Miller, where they had very strong renewals in the first quarter.

Portions of the consulting and administration businesses also have weaker performance in the second quarter of the calendar year due to seasonality. .

Adjusted EBITDA for the first half of 2016 was $1,077,000,000 or 25.4% of adjusted revenues as compared to pro forma adjusted EBITDA for the first half of 2015 of $979 million or 25.6% of adjusted revenues. Due to the seasonality quarter-over-quarter, we believe the first half of calendars 2016 is a more meaningful indicator of performance.

For the quarter, earnings per diluted share were $0.51 and adjusted diluted earnings per share were $1.66. .

Global healthcare solutions, the mid-market healthcare exchange, and the U.S. large market P&C sector. We've won another 9 global healthcare solution clients, and the pipeline continues to look very strong. .

Turning to the mid-market exchange. We've won a number of new clients with approximately 70,000 eligible lives for implementations this year and continue to see the pipeline build. To provide some context to the 2017 wins, Willis, acting as our channel partner last year, sold approximately 9,000 lives for all of 2016. .

Lastly, in the U.S. P&C large company space, we've been awarded 10 new projects so far this year. We're certainly off to a strong start, but we continue to believe that our revenue synergies will be much more heavily weighted to 2017 and 2018.

As we'd mentioned last quarter, most of these wins will not have a significant impact on our 2016 financial results, however, we're very pleased with the progress to date. .

Now moving on to the tax and costs synergies. We continue to be on track to achieve our original goal of a 25% tax rate, a full year ahead of schedule. We continue to expect to exceed this goal longer term.

We are reaching the estimating merger cost synergies of $100 million to $125 million by the end of 2018 and believe we're on track to achieve this goal. As noted last quarter, we plan to save about $20 million in calendar 2016 with an exit run rate of about $30 million. .

Next, I'd like to move to the Operational Improvement Program or OIP. Incremental savings from the OIP were approximately $97 million from the second quarter of 2015. We incurred an incremental $16 million of restructuring costs in this same time period.

We plan to spend approximately $165 million in 2016 and remain committed to saving $325 million by the end of 2017. OIP continues to be on track. We'll have more detailed information regarding margin impact at our Analyst Day in September. .

Now let's look at the performance as well as our revenue and margin expectations of each of our segments. On an overall constant currency basis, commissions and fees for Human Capital and benefits increased 3%, corporate risk and broking increased 9%, investment risk and Reinsurance increased 7% and Exchange Solutions increased 47%.

All of the revenue results discussed in the segment detail and guidance reflect commissions and fees constant currency unless specifically stated otherwise. .

Okay. So now let's look at each of the segments in more detail. Turning to Human Capital and Benefits or HCB. HCB generated growth of 3%, driven primarily by the Gras Savoye acquisition. On an organic basis, commissions and fees were flat.

Retirement commissions and fees were up slightly due to strong demand in Great Britain, which was offset by the expected decline in the U.S. revenues with the decreased demand for both lump sum project works. Talent and Rewards commissions and fees were down, as the number of M&A transactions and special projects slowed year-over-year.

Health and Benefits services continued to see strong demand and the U.S. large company. And as I mentioned earlier, the Global benefit solution business had strong momentum. .

Technology and Administration Solutions, or TAS, continued to produce solid results due to increased project and call center demand. We continued to have a positive outlook for the HCB business for the rest of 2016.

The demand for both lump sum projects and one-time annuity purchases has been picking up, and we expect greater activity in the second half of the calendar year. Talent and Rewards generally has easier comps and a promising data services pipeline. We also continue to expect growth in the health and benefits and TAS businesses. .

Turning to Corporate Risk and Brokering or CRB. Commissions and fees grew 9% from the prior year, largely as a result of the Gras Savoye acquisition. On an organic basis, commissions and fees grew by 1%. .

In North America, commissions and fees were down slightly after a strong first quarter. Retention levels were strong, but we experienced lower levels of new business as compared to last year. .

Great Britain produced solid results as the P&C and financial lines led our growth. The international region had modest growth despite a challenging quarter for both China and Brazil. .

Western Europe had solid organic results given the environment, and Iberia was particularly strong, growing mid-single digits as a result of new business. .

We expect CRB to show growth in the second half of the calendar year. We've seen some slowdown in the emerging markets but generally, we see a good pipeline around the globe even if it is a bit softer than a year ago.

While we don't believe the North America new business levels show any secular change in the market, we'll continue to monitor this closely. .

Now to investment risk and reinsurance. Commissions and fees grew 7% for the quarter, driven by the acquisition of Miller Insurance Services, which is performing in line with our acquisition assumptions.

Organic commissions and fees declined 4.5%, primarily due to a continued decline in demand for risk consulting projects, lower demand for investment advisory services, lower profit sharing on certain insurance contracts and a slowdown in Capital Markets. .

Capital Markets commissions and fees are closely tied to the number of insurance-related M&A transactions, and we've seen a significant slowdown in transactions year-over-year. Reinsurance commissions and fees were flat as the international market and the specialty business did quite well but new business was soft in North America.

We anticipate some growth in the second half of the year as comparables get a bit easier for the IRR segment and we may be seeing a slight increase in demand for Reinsurance due to the recent losses noted by many of the carriers this past quarter.

However, we expect most of the market headwinds related to this segment to continue for the rest of the calendar year. .

As discussed in the last earnings call, JLT paid a $40 million settlement in quarter 2 related to the fine arts and jewelry team departure. This settlement was included in IRR's total revenues as other income. This item has not been adjusted out of GAAP earnings, and this is consistent with historic practice. .

Lastly, Exchange Solutions followed up a strong first quarter with another outstanding quarter, with commissions and fees of $154 million, an increase of 47%. On an organic basis, the Exchange Solutions' segment grew by 43%.

Driven by record enrollments, our retiree and access exchange revenues increased 48% and the other Exchange Solutions business has increased 44% and 36% on an organic basis. Increased membership and new clients drove the revenue increases. .

Our health and welfare administration business is growing, primarily as a result of the unprecedented new business won over the last 2 years. .

I'd also like to provide some comments regarding the selling season for the 2017 enrollment period. We had a strong selling season and expect to enroll over 300,000 retirees and active employees onto our exchanges. In the retiree space, a little over 100,000 retirees are expected to enroll for 2017.

Now we had a record enrollment last year as a result of the State of Ohio, and we did not anticipate duplicating the 2016 enrollment levels. While we aren't enrolling the retirees of a large state of municipality this year, we continue to feel confident in this market in the long term.

However, we would also expect that the enrollments in this market will have some volatility from year-to-year. .

In the active space, we sold approximately 200,000 lives, with 1 client opting to enroll for 2018. We anticipate enrollment growth of approximately 80% to 100% year-over-year. I've previously mentioned the success we've had in the mid-market in the very short time since the merger.

I've had one comment in my previous statements regarding the mid-market environment. It appears that the adoption rate in the mid-market has accelerated, and we feel that this is sustainable.

We continue to see strong interest from the large market, and we've had some success in winning a few large clients, but the pace of adoption continues to be slower as these organizations are still taking more time to make decisions.

We can't predict the inflection point in this market, but the value Exchanges provide to both the employee and employer is quite impactful and we continue to expect the large market to be a significant part of the overall exchange market.

We expect the second half will be strong but we will not have any significant off-cycle enrollments this year, so the second half commissions and fees growth rates will be lower than we've seen year-to-date. In the Exchanges Other, we continue to add new administration clients but have strong comparables in the fourth quarter.

So we would expect commission and fee growth rates to normalize for this line of business as well. .

I'm encouraged by the quarterly results, the strong collaboration we're experiencing at a grassroots level, the commitment to the integration efforts, including the revenue synergies and of course, the continued focus on our clients. I'd like to thank all of our colleagues for their hard work in helping shape this organization for long-term success. .

Now I'll turn the call over to Roger. .

Thanks, John, and good morning, everyone. I'd also like to add my thanks to our colleagues for all their hard work. Prior to the merger, in a previous call, I had talked about the unique opportunity we had to create a powerful organization, which would be stronger than what we could have achieved as individual organizations.

Now that we're into our eighth month of integration, I'm happy to say that we're seeing clear development of these merger synergy focus areas. We have confirmation that the enhanced global footprint and large market relationships are having a positive impact on our Global Benefit Solutions business.

We're seeing some early success in utilizing the U.S. mid-market distribution network for our healthcare exchange, and we've had some early wins in the large market P&C space and our cost rationalization efforts are bearing fruit.

There's still a lot of hard work ahead of us, but seeing the collaboration among our colleagues and the market activity make me optimistic that we're creating the powerful organization that we envisioned..

Now for our financial results. As a reminder, our segment margins are before consideration of unallocated corporate costs such as amortization of intangibles, restructuring costs and certain integration expenses resulting from mergers and acquisitions. The segment results include discretionary compensation. .

Income from operations for the quarter was $136 million or 7% of revenues. The prior year second quarter pro forma operating income was $170 million or 9.4% of revenues. Adjusted operating income for the quarter was $357 million or 18.1% of adjusted revenues.

In the prior year quarter, pro forma adjusted operating income was $347 million or 19.2% of adjusted revenues. Income from operations for the first half of 2016 was $462 million or 11% of revenues. The prior year first half pro forma operating income was $553 million or 14.5% of revenues.

Adjusted operating income for the first half of 2016 was $1 billion or 23.7% of adjusted revenues and the prior year first half pro forma adjusted operating income was $884 million or 23% of adjusted revenues. .

During the quarter, we recognized a net $6 million currency gain as shown in other nonoperating income. This gain is driven by the reversal of a currency loss recognized on certain balance sheet positions in the first quarter. The GAAP tax rate for the quarter was 21% and the adjusted tax rate was 25%. .

Before we discuss the segment operating margins, I'd like to remind you that we've provided recast segment operating income for the prior periods in the 8-K we filed on July 14, 2016. Additionally, our segment margins are calculated using total segment revenues. .

For the second quarter, the operating margin for the Human Capital and Benefits segment, or HCB, was 15% as compared to pro forma 20% last year. Commission and fee declines in talent rewards and quarterly timing in the mid-market health and benefits business and in incentive costs drove the second quarter margin lower than the prior year.

As a reminder, the North America mid-market health and benefits business placed a greater number of their policies in the first quarter this year, depressing the second quarter results. For the first half of 2016, the HCB segment operating margin was 24% as compared to 26% in 2015.

We anticipate the HCB segment margin to be in the low 20% range for the year. .

For the second quarter, the corporate risk and broking segment, or CRB, had a 19% operating margin as compared to a pro forma 22% in the prior year. For the first half of 2016, the CRB operating margin was 19% as compared to 17% last year.

As a result of the heavy lift weighting of commissions and fees for Gras Savoye in the first quarter, the seasonality of the quarterly margin has changed as well. We anticipate CRB's operating margin to be around 20% for the year.

The team is focused on balancing the expense base against the current revenue environment in order to drive margin enhancement. .

For the quarter, the investment risk and reinsurance segment, or IRR, had a 25% operating margin. The margin included the $40 million JLT settlement relating to the fine arts and jewelry team departure. Without the legal settlement, IRR's operating margin would have been 17% for the second quarter or flat year-over-year.

The increased margin was a result of the legal settlement and the Miller acquisition, which were partially offset by the decline in commissions and fees in the Risk Consulting and Software and investment businesses. Inclusive of the legal settlement, we expect the IRR segment margin to be around 20% for the calendar year. .

Exchange Solutions' operating margin was quite strong at 20% as compared to 8% in last year's quarter. For the first half of the calendar year, the Exchange Solutions' segment operating margin was 22% as compared to 11% last year. .

For the quarter, the Retiree and Access Exchanges led the segment with a 45% operating margin, with margins being flat to down for all other lines of business. We continue to invest in the actives exchange. Margin on the administration business is generally soft for several quarters as new clients come on the platform.

For 2016, we expect the Exchange Solutions' segment margin to be in the mid-teens. As a reminder, margins are seasonally higher in the first half of the calendar year as compared to the second half of the year due to our enrollment season.

Costs build up prior to the open enrollment, but commissions and fees are recognized over the year once the policies become effective, which is typically the 1st of January..

Moving to the balance sheet. We continue to have a strong financial position. During the quarter, we successfully issued our first public Eurobond of EUR 540 million, 6-year issuance. This transaction completed our debt restructuring plan for the year.

A portion of the bond proceeds was used to pay off the remaining balance on the $1 billion term loan facility we entered into in November 2015. .

We also reinitiated our stock buyback program in June. Through August 1, we've repurchased $100 million or approximately 805,000 shares. We anticipate repurchasing another $200 million by the end of December for a total repurchase of $300 million for the 2016 calendar year..

Free cash flow was $265 million this quarter and $335 million for the first half of the year. Free cash flow is generally expected to build through the year. .

Now let's review our guidance for fiscal year 2016 for Willis Towers Watson. We expect to incur approximately $150 million to $175 million for integration- and transaction-related items. Our deferred revenue add back adjustments were completed in the June quarter.

Integration- and transaction-related expenses and restructuring costs will continue to be adjusted from our GAAP measures..

In fiscal '16, we expect reported revenue growth to be around 7% and constant currency revenue growth to be around 10%, with the primary drivers being the Miller and Gras Savoye acquisitions and the Exchange Solutions' segment. We're bringing organic revenue growth guidance down to a range of 2% to 3%.

Although the second quarter organic growth was quite solid at 5% overall and 3% for commissions and fees, we continue to see headwinds and lag where we expect it to be.

This new range reflects the market environment we've seen in the first half, with some expectation of slightly improved commission and fee organic growth in the second half due to pockets of improved business momentum and areas of better sequential and year-over-year comparisons. .

We continue to expect GAAP operating income margin to be around 8% and adjusted operating income margin to be around 20%. We believe the various cost-reduction programs underway will allow us to keep this margin in line with previous expectations.

In calendar 2015, pro forma GAAP operating income margin was 10.5% and pro forma adjusted operating income margin was 19.3%..

The GAAP tax rate for the year is expected to be in the 10% to 11% range and the adjusted tax rate is expected to be in the 23% to 24% range. We expect GAAP diluted EPS to be in the range of $2.48 to $2.68. Adjusted diluted EPS is expected to be in the range of $7.60 to $7.80, which is down from the previous guidance of $7.70 to $7.95.

Guidance assumes average currency rates of $1.38 to the pound and $1.11 to the euro. .

Overall, I'm very pleased with the integration efforts, including the early wins that relate to our revenue synergies. The focus on margin growth and our continued progress in streamlining reporting. Now I'll turn it back to John. .

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

[Operator Instructions] Our first question or comment comes from the line of Greg Peters from Raymond James. .

I have three areas I'd like to focus on, competitive positioning, the OIP, and EBITDA guidance. First, on competitive positioning.

Could you provide some additional color around how you see where the company is considering the results -- recent results from some of your peers and what looks to be like some of the challenges you reported like in legacy Towers Watson in the second quarter?.

Yes. So let's see, focusing specifically on the legacy Towers Watson there. I think -- we see some challenges in Talent and Rewards, as I mentioned. And specifically, that is obviously the most economically sensitive of our businesses there and tends to go up and down.

As we've seen a cutback on M&A and on some other projects, that has impacted where we are. We don't feel that we're losing out necessarily to the market at all. I just think we see the market as being a little bit slower. We do feel pretty good about -- that we think we'll see a little more of a pick-up there.

We have easier comparables, and we also see maybe a slightly improved pipeline for the second half of the year. So while it's down, we don't feel that we're losing any market share, and we feel that we continue to be well positioned there.

I think in the Risk Consulting and Software and in the investment part of the business, those are both ones that have seen some challenges in the last couple of years really. And I think we continue to see them undergoing some challenges.

Now the Risk Consulting and Software is not one that our major competitors really have, so we don't have any direct comparables there. But we do see a decline in a lot of the risk consulting projects.

The software piece of that business is doing relatively well but the consulting part of the business, we're just seeing less of an appetite for that among our clients. And I would say that again, it's not so much that it strikes us that we're losing market share there. It's that we just see the market being softer than it had been.

In the investment part of the world, we don't run the funds of funds and so we don't have a direct comparison again to some of our competitors, but we are seeing a decline in some of the consulting projects around that. And so we're seeing more of a focus to some of our delegated investment, which I think was the growth area that we see.

But a large part of our business has been consulting, and we do see some softness there. If I look at the rest of the businesses, whether it's legacy Willis or legacy Towers Watson, I think we see some ups and downs.

I think, in general, we're within 1% or so of where the market is going, with the -- with maybe an exception of the Exchange Solution, which has just had a fantastic half -- first half of the year. .

Great color. On the OIP... .

Yes. [indiscernible].

Yes, I just wanted to circle back on your comments on OIP. I know and you've previously said that you're on track to get the 325 savings, but I know that a lot of it has been spent or invested so far.

Can you give us an update on what you might expect to harvest in savings over the next 2 years of that 325?.

Yes. So that's a subject of intense study by us right now, and I think Greg, we'll really be -- we're really targeting next month when we have the Analyst Day to present the detailed analysis of that.

But I think that it's safe for us to say that, I think, we were changing a little bit -- well, we're changing a lot the focus of OIP to say what we're concerned with is not what the cost reduction is. What we're concerned is what the margin improvement is, and so we'll be prepared to address that next month. .

Perfect. And this, just -- and I'm going to use that to dovetail into the EBITDA issue. Looks like the guidance is just a tad lower than where it was before. I'm curious if that changes the calculation or the calculus on the debt and rating agency discussions.

And more importantly, ultimately, we're trying to reconcile EBITDA with your longer-term target, I think it was 25% by the end of 2018. So any color there would be helpful. .

Yes. I'll let Roger address that. .

Yes, just to the first question, no impact on any rating agency matters at all. And in terms of the goal, I mean as John said, we will be talking about the levers to get to the goal by 2018, and we're still focused on that and creating the structure internally to drive to that. .

Our next question or comment comes from the line of Bob Glasspiegel from Janney. .

A quick question on the Reinsurance organic guidance, just making sure. We knew about the JLT settlement when you gave the prior guidance.

So I assume we're not factoring any lost revenues from departures in the revised lower guidance? It's other factors that you cited?.

Yes. I think that's right. So of course, there's a lot to IRR, and John already talked about the legacy Towers Watson Risk and Financial Services piece. There's no revision in that guidance related to the departure of the fine arts and jewelry team or no change at all really with respect to that matter. .

Just clarifying that. You don't look to see any significant revenue lost from the departures you can replace that with new hires? Or is that a [indiscernible].

No. What I'm saying is... .

No. That's already in there is what we're saying. It was already in there previously. .

Right.

And what is the sort of revenue impact from the departures? Is it material?.

I think it's about $10 million.

Is that right?.

Somewhere in that neighborhood. .

Or is it about $20 million? $20 million revenue. .

Yes. Yes. $20 million. About $20 million. .

Okay. That's helpful. The free cash flow operations in the quarter were roughly $300 million of -- from a cash flow statement.

What were the big drivers in the improvement there in the quarter?.

Well, I mean, I think it's -- so if you're looking sequentially, of course, we paid incentive comp in the first quarter, so for... .

I was looking more year-over-year, it was 300 versus 70?.

Yes versus even 7, I think. So when you're looking at the comparative cash flow statement, that's just the legacy Willis cash flow statement. So the biggest difference is really the consolidation of the companies and the free cash that's been added as a result of the merger. .

There weren't any significant items in and out that distorted sort of the operating trend to the cash flow?.

No. I mean, it's -- no, just the performance of the business and what you would expect in the June quarter from the legacy Towers Watson business. So no distortion. .

Our next question or comment comes from the line of the Elyse Greenspan from Wells Fargo. .

First question, in terms of your guidance, what are you including for currency on earnings for the back half of the year? And also what was the currency impact in the Q2? And what had you been assuming for currency, I guess, in your prior earnings guidance?.

Yes. I mean, I think the rates -- I don't have the rates in the prior. I mean, obviously, the pound is down. The euro is about the same. I think it was -- I think we're at 111 and it was 111. Offhand, I don't have it.

Are you asking for what the rates are that are assumed in the second half?.

No.

I'm just asking at what bottom line impact on EPS are you expecting in the second half of the year?.

Yes. We'll have to get back to you on that, Elyse. We don't have that at our fingertips. .

Okay.

Do you know what the currency hit was in the Q2 on earnings?.

About $31 million. .

Okay, great. And then in terms of the margin, just going back into the EBITDA margin for this quarter in particular. So if you kind of back out the JLT gain, you'd probably get close to about 400 basis points of deterioration when you look at the last year. I know you said that there was some seasonality from some of the legacy Willis acquisitions.

But can you just kind of go into more detail, I guess, on what outside of just those 2 acquisitions is really driving the margin deterioration? And how, I guess, you expect that to kind of flip as you move -- now expect margin improvement in the back half of the year and as you go towards that 25% target?.

Yes. So that's why we gave you the 6-month margins. So for 6 months, the margins were either slightly up or about the same as last year's. So that illustrates the seasonal timing impact.

And it's really, as we said in the first quarter call, the Gras Savoye revenues came in about -- 70% of the revenues came in, in the first quarter so there's extreme seasonality that drove that. So again, as we said in the script, we think the 6-month margin numbers are more indicative of where the company is. .

Okay. And then on the organic, the outlook for the brokerage -- risk and brokerage business for the second half of the year, it's implying some level of improvement versus half year 1.

And I'm just curious how you kind of think about that business evolving on an organic basis, especially as you kind of look to legacy Willis, the results there as it gets a little bit tougher comps in the second half of the year.

So what's driving the organic improvement in your mind?.

This was in IRR, you're asking about that?.

CRB?.

Yes. .

In CRB?.

Yes. I mean, it does imply a little bit better second half. There are some areas where there's a pipeline that supports that growth level. There are areas where the difficulty in the first half or even the first quarter won't be repeated. For instance, we talked last quarter about the South Stream project that was a one-time write-off.

There are also areas where seasonality of growth actually in the last couple of years has been stronger in the second half. So while it's not a big pickup, there are several factors that drive that expectation. .

Okay. And then one last question if I may. You guys started repurchasing stock probably a little bit earlier than we were expecting, yet I noticed in your guidance the share count stayed the same.

How come, can I get more detail there?.

Yes. We have this odd phenomenon based on the merger close that -- because it closed on January 4, actually -- and we're talking plus 1 million shares here, but the account was a little bit lower than the real run rate coming into the merged company in the first quarter.

So we're now on a path where given the share repurchases we talked about and now that the timing is normalized, we'll be seeing downward impacts to the share count. .

Our next question or comment comes from the line of Quentin McMillan from KBW. .

I just wanted to ask about the Operational Improvement Program. John, it seems like you're going to give obviously a lot more color in the upcoming Investor Day, so look forward to that. But can you just clarify something? It seems that you just said that you're not focused on the cost reduction but what the margin improvement is.

Am I reading correctly to assume that you're thinking that revenue synergies and top line boost from potential gains from the operational improvement are what you now are focusing on? And that the underlying expense savings are not necessarily what's going to drive the margin improvement?.

No, that wasn't what I meant to say. What I meant to say was that we don't see getting the -- we don't see getting a cost reduction by itself as the -- we don't see that as the end game. What we see as the end game is getting margin improvement.

And so what we want to look at, at the OIP is to say how does this result in margin improvement? And that's going to be what our focus is. .

Okay, great. Appreciate that. And then second question for you, John. People are now looking out to sort of your own compensation metric of 10 10 in 2018 as sort of the longer-term guidance. I know you guys haven't necessarily put that out there but that's what some are talking about.

So I just wanted to sort of lay out a baseline of kind of holding the macro flat.

If we kind of live in a market -- in an environment with a 2% GDP, the 10-year stays around 2%, inflation is kind of constant and the P&C rates stay in this sort of negative -- a couple hundred basis points maybe, is that an environment where you feel confident that you're going to be able to drive towards that 10 10 number in 2018? Or is there something that maybe needs to break to the upside for you to reach that?.

Now look, I think, one of the things we knew that when we were putting together Willis and Towers Watson was that the first year, we would have some puts and takes and it would be a little bit messy and we were in some ways, in a difficult environment.

But frankly the -- all the different possibilities that are there from the merger, whether it's revenue synergies, cost synergies, tech synergies, whatever, we think all of those things provide tremendous upside. And so I continue to be bullish about the prospects. And as I told investors from the beginning, this is a 3-year project for us.

It's one of the reasons why we put together the compensation plan the way we did and focused on those metrics. I continue to be positive about hitting them, so I'm still focused on that. .

Great. And if I can just -- very quickly for the guidance in terms of the 2% to 3% organic growth.

Are we assuming that that $40 million is in the total organic growth number? The 2% to 3% you're giving is total, it's not commissions and fees organic growth? The $40 million JLT will be in there?.

That's right. It's total revenue. .

Our next question or comment comes from the line of Dave Styblo from Jefferies. .

Just want to talk about the areas of weakness and get a better understanding of what you guys think is under your control versus what's market-related. We heard a lot of threads between China, a soft M&A market, some discretionary spending that happens by employers for legacy towers business.

It seems predominantly market-related, but I just want to get a sense of the potential improvement, not so much for this year, but also next year in terms of what you think you can do to change and improve the organic growth profile of the company?.

Yes. So let me just sort of talk about that at an overall level there. I think, as you mentioned, when I was responding to the question about the legacy Towers Watson, I said to the extent we see some areas that are underperforming, we have a sense that it's the market and not so much specific things going there.

One of the things that make it a little bit difficult is in some of those areas, like Risk Consulting and Software, we don't have natural competitors that are public companies to look to -- to see what the market is. But our overall sense is just that the market is down there. And we've been through this. We see some ups and downs.

We have areas like our old Talent and Rewards that are very heavily dependent on the economy overall. So we see those going on. We have areas -- we have similar areas like that in -- from the legacy Willis part of the business.

So when we look at the Capital Markets area there, that's a small area but it's one that is very sensitive to the amount of insurance-related transaction -- M&A transactions that are going on. And for comparison last year, there was $110 billion in M&A transactions in the insurance space. So far this year, there's been $10 billion.

That's a pretty big difference, and it's one of the reasons why that has contributed to a decline in the IRR this year. I think when we look at it, there're a couple areas where we are trailing the market. I think if we look at our corporate risk and broking and if we look at the Reinsurance, we're a little bit lower than the market there.

I think in both cases, we look at those as it may be, in some cases, a portfolio effect. So for example, I think the international, which has been the real source of growth for Willis versus the market over the last several years, that's the area that's particularly down this year. And so that may affect us more than some of our competitors.

But I think it's safe to say that we're probably 1% or so below them this year. We don't see anything that's structural. We think that some of that is related to just some goings on in the business that we expect to reverse themselves. We expect to be growing at about the level of the market or better in 2017. .

Okay, that's helpful. On the Exchanges, just to make sure I square the numbers right. So I think you said 300,000. Was that all for '17? So I think there was also a comment about one of the employers or one of the clients was going to be landing in 2018 and wasn't sure what the impact of that was.

And then also while on the Exchanges, should we expect margins to rise consistently from here on out year-over-year as the business starts to scale more? I'm just trying to juxtapose that against comments about continued investments in the active side of the business. .

Yes. So I think what we had said was we do expect to enroll about 300,000 in total. .

And those are not total covered lives.

Those are just actual employer, employees, right?.

Actually, what -- we've sold 300,000 in total that we will be enrolling in both 2017, and 1 of them that's going to be deferred to 2018. One of the big ones that deferred to 2018 is about 60,000. So it's a big case that is deferred. .

Got it. Okay. And then lastly, just on bridging the EPS a little bit. So I guess, $0.13 decline at the midpoint certainly, I'd imagine it's the organic growth that's driving the vast majority of that.

Are there any one-timers on the positive side, whether that be FX? Because I think the way the currency moves that actually benefits your earnings, although my understanding is you also have some hedges in place. I'm not sure if that mitigates it.

But is there a bit of a bridge you can provide us so we have a clearer understanding of $0.13 drop at the midpoint?.

Yes. So I think we'll -- as Roger said, we'll get out some more detail on the actual currency effects and everything. I think we do have a -- we do have some hedges, which take about, I don't know, 70% or 75% or so of the difference there, something like that. .

Yes. I mean, so specifically, the pound sterling is -- it's pretty much offset when you take the hedges into consideration. I mean, I think the big driver of the -- as you said, of the downgraded guidance is the organic growth expectation. .

Yes. And I think if you look at it, look, in the first quarter, we had revenue growth initially. We had said it was going to be in the mid-single digits, and we said it was going to be muted. And so then we were in the lower end of that.

That's because it was down to about 3% to 4%, and now we're looking at it and saying actually it's probably going to be closer to 2% to 3%. And so we wanted to come out with some specific numbers this time, but I think that's the overall effect.

We have gone back and done a -- and Roger sort of alluded to this, we've gone back and done a reforecasting exercise to look at what is a reasonable revenue growth expectation. We feel pretty comfortable about that 2% to 3%. We think that's a pretty good number. .

Our next question or comment comes from the line of Tim McHugh from William Blair & Company. .

Just to follow-up on the Exchange, two questions. One, I guess -- sorry I was a little confused.

The 300,000 includes the 60,000 that's deferred into next year?.

That's correct. Yes. Sorry, Tim. We were talking. The 300,000 is the total we sold, and this client has signed up for 2018 already, so we've already done that. But it does include everything, yes. .

So and then the 80% to 100% growth, what piece was that referring to?.

That was the enrollment growth in the active space year-over-year. .

Not the -- not including the 60,000 because that will take effect in... .

That's correct, not including the 60,000. We'll still have the 80% to 100% growth. .

Okay.

And on the retiree side, I get you're not going to have an Ohio every year, but how do you feel competitively you held up? Were there just not opportunities? Or was there any change in the competitive dynamic in terms of competing for some of the larger retiree opportunity?.

No change in the competitive dynamics. There was not any big case like the Ohio case or even one any remotely close to that this year. So yes, we feel like we continue to have, by far, the strongest offering in the retiree exchange space. .

Okay. And then last question, just turnover.

Can you -- where is it trended year-to-date, I guess? And more so, I guess, besides just the overall turnover number, I guess, any sense of how meaningful the turnover is, I guess, in terms of key individuals?.

Yes. So I think overall, the -- frankly, the turnover has been lower than I would have expected.

We were running at, I think for last year or so, a little over 10% in voluntary turnover, and we're actually running just under 10% now, which I used to think in terms of when we were in just the consulting area, whether it was Watson Wyatt or Towers Watson, I used to think of maybe 10% to 12% voluntary turnover rate as being about the right level.

And I think there's probably more turnover in the brokerage market generally. So I would have expected that to be somewhat higher. So I think coming in at just under 10, we're at 9.8 or something like that now, is a little bit lower than I'd expected. And so that's what we feel about that overall. When we look at the -- there is obviously seasonality.

And so we noticed this in the old Towers Watson days. You get more turnovers after you've just paid bonuses than you do there. We continue to see that. No particular changes there.

And I think when we look at specifically where we've had some competitors try to target some of our individuals, one of the things we do is we prioritize those, and we don't necessarily try to respond to every raid on an employee like that. And we target the ones that we think are the real high-value employees.

We've been very successful at that and we've continued to hold on to the ones that we really wanted to. .

Our next question or comment comes from the line of Mark Marcon from R.W. Baird. .

With regards to the Exchange Solutions, can you just talk about the mid-market pipeline? And what your expectations would be for continued sales through the balance of this year that can go into effect in 2017? And then I have a follow-up question on a different area. .

Yes. So I don't have right off at my fingertips here, Mark, the relative numbers for the second half, but the mid-market is different than the large market in that you can continue to have sales that occur up until almost to the November time frame in term -- and still implement them. But by far, the bulk of it will occur in the first half.

So I don't have all at my fingertips, whether it's like 80% occurs in the first half or it's probably something like that. But we'll get you those numbers. I would think it's safe to say though that the bulk of the sales have already occurred by far, although there will be some continuing.

I think -- I made a comment in the script to say that we look at the mid-market as saying that it's accelerated and that we feel that that's sustainable. So that's based on our talking with clients, our seeing what's happening to the pipeline.

So I don't think we're expecting to see -- we've had a terrific first half of the year in terms of selling this. We're not predicting any decline in the second half as a result of that. We think we're going to continue to see the mid-market being an important source of new business. .

Can you talk just about the existing clients in terms of their experiences? What sort of client retention rate are you currently running? What are the savings that you're currently experiencing? And also to what extent do you think the ACA, all the work that went into getting ready for 1094s, 1095s may have distracted people from putting in place exchanges for this year?.

So I think, in terms of the overall savings, we can see that very significantly. It can vary based on the specific geographical distribution of the employers.

It can vary based on what kind of plan they're coming from, whether they already had a plan that, for example, had high deductibles or what other features they might have already had built into it. Generally, we look at saving between 5% and 15% for the employer.

Although often what will happen is the employers will probably give about 2/3 of that back to -- or about 1/3 of that back to the employees and keep about 2/3. So when they make the exchange, it's a win-win for both the employer and the employee in terms of the cost aspect to that.

That's been something that we've seen since the beginning and we don't -- we're not seeing any change in that overall. I think in terms of the adoption rate, it's hard to say exactly what -- whether people are distracted by some of these other ACA things. I tend to think that that's not the case. I think we have seen, as I said, the mid-market pickup.

And in fact, if you are thinking about employers that might be distracted more you might think that actually, it's the smaller ones that have more of those distractions. So I don't think that's what we're really seeing there. I do think we're seeing the natural conservatism of larger organizations continue to be a factor in the marketplace.

But we are seeing the smaller ones adopting it somewhat more enthusiastically than they did even a year ago. .

Great. And then can you just comment with regard to your U.K. business? I mean, Bank of England just took down their growth forecast. So to what extent do you think the U.K. -- your overall portfolio of U.K.

businesses are cyclically sensitive?.

Yes. I think, the whole impact of Brexit, of course, we did that call the other day. And I guess it was last month after Brexit, and went through that. I would say that we really don't have any change in views or necessarily guidance from then to now. When we look at Brexit, I think it's a hodgepodge of both pluses and minuses.

And when we look at our overall exposure, for example, in corporate risk and broking, the overall CRB revenue exposure is about 7% of our revenues. So it's not like we see that, that is the biggest deal in the world. If markets were to move from London to elsewhere, it's not clear that we're disadvantaged by that.

In fact, we might even be advantaged depending on where it was to move to. So I think there's nothing that we see now that we say this is necessarily a problem for us. I mean, I think even at the senior levels of our company, we have different views as to the impact of Brexit overall.

Some of us have -- I've been relatively relaxed about the notion of Brexit. Some other people are more concerned about that. But I think overall, we don't see the movement of the B or V today isn't anything that was unexpected, and I don't think it changes our overall guidance. .

Our final question or comment comes from the line of Kai Pan from Morgan Stanley. .

Just on the free cash flow usage.

How much do you plan on spending on deleveraging the balance sheet and merger acquisitions as well as buybacks? Is that -- can you spend most of your -- would rating agencies have issues with you spending most of your free cash flow on return to shareholders?.

There are a number of angles in there. So maybe just to hit the last one. Everything that we're doing has been part of the communication with the rating agencies. So we've been managing that internally and there are no issues there.

With respect to the usages ultimately of free cash for the year, as we've said, we expect another couple of hundred million of share repurchases at this point. And we continue to evaluate that quarter-to-quarter based on how the company performs. So that's where we are for right now. .

Are you considering any sort of deleveraging? Or like is there going to be any sort of like -- on the merger front as well?.

No. I think as we -- we're in the same kind of mindset that we talked about, I think, last quarter, which was stabilizing the rating agency metrics around the level that support our current rating. And there are a lot of angles to the rating agencies' calculations, but it doesn't imply significant deleveraging. .

Okay. Last one, if I may. If I could just press a little bit further Quentin's earlier question.

If organic growth is going to be slower than you currently expect it going forward, are there other levers you can pull on the expense side that will enable you still be able to achieve your $10 plus by 2018?.

Well, I don't know. .

I mean, I think, what we -- we think that we have plans to get to the $10 plus level, even with modest organic growth. So we remain confident about hitting that..

Thanks, everybody else, for joining us this morning, and I look forward to talking to you at Analyst Day in September. .

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