All right. Good afternoon. We're going to keep on going here. My name's Mark Marcon. I follow human capital technology and solutions. Our next presenting company is Willis Towers Watson. Willis Towers Watson is a combination of the old Willis Group and Towers Watson, which I've followed as they've been public. In addition to that, people forget, but Gras Savoye, really an integration of three companies simultaneously. With us today, we're very, very pleased to have Roger Millay. Roger announced a few months ago that he's going to be retiring, but he's basically going to serve out through the fiscal year and the closing of the bank. Well, actually through the quarter-
Yes
and the Q. I was on the old schedule for a second.
Yes. It would've been.
Yes. We're really pleased to have you here with us. It's been a magnificent run. Roger's going to go through a few slides or one slide, and then we're going to go through a discussion.
Great. Thanks, Mark. It's been a great run, and Mark and I have done a number of these together, and I've enjoyed the support that we've gotten in working with you. Thanks. Is it okay if I just sit here and make myself comfortable?
Yeah. Absolutely.
Yeah. Great. I just want to run through a few slides. I know we have a half an hour, I think. Just hit the high level waves here. Of course, forward-looking statements, non-GAAP measures, which we do use a lot about non-GAAP measures. I'll just hit the top of the waves, and when we get to questions, we can go more deeply. Just for those of you who don't know us as well, Willis Towers Watson is a, let's see, 17-month-old company now, merger of equals, that really follows the Aon and Marsh model that says that there are business synergies, client synergies to be had by marrying a global broker with a global HR, and actuarial consulting and services business. That's who we are. Well, we don't have slides anymore.
I'll just keep going, and maybe the slides will catch up. That's really what the first slide really says that we have global scale in our industry, to drive the synergies between those two elements of our industry. That's really the key point. I think, moving into the kind of broader introduction and getting into the merger, there are specific synergies between the legacy Willis business and the legacy Towers Watson business, that we identified and are very focused on exploiting here with the merger. I think it's important to note There we go. Okay. That was the first slide. The second slide, again, just talks about the value proposition globally and really says that by putting these two businesses together, there are benefits for all the stakeholders of the company. Clients get broader services.
Shareholders are going to benefit from the synergies between the companies, which I'll talk about in more detail in the next couple of slides. For the associates of the company, of course, richer career opportunities, and benefiting from that broad scale of the company. All stakeholders benefit here. That's our focus. I think, the good news is now, two years later from announcement of the merger, that the things that we saw that we announced on June 30th of 2015, that should be of potential value for the company, we feel like we're making good progress across the board. Last year was a difficult year. We expected bumps in the road in a big integration like this. Again, in the areas of new areas of value creation, we feel like we're making good progress.
I'm, again, not going to drill all these slides, but you can see across here the three key areas of revenue synergy. The important point underlying these three areas is that in the two companies, there were strong assets to deliver services to clients, good revenue generation areas and areas of good profitability. In different areas of the two companies, there was a weakness in distribution. What the merger really brought was the ability to take the key offerings of the two companies, in particular areas, and drive it through an adjacent, more powerful distribution network. In an area like global health benefit services for Towers Watson, we had a good offering. We have strong penetration in Towers Watson, with large companies.
When we went to a multinational who had presence in 60, 70, 80, 100 countries. We could say, "Look, great, but we're in 35 countries, and we have to outsource the distribution in the rest of the world." Not the ideal answer for either stakeholder in that case, but certainly for a shareholder, you're not getting the profit from the countries that we didn't represent. Now we can drive these services, which we're seeing demand above the level that we expected. We're seeing these services, and getting the profit around the world. We're seeing good momentum there and the offering is validated, and a very clear distribution synergy to exploit. The second one in exchanges. In private exchanges, that offering continues to generate momentum in the market, but it also continues to generate higher momentum in the mid-market. This is a U.S. offering.
Towers Watson had really just little presence in the mid-market in the U.S., whereas that was the focus of the Willis business. We're seeing ramp-up there, consistent with driving that product through this distribution network. The important point to emphasize there is that we're not asking people to do something different than what they did before. The Willis people sold health benefits product in the mid-market before. We're just adding a new tool to their toolkit, so to speak. The third area was large company property and casualty. That was the biggest in terms of dollars, probably the biggest ramp to make. It's adding to the strength that the legacy Willis organization has in the U.S. to penetrate the large company market. Again, the concept is validated. It's not a rocket science concept, but we've got to execute.
As we see on the next slide here across those revenue synergies, we're seeing momentum in the pipelines that validates that those are real synergies. It's still early days. I mean, those synergies are expected to ramp. On the revenue side of the business, it takes longer. On the cost side, there's more clear visibility here today that in the cost synergies that we identified, I mean, tax, it's evident that we've achieved our goal and actually overachieved by a little bit. In the core kind of cost takeout merger synergies, we're well on track, and there's strong visibility to that. I think largely in synergies, we feel good. We still have execution to do, certainly. The last piece I wanted to hit here was reflecting back to the performance of last year and where we feel we are.
We needed to demonstrate this year that we were turning the ship in the direction of the kinds of goals we have. Improved margin, growth that is at or above market levels of growth. We didn't demonstrate those things last year. We saw progress evident on the cost side, but the clarity of margin enhancement wasn't where we wanted it to be. The good news is in the first quarter, you really see that coming through. I think as we've been talking to investors, what we've been emphasizing is that really, we had a number of things to put in place in the company last year. There were some headwinds on the organic growth side that were, call it unanticipated, more than what we expected. However, we did feel like we came out of 2016 with an aligned organization. We made some organization changes last year.
Good news in the first quarter that we see results that we're saying are indicative now of pointing in the right direction. We're not declaring victory. We're on the path. We have an aligned team now that's pursuing what they need to pursue to win against what we undertook. We have validated objectives. It's now becoming more about execution. The last thing I would say about this, and I think Mark might ask me a question about this, is that first quarter was particularly strong. We talked about timing. There are some in the marketplace who feel that we habitually understate where we are. I just want to say the timing is real.
A lot of the success in the top line are not a lot, but kind of the outperformance in the top line truly was timing things, and we could talk more about that. The timing was generally or mostly a switch between second quarter and first quarter revenues. What we said in the call was that we think we're on track to be more at the upper end of the range we gave for the year, but we weren't getting overly enthusiastic after one quarter about the overall momentum. Because we still have work to do. That's my intro.
Great. Since you made it a point that you'd like to talk about it, let's talk a little bit, starting out with just the very short term, and then we'll go to the longer term 2018 targets and what we need to do in order to accomplish those. From a short-term perspective, you were very clear on the call about the timing elements and how we should really look at the first and second quarter together, in terms of determining a run rate. Can you go through some of the specific elements that were pulled forward? Then also for those who don't model things all that closely, and they're looking at the year ago period in terms of the second quarter comp, we did have the Fine Jewelry benefit in the second quarter a year ago, that causes a tougher comp.
Can you go through some of those things?
Yes. Thank you for that. A few elements of the timing, and maybe this is a part of where people try and discount what we're saying a little bit, because when you talk about Easter timing, it does perhaps sound like maybe you're blowing a little smoke. For the consulting businesses, working days during a quarter are significant, right? Because you're generating daily billings. If you're trying to figure out single-digit kind of organic growth rates, if you have 3% less billing days in a quarter, that's a pretty big hurdle. Easter is particularly significant because in the continent in Europe, typically people take off a week. When Easter flips from one quarter to another, it has a meaningful impact, and that's what happened this year.
Particularly in the Human Capital and Benefits segment, because that's where the consulting businesses are concentrated, that clearly had an impact. It's hard to measure, right? A part of what we're trying to assess is what's the underlying momentum. You have some sense of that, but you can't pin it down exactly in the consulting businesses. That's one clear element. The other, which is again, a little bit harder to fully understand relative to the year, is the brokerage business naturally has larger deals that come along. They tend to be more infrastructure-oriented. We had one this year. We had a dynamic where, because of regulatory change in Russia, that business people were incented to have that deal fully positioned before the end of last year, and the revenue resulted as first quarter revenue.
If that regulatory change hadn't happened, it was planned that that revenue was going to come in over a period of several months and more like the first half of the year. That is identifiable. What you can't answer really at this point is, well, that doesn't necessarily mean that you're not going to have a larger transaction in the second quarter, but it is a clear timing item that in our plan, was accelerated into the first quarter. There were a couple other smaller elements like that in the wholesale business and the reinsurance business. They were smaller. Again, as we step back from this, we said, well, it probably was more of a 3%-4% quarter. It's supportive of the overall guidance that we have for the year.
Definitely, there's revenue that otherwise would have been second on an equal calendar year-to-year or whatever. Second quarter would be disadvantaged. If you net through, because a lot of folks have asked the question, well, wait a second. Something's going on here, because if you're 5 in the first quarter, then the other 3 quarters, it's implied, and if you're kind of two and a half to 3% for the full year, then you're only growing a point or two for the rest of the year. Well, then your business really is in the dumps. Well, one, you can't think of this as that was business that was done during the year. It was real business. It doesn't say that two and a half to three wouldn't be real. It is.
A key, when you net through all of that, a key is, well, what's going on in the brokerage business? Mark mentioned the Fine Art, Jewelry & Specie. We do have a headwind in this second quarter because there was a $40 million one-time transaction that came in the second quarter last year that had a couple points of impact on margin, and so it's a couple of billion kind of revenue number. That's a headwind that we don't have. That business is gone, so we can't beat that. There's pressure on the second quarter, just seasonally during the year because of that. Everybody needs to take that seriously. The other key I think that it nets down to is really what's the underlying performance in the brokerage business. We were encouraged the way international performed. It needed to perform better.
That should be the growth leader, really in the retail brokerage, geographic-oriented brokerage business, we were encouraged by that. North America was still down. Now, North America had a reasonably challenging comp because there was some timing that pulled business into the first quarter last year. That's where we expect that to gradually improve through the year. We've been saying that pretty consistently. I think those are all the elements of timing.
Just to set the stage in terms of what everything that Roger just talked about was, there was significant outperformance during the first quarter, and you guys do have a longer-term track record of sandbagging a little bit. It's a combination of those two things. You did say all the things that you just said, but it wasn't fully reflected in some of the estimates that are out there. You're just setting the record straight.
Yeah. Setting the record straight, also, I do want to make the cultural point that we want to be a company that does what it says it's going to do. You need to work your way to set the stage for that. We're in a big integration. We had a good quarter. We're not going to declare victory after a good quarter. We believe we know that we still have work to do to perform at the level that we need to perform. Again, we think we've set the foundation.
Well, let's go through that in terms of you're going to do what you said. You guys did set a target of roughly, well, there's an expectation that you could get to $10.10 in earnings plus by the time we get out to 2018. We did see adjusted earnings grow 22% in calendar 2016 to around $796. Basically implies some pretty good solid earnings growth for the next two years.
Sure.
The valuation doesn't fully reflect it. I was wondering if we could just dive into some of the steps that you still have, some of the levers that you still have to pull as a self-help story, in order to accomplish that. I want to come back to the revenue growth a little bit later. First, I'd like to start out with the things that you absolutely, positively can control yourself, which would basically be some cost elements that you've talked about.
Yep.
One part of it was Willis is domiciled in Ireland, you've already benefited from the tax rate. We've seen that. That's done. Number two, you did talk about the merger-related synergies. During the last quarter, you basically said you're going to be towards the upper end of that $100 million-$125 million in terms of cost synergies between the two organizations. Thus far, how much of that have we actually seen out of that? We know where we're going to be, but how much has already been realized?
Just as a preface to that answer, because earlier I was saying that the revenue areas are more challenging, because it's not under your control if clients have to come along with you. I think you properly characterize relative to the 10.10 cost takeout being in our control. I think that's largely true, but I will say that the cultural change last year was really important to make sure we had a full company focused on margins, right?
I'm getting to that too.
We can hit that later. I think we've given the numbers. Actually, I don't off the top of my head remember the exact number, but I think we're roughly now about halfway through in terms of run rate. The way that the cost takeouts were patterned, there's natural overlap of resources that, if you want to call it the low-hanging fruit that happens in the first year. Throughout last year, we were doing that. Then a lot of the other changes require infrastructure kind of work. That's coming more in the, say, last six quarters or five or six quarters, and we've been doing a lot of the setup work, so consolidating data centers, consolidating real estate. We're doing some big real estate work right now. Consolidating financial systems.
We just, in the first quarter, started rolling out the new financial system, that'll go on into next year on a kind of staged, bit-by-bit basis. We're probably about halfway in terms of run rate, with a lot of work still to do and big projects. The work is underway. We had a clear plan, the reason for the confidence at the upper end of the range is that we see those projects really doing what they're supposed to be doing.
Roger Millay, when do you think those will be fully completed? Is it six quarters out, or?
Yeah. I think if you looked at the work schedule, probably Well, actually, most of it done by the third quarter of next year. Real estate, of course, is something that you time based on the expiration of leases. Without looking at a specific schedule, my guess is it goes right up to the end of 2018, just doing it location by location. There will be real estate locations that will go into 2019 as well. The key thing for us about the integration timeframe is really that is the period, just as we did in Towers Watson, that's the period that we're constraining ourselves to carve out costs as an integration cost. Again, as business as usual, there'll be real estate stuff going on in 2019 too.
Right. As we think through the other levers that you can pull, there's the organizational improvement, operational improvement plan that Willis already had undergone, parts of that dropped to the operating line, parts of it were reinvested. When we take a look at that, it looks like We were expecting from this year to generate about $95 million in savings in terms of what was on the balance sheet this year. How much of that have we actually already seen?
Yeah. A few points to that. First, we said in Analyst Day last year that we were really shifting the focus of what we wanted to talk to the investment community about to margin achievement and not particular dollars. Because as you said, there were a lot of dollars talked about, but you couldn't find it in the margin.
That reflected the change that we had made internally in our management processes, where for 2017, we didn't charter any projects that we didn't have the project team next to a business owner saying, one saying, "We could do this," business owner saying, "Yeah, I'm on board with that and I'm going to drop it to the margin line." We went in with a plan, and it's in our guidance, that the team fully aligned around dropping to margin, and we got margin in the first quarter. We seem to be pointed in the right direction. The way OIP works is that all the projects aren't identified on December 31st of the prior year. Projects continued to be chartered in the first half of this year.
The hope is, right, to continue that aligned process and to have continuing cost takeout that will benefit next year. That's the way it should work, right?
Right. In addition to that, we basically had the business restructuring plan that you executed-
Yep
the tail end of last year.
Yep.
We haven't really seen that much in the way of those savings either, have we?
Yeah. A lot of that was towards the end of last year.
Yeah.
Particularly for HCB, that's kind of the nourishment to enhance margin for HCB.
Basically there's, between the merger integration, the BRP, and the OIP, we still have quite a bit that still hasn't been reflected. You've taken a lot of the expenses from a cash flow perspective in terms of the restructuring charges.
Yep
What you had to do.
Yep.
Obviously there's a lot to come through, and that gives you a lot of confidence in terms of being able to get to that 25% adjusted EBITDA margin.
Yeah. That's the raw material. Yep.
Okay.
Yep.
If we go back to the revenue, the organic revenue growth was really strong in the first quarter. In order to get to that plan in terms of that 25% adjusted EBITDA margin and basically the 10/10 in earnings, we're basically talking about 2%-3% offline organic revenue growth is what you really need.
Yeah. I'd just refer people back to the Analyst Day chart from last year where we were saying, look, we have a number of levers, and we use 2%-4%, is the range that we talked about. Not making any particular statement about where we thought we'd be in 2017 or 2018. At that level, with other levers moving in a particular way, that we were going to achieve the 10/10.
The other thing to take into account in terms of all the changes that have gone through are basically some of the leadership changes, because you obviously had this merger of equals. You had a number of different corporate officers that were nominally still in place, but it was understood they weren't going to be there for the long term. Basically, you ended up really setting the table in terms of the leadership towards the end of the fourth quarter.
Right.
So-
Yeah.
And-
Importantly, because I think this is maybe an element of where folks feel maybe a little confused by the first quarter and how strong it was. Particularly in North America, that's a complex, or this is a complex market to do integration. If you have a lot of offices, you have multi-products, teams need to come together across broad geographies. When you have new initiatives like the synergy initiatives, it's fairly complicated in terms of running a team. It's easier in smaller markets, obviously. Not only did we name the leaders at the end of last year, but of course, their next step was to look a layer down, and then that layer looked a layer down, right? We're still having discussions in the last few months about, oh, here was a key person in a legacy company who was driving a particular market.
We had moved that person over to this function, and you know what? We were better off when that person was back over there. That activity still goes on, which is why it takes a few quarters for this to settle out.
Great. Unfortunately, we're out of time. It just flew by. Please join me in thanking Roger for a terrific presentation and for a terrific 10+ years.
Thanks, Mark