Thank you for joining us. I want to introduce Roger Millay, CFO of Willis Towers Watson, who we're lucky enough to have. He's retiring this year. I feel like it's a special treat. I also just want to add, sometimes at Willis we have our ratings, and I can't speak of a more decent treatment I've received from the people at Willis Towers Watson as I've been an agitator, and I hope that may change in the future. Let's hear what he has to say, and we'll get some Q&A down the line. Thank you very much for coming, Roger.
Great. Thanks, Josh. We take it as a challenge to prove you wrong, so
I hope so. Please do
That's okay. Life is okay like that. We're okay with competitive markets and different views. I'm just going to take five minutes here, I think, which probably means closer to 10, and zip through some slides, and then we're going to do a Q&A. Obligatory forward-looking statements. I'm sure I'll make some. We use some non-GAAP measures. Please note that. I'm sure you're speed reading through all these slides, and there'll be a quiz later. Let's get into the highest level perspective that we have on Willis Towers Watson, and why Josh is wrong. Look, first, I think you have two firms coming together here, really three firms, because Willis closed the acquisition of Gras Savoye right before the merger. We think that it's a combination of assets that very naturally you can do a lot of in our industry.
Also that there were very clear offsetting strengths and I'll even say weaknesses, but areas where either company just needed to add capabilities, that one firm brought those capabilities to the other firm. There were clear complementary natures of the business segments. We now have, obviously, broad global scale, much better positioned to compete with the global leaders in the industry. Whereas again, each firm, the two large legacy firms, had holes before. The point of this slide, again, is just real strong scale with assets that we can do a lot with. We'll be talking, I'm sure, through the conversations about our segments, but you can see here the array of segments that we have and the division between business mix and geography.
This is a slide we've been carrying since, if not the first day that we talked publicly about the merger, from the very early days. The point really here is, again, it's getting back to this strong assets point, but the platform is one that, given from a client point of view, that these businesses are complementary, that we can do a lot with. As we do execute on the synergies between the businesses, clearly clients will benefit from that. Shareholders will benefit through accessing and executing on the synergies, both top-line and bottom-line synergies. That will enhance the overall positioning of the company. Associates or colleagues in the company will benefit from that as well. You can see in the center of this circle, a little bit different articulation of the businesses that we brought together, more from a legacy point of view.
The underlying businesses that illustrate this point of ABS or advisory, broking, and solutions, and the businesses in that circle span the brokerage world and the consulting world. We can talk more about it, but where there are overlaps between those two worlds. Just again, briefly, some of the highlights on these synergies, which we feel like at this point, and I think this is largely a key point for the merger, that a lot of the opportunities that we envisioned two years ago are coming to fruition. As we know, we had some difficult points last year. There are challenges in big integrations like this. Actually, if I were standing here and saying there were no challenges in 2016, probably you should be saying to me, "Well, you're probably not making any changes then.
How are you going to be successful?" We do have to reorient these assets to get synergies out of them, and we are. Just hitting the key revenue areas. Largely the theme here is leveraging distribution that one company had that the other company either didn't have at all or was weakened. In Global Health and Group Benefits, that's about international presence. Towers Watson, legacy Towers Watson, had a very strong offering in global health benefits for large multinationals. We just didn't have the coverage in Towers Watson to serve everywhere in the world that clients needed. We had to outsource in a lot of countries to another company, the service in these areas where we weren't covered. Now we have the coverage globally. We brought this capability, the multinational company presence, particularly in the U.S., where health benefits through private employers is dominant.
We brought that kind of client presence to the Willis network, and we're having a lot of success with it. Similar in exchanges. Legacy Towers Watson, a leader in private exchanges, but without presence in the mid-market, which was the real growth area in the early days of private exchanges and continues to be a great growth area. We're having a lot of success now, the Willis brokers bringing in the mid-market private exchange business. Finally, the legacy Towers Watson strength in large companies globally. If your foundation is actuarial services and defined benefit pensions, you're going to be really good with large companies because that's who's delivering and offering defined benefit pensions. particularly in North America, a weakness, that presence in the large market, a weakness in legacy Willis. Now we're putting those teams together and having success there.
The key thing on the revenue synergies is that this isn't cross-selling where you're asking someone who was effective in a certain area of business to sell a different kind of business. This is really leveraging the distribution network to put more product through it. Something that, again, was a key to legacy Towers Watson growth over time, and now we've just expanded that approach. We still feel these are the original guidance numbers for these areas of revenue synergy, and the ones that we continue to work on. In cost, we had tax synergies. The legacy Willis domicile was in Ireland. Towers Watson was in the U.S., clear tax synergy there. We're ahead of what we had targeted on taxes. In cost synergies, there were cost overlaps, mostly in the corporate functions.
Again, if it's a distribution play, if it's a business breadth play, you're not going to have a lot of cost synergy in the businesses. Again, that's why the highlight of revenue synergies. All that leading to a 25% EBITDA margin target, two to three points enhancement over the integration period. Where are we on these synergies? I won't drill this page, just say that we've been tracking the pipeline in a very detailed way. It's something we knew we had to have a lot of discipline around, and if we had the discipline, that would get the attention of the business. The pipelines that we've been reporting on every quarter, and you can see what the anecdotes add up to, that we won a number of accounts. Of course, in the early days, that's what you have. You won accounts.
You don't realize these revenue synergies all at once. The dollars or the currency magnitude of the synergies add up over time. The revenue synergies are targeted to a run rate at the end of 2018. While we're on track, we are in the early days here. Again, as we've stated, we had given a range for the cost synergies. We think we're towards the upper end of that range of $100 million-$125 million, and we're ahead on the tax side. We think we're on track for everything that we said we were going to do. I think the big thing as we exited 2016 and entered 2017, given the challenges that we had last year, was exiting the year beginning 2017 with momentum that has clearer indicators of heading towards the goals that we have.
We think the first quarter is indicative of that. It was a particularly strong quarter ahead of our expectations and ahead of the investment community expectations. Some of that was clearly timing-oriented, very identifiable timing items. We've cautioned folks not to wildly project the first quarter as now indicative of the new run rate. We do think it's headed in the right direction, and that's really what we were looking for. One quarter doesn't make a merger, we expect to continue to build. We think there are particular areas of the business that suffered last year because they had more integration change and type activity and restructuring activity. We think there are identifiable areas, again, particularly in North America, that the momentum will build through this year. The first quarter, very good. We're very happy with the results.
We saw growth in all the segments, which we needed to see. Hopefully, that positions us for continuing strong performance this year. Those are the highlights, and maybe we can open it up now. Josh, are we going to sit up here?
Yeah.
Okay.
Let's talk a little about the quarter. Two things. I think you captured three different sentiments that I want to touch on all of them. One is the sense that you feel that after a rough 2016, that you are going in the right direction. The numbers might speak that a little bit, but maybe you can talk a little about qualitatively what's changed. Two, that, yeah, it certainly fit my expectations, your expectations maybe also earlier there was guidance to expect maybe a slow start to the year that would build as momentum went on and what changed over the course of the quarter. Finally, to try and understand these timing differences, I have some maybe more picayune questions, but how much of the revenues from the first quarter maybe were more part later in the year that just timing brought them in?
How should we think about the margin on those elements that maybe there's a producer who's going to be paid a salary and benefit down the road? Does that mean the margins were a little higher too for the quarter?
Okay. I'm sure you're going to have to remind me.
I got them listed right here in front of me.
Good. Thanks for that. Maybe I'll step back a little bit about what the process is like to do what we're doing. As I'm sure you've heard us say, we expected there to be bumps in the road in the first year. You don't necessarily know where the bumps are going to be. You know undertaking a lot of change that there are going to be challenges. I think the other thing I'd say coming into last year, we did strongly believe we had identified areas of synergy. There was every reason to believe that we were going to get momentum around them. We had to have measures in the company that could be used actually more internally, right?
If things are really aligned between the investment community and the company, you can see a straight line between the measures that the company uses to manage itself to success and then would be illustrated in the external numbers. We had to set up that kind of tracking and measuring mechanism. We knew that going in. We knew before the deal closed that we were going to focus on the adjusted margins that we announced. We needed to adapt both legacy companies' measures to how we wanted to drive success. That by itself is disruptive and financial systems need to catch up with that. Business leaders need to adapt to what now their measures of success are. Of course, you have to announce organization structure, and when you put that in, that's disruptive.
The early days, there's dislocation and people aren't as focused externally. It is interesting. One of the synergies we didn't talk about, which is probably actually the most natural synergy, and that is between the legacy Willis Reinsurance business and the legacy Towers Watson risk consulting and software business. Where you had a bunch of people from a little different perspective, but a very complementary perspective, looking at helping clients manage risks, model risks, use particularly actuarial analytics for clients to be comfortable that they're enhancing their overall risk management and actions they're taking does that. I think actually in that business, it happened very quickly that teams got together. They were going to clients and you felt the enthusiasm and there wasn't a lot of disruption in the organization.
The other extreme of that is North America, where you just have a big geography, a lot of offices, and when we put into place, particularly the CRB structure, global structure, that there was a lot of internal focus, and probably those are the two extremes. In the early days, you don't really know what the numbers are going to be, but you need to have a business that you can manage. In the first six months of last year, that's what we implemented. The numbers told us where our holes were, right? What we needed to respond to. There was some period of time where we just determined how to react to that. The organization changes, well, two things while we're doing that. One, we set the tone after the first and the second quarter on how we're going to operate as a company.
How do you react when results aren't what you hoped they were going to be? What does financial discipline mean to the new company? It meant something different, I think, to people, and they needed to understand that. How committed are you and how much action is expected when you miss? I'd say that kind of financial discipline is important to John Haley and I, and we believe it's a part of why Towers Watson had a lot of success. We implemented that. We made some management changes in the second half of the year. We thought they were responsive to where we had holes. We think the evidence is in now that that was a pretty good call.
I think what we were watching actually more as the year went through was, is the team responding to the challenges of being on the path to the merger goals? The changes that had been made, is there action being taken around that? Is the organization being simplified? Really, last year was about the setting the foundation. We didn't want to have numbers that were as far off from what we hoped for as they were. We knew we weren't going to win in the long term unless we set that foundation. The budget process then at the end of the year was really important because that was our first time together and putting the new team's imprint on what we were going to go after. We spent a lot of time on that part of the process and talking about what's the longer-term aspiration?
Where do you have to be in 2017 to credibly be on track for 2018? What changes need to happen in the business to do that? What does it mean for the new company to invest? How strict are we going to be on investment? Will we just accept kind of things that come bottoms up out of the business, or will we challenge for business cases? We worked through all that. One of the things I've said quite a bit is, I think that we did set the foundation last year. We did in the less measurable team dynamics part of the operation look a lot different in the beginning of 2017 than we did in the beginning of 2016.
We think particularly the new leaders, Carl Hess in IRR, Todd Jones for CRB, and Joe Gunn for North America really were well-engaged with their teams and setting the track for success. That's intangible. 2017 was about seeing that progress in the numbers, seeing how rapidly it comes. We think the first quarter indicated that. Now, there was clear timing. It's not clear after one quarter exactly what the momentum is, because it's just one quarter. It's definitely indicative of a year that's going to be better. I think that the team is more engaged in the way a team needs to be engaged to drive towards the end of 2018 goals that we have.
Do we have any numbers as to how much of the very impressive 5% organic growth in the first quarter is related to timing of things as opposed to things that are naturally embedded within the first quarter? Two, is that stuff that was timed unusually this year, does that have a higher margin given the way salary and benefits are allocated?
Yeah. First, most of the timing items were shifts from the second quarter into the first. Not all of them, but most. I think the more important number for us to see for this year, and this is how we thought about setting up the plan, is really what's the first half going to look like versus the second half. We'll need to cut through the first and second quarter and see what the run rate is really like. As we've said on the call, we think the run rate is more indicative of one that's towards the upper end, the upper half, the upper end of our guidance, 2%-3% revenue guidance, than the lower half. That's a good thing. Again, one quarter, you're not really certain. There are some anomalistic things about the second quarter for us.
The fact that there was this fine arts and jewelry settlement in the revenue numbers last year in the second quarter. Of course, as I said, the timing-related matters. Bigger challenges. I think in terms of the margin levers for the timing matters, I think there's probably a mix of things there. Of course, some of the large brokerage deals, like this energy-related project that we notably called out, that's pretty high-margin business when it comes in. That helped. It's a little different in the consulting businesses, which are really the ones that are impacted by the Easter timing.
Which is very real. Maybe some of you say to yourselves when we talk about this, "Oh, this is just a way that these guys use to talk down their numbers." As I was saying in one of the earlier meetings today, actually in managing the consulting business, one of the things that we first talk about when we look at month-to-month results is how many business days were there. Because again, you need a business day to bill stuff, right? You're accumulating hours and billing days and that sort of thing. It is meaningful. A day a month, or in the case of Easter, for parts of the business, close to a week of difference because of the time people take off around Easter, particularly on the continent in Europe. That's material to not just a month, material to a quarter.
It's a little harder to tell on that acceleration, but it's meaningful on the margins. Now, we did have an offset, as we pointed out, that we did have those E&O-related charges in the first quarter that offset some of the margin timing benefits. We think the margin is indicative of us being on track for the year.
One of your competitors, Aon, announced a large transaction a few months ago. They are selling a large part of what used to be Hewitt to Blackstone. It's interesting, people would say to me, "What's the difference between Towers Watson and Aon Consulting?" I would say, "Well, Aon, it's really a benefits administration, HR outsourcing business, and Towers Watson's really a consulting in terms of professional services." Really that's clearly not true because Aon still has a consulting business all of a sudden now, and they're selling these things off to Blackstone. Can we talk a little about where there's overlap between what Aon does today and what you do, and where there's overlap between what Aon is selling?
Does the fact that Aon is selling this business, which includes the backbone of, I guess, the exchange function of how to operate, does this tell us anything about businesses that Willis Towers Watson is in, and what are the high-margin business, the low-margin, what are the growth businesses? What's the market shaping up between, and what does that transaction say, I guess?
Yeah. Clearly, that transaction is really interesting to us. From what I understand, all the details of how Aon and Blackstone are going to still interrelate on some of these businesses, all those details aren't totally clear yet today. It does illustrate thinking about that part of the business that's different than ours. Our focus in those legacy Hewitt, more administration type-oriented businesses, we were never as broad a kind of BPO company as Hewitt was. Our focus has been first in the administration of health benefits to be a higher value-added, higher return, but recognizably then a higher cost provider of those services, different from the approach that the legacy Hewitt business had, which has been a lower margin business through its history. That approach has proved to be good for us. We are high quality in service.
That's accrued to our benefit in winning business, particularly in the last few years. That foundation, actually with the advent of private exchanges, having that very solid platform and very profitable platform, is the foundation for active exchanges. That legacy Hewitt administration business platform also was the foundation, as I think you intimated, for exchanges for Aon. How they're going to bridge that. One of the things we've always said is we want to own the assets. We think that that is having the intellectual capital, but also the technology platform. We think that's one business, and particularly in health benefits, which of course is dynamic from year to year. There are regulatory changes in the practices of managing health that have to be adapted to, and to be a leading purveyor, you need to be able to adapt to that.
It might be more difficult when you have one party controlling the infrastructure and one party controlling the intellectual capital. Although while it's not totally clear, it's very inconsistent with the way we've approached the business. We don't see anything in that change that creates new challenges for us. It seems to be reflective of our continuing opportunity to grow our leadership in that space. I'll just add to that to say that all parts of the administration businesses now, including the retirement parts, and particularly the health benefits administration areas, they've all been growing very nicely, executing very well over the last few years, and the prospect is for that to continue. The last point, just on the retirement area, we've won the largest assignments in Defined Benefit pension administration in the last few years than we've ever won.
That part of the business is going very well, whether that had an influence on how they thought about the future, I don't know, but we feel like we're winning.
When we think about the legacy Towers Watson businesses, I think of them as GDP businesses, maybe that. There's an overlay on top that. A lot of the growth has come from bulk lump sum projects that you've won. First of all, what is the pipeline? I realize that you can't tell exactly when they're going to hit, but is there a time when bulk lump sum has been, all the pensions have been completely overturned, and there's no more bulk lump sum project work to do? Is there a reason to look at these businesses better than GDP growth businesses? I guess healthcare is a better than GDP growth business.
Yes.
That'd be one thing. Can you sort of talk to those points?
Yeah. Health, now we're sweeping in exchanges and everything. We believe that while we had to make some shifts in orientation because of the growth challenges of defined benefit pensions, we believe that we were a GDP plus business. If you look back to the legacy Towers Watson growth rates in 2014 and 2015, I think we demonstrated that kind of progress and opportunity. There is a mix underlying, maybe just to cover that spectrum. Health benefits is probably the largest concentration of GDP plus businesses. At the other end, we view the retirement business, the defined benefit pension-focused business as a low single-digit grower, that in years where there was higher project activity, that a good growth year might be at the higher end of low single digits.
In some years when you're comparing to that, because particularly the bulk lump sum kind of ebbs and flows, you'd be slightly negative. The thing not to forget is, the Defined Benefit pension business is a counter-cyclical business. If you go back to 2009, coming out of the 2008 disruptions, for several quarters, retirement grew upper single digits because at times like that, you tend to have not only disruption in the calculation of liabilities, which puts pressure on companies, you have disruption, of course, particularly in 2008, in capital markets. The investment equation's getting out of whack, the liability equation is getting out of whack, and you have clients who are under pressure to improve profitability. You can also add, in those environments, have changes in regulation as well.
Historically, that's been the period of highest growth in retirement. The low single digit growth kind of brings in through a cycle, you're going to have a year like that. You're going to have some projects, and then you have the steady to declining kind of more valuation part of that business, which is more commodity-driven. I think in between that, for legacy Towers Watson, the technology concentration of that legacy actuarial and consulting and benefits-oriented business, the technology component was growing. You looked at risk consulting. I mean, we had a great, and still have a great growth business in providing software to insurance companies for capital modeling, risk modeling, pricing in talent and rewards. HR was becoming more and more technology-oriented and had a strong offering there with great growth.
On the investment side, again, maturing of managing investment pools for the retirement business and Defined Benefit pensions, but bringing more technology-oriented solutions in the investment arena, particularly as countries moved more to encouraging pools of discretionary $ to be put together for management, kind of country by country and through regulatory incentives. We had some great offerings in investments. A number of markets or sub-markets that clearly had secular growth trends that were offsetting the DB pension pressure.
Switching folks a little bit. Are there any questions from the audience? No. Okay. Switching folks a little to the brokerage side of the business. I think the previous management team at Willis said we can't compete with Marsh & McLennan everywhere, but we can be very competitive in certain areas. When you're looking at the market, where do you think Willis's best markets are? Who are your biggest competitors? Where is the positioning? What is the outcome for the brokerage part? Where is Willis Brokerage today?
Great question. I think maybe some of the quotes that I had heard in the past, the term picking your spots might've been used. First I'll just say that I think all companies, all businesses need to pick their spots. I mean, any company that tells you they're not picking their spots, I would guess would tend not to be a good investment. It's about investing well given your opportunities, right? I think Willis did use that kind of perspective. I do think as I've engaged with the Willis business and brokerage as it existed there, I think one of the first things you have to acknowledge is that geographically it was quite diverse, right? It was managed in a way that also promoted that diversity.
Really strong capabilities in the Lloyd's market and the specialty market, in financial products and aviation and shipping, I think globally competitive pretty much with anybody. That was really, to me, it seems a real center of capability, and that was a global capability. Important to acknowledge that, and it comes through in the numbers that it's probably the most predictable business in the numbers. If you look at North America, trying to compete in the large market with Aon and Marsh, but not with the resources. I think pick your spots in that case was, look, we're not always going to have the resources. Maybe in a particular RFP or a particular client situation, we're able to put a team together to compete, but no way across the multiplicity of the business we're going to be able to do that.
That was a big motivator for the merger.
Are you most commonly in North America against Aon or Marsh? More commonly are you against Lockton or Gallagher? Always different places depending on where you are.
I think historically more common with the mid-market players than Aon and Marsh, but aspiring to be more effective there. Again, that's why one of the revenue synergies is around that, the marriage of the large company distribution effectiveness of Towers Watson, which opens the door. I mean, that's the hardest thing when you're trying to break into a new market. You need to open the door, and you need to be able to schedule a meeting. More than one meeting, you need to get into the loop of business activity. I think what we believed and what we're seeing now is that Willis Towers Watson is going to be able to be much more positioned in that way than Willis by itself.
We had this group of 220 or so, 250 or so client development folks whose whole job in life was to increase penetration in the market. We think now we do have similar to Marsh and Aon, that opportunity to manage the business effectively for large clients while still also having the mid-market offering and staffing that. We'll have to build that large market resourcing over time, clearly.
We're out of time. Thank you very much for coming, and thank you to Ida as well. Good luck in the rest of the year.
Great. Take care.