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Towers Watson & Co. (NYSE:TW)

F2Q13 (Qtr End 12/31/2012) Earnings Call

February 7, 2013 9:00 AM ET

Executives

Aida Sukys - Director, Investor Relations

John Haley - Chief Executive Officer and Chairman

Roger Millay - Chief Financial Officer and Vice President

Analyst

Sarah Gubins - Bank of America

Julio Quinteros - Goldman Sachs

Tobey Sommer - SunTrust

Matt Hill - William Blair

Ashwin Shirvaikar - Citi

Jeff Volshteyn - JPMorgan

Mark Marcon - R.W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2013 Towers Watson earnings conference call.

(Operator Instructions) I would now like to turn the call over to your host for today, Ms. Aida Sukys, Director of Investor Relations. Please proceed.

Aida Sukys

Thank you, and good morning. Welcome to the Towers Watson earnings call. I am here today with John Haley, Towers Watson's Chief Executive Officer; and Roger Millay, our Chief Financial Officer.

Please refer to our website for this morning's press release. Today's call is being recorded and will be available for replay via telephone for the next two weeks by dialing 617-801-6888, confirmation number 30322967. The replay will also be available for the next three months on our website. Our website also contains a few slides that are complementary to today's call. Those slides include certain reconciliation information required by SEC Regulation G.

This call may include forward-looking statements within the meaning of Section 21 of Securities Exchange Act of 1934 that involves risks and uncertainties. For a discussion of forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by the forward-looking results, investors should review the forward-looking statement section of the earnings press release issued this morning, a copy of which is available on our website at www.towerswatson.com, as well as other disclosures under the heading of risk factors and forward-looking statements in our most recent Form 10-K and in our other 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.

During the call, we may discuss certain non-GAAP financial measures such as adjusted EBITDA, adjusted net income and adjusted earnings per share. For a discussion of these non-GAAP financial measures as well as a reconciliation of these non-GAAP financial measures to the mostly comparable GAAP measures, investors should review the press release and the accompanying financial tables we posted this morning. After our prepared remarks, we will open the conference call for your questions.

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

John Haley

Thanks, Aida. Good morning, everyone, and thank you for joining us. Today we'll review our results for the second quarter of fiscal 2013 and our guidance for the remainder of the fiscal year.

Reported revenues for the quarter were $946 million, an increase of 8% over prior year reported revenues and up 6% on an organic basis. On a constant currency basis, revenues increased 8%. Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures.

Our adjusted EBITDA for the quarter was $178 million or 18.9% of revenues. The prior year adjusted EBITDA was $172 million or 19.5% of revenues. As a reminder, the Exchange Solutions business, which incurred significant cost in the first half of the fiscal year was acquired on May 29, 2012, impacting the year-over-year comparisons.

For the quarter, diluted earnings per share were $1.15, up 25% and adjusted diluted earnings per share were $1.48, up 10%. Exchange Solutions seasonality impacts reduced diluted earnings per share by $0.18 and reduced adjusted diluted earnings per share by $0.12.

We're extremely pleased with the overall results this quarter. All segments and regions posted revenue growth and we've normalized the ERP development related receivables and reserves. Roger will talk about the ERP issues in more detail later in the call.

Economic and regulatory changes helped drive growth this quarter, however, the thought leadership displayed by our consultants, essential to why we've done so well in the marketplace. One good example of this is our bulk lump sum project work. Bulk lump sum work refers to the de-risking process, which allows organizations to pay pension liabilities to certain groups of terminated employees, which reduces pension liabilities.

Due to the vision of our leadership, we were prepared to quickly penetrate the market and execute the work on very tight deadlines. I am also very excited about the future of Exchange Solutions and the capabilities we've developed to enter the active and pre-65 retiring markets.

We recently launched OneExchange, the industry's first health benefit solution that leverages both private and public health insurance exchanges. One of the great aspects of the Extend Heath acquisition was how we were able to leverage the technology and process platforms beyond the initial core retiree focus into the broader pre-65 retiree individual in active markets.

We have the existing leading and most market-proven platform, and it will not require significant investment to expand into the new applications. This puts us in a great position relative to the current market opportunity under the Affordable Care Act. I feel strongly that the market leading standard set by Exchange Solutions in the retire exchange business will continue to lead to great success in these new markets.

We're also extremely excited about our recently announced strategic alliance with Fidelity. Specifically, Exchange Solutions will work with Fidelity Investments to provide retiring participants, who are coming off company sponsor health plans, access to resources and support to get quality coverage at a price they can afford.

This agreement will help simplify the transition process for the millions of retiring Americans, as they sift from employer-sponsored medical coverage to the individual Medicare market for health insurance. Fidelity will begin offering this service to its plan sponsor clients during the third quarter, in time for this year's benefit enrollment season, which typically starts in the fall.

Now, let's look at the performance of each of our segments. On an organic basis, Benefits grew 10%; Risk and Financial Services grew 1.5%; and Talent and Rewards grew 5%; on a pro forma basis, Exchange Solutions grew 33%.

For the quarter, the Benefits segment had revenues of $519 million. Benefits segment revenues were up 10% on a constant currency basis, primarily due to increased project work across all lines of business. In addition, the segment benefited from the normalization of the ERP related reserves.

The Americas region constant currency reserves increased by 13%, and EMEA's constant currency reserves increased by 6%, retirement revenues increased by 10% on a constant currency basis, driven by a 15% increase in the Americas. The increase in the Americas was primarily due to the bulk lump sum projects that were accounting benefits to our clients related to completing the work by December 31. While we anticipate some of this work continuing into the second half of the fiscal year, we will not experience the volume of work we completed in the first half.

EMEA retirement revenues were 5%. We saw some pick up in Germany and benefited from an increase in auto enrollment project activity in the U.K. We expect auto enrollment work to continue, but the general business environment in the U.K. continues to be challenging.

Technology and Administration Solutions revenues increased by 10% on a constant currency basis. EMEA led growth with 13% constant currency increase, as a result of client wins during the last fiscal year. TAS Americas also assisted with the call center work associated with the bulk lump sum project work.

Health and Group Benefits constant currency revenues increased by high-single digits and the pipeline look solid. Going forward, the Benefits segment should continue to show modest growth in all three lines of business.

Now, let me turn to Risk and Financial Services. For the quarter, the Risk and Financial Services segment had revenues of $208 million. Revenues were up 1% on a constant currency basis, led by growth in the Americas and Asia-Pacific. Risk consulting and software revenue declined by 1% on a constant currency basis. Both the Americas and Asia-Pacific grew by double-digits. However, EMEA's revenues declined by 10%.

EMEA clients continue to be cautious with discretionary spending. In addition, it appears likely that the timeline for European regulators to implement Solvency II may slip beyond 2014, and related project work may not reappear for sometime.

Brokerage revenues declined by 7% on a constant currency basis. The second quarter was impacted by lower renewals from previous quarters and minimum new business. However, our January 1 renewals went well and we had some good new wins. So our outlook for the second half of the year is stronger.

Investment had 12% constant currency revenue growth led by EMEA. All regions experienced double-digit growth on very strong FY '12 quarter two comparables. We're having success in deepening relationships with our existing pension clients and broadening our client base beyond pensioned plans to sovereign well plans and insures. We continue to feel confident in the investment pipeline. Overall we expect Risk and Financial Services to slightly improve its current momentum in the second half of the fiscal year.

Next, let's move on to Talent and Rewards. For the quarter, the Talent and Rewards segment had revenues of $176 million, with revenues up 5% on a constant currency basis, led by a 10% increase in EMEA. Europe continues to be a challenging economic environment and we would normally expect different results under these kind of economic conditions.

However, a number of factors in the quarter contributed to this strong performance, such as regulation in the financial sector, a renewed focus on performance management, communication related to pension changes and organizational changes, and implementation of new HR models. We also have to acknowledge the impact of strong client focus sales and marketing activity.

Rewards, talent and communication, constant currency revenues increased by 6%, and executive compensation revenues were strong with 16% constant currency revenue growth. Both businesses were led by EMEA. Executive compensation continues to be driven by increased regulation and governance activity, but this is particularly through Europe.

As expected, data surveys and technology revenues declined by 2% on a constant currency basis driven by Asia-Pacific. Compensation surveys were delivered earlier than forecasted, which led to favorable timing of revenue recognition and outperforming revenue guidance in the first quarter. While there were some positive factors that worked in our favor this quarter, market dynamics for this segment remained challenging.

We're feeling somewhat more positive about the overall environment, but as we move into a seasonally slower part of our fiscal year, we expect to continue to see mixed results in Talent and Rewards for the rest of the fiscal year.

Lastly, I'd like to move to the Exchange Solutions segment. For the quarter, the Exchange Solutions segment had revenues of $16 million, net of deferral revenue required by purchase accounting rules. On a pro forma basis, excluding the $5 million negative accounting adjustments, revenues grew by 33%.

We just completed a very successful enrollment period and are pleased to announce that we enrolled more than three times the number of members than in each of the last two years, proving the scalability of the process and technology. We've now exceeded our target of 350,000 members.

As I mentioned earlier in the call, I'm very excited about our recently launched OneExchange, an integrated health insurance exchange solution for active employees and retirees. This is a terrific example of why we thought Extend Health would be such a great fit with Towers Watson.

The senior management team of Exchange Solutions' work with the multidisciplinary group of Towers Watson consultants to develop this market-leading delivery system. In the spirit of our client first approach to consulting, we took the time to ensure that as we entered this broader active market, and what is clearly a very dynamic period in the evolution of the exchange business, our solution was strongly aligned with our clients needs.

This powerful new platform will utilize our patented technology, administrative systems and consulting services. I'm certain that OneExchange will maintain Towers Watson position as market leader in the exchange business.

It's been an exciting week for Exchange Solutions with the launch of OneExchange and the announcement of our strategic alliance with Fidelity. We have great expectations for the Fidelity relationship.

The reason, the initial alliance between Towers Watson and Extend Health was so successful was with our client-service and quality cultures met so well. And given the quality of Fidelity as an organization, their commitment of delivering high-quality services and products to their clients, we believe the relationship with Fidelity will be just as successful.

We had a very strong second quarter. And I'd like to take this opportunity to thank all of our associates for their contributions and efforts. While there were some heroic efforts put forward this quarter, these results are due to the continuous hard work, innovative thinking, and perseverance in a challenging work environment.

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

Roger Millay

Thanks, John, and good morning to, everyone. As John mentioned, our business really delivered this quarter. I'd like to add my thanks to associates for all their efforts.

As a result of topline growth and some one-time favorable factors, we significantly outpaced our expectations. As a reminder, our segment margins are before consideration of discretionary compensation and other unallocated corporate costs, such as amortization of intangibles resulting from merger and acquisition accounting, and transaction and integration costs.

For the quarter, the Benefits segment had 36% NOI margin, Risk and Financial Services had 22% NOI margin, and Talent and Rewards had 34% NOI margin. As expected, Exchange Solutions had an NOI loss, as a result of the seasonal ramp up for the annual enrolment period.

Net income attributable to controlling interest for the quarter was $82 million. Adjusted net income was $107 million. This quarter we had $9 million of transaction and integration costs.

For the first half of fiscal '13, we've incurred $18 million in transaction and integration costs as compared to $44 million in the first half of fiscal '12. As planned, we will finalize all transaction and integration costs in the third quarter, and expect to be within our guidance range of $30 million to $35 million for the fiscal year.

As of February 1, we completed the worldwide ERP system deployments with the second rollout in the Asia-Pacific region. The human resources ERP system has also been fully deployed. We can now focus on final stabilization and wind-down activities in the coming months, particularly around the most recent deployments in Asia-Pacific and human resources.

I'm also extremely pleased to say that we've stabilized and normalized the ERP deployment related receivables and reserves. As of December 31, our DSO was back in the range of historical levels. As I've mentioned in previous calls, we continue to expect receivables to be a bit elevated for several quarters in the geographies that have been recently deployed. But we feel the Americas and most of EMEA are now stabilized and back to business as usual.

The tax rate for the quarter was 31%. The forecasted rate was a range of 37% to 38%. As part of the continuing integration efforts, legal entity consolidation continues, and this quarter we benefited from a non-recurring U.S. tax benefit on our Australian branch incorporation.

Moving to the balance sheet, we continue to have a strong financial position. At December 31, we had $373 million in cash available for our use. During the quarter, we generated $169 million of free cash. Free cash flow generally improves through each of the consecutive quarters of the fiscal year. And as the integration period is concluding, we expect to continue to see strong free cash flow as we complete the fiscal year '13.

We had $275 million of borrowings outstanding from our credit facility at the end of the quarter. We also have $250 million outstanding on our five-year term loan, which was used to fund the Expend Health purchase. During this quarter, we repurchased approximately 370,000 shares at an aggregate cost of $20 million.

Now, let's review our guidance for fiscal year 2013. Overall, we expect revenue to be in the range of $3.60 billion to $3.65 billion. We're expecting our adjusted diluted earnings per share to be within the range of $5.28 to $5.38. We expect our adjusted EBITDA margin to be within the range of 18.5% to 19%.

For the fiscal year our guidance assumes an average exchange rate of $1.60 dollars to the British pound and an average exchange rate of $1.30 dollars to the Euro. We expect the fiscal year '13 income tax rate to be around 34%, excluding any impact of resolving ongoing tax examinations in the second half of fiscal year '13. These examinations may potentially lower the tax rate in the third or fourth quarters, but this impact is not included in our guidance.

In addition, we believe we're starting to see the impacts of our restructuring activities in lowering our steady state effective tax rate. We expect average diluted shares outstanding to be about 72 million. We expect GAAP diluted earnings per share to continue to be lower than our adjusted diluted earnings per share.

Now, we'll review our fiscal year guidance for the segments. We expect constant currency revenue growth in the Benefits segment, to be in the low-to-mid single-digit range for the fiscal year. The NOI margin for Benefits is expected to be in the low-to-mid 30% range.

Next, in Risk and Financial Services, we expect constant currency revenue growth to be in the range of 1% to 3% for the fiscal year. This business is highly dependent on project work, and where we come out in this range is dependent on the business environment. We expect the NOI margin to be in the low-to-mid 20% range.

In the Talent and Reward segment, we expect constant currency revenue to be roughly flat for the fiscal year. This segment has had good execution in a tough environment with a disciplined approach to marketing, staffing and cost management. We expect the NOI margin to be in the high-teens range.

Lastly, in the Exchange Solutions segment, we expect pro forma revenue growth of around 35% for the fiscal year, which is net of about $12 million of deferred revenue write-off required by GAAP purchase accounting rules. We expect the NOI margin to be in the low-double digit range, which includes the impact of the deferred revenue write-off.

There will be no material impact to the FY '13 forecast, as a result of OneExchange and the strategic alliance with Fidelity. As John mentioned previously, we're leveraging the current Exchange Solutions platform to develop OneExchange. So we don't see that any meaningful investment will be required.

OneExchange and Fidelity marketing efforts will focus on the 2014 enrollment periods. As we've discussed in the past, due to the seasonality of the exchange business cycle, we expect revenues to impact the second half of fiscal year 2014.

Overall, I'm very pleased with our performance for the quarter, and I'm enthusiastic about our continued growth, not only in our consulting and service areas, but with the new opportunities Exchange Solutions is providing us.

Before I turn the call over to John, I'd like to take this opportunity to congratulate him, on being named one of the 2013 Outstanding Director Award recipients by the Washington Business Journal and the National Association of Corporate Directors, for his work with MAXIMUS.

We know first hand of John's leadership, excellence, through his many years of leading Towers Watson as Chairman and CEO. This is an honor well deserved. Congratulations, John.

John Haley

Thanks, Roger. Finally, this quarter also marks the end of our third year of integration. It's quite amazing to look back and see the accomplishments of the leadership teams, and all of our associates, that work so hard to achieve our goals.

We recognize this milestone did not come without sacrifices by our associates and their families. However, the overall client experience has been seamless, and we surpassed our own expectations. Now, we'll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Ginocchio of (Roger Bank).

Unidentified Analyst

Just on the free cash, it looked very strong in the second quarter, better than we expected. Any kind of update on how you're looking into free cash flow for the fiscal '13?

Roger Millay

I guess, I'd say to that that as we said, results were strong, were normalized. And so the results are supportive of the guidance that we had given for the year, which we expected stronger free cash for the full fiscal year, nothing more specific than that.

Unidentified Analyst

And then I'm sorry if I missed it, could you breakout how much did it benefit to, was it a point of organic growth from the normalization of ERP?

Roger Millay

Yes, that' correct.

Operator

Your next question comes from the line of Sarah Gubins of Bank of America.

Sarah Gubins - Bank of America

It's nice to see the health and Benefits segment picking up, and you talked about seeing high-single digit growth. Do you think there's any chance that it could accelerate past that as companies are considering their healthcare options under the new legislation?

John Haley

I think that's possible, Sarah. If we look back over the last several years though, we've been at about the high-single digits or sometimes the low-double digits, right after some legislative activity. And so I would expect the high-single digits, is probably our best estimate to that, could it go into the low-double digits, yes, perhaps.

Sarah Gubins - Bank of America

The opportunity with Fidelity is there any way to size the potential for that opportunity. I know it doesn't really kick in at least for another six months or so?

John Haley

No, we don't really have a sizing on that. As I said, we're very excited about having this kind of alliance with Fidelity because we do think there is a very good cultural fit and we think we can go-to-market with this alliance in a very good way. Somewhere to the way indeed that Extend Health and Towers Watson were able to go-to-market before we formally got together. So we're very excited about that. As we think it will open up some opportunities with some very large clients there, but we have no projections at all of what that might be.

Sarah Gubins - Bank of America

And then last question, I'm not used to hearing EMEA led growth in areas like Talent and Rewards, so that was encouraging. Was that more of a catch-up, and does it last for a few more quarters or was it a catch-up in the quarter-end and then things should slow down relatively rapidly?

John Haley

As I said during the commentary, I think we were a little surprised normally during this kind of an economy as a backdrop, particularly in EMEA. We might have expected somewhat different results. But there were specific things that maybe drove each of them. I went through that list.

I would mention that a very big one for us though is the executive comp consulting. And if you look at it in EMEA, there is a lot of pressure both from regulators, from public bodies, and just public sentiment, causing people to look at executive compensation plans; the way they're structured, the way they operate, and that drove a big increase in revenue in our executive comp consulting.

Operator

Your next question comes from the line of Julio Quinteros of Goldman Sachs

Julio Quinteros - Goldman Sachs

So just to maybe jump a little bit ahead here, but just wanted to see what the cadence at this point is looking like as we start thinking about fiscal '14, almost being through fiscal '13. Is there any puts and takes that you guys can kind of highlight in terms of what the comfort levels would be right now as we start seeing sort of round the corner into fiscal 2014?

Roger Millay

Well, Julio, I guess you have the right to look forward, so fine question. And we don't have good guidance beyond this year. I think we've talked on and off about the unpredictable environment. So I don't think we want to look much beyond this year. And I think we talked about the things we're excited about that go beyond the end of fiscal year '13, and that is some of the growth initiatives that we have underway and the strength for the company, but no specific numbers for you at this point.

Julio Quinteros - Goldman Sachs

And just in terms of the cadence in Europe for the rest of fiscal '13. If you start thinking about be in Benefits versus Risk, and Talent and Rewards, and Exchange. When you think about the next couple of quarters for fiscal '13, where are, I guess, the biggest sources of drags in terms to the European exposure right now?

Roger Millay

The biggest sources of drag, I mean if you maybe just walk through some of the performance in EMEA, John talked about, telling the Rewards and executive compensation. And then we talked about in the Benefits segment that both retirement and particularly TAS have had some good results recently.

So I think really the biggest source of drag that we see right now is in the insurance related businesses, particularly risk consulting, which has seen definitely a slowdown in project activity. So I think right now that's the biggest one.

Operator

Your next question comes from the line of Tobey Sommer of SunTrust.

Tobey Sommer - SunTrust

I don't know if you gave a specific enrollment number or growth number. I heard you say really kind of 3x previous years. What was the rate of growth and enrollments in the exchange business?

Roger Millay

I just said the numbers that I think we're going to focus on giving our total active members numbers. And as I think John said in his script, we did achieve our goal of exceeding 350,000, which implies a very robust level of enrollments for this period. And we don't have a specific number on that for you though.

Tobey Sommer - SunTrust

Could you even a bracket arrange order of magnitude, and if you don't have it in front of you, that's fine, we can get back to it. And I wanted to ask you about cash flow as well. What kind of change, does that imply your new outlook for the full year's free cash flow?

John Haley

As I said early, we have not given guidance other than the expectation that we expect free cash to be stronger this year than it was last year. Certainly, we're on track for that. And with receivables normalizing, I think now and I alluded to this in my remarks that, we should be back now to a more normal pattern, where with the business strong as we finish a calendar year, and then in March quarter with a lot of the seasonal activity that goes on, free cash strengthens in the third and fourth quarters. So I think we're back to that more normal pattern that the business has.

Tobey Sommer - SunTrust

And my last question relates to the exchange business as well. You signed up a partnership now with Fidelity, and that sounds interesting, you're extending the business beyond just retirees as well. Do you have initiatives in place to spread out enrollments in periods other than the heavy fourth quarter. And if so what kind of leverage can you pull to facilitate that?

John Haley

So we actually have some off-cycle enrollments that we do right now in the retiree Medicare market. But frankly, what we can do is, it's going to be relatively limited. We think this is going to be a business that is just going to have some real seasonality to it. And even when we move into the active market, well, it's not impossible. You could have plans that would be on different plan years or something like that. The fact of the matter is we think plans are going to be basically calendar year plans.

Tobey Sommer - SunTrust

You have initiatives to develop a more robust partnership, in kind of channel distribution? In other words, is this Fidelity announcement kind of the first of what could be more?

Roger Millay

Just a reminder that we do have an active program, marketing to municipalities that do typically have mid-year, fiscal year, so that offsets a little bit of the seasonality and that's an active marketing program.

John Haley

And that's probably more important in the retiree market of the Medicare market than in the active. So I think we'll look at other potential partnerships. But for right now, we're pretty excited about what we have with Fidelity. And as I said we're the largest of such exchange. We like that position. We think Fidelity is going to help us to build on that position. And so we're pretty excited about our prospects going forward.

Operator

Your next question comes from the line of Tim McHugh of William Blair.

Matt Hill - William Blair

This is Matt Hill in for Tim McHugh. I had a question, on the OneExchange product. I think you made the comment that you didn't expect too much incremental investment going forward in that? So I'm just wondering the set up of that, how much investment was involved? And then, do you think during a more active enrollment period, are we going to see more temporary help coming into facilitate that?

John Haley

I think when we were saying that we didn't expect that there was a lot of investment, what we meant was that OneExchange is really built on the same patented technology as the retiree exchange that we have. The underlying technology that we used for that was originally designed for part-time in contract workers, and it's proven to be scalable. So we don't plan on any significant capital investments.

Now, could we need to bring in a lot of extra people for enrollment as we start adding a lot of people to exchanges around enrollment season? Yes, that would be feature of it. But we were talking about no real capital investment required.

Matt Hill- William Blair

And then just a question about the retirement practice, I think you had mentioned that it was a lot of deadline from clients to get the stuff done by the end of the year, involving the long-term payments. Is that something specific to the end of the calendar year for them? Or basically could we expect that maybe at the end of next year kind of breaking up again?

Roger Millay

There was a specific provision in the law of that it was a unique opportunity for some arbitrage in the lump sums and the interest rate used to value plans that disappeared December 31.

Operator

Your next question comes from the line of Ashwin Shirvaikar of Citi.

Ashwin Shirvaikar - Citi

My first question, I guess, going back to the Exchange Solutions and the seasonality there. The first half of the year, we had roughly $0.20 EPS drag, your take, I guess. What level of positive should we expect in the second half, presumably nicely north of $0.20? And then the sort of a related question, to what extent should we expect revenue growth to mirror our enrollment growth?

Roger Millay

I'm sorry, what was the second half of that?

Ashwin Shirvaikar - Citi

Enrollment growth.

John Haley

Yes. Well, Ashwin, I don't have at my fingertips, kind of, how our guidance for Exchange Solutions turns into EPS for the second half for the year. Certainly, I think you can see from our guidance for the third quarter and the revenue numbers are, I think around double what they were in the first half of the year. And then the NOI margin instead of being at an NOI loss, we're talking an NOI margin for the third quarter of the low 40% range.

So the contribution is quite large, just really haven't dropped that down specifically to contribution to EPS, but I think probably that's pretty easy to calculate. And we can talk about it offline, if you want. But I think we've got the numbers out there that you need to calculate.

And so I think as we've discussed, as you think about how that business runs. The run rate of revenues for the third quarter should be pretty close to the run rate of revenues for the fourth quarter, so the dynamics don't change all that much. It's really first half versus second half.

I think certainly the enrollment growth and annual enrollments is the main driver of growth for the business. So the participant levels drive revenues, and there will be a close correlation over time. It certainly won't, I'm sure there will be puts and takes, but it won't be exact but there will a close correlation overtime.

Ashwin Shirvaikar - Citi

With regards to, I guess, the balance sheet, in the past when you guys have made acquisitions, you have a tendency to pay down any associated term loans and debt associated with the acquisitions as soon as you can. Should we expect a similar pattern here as you kind of head into the healthiest part of your cash flow generation cycle?

Roger Millay

Well I think John, may also want to comment, Ashwin, on kind of outlook for growth and things he is thinking about, but in terms of the way we're thinking about the balance sheet, if you look at the levels. And I think we've talked about this around the time that we did the Extend Health acquisition, the level of a bad book debt of about one times EBITDA, which we were totally there. Probably I think we were at 0.7 or 0.8 times EBITDA when we initially did Extend Health.

That puts us at say two to three times, debt-to-EBITDA from a rating agency, kind of a equivalent leverage point of view. That's a level that we're comfortable with, but going forward really, the activity depends on growth opportunities that we have and other decisions that we make relative to those growth opportunities about managing the balance sheet. But the levels we're at we're comfortable with.

Ashwin Shirvaikar - Citi

Just to clarify, you will not necessarily be paying down the debt?

Roger Millay

What we had said, just going back to when we did Extend Health, we had talked about focusing in the first six months of the calendar year on debt pay down. And I think that's what we did. So going forward we're not necessarily saying that that's the primary focus, right now. As I said in my remarks, we did start buying stock back again in this past quarter, in the December quarter. So I think nothing more than really were in a range of debt-to-EBITDA that we're comfortable with.

John Haley

I was just going to say, I thought Roger summarized it pretty well. I think we feel like we're in a good position. We feel like we have options and I think which way we're going to go is going probably going to be determined by what different opportunities are there.

Ashwin Shirvaikar - Citi

I guess, last question in on tax rate. Roger, in your comments you had some indication that forward tax rates could continue to head down, is that a target you're looking at?

Roger Millay

Yes, and thanks for that question, because I think this is an area of our integration success that people don't highlight quite as much, because it doesn't get technical. But we have started to see that the consolidation activity that we've been engaged in the past three years around the world, it's a great efforts by a lot of folks in this area. If you go back I think about a year ago, we were talking about tax rate of 37% to 38%.

At one point maybe even as we entered this fiscal year, we drop that down to 36% to 37%. From what we see right now, we're comfortable saying that 35% to 36% range is something that is our steady state. And we continue to work to gradually bring that down. I think we said that in the beginning of integration, we thought we could gradually bring it down. It's taken a lot of work, but we're now on our way I think.

Operator

Your next question comes from the line of Jeff Volshteyn of JPMorgan.

Jeff Volshteyn - JPMorgan

Could you remind us the competitive landscape in the exchange offerings from some of your larger and smaller competitors and then both in active and retiree markets?

John Haley

So if we look at our key competitors there is, Aon Hewitt is probably our largest competitor. Now, they offer a fully-insured group-based, what they call a, corporate-private exchange solution. They announced it early actually, even before some of the details of ACA were finalized. So it got a lot of attention for that.

They do have three clients, Sears and Darden and one undisclosed. So there is a Mercer, they've recently announced a relationship for Benefitfocus to provide an offering in the active and non-Medicare exchange space and that's going to be at Medicare marketplace. They also announced recently that they're going to be partnering with Connections to offer an Exchange Solutions for the Medicare eligible populations.

ACS Buck has recently announced a relationship with CHOICE Administrators Exchange Solutions to provide an offering in the active non-Medicare exchange space. ACS Buck has been working with Connections Inc. for sometime to offer an Exchange Solutions for Medicare eligible population. So that's the same one that Mercer's is going to be partnering with.

Bloom Health offers a single-carrier, multi-product exchange usually choosing one-carrier partner per market to under-write the small group coverage. Last year, WellPoint, Health Care Services Corporation, and BlueCross BlueShield of Michigan purchased majority stake in Bloom. And Bloom usually partners with the Blues, although they have partnered with the non-BCBS carriers in certain markets.

And then finally there would be Liaison, which offers a single-carrier, multi-product exchange, usually choosing one-carrier partner per market to under-write small group coverage. Liaison works primarily with regional and national carriers. So those are the five that we would see our key competitors there.

Jeff Volshteyn - JPMorgan

And so when you look at your sort of differences between your offering and others, is that your distribution channel, for that your partnerships, help us understand the competitive advantage here?

John Haley

So I think there is a couple of things. One is, as I mentioned we've been by far the most successful in the retiree Medicare market. We have a very large share of that market. And the reason we have the large share is that we have a reputation for delivering in a high quality environment. We have technology, which was built from the beginning to be scalable, almost everything is done electronically and so we have this terrific base that we're building off, where we are clearly the leader.

With our OneExchange product, what we're doing is we're taking that service that we've offered in the retiree medical market and we're extending it to early retirees, to the active market, and we're doing it in a way where the Exchange Solutions folks, as I mentioned who have partnered with a multidisciplinary group throughout Towers Watson. So we've gotten the thinking of our experts in healthcare design and in communications to bring solutions to the market.

So unlike some others, for example, with the active exchanges, they offer only fully-insured solutions. What we've done is to develop a self-insured solution also. And we and the healthcare economist, I think out there would tell you that, that's the only way to really drive savings in the market. So some of the things we would mention is that; a, we did wait till after the election to make the most of the what the details would be under the Affordable Care Act, so our solutions had been designed with knowledge of what the rules and requirements would be.

We think we have something that is taking advantage of market forces and good plan designed to drive down cost. We also think we have things that are designed so that you're not going down a blind alley, so we have our design done with the excise tax in 2018 in mind. So we think we offer a solution that is unlike any other in the market.

Jeff Volshteyn - JPMorgan

Roger, if I could ask two clarification questions. What are your foreign exchange assumptions for the third quarter?

Roger Millay

We have the overall FX assumption for the year that we gave you, the $1.60, the $1.30 and that reflects both the actual for the first half of the year. And then we've given you a projection for the second half. You have to back into the numbers, but I don't think our third quarter is all that far off from the $1.60 or $1.30, but we haven't given you specific numbers for that.

Jeff Volshteyn - JPMorgan

And then is there an update to the amount that you'll be contributing to your own pension plan this year?

Roger Millay

Not an update. We're still executing against the plans that we talked about, which continue throughout the year. Although, the heaviest cash contributions and payments were in the first half of the year. So that will be a little bit lighter in the second half but still on the same plan.

Jeff Volshteyn - JPMorgan

So still, I think it was about $90 million.

Roger Millay

It was $90 million higher, I think. The total was like $116 million.

Operator

Your next question comes from the line of Mark Marcon of R.W. Baird.

Mark Marcon - R.W. Baird

I was wondering if you could talk a little bit more about the dynamics around the big lump sum transactions on the retirement side. And to what extent those end up impacting just the recurring business, number one? Number two, while there is December 31 rationale for doing everything prior to the end of the calendar year, given that tensions continue to increase in terms of visibility and there is a source of pain for client, can you talk about just the additional types of consulting that you're doing there?

John Haley

Just as an intro, when you think about de-risking, it really has a lot of different facets, and a lot of that activity has been going on for years. And general de-risking has increased our revenues in some ways and it's decreased it in others.

For example, when you freeze a pension plan, it generates actuarial administration, communication revenues. Following the freeze, there is maybe less consulting on plan design in regulatory compliance. However, if you look at the actuarial, the administration, the investment services needed by the plan that remains largely the same.

(technical difficulty) bulk lump sum projects, it's the same kind of things there. The interesting thing about the bulk lump sums is the people who are being paid off and there pension liabilities extinguished, they are the people who are the near-term recipients of Benefits.

So when I pay off the people who are the current retirees, when I give them lump sums and get rid of their pension liabilities, I haven't shortened the life of the pension plan by any degree at all, because the actives are still running out there for decades and the plan is running on.

Now, with a larger group of the population gone, there maybe less of activity on some plan design projects for those individuals, but again, all of the actuarial, administrative investment work that needs to be done on the plan it continues really on the same time scale as it would have before. So I think that's for the first of the question.

On the second part, I guess, I would say that pension plans, they do have a lot of prominence as you mentioned, and it's important to the organization. I actually think we'll continue to see activity in, first of all just de-risking, generally will continue to be activity. But specifically in terms of bulk sump sums, I expect to see people continuing to look at them.

Even though the particular arbitrage activity that was available disappeared December 31, there were still be good reasons for pension plans to look to payoff individuals and get rid of the liabilities. I mean one simple reason for that is, you look PBGC premiums are supposed to go up in the U.S. and as PBGC premiums go up, if people can payoff the retirees and get out of them, then they'll better off.

Mark Marcon - R.W. Baird

And then with regards to the healthcare practice, wouldn't there be a rationale for assuming that the consulting will pick up. There was obviously in the fourth quarter a lot of uncertainty around the election, and whether or not it would make sense to do any sort of consulting around it given the uncertainty of the election? But now that we have clarity and there's deadlines, wouldn't we expect there to be some additional work that would be done, particularly since some of the regulatory agencies just recently ended up coming out with their interpretations of legislation?

John Haley

So if you look at the high-single digits, which is what we had talked about, that is actually a pick up from what the healthcare growth rate has been in recent quarters. And in response to an earlier question, I think it was from Sarah, she said that I thought that is it possible that that could be in the low-double digits. I think it's possible. I just think we haven't seen that yet. And so we think that high-single digits, is probably a prudent number for guidance.

Mark Marcon - R.W. Baird

And then can you talk a little bit just more about OneExchange and also clients with Fidelity, just in terms of how the business model would be different than the Extend Health or if it's similar?

John Haley

So I think the great thing about OneExchange is that it really offers one integrated system for employers to handle all of their healthcare. So it takes this existing platform that we used for retirees. And it extends that same platform. And we think this is one of the beauties of the system that Extend had, and it forms the basis of Exchange Solutions, is that it's a system that was built to handle all of the difficult healthcare, all the different populations and it's easily scalable.

So we don't require any extra investment and we can extend that to everybody. But the OneExchange really just gives it, you go to one place and you can handle all your different healthcare populations through the same platform.

Mark Marcon - R.W. Baird

The way that you would be paid would be the same way?

John Haley

It's our intention to use payments from the health plans to fund OneExchange. Now, this is subject to change based on how payment structures and associated regulations emerging in non-Medicare markets. So we have a plan now, but we're going to look and see how that market develops.

Mark Marcon - R.W. Baird

And then you were going on to Fidelity?

John Haley

Yes, then I was going on to Fidelity. By the way, the other thing I'd just say quickly before I leave OneExchange. The other great thing about it is we have it tied in with our healthcare consulting capability. And so that means that I think we do have some great plan designs that we're able to offer to the partners.

So specifically what is Extend Health going to do with Fidelity Investments? We're going to work them into; a, provide retirees with the access to resources and support to get quality coverage at a price that the retirees can afford. We're going to assist plan sponsors during this transition as they communicate changes and help retirees, select a private insurance option.

And then finally, where Fidelity has what they call their Plan for Life workplace guidance experience and we're going to enhance that by giving them access to the Extend Health exchange.

The business arrangement, we would classify this really as a channel partner arrangement. And the channel partner arrangement is very familiar to us because when Extend was a private company, Towers Watson was one of their channel partners. We found this type of strategic alliance a benefit that both Exchange Solutions and channel partner and it really works quite effectively. Both sides were quite pleased with the way that worked in the past and we expect it's going to bring benefits to both us and Fidelity.

Operator

At this time, there are no additional questions in queue.

John Haley

Well, we'll close then. So thanks everyone for joining us this morning. We look forward to reviewing our third quarter results with you in May.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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