Towers Watson & Co.'s (TW) CEO John Haley on Q4 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Willis Towers (WLTW)

Towers Watson & Co. (TW) Q4 2014 Earnings Call August 12, 2014 9:00 AM ET

Executives

Aida Sukys -

John J. Haley - Chairman, Chief Executive Officer and President

Roger F. Millay - Chief Financial Officer and Vice President

Analysts

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Ato Garrett - Deutsche Bank AG, Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 4 2014 Towers Watson Earnings Conference Call. My name is Matthew, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Ms. Aida Sukys, Director of Investor Relations. Please proceed, ma'am.

Aida Sukys

Good morning. Thank you, Matthew. Welcome to the Towers Watson Earnings Call. I'm 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 week by dialing (617) 801-6888, confirmation number 92596640. The replay will also be available for 1 week on our website.

This call may include forward-looking statements within the meaning of Section 21 of the 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 our actual results or events to differ materially from those contemplated by forward-looking results, investors should review the Forward-Looking Statements section of the earnings press release issued this morning, a copy of which is available on our website at 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 under Regulation G to the most closely comparable GAAP measures, investors should review the press release and the accompanying financial table we posted on our website 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 J. Haley

Thanks, Aida. Good morning, everyone, and thank you for joining us. Today, we'll review our results for the fourth quarter of fiscal 2014 and review our guidance for the first quarter of fiscal 2015 and provide some context for the full year of fiscal 2015.

As a reminder, the Brokerage business has been reported as discontinued operations in our current financial statements. The sale was finalized on November 6, 2013. In our third quarter, we announced the expansion of our Exchange Solutions segment, which will combine all of our OneExchange resources, as well as the health and welfare administration work under one segment. There's no impact from this action to the fourth quarter results we'll be discussing today. We will begin reporting on the newly expanded Exchange Solutions segment as of the first quarter of fiscal 2015.

Reported revenues for the quarter were $879 million, an increase of 5% over the prior year fourth quarter reported revenues and up 4% on a constant currency basis and up 3% on an organic basis. Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures.

Our adjusted EBITDA for the quarter was; $169 million or 19.2% of revenues. The prior year fourth quarter adjusted EBITDA was $161 million or 19.3% of revenues. For the quarter, diluted earnings per share from continuing operations were $1.17, up 4%, and adjusted diluted earnings per share from continuing operations were $1.34, up 2%. We're very pleased with the fourth quarter results and ending our fiscal year on a positive note. Every region reported revenue growth in the fourth quarter.

This was a challenging year from an economic and operational basis. Global economic conditions continue to provide an uncertain operating environment, and we undertook a number of initiatives to help build the foundation for long-term growth. While these factors pressured revenue growth at times during the fiscal year, we achieved our most important strategic goals.

Three key fiscal year '14 goals were: to stand up the OneExchange platform and expand the Exchange segment; restructure the Risk Consulting and Software business; and divest ourselves of the Brokerage business in order to redeploy capital for more aggressive growth opportunities.

I'd like to provide a bit of detail as to what these objectives entail. Enhancing OneExchange and expanding the segment was an ongoing effort for most of fiscal year '14. This effort included developing the self-insured exchange product for active employees, working with carriers and educating our clients and prospects. We successfully enrolled our first beta clients onto the OneExchange active self-insured platform.

We acquired Liazon to round out our Exchange offerings to include fully insured products, added a great array of ancillary products and enhanced our ability to enter new markets with the broker network.

OneExchange is the only private exchange in the market that covers all employee populations, provides self-funded and fully funded solutions with bespoke planned design with all transactional assets owned by the provider.

Finally, as of July 1, we've restructured the Exchange Solutions segment to more cohesively manage and account for the quickly developing private exchange market. As a reminder, the expansion of the segment included moving some health care associates and the health and welfare administration group into this segment to support our active access and retiree suite of offerings.

The Risk Consulting and Software business saw a sharp decline in project work at the end of fiscal year '13, specifically in EMEA, with the indefinite deferment of Solvency II. M&A activity in the insurance sector had dropped off significantly as well. Our goal in fiscal year '14 was to restructure the staffing levels and skill sets to align more effectively to what we believe was a fundamental change in market demand.

Our objective was to stabilize revenues and return to historical profitability by the end of fiscal year 2014. We're very pleased with the results that RCS has delivered. The leadership team and senior associates worked diligently on this restructuring and accomplished this objective segment with great professionalism.

Lastly, we sold the Brokerage business in November 2013. Given how quickly the exchange market was developing, we had to weigh where our capital investments and management resources required the most attention for our overall growth strategies. This has been a very challenging year for our associates and the leadership teams. They had to navigate through challenging economic issues around the globe, ensure our fiscal year '14 strategic objectives were achieved and maintain our thought leadership role in the market, while continuing to run their day-to-day business. I'd like to congratulate all of our associates for their accomplishments this year and for helping to build a strong foundation for long-term sustainable and profitable growth.

Now let's look at the fourth quarter performance of each of our segments. On an organic basis, Benefits increased by 1%, Risk and Financial Services increased by 7%; Talent and Rewards decreased by 1%; and Exchange Solutions increased by 41%.

For the quarter, the Benefits segment had revenues of $508 million. Benefits segment revenues were up 1% on a constant currency basis. Retirement revenues were roughly flat on a constant currency basis due to increased bulk lump sum de-risking activities in the U.S., which were offset by some weakness in EMEA. Health and Group Benefits revenues increased 7% on a constant currency basis due to increased client work. Technology and Administration Solutions revenues increased 7% on a constant currency basis, primarily due to new client work in the Americas.

The organizational expansion of the Exchange Solutions segment announced back in January was effective as of July 1. This move will impact the Health and Group Benefits and Technology and Administration Solutions headcount and revenues. Roger will discuss the impact of the restructuring a bit later in the call. Going forward, the retirement business should see an increase in bulk lump sum projects, and we feel positive about the Benefits segment's pipeline.

Now let me turn to Risk and Financial Services. For the quarter, the Risk and Financial Services segment had revenues of $161 million as compared to $146 million for the fourth quarter of fiscal '13. Revenues were up 7% on a constant currency basis. Risk Consulting and Software revenue increased by 5% on a constant currency basis, with both P&C consulting in EMEA and software revenues experiencing strong growth.

We don't believe the fourth quarter revenue growth is fully representative of the market demand, and we may continue to see some volatility in consulting revenues throughout FY '15. Investment had a 10% constant currency revenue increase. EMEA led the growth, but all regions experienced revenue growth this quarter. Client demand and our pipeline remain healthy.

I'd also like to acknowledge and congratulate Chris Ford, Global Director of Investment, for being recognized by the Financial News as the second most influential person in European pensions. We're fortunate to have Chris leading the team and commend the entire team for their thought leadership. We expect continued improved performance during FY '15 for this segment.

I'll now turn to Talent and Rewards. For the quarter, the Talent and Rewards segment had revenues of $131 million, with a decline in revenues of 1% on a constant currency basis. Data, Surveys and Technologies increased 2% on a constant currency basis. Reward, Talent and Communication revenues decreased by 7% on a constant currency basis. We saw strong revenue growth in the Asia-Pacific region, but it was offset by the softness in EMEA and the Americas, due partly to continuing challenging economic conditions in some parts of Europe, as well as clients in stronger economies taking on fewer larger projects or bringing more projects in-house.

Executive Compensation revenues were up 4% on a constant currency basis, with revenue growth in all regions. Going forward, we anticipate that Talent and Rewards will experience similar results in FY '15 as it did in FY '14.

Lastly, let's move to the Exchange Solutions segment. For the quarter, the Exchange Solutions segment had revenues of $51 million, an increase of 48% on a constant currency basis.

Now let's turn to an update of the selling season. The OneExchange Retiree selling season has developed into a year-long activity. As you may recall, one of our long-term objectives in developing the retiree market was to create more demand for off-cycle enrollments. We define the term off-cycle as client transitions with policy effective dates other than January 1. Adding off-cycle enrollments enhances our ability to optimize staffing resources, infrastructure, customer service, capacity and profitability.

Given that we've made a strategic decision to focus on creating a year-round enrollment environment, we'll be providing full year fiscal '15 enrollment figures rather than just the fall annual enrollment period. With about 5 months left in the selling season for this fiscal year, we're pleased to announce that we've already locked new business that will result in FY '15 growth of about 200,000 net new retirees. The off-cycles we sold for FY '15 already surpassed the total off-cycle enrollments for FY '14.

Before moving to the active market, I'd like to acknowledge how pleased we are that Towers Watson was selected by a few of the defense contractors, including Northrop Grumman, to help transition their retirees to our retiree medical exchange this past year. We're also excited about the progress we've made in the public sector. We're very pleased that the state of Rhode Island entrusted Towers Watson to help transition their retirees into our exchange. Overall, we're now serving more than 90 Fortune 500 organizations.

The sales season for large employers has concluded for the annual enrollment for 01/01/15, but sales efforts for midsize and small employers continue. Most active enrollments for large employers occur during the annual enrollment period. As you may recall, we were able to secure a large off-cycle client last year, and we secured another large off-cycle client for the fourth quarter of FY '15. This is not typical, and we do not anticipate active off-cycles trending the same way as the Retiree exchanges.

We anticipate enrolling approximately 170,000 active employees or about 300,000 new covered lives in OneExchange Active by the end of FY '15. We're pleased with the results of our first year being actively engaged in the market. As you may recall, last year was our beta year, and we limited the participation in the Active exchange. By the end of fiscal year 2015, we expect to have more than 425,000 covered lives in OneExchange Active.

In general, we've seen midsize and small employers making decisions much faster than large organizations. There were a number of large companies that deferred the decision for the 2015 annual enrollment season for several reasons. Many organizations didn't want to be first movers or there wasn't enough time to complete the financial analysis, which can be quite complex in a large organization.

There also wasn't time to socialize the change throughout the organization. It's important to mention that data gathered from our beta clients, including Towers Watson, and the analysis we performed for a number of clients and prospects this selling season proved our financial thesis regarding the savings large and midsize employers can experience by utilizing the self-exchange OneExchange offering.

To summarize, we're bullish on the exchange business for FY '15 and beyond. We're confident that our comprehensive OneExchange offering, which works for any size employer on a fully or self-insured basis and for any employee population, will continue to resonate in the market. We've made great strides in the 2 years since we acquired Extend Health. At that time, we only had the Retiree exchange with 200,000 retirees, and now we're anticipating that by the end of FY '15, we'll have more than 1.2 million covered lives on our 3 exchange offerings.

Before I turn the call over to Roger, I'd like to congratulate him on being recognized by the Washington Business Journal as CFO of the Year for 2014. On a personal note, I work very closely with Roger and appreciate his partnership in not only directing Towers Watson's financial strategy, but his thoughtfulness in all business matters. I couldn't be more pleased that he received this well-deserved honor.

Now I'll turn the call over to Roger.

Roger F. Millay

Well, thanks very much, John, and good morning to everyone. I also want to add my thanks to our associates for their accomplishments during fiscal '14. As John noted earlier, we've asked the team to take on a lot this year to help position us for long-term growth and strong profitability and they did it in a challenging economic environment. I believe that the investments we made this past year, while also achieving our profitability goals, have positioned us for strong future growth and value creation.

Now let's turn to the financial overview. 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 costs. Also, as a result of our decision to exit the Reinsurance Brokerage business, we continue to reflect activity related to Brokerage as a discontinued operation.

As noted by John earlier, the expansion of the Exchange Solutions segment didn't impact the fourth quarter reporting. For the quarter, the Benefits segment had a 31% NOI margin. On a year-over-year comparison, margins were down slightly due to strategic growth investments. Resources were added as a result of new benefits administration assignments, health care consulting projects to build our OneExchange Active platform and to enhance the global Health and Group Benefits offering. Some of these costs transitioned to the expanded Exchange Solutions segment as of July 1.

Risk and Financial Services had a 24% NOI margin. RFS showed strong profitability, with the Risk Consulting and Software margins returning to historical levels in the second half of the fiscal year following the restructuring of this business.

Talent and Rewards had an 8% NOI margin in what is a seasonally softer profitability period. And Exchange Solutions had a 37% NOI margin. This margin is down as compared to last year as a result of absorbing planned investments and continuing to build the Liazon platform and for maintaining higher staffing levels to accommodate off-cycle enrollments. Net income attributable to common stockholders for the quarter was $82 million. Adjusted net income from continuing operations was $94 million.

The tax rate for continuing operations for the quarter was 34%, within our third quarter forecasted range of 34% to 35%. The year-end tax rate came in as forecasted at 28%. We believe our fiscal year '15 tax rate will be closer to historical levels at approximately 33% to 34%, as a number of tax settlements and discrete items favorably impacted the fiscal year '14 tax rate.

Let's move on to the balance sheet. We continue to have a strong financial position. At June 30, we had $693 million in cash and $108 million of short-term investments that are available for our general use. This is a seasonally peak period for cash balances in advance of our September bonus payments. Most of the cash is outside the United States.

As of June 30, year-to-date free cash flow was $391 million as compared to free cash flow of $453 million in fiscal '13. Fiscal '14 free cash flow was more consistent with historical pre-integration levels and in line with our target of free cash generation at a level of approximately adjusted net income.

The main driver of the year-over-year decrease in free cash flow was a higher discretionary bonus payout relating to our strong fiscal year '13 financial performance. We continue to expect solid free cash generation for fiscal year '15.

This quarter, we repurchased $18 million of Towers Watson's stock and paid about $10 million in dividends. For fiscal year '14, in total, we repurchased approximately $93 million of Towers Watson stock and paid about $21 million in dividends. As a reminder, for tax planning purposes, we prepaid dividends for calendar 2013, so dividend payments were higher in fiscal year '13 than in fiscal '14. However, we increased the dividend payout by 22% this past fiscal year.

As of June 30, there was a remaining balance of $70 million on our $150 million open-market stock purchase -- repurchase authorization. We had no borrowings outstanding from our credit facility at the end of the quarter.

Now let's review our guidance for fiscal year 2015. Today, we'll provide you with fiscal year '15 first quarter guidance, as well as some context for our full year fiscal 2015 outlook. As a reminder, we'll provide full year fiscal -- full fiscal year guidance at our Analyst Day on September 19.

There were a couple of items -- there are a couple of items to note before we review our first quarter guidance. Starting July 1, we've combined all of our OneExchange resources, as well as the health and welfare administration business that had been part of the TAS line of business under the Exchange Solutions segment. We're working on the fiscal 2014 recasted segment reporting to align with the new fiscal 2015 structure.

We estimate the impact of the recasted financials as a result of the Exchange Solutions segment expansion for fiscal year '14 first quarter to be a $28 million revenue reduction in the Benefits segment and approximately a $115 million reduction for the first -- for the full fiscal year '14. These revenues will be included in the fiscal year '14 revenue baseline of the Exchange Solutions segment. There will be no impact to the total company fiscal year '14 revenue totals.

For the first quarter of fiscal 2015, we expect revenues will be in the range of $840 million to $860 million. On a constant currency basis, this correlates to a growth rate of 2% to 5%. Our EBITDA margin is expected to be around 18%, which is in line with fiscal year '14 first quarter results and historical first quarter results in general.

As part of our initiative to refocus resources to high-value strategic growth areas, we've successfully absorbed approximately $13 million of investments for the first quarter in the Exchange Solutions segment, while holding company margins flat by cutting costs in other parts of the company.

We expect adjusted diluted earnings per share to be in the range of $1.17 to $1.22.

Last year, the impact of a 15% tax rate in the first fiscal quarter favorably impacted adjusted EPS by $0.32. At normalized tax rates, the first quarter adjusted earnings per share would be -- per share growth would be in the 5% to 10% range. For the first quarter, our guidance assumes an average exchange rate of USD 1.68 to the British pound and an average exchange rate of USD 1.34 to the euro.

For the first quarter, we expect income tax rate to be in the range of 33% to 34%. We expect average diluted shares outstanding to be around $70.6 million. GAAP diluted earnings per share will continue to be lower than our adjusted diluted earnings per share.

Now we'll review our fiscal year 2015 first quarter guidance for the segments. We expect the Benefits segment constant currency revenue growth to be in the low- to mid-single-digits when compared to first quarter fiscal '14 revenues adjusted for the roughly $28 million reduction due to the Exchange Solutions segment expansion. This reduction relates to the revenues that were previously in the TAS health and welfare and Health and Group Benefits lines of business. The NOI margin for Benefits is expected to be around 30%.

Next, in the Risk and Financial Services segment, we expect constant currency revenue growth of flat to low-single-digits, with a continuing tough environment for risk consulting. We expect the NOI margin to be around 20%, which historically has been in the mid-teens in the first quarter. In the Talent and Rewards segment, we expect a low-single-digit constant currency revenue decline. This is in part due to strong comparables last fiscal year, in addition to expected timing differences between the first and second quarters. We expect the NOI margin to be around 20%.

Finally, in the Exchange Solutions segment, we expect revenue in the range of $77 million to $79 million, which is equivalent to low- to mid-20% constant currency revenue growth when compared to the first quarter of fiscal '14 revenues adjusted for the approximately $28 million of revenue added from the Benefits segment as a result of the Exchange Solutions segment expansion.

The continued enhancement of our exchanges capabilities and growth in the health and welfare benefits administration has resulted in the addition of about 400 associates over the past year. About half came with Liazon and the remainder relates to call center expansion to handle enrollment growth and benefits administration client growth. These resources are supporting the expansion of our OneExchange capabilities, as well as robust new client activity in health and welfare benefits administration.

We expect the first quarter NOI margin for Exchange Solutions to be around 10%. As a reminder, Exchange Solutions' profitability is seasonally low in the first half of the fiscal year as we incur all the costs of the annual enrollment period in the first half, but only recognize revenue on a monthly basis, starting with the effective date of the policy.

We've seen a move to off-cycle enrollments, which will temper the margin volatility over time, but in the expanded Exchange Solutions segment, the majority of the active enrollments are still effective January 1. We're pleased with the execution of the core business strategy and the great strides we've made and continue in our growth initiatives around the company.

Let's step back now for a comment on the full year for fiscal 2015. Overall, we expect revenues to increase around 4% on a constant currency basis. We expect our adjusted EBITDA margin to be slightly under 20%, and adjusted diluted EPS from continuing operations is expected to increase in the low-single digits. Adjusting for the abnormally low fiscal '14 tax rate, the EPS growth rate would be more in the range of high-single digits. This guidance assumes an average exchange rate of USD 1.68 to the British pound and an average exchange rate of USD 1.34 to the euro.

I'd like to conclude by once again thanking the Towers Watson associates for all of their hard work in managing the business and driving our growth initiatives during this fiscal year. We continue to focus on building the foundation for long-term profitable growth.

I'm very pleased with the progress we've made this year and the efforts currently underway and feel confident in our future.

Now I'll turn it back to John

John J. Haley

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from line of Shlomo Rosenbaum.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

I just want to clarify some of the numbers that went out in terms of expectations for the various exchanges, kind of a housekeeping, making sure I got that right. So for fiscal year '15, you're expecting 800,000 on the Retirees and then 300,000 on the Actives. I'm just trying to get to where you're getting the 1.2 million from.

Roger F. Millay

Yes, so what we said, Shlomo, is at this point in the selling season, we've locked down business that would equate to an increase of 200,000 in the retiree count. So that would be up to -- from 600,000 to 800,000. And then in the Actives business, 300,000, kind of same thing. The outlook is for 300,000 additional lives, which would take you up to, I think we said at least 425,000. So that's how you get to the 1.2 million plus the 4,000 for access.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then what's -- just in the last 6 months, if I look at the difference in the covered lives, it looks like the Actives were basically flat. Does that have to do with all of the seasonality that's involved in that? Like the increase looks to be about 40,000 in the Retirees and then just flat in the rest of the business. Can you give us some color around that?

Roger F. Millay

Yes. I mean, I don't know that it was totally flat. I mean, we did have the off-cycle in the larger market and a little bit of an increase in Liazon. So I think there was a little bit of growth that's shown, but I haven't really looked at it from a quarter-over-quarter point of view. But there are still off-cycles coming in. In fact, I believe we have one coming in on July 1. So there's-- as we've said, still, most of the growth, particularly in Actives, comes with the annual enrollment period that you'd see on January 1, but there is some off-cycle activity.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, very good. Then just a couple other questions. Just looking at the competitive environment on the exchanges, how would you guys say you'd fared in terms of winning deals versus the competition success rate? Historically, you guys have gotten about 70% on the Retirees. Has that changed a lot? Can you just give us some color there?

Roger F. Millay

Well, I'll give a couple of comments, Shlomo, this is Roger, and John may have some as well. I guess it's fair to say, one, that this was the first full year across the board of full competition and I think we fared quite well. There is more volume now, so I think it's a little more difficult to follow on a case-by-case basis. But I think what we ran through here really highlights, I think, what happened in the market. We've won and we mentioned Northrop Grumman in the comments. We've won some really good accounts on the Retiree business and feel really good about the forward momentum in the Retiree business, and we're happy to announce the success in the public sector with the state of Rhode Island. In the Actives sector, the Liazon business, the activity through the brokers, has been very robust and I would say exceeded our expectations when we were looking at the acquisition and so we're very pleased there. And with the larger accounts, as we said, the decision-making cycle is longer, but we feel good about the resonance of our offerings there, and the sales cycle for 01/01/16 continues right out of the cycle that we had for 01/01/15. So I think we're doing well and winning, at least, our share.

John J. Haley

Yes. I mean, I think I agree with all of that, Roger. I guess the only thing I would add is on the Actives, particularly the bigger ones, what we've seen is that, in general, when we haven't won a case, it's because it's been pushed off for a decision for later. I think there were 2 cases where they went to a competitor instead, and in both cases, they were already existing clients for administration of the competitor. So we haven't lost anything that was really sort of a jump ball like that for that. So we feel pretty good about where we stand and our ability to compete in that market. On the Retirees, there was one big case this year that went to a competitor, but when you look at all that we've brought in, the aggregate of that is even larger than that case. So I think we still got over 50% of the market this year, which was really quite an accomplishment given that we didn't get the one big case. So again, we feel pretty good about our value proposition there.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, great. And then just last question. If I take the expectation for revenue growth on the exchange for next quarter and I kind of normalize it by pulling out the $28 million that's going to be reallocated from the Benefits business, looks like the revenue is going to step down a little bit sequentially, maybe like $4 million -- to $4 million. Why would that happen?

Roger F. Millay

I'd have to look at that from a sequential point of view. I mean, we wouldn't expect that, Shlomo, so we'd have to get into some of the underlying assumptions there. I mean, we wouldn't expect any kind of robust sequential growth, but we wouldn't expect a decline. So we'd have to take it personally [ph] here.

Operator

Your next question comes from the line of Andre Benjamin.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

I first wanted to see if there was any update to how you're thinking or your level of investment that you made and capacity to add enrollees for both Active and Retiree and how that compares to how you're talking about the anticipated pickup. And could you confirm whether that capacity is a number of lives covered or just the number of employees?

Roger F. Millay

Yes, if I followed your question correctly, and I think this is going to -- how I'm going to answer it anyway, but you're talking about how we think about adding the capacity, and I would say that it's not necessarily at this point -- while it anticipates business that has already been signed, we don't have a specific number that we're positioning ourselves for. So I think to walk through how we've thought about it, really, since a year ago or so, as we start to position the business for the 01/01/15 enrollment period, particularly for Actives, we wanted to establish a platform that could handle robust volume and across-the-board large accounts and the whole span of the market, when we got into Liazon. So the view is to really simultaneously fill both the sales pipeline, as well as the capacity to handle that market development at a level that we could handle what comes along. And I think as we've talked about it, there was a focus on 01/01/15 but also thinking about 01/01/16, and that was bolstered, I would say, by the success that we had in the client discussions, as we discussed earlier, that the client discussions, relative to our offering, relative to the ability to save money, were very constructive. And the interest level is there, talking about even out to 01/01/16. So I think that's really it. We don't -- we want to have a foundation that serves clients very well. We're very attentive to the pressure and stress that the business goes under to do the annual enrollment period. And we want to be positioned to handle that well, whatever comes along.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And the follow-up, is there anything different that you're hearing from new customers versus customers that signed up previously? How much of those are going for the self-insured versus fully insured option? And then I know you're not going to commit to any kind of multiyear view, but just trying to get a sense of how many people would you say are in that bucket of companies or lives that are looking at it actively, but don't want to be that first mover or couldn't finish their work, et cetera?

John J. Haley

Yes, I mean, I think -- look, we see a -- we've seen a tremendous amount of interest in the exchange model, but there are a lot of folks that don't want to be a first mover, or as we said, it could be some other things, they need a little more time to socialize a change within the organization or some more time to commit to some of the financial projections, et cetera. So I think we -- we're encouraged by all of the interest and activity in that, but we don't -- we can't really offer, I think, any projections as to what's likely to happen there. I think we're not seeing anything really different in terms of the -- our new clients versus our existing clients. We see the same kind of interest and exchanges for the same reasons and not really any difference by the time when they've adopted it.

Roger F. Millay

I'd just add a couple of things to that. One is, certainly, we've gotten some great response from the couple of beta clients that we had in the large company self-insured market. So that's been, I think, heartening and validates, I guess, our competitive proposition. As you look at the self-insured versus fully insured, certainly, in the small and medium market and through the brokerage network, 90% of the volume or so has been in the fully insured market. We have positioned some direct sales of the self-insured product onto the Liazon platform. So I think while it's difficult to sort through exactly what the future is going to look like, it really feels like what were -- our offerings are resonating. But again, there are competitors in the market who have their own sales propositions and clients are having to sort through that. But again, we feel good about where we are and our offerings.

Operator

Your next question comes from the line of Tobey Sommer.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

You made a comment about market share kind of aligning with existing benefit and administration providers. Do you think in the health care exchange business, ultimately, that, that is how the market share will shake out?

John J. Haley

No, we don't necessarily think that that's the case. Although I think the point about that, Tobey, was to say whoever has -- if somebody already has the work for a client, they have a bit of an advantage going in there. We would be more concerned about losing a client that was where somebody didn't have that advantage than to losing to somebody where they had that advantage.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Understood. In terms of your Rhode Island win, was your recent affiliation with The Segal Group integral in that? And are there prospects for you to continue to penetrate the public market?

John J. Haley

No, we're working on a couple of sales with Segal right now, although we don't have anything really to update about that. But the state of Rhode Island was one that we had been pursuing before.

Roger F. Millay

Back to your earlier question. The majority of the exchange clients enrolling during fiscal '15 are actually new clients to Towers Watson.

John J. Haley

For us, yes.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

So that would be kind of additive, if you were to think of it from a market share perspective, of your existing Benefit business?

Roger F. Millay

That's correct.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Okay. In terms of the general move within health care towards consumer-directed health care, what are you seeing in terms of changes in either the elections of the individuals on the exchange? Or any kind of comments you could make about the move towards kind of high deductible plans, for example, would be helpful.

John J. Haley

Yes, I don't think we have any analysis that we're really ready to share at this time around election rates or trends there. That is something that we'll be looking at and trying to understand how that's going to impact things going forward. But we don't have anything to say right now.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Is there any change to your pricing either on the expectations in terms of either the Retiree or the Actives side?

John J. Haley

I just think...

Roger F. Millay

You want me...

John J. Haley

Yes.

Roger F. Millay

No, maybe in average revenue per member, that we're still, for Retirees, still saying the 250 to 300 range is what we expect going forward. As we look at Actives, more like the 225 or so to 240 kind of range is what we're looking at going forward.

John J. Haley

And part of that is related to the -- we're not doing a breakdown between Liazon and the TAS self-insured. So that's why the overall range averages up to that, Tobey.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So it's not a change in kind of underlying pricing?

Roger F. Millay

No, it's reflective of how the mix has changed now.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Last question for me, you said you're having kind of longer discussions and dialogues with kind of larger employers about the move to exchanges. At this point, you probably have a bunch of deferrals of answers, but -- as you describe it. Do you actually have any affirmative kind of yeses and people who are signing up already for next year's enrollment?

John J. Haley

No, we don't have that, Tobey, but what we have is the 01/01/2016 sales season has already started. So we are actively engaged with people in talking about that, and particularly folks who thought seriously about 01/01/2015, or at least thought to varying degrees of seriousness about 01/01/2015, are now deciding to turn their attention to 01/01/2016 very early so that they'll be able to make timely decisions.

Operator

Your next question comes from the line of Paul Ginocchio.

Ato Garrett - Deutsche Bank AG, Research Division

This is actually Ato Garrett on for Paul Ginocchio. First, I just want to get a sense about large client enrollment potential. Do you think there's a chance for any large clients to come on later on this year to help add to enrollment on the exchange?

John J. Haley

Well, as we said, we do have one large client that is going to come on as of April 1, 2015, so in the remainder of the fiscal year. It's -- we don't really expect any other large clients to come in during the remainder of the fiscal year. There theoretically could still be time for somebody to decide to do that and we could implement it. But as a practical matter, we think the activity -- as I mentioned during the remarks, we don't anticipate the same kind of off-cycle enrollments among the Actives as we've seen among the Retirees, so we don't expect that to be as big a phenomena anyway. And then in addition, it's a little late. We would have seen some people if there were some big ones coming on. So not for the remainder of this fiscal year. We think we pretty much know them.

Ato Garrett - Deutsche Bank AG, Research Division

Okay. And then for the clients that you've seen making the transition to the health care exchanges, can you give us some kind of a sense of what level of savings those clients are achieving by transitioning to a health care exchange?

John J. Haley

It varies depending on what the starting point is for the client, but 5% to 15% is what we would see most commonly. And when I say it varies depending, it's what their planned design had been and how much they're moping [ph] , but we see everybody getting at least around the 5% savings.

Ato Garrett - Deutsche Bank AG, Research Division

Okay, great. And looking for the additional investments and severance costs that you had in this year, how much of that will you be lapping in fiscal '15?

Roger F. Millay

Well, Ato, I think the severance ended up around $20 million for fiscal '14, probably won't be 0 for fiscal '15. But it will be likely in the single digits, at least from what we're anticipating right now. We're just not anticipating the same level of activity. So that's kind of order of magnitude there. In terms of the investments, I think we'll be giving more specific guidance on the segments looking forward. We talked about the $13 million in the first quarter, which is really the rollover. If you recall, when we acquired Liazon, we talked about being $0.10 to $0.15 dilutive for the fiscal year '15, which are -- '14, I'm sorry, which was a partial fiscal year. And that tended -- effectively, the $13 million for the first quarter is kind of the rollover, that activity plus the expansion that we talked about, particularly for the great sales success we're having in the health and benefits administration. So I think that's the context for now and a little bit more to come in Analyst Day.

Ato Garrett - Deutsche Bank AG, Research Division

Great. And finally, looking at your retiree enrollments, was there anything in particular that contributed to the spike in enrollments?

Roger F. Millay

Great sales success.

John J. Haley

Yes, I think we had a very good sales season. We got quite a large number of clients. In contrast to, say, a year ago, when the vast bulk of our retiree enrollments came from one client. This year, we sold a large number of large clients, but it was actually a good number of large clients.

Operator

Your next question comes from the line of Sara Gubins.

Sara Gubins - BofA Merrill Lynch, Research Division

I'll start on exchange as well. So could you give us any color on how many clients you're adding to the active self-insured exchange? I think you had 2 this past year, as well as Towers Watson. And could you talk about what kind of industries they're in? Is it broad? Is it concentrated?

Roger F. Millay

Yes, I don't know that we have a...

John J. Haley

We haven't actually focused that much on the number of clients or any kind of breakdown from them, Sara. So...

Roger F. Millay

Yes, and it fits with kind of what we're saying that now, because the -- there's been kind of a merging of activity between the Liazon platform and the initial TAS-based platform that we had for self-insured, we really look at it as one business right now. Fair to say, I mean, it's in the large kind of self-insured client base. It's like a handful or it's not a huge volume. And the volume, as we said in the notes, the volume was really in the small- to medium-size clients.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And any -- could you give any color around for those handful of large self-insured exchange clients that you're adding, size of the employee base? Is this like another 20,000 each or bigger than that or smaller?

Roger F. Millay

Yes, I mean, this probably ranges from kind of a mid-single-digit thousands up to maybe, I don't know, 25,000 or 30,000, that kind of range. And kind of the industry is pretty broad based as far as industries, not a really concentration in industries.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. So of those 300,000 new covered lives that you're adding, the majority of that is going into Liazon and then there are a handful of new clients maybe adding up to 1/3 or so of that 300,000 that's going into the self-insured exchange. Is that a fair estimate?

Roger F. Millay

I don't know about the 1/3, but certainly the volume was driven by the small or medium clients with -- on the Liazon platform.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. So that 220 and 240 in pricing that you talked about, can we think of that, on average, as sticking for fiscal '15? Or should we assume that, that comes down more because the shift towards Liazon?

John J. Haley

No, that's a good number for FY '15.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. Just switching gears for a minute, could you talk about expectations around discretionary compensation next year?

Roger F. Millay

As you know, generally, we're around the mid-30s as a percent of pre-bonus operating income. That's generally where we stick. It's come down a little bit the last couple of years and there's a bit of a mix shift in the company, but we would expect to just still be in the kind of mid-30s type range.

John J. Haley

Yes, I mean, I think it -- there's probably a bigger difference in some ways than it looks because we actually boosted it up last year and then we brought it down a little bit this year. And so there's a bigger difference comparing one year to the next. Roger's right in about that mid-30s level is about where we come out.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just last question. In discussing Talent and Rewards, one comment you made was that clients are bringing some more projects in-house and that some are just not doing bigger projects. For the ones that are bringing them in-house, do you see that as a new trend? Or was that just a couple of projects that they happen to make that decision?

John J. Haley

We don't see it as a trend. At least at the moment that's not the way we're seeing it. We think it's an artifact of some of the pressures that clients are feeling right now.

Operator

Your next question comes from the line of Tim McHugh.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I guess, just wanted to follow up maybe on Sara's question a bit. I mean, you said you weren't sure about the 1/3 that you -- she mentioned in terms of the percentage of, I guess, the active enrollments, the 300,000 coming from the self-insured or kind of the jumbo market. Can you give us a rough percentage in terms of how much is the large market versus small mid-market?

Roger F. Millay

Well, the reason that I said I wasn't sure about the 1/3 is because I don't really have a number. So really no. I mean, you know what, again, just kind of reiterating, certainly, the majority is driven by the small- and mid-market, but we don't have a specific number, a breakdown there.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And is there anything that you saw, I guess, in the enrollment season that, especially for the jumbo market, given it seems the small and mid-market is certainly doing well, but for the jumbo market, is there anything that, I guess, changed your view of client adoption, that it was taking longer than you expected or there wasn't as much interest? I know you've kind of hedged that people may take long to make decisions, but I guess just as you step back from it, do you feel any differently at this point than you did 6 to 9 months ago about the exchange business?

John J. Haley

Yes, that's a pretty good question. I guess, when you deal with the question of interest, I think the interest is every bit as high as we had anticipated it would be. I think it did take -- it is taking longer to make decisions than we had thought it would. In retrospect, maybe we should have anticipated that it would take a little bit longer just given how complex of these things are and given how complex they are for an organization to get -- particularly a big organization, to get their arms around it and to do it. But I think -- I don't think there's anything that has caused us to fundamentally question our overall thinking as to this is going to be a big business or anything like that. No, I don't think there's anything there.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. I guess -- and then just two, to ask about the margin comments for the year, you talked about kind of $13 million of investment in Q1 in the exchange business. Does that lessen throughout the year? Or are there other factors? It sounds like, while you're not expecting margin improvement in Q1, you expect a fair amount or a decent amount for the year. And so I guess, what -- is there anything different in the, I guess, the remaining 3 quarters versus Q1?

Roger F. Millay

Yes. I would say, Tim -- so the $13 million doesn't necessarily lessen. What will happen is that revenue will come in. So margins -- and we'll give, again, more specifics at Analyst Day. But margins, as the year goes by, margins will be enhanced.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And I guess one last question. The comment around revenue growth for this year, I think you talked about expecting to see a pickup in lump sum work. How much of a, I guess, how much of a contributory factor is that? Are you expecting a significant surge like we saw the last few years? Or is it more just a return to kind of normal level? Trying to understand if it's providing a big boost or just normalizing, I guess.

John J. Haley

I think it's somewhere in between. I think we had some bulk lump sum work this year, but it was a big step-down from the year before. We think this is a small step-up from this year. So a help to us, but not what it was 2 years ago.

Operator

Your next question comes from the line of Jeff Volshteyn.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

I know we're running late here so I'll be efficient. Just following up on Sara's question, let me try to ask it another way. When you look at 2015 enrollments, do you expect the majority will come from brokers or directly from the direct channel?

Roger F. Millay

The majority will come through brokers.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

Okay, okay, that's helpful. Looking at Access, I recall there were technical challenges with public exchanges as far as how to get people on those exchanges. Where does this stand now? And can you just give us a little more color on the Access business?

John J. Haley

Do you want to...

Roger F. Millay

I mean, I think the Access business, there still is -- while we're still actively discussing that with clients, because of the uncertainties about the public exchanges and I think the full kind of network of the public exchanges, there's still uncertainty about how much volume we'll see go through that. So ultimately, it still seems to be an attractive part of our offering, but we're not anticipating a big impact in fiscal '15.

John J. Haley

Yes, I mean -- and I think the, as Roger says, the Access is something that is not a big part of what we do. We do like having it to round out the whole notion of OneExchange. We've had good feedback from our clients about the Access product, particularly given the difficulties of working with some of the public exchanges.

Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division

That's helpful. And a final question for me, on the health consulting business. You had strong results this quarter. How should we think about it going forward as it shifts into the Exchange bucket, so to speak? And will we be able to use the historical comparisons on an apples-to-apples basis?

John J. Haley

Well, I mean, I think I would say this: we have remained committed to maintaining a very strong consulting business in the Health and Group Benefits. Even if exchanges grow to be quite big, we expect there will be a lot of clients out there that will be looking to use our health care consulting services. So we're committed to maintaining them. I mean, I do think though that if there's a big shift to exchanges, then clearly it won't be apples-to-apples.

Operator

Ladies and gentlemen, I would now like to turn the call over to John Haley for the closing remarks.

John J. Haley

Okay. Thanks very much, everyone, for joining us this morning. We look forward to seeing you at Analyst Day on September 19 and reviewing our first quarter results with you in November.

Operator

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.

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