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Executives

Roger F. Millay – Vice President and Chief Financial Officer

John Haley – Chairman and Chief Executive Officer

Analysts

Paul Ginocchio – Deutsche Bank

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Timothy McHugh – William Blair & Company

Sara Gubins – Bank of America/Merrill Lynch

Jeffrey Volshteyn – JPMorgan

Tobey Sommer – SunTrust Robinson Humphrey

Mark S. Marcon – Robert W. Baird & Co.

Vincent Lin – Goldman Sachs

Towers Watson & Co. (TW) F4Q 2011 Earnings Call August 16, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Towers Watson & Co. Earnings Conference Call. My name is Kim and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of today’s conference. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to your host for today’s conference Mr. Roger Millay, Chief Financial Officer. Please proceed Mr. Millay.

Roger F. Millay

Thank you. Good morning, everyone. This is Roger Millay. Welcome to the Towers Watson earnings call. I’m here today with John Haley, Towers Watson’s Chief Executive 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, 22481994. 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 conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including statements, among others, regarding expected financial and operating performance. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

You are cautioned that these statements may be affected by the important factors set forth in our filings with the Securities and Exchange Commission and in today’s press release and that consequently actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise, except as required by federal securities laws. 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

Okay. Thank you, Roger. Good morning and thank you for joining us. Today, we will review our results for the fourth quarter of fiscal 2011 and our guidance for the first quarter of the 2012 fiscal year.

I’m pleased to report that revenues for the quarter were $851 million, an increase of 14% over prior year reported revenues and an increase of 8% on a constant currency basis. Our organic growth rate, which adjusts for changes in foreign currency exchange rates, acquisitions and divestitures, was 6% for the quarter. For the fiscal year, revenues were $3.26 billion.

The fourth quarter marks the end of our first full fiscal year as Towers Watson and we are very pleased with our financial results and our integration progress. We are well positioned to build upon our success from this year and we have a strong platform for long-term profitable growth. In recognition of our strong performance this year, we announced earlier today that the Towers Watson Board has approved a 33% dividend increase for fiscal 2012. We view this as further evidence of the confidence that management and the Board have in Towers Watson and our future.

Turning to segment performance, all of our segments performed well and achieved organic revenue growth. Our segment organic growth this quarter is as follows. Benefits 4%, Risk and Financial Services 1%, and Talent and Rewards 14%.

Our revenue growth reflects wins from both new and existing clients. Clients have responded very positively to the broad array of services and deep expertise we can provide as Towers Watson. Our associates have done an outstanding job of building strong relationships and partnering with our clients to understand their challenges and offer creative solutions.

It’s also important to note that we still have easier prior year comparables due to where we were as Towers Watson at this time last year. The fourth quarter of last year was only our second quarter of operation as Towers Watson.

Our adjusted EBITDA for the quarter was $159 million, up 35% from last year and our adjusted EBITDA margin for the quarter was 19%. For the quarter, diluted earnings per share were $0.59 and adjusted diluted earnings per share were $1.6. Adjusted diluted earnings per share increased 18% over the prior year.

Adjusted diluted earnings per share include a normalized income tax rate and exclude non-recurring other income transaction and integration costs, stock-based compensation costs from restricted shares issued in conjunction with the merger, and the amortization of merger accounting intangible assets. We remain focused on profitable growth and are well positioned to take advantage of market opportunities.

Now, we will review the performance of our segments. For the quarter, the Benefit segment had revenues of $483 million, including the revenues from Aliquant, which we acquired in late December 2010, Benefit segment revenues were up on a constant currency basis. On an organic basis, revenues were up 4%.

Retirement, Technology and Administration Solutions and Health and Group Benefits were all up. Retirement revenues increased 2% on a constant currency basis and revenues increased in all geographic regions. As we previously noted, retirement historically lags behind economic recoveries, so we’re pleased to see this kind of growth.

In Technology and Administration Solutions, revenues increased in the US and declined slightly in Europe. The increase in the US was largely due to the revenues from Aliquant. The integration of Aliquant into our US business continues to go well. Activity in the marketplace continues to be strong.

We had low double-digit revenue growth in Health and Group Benefits this quarter. Client demand continues to increase as companies look for solutions to manage employee health and productivity issues.

The Benefits segment had solid topline results in the second half of fiscal 2011 and we expect that momentum to carry over into fiscal 2010 with organic growth led by Health and Group Benefits.

Now, let’s move on to Risk and Financial Services. For the quarter, the Risk and Financial Services segment had revenues of $194 million, including EMB revenues were up 10% on a constant currency basis. Revenues were up 1% on an organic basis.

Risk Consulting and Software revenues benefited from a smooth integration with EMB. We continue to be excited about the opportunities that our strength and capabilities in this area could generate. Regulatory changes and M&A activity continue to drive demand. On an organic basis, revenues grew in the low single digits. We're looking for continued growth in fiscal ‘12.

In Brokerage, strong new business activity in Europe and improving pricing conditions in the property catastrophe line led to low single digit revenue growth. Revenues in Investment Services declined on a constant currency basis. Investment has experienced a decrease in traditional ad hoc client work and while our pipeline remains healthy we’ve seen sales cycles lengthen recently. The team has a plan to resume growth in fiscal ‘12 and we expect to see them turn the corner on last year's challenges.

In summary, we expect growth to continue in RFS led by the integration of EMB and the strong capabilities they’ve added. We see opportunities in our RFS markets and hope to drive improved organic growth results in fiscal ‘12.

Now let me turn to Talent and Rewards. For the quarter the Talent and Rewards segment had revenues of $136 million. On a constant currency basis revenues were up 7% from the prior year quarter. After adjusting for the revenues they transferred to Pay Governance and excluding revenues acquired in the EMEA, Talent and Rewards had 14% organic revenue growth.

On an organic basis revenues increased in all lines of business; Executive Compensation, Rewards, Talent and Communications and Data, Surveys and Technology. The increase in organic revenues in Executive Compensation was largely due to an increase in activity in North America in both management and compensation consulting and strong growth in Asia Pacific and Latin America.

In North America, we worked with many companies to help prepare for new Dodd-Frank requirements that went into effect in 2011. We’ve seen a strong pickup in demand in Asia-Pacific particularly in China as local companies expand nationally, regionally and globally and look to implement Executive pay plans that support their growth agenda.

Revenues also increased in Rewards, Talent and Communication, with strong activity across all our regions. As companies look for growth they begun to implement programs to reengage their employees, drive pay per performance, and develop talent. We’ve won a significant number of these projects with existing and new clients due to our broader array of integrated services and tools, and bigger scale in all major regions.

Revenues in Data, Surveys and Technology increased in all geographic regions and was led by Asia. Client interest in benchmarking metrics, measuring ROI, and HR organizational effectiveness has driven demand globally for our practices.

Overall, we’re very pleased with the organic growth in this segment for the quarter and the year. As you know, this is our most cyclical business, so assuming continued economic expansion we expect this segment to be our highest growth segment. In any event we’re forecasting continued solid growth in the first quarter given our projects underway and the solid pipeline.

We’re very pleased about our results this quarter and for the year. It’s a reflection of how well the integration has progressed. Our associates have skillfully adapted the changes in their day-to-day work environment while helping us grow the business through working with clients. As we wind down the bulk of our integration activities, we look forward to reenergizing our growth plans.

Now I’ll turn the call over to Roger.

Roger F. Millay

Thanks, John. As John mentioned we performed extremely well this quarter. We continued to deliver solid, topline growth with a very healthy increase in operating earnings in comparison to a period in which revenues were very soft and we have not yet realized significant cost synergy savings. The topline revenue growth translated into good segment margins. 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 accounting and transaction and integration costs.

All of our segments exceeded our margin expectation in the seasonally softer quarter. The Benefits segment had a 33% margin for the quarter. Risk and Financial Services had a 20% margin for the quarter, which is typically the weakest quarter for this business. Talent and Rewards had a 13% margin for the quarter, up significantly from a small loss in last year’s fourth quarter.

Net income attributable to controlling interests for the quarter was $44 million. Excluding transaction and integration costs, stock based compensation arising from the merger, the amortization of merger accounting intangible assets, non-recurring and other income, and assuming a normalized income tax rate, adjusted net income was $78 million.

This quarter, we had $23 million of transaction and integration costs versus $29 million last quarter and $38 million in last year’s fourth quarter. While these costs are choppy and difficult to preciously predict quarter-to-quarter, we expect to see a gradually slowing trend in these costs over the next year as we near the end of our three-year integration plan. This quarter the majority of the costs related to our large IT initiatives, integrating both the ERP software and hardware platforms of the company.

I’m happy to report that we successfully launched the pilot deployment of our new Oracle ERP system on August 1. We will now gradually deploy through the rest of the world over the next year and half. This project will improve internal efficiency and builds a scalable platform to support future growth.

We also had some real estate and HR related costs this quarter although not at the level of last quarter. The normalized tax rate for the year came in higher than we expected due primarily to a shift in the geographical mix of income versus our forecast.

Our operating outperformance this quarter was driven by the United States, a high tax rate country, while some lower rate countries underperformed against forecast. This led to catch-up adjustment for the year, which was all recorded in the fourth quarter driving this quarter’s normalized rate up to 43%. If the fiscal year ’12 geographical mix is consistent with fiscal year ’11, we expect the normalized tax rate to continue to be above our earlier expectations and be in the range of 37% to 38%.

Diluted earnings per share for the quarter were $0.59, a decrease from $0.77 last year when we recorded a significant income tax benefit due to the release of valuation allowances. Adjusted diluted earnings per share were $1.06, up 18% versus last year.

Moving to the balance sheet, we continue to have a very strong financial position. We ended the quarter with about $450 million of cash that’s available for our use. We didn’t have any borrowings outstanding from our credit facility at the end of the quarter, but we do expect to borrow $75 million to $100 million from the credit facility when we pay bonuses in September. We still have $99 million of notes plus accrued interest payable to B1 shareholders from the tender offer that was completed in June 2010.

Our free cash flow remains strong in the fourth quarter and we ended the year with over $400 million in excess of our expectations. I should note that a part of our free cash flow strength this year resulted from the payment of only a half-year of bonuses in fiscal year ‘11 due to the timing of the merger. Going forward, we will have a full year bonus payments each September. Also in fiscal year ‘12, we expect CapEx to run a bit higher than the fiscal year ‘11 – than in fiscal year ‘11 due to our IT integration initiatives.

We have now repurchased about 800,000 shares under our $100 million repurchase authorization and used about half of the authorization. As John mentioned, we are also increasing our dividend, which reflects our confidence in the integration activities and our ongoing business. The new dividend level equates to about a 10% payout ratio, which will use as a reference point to consider possible future dividend increases.

Now, let's review our outlook for fiscal year 2012. Today we’ll give you guidance for the first quarter of fiscal ‘12 as well as some context for our full-year fiscal ‘12 outlook. As a reminder we’ll provide full fiscal year guidance at our Analyst Day on September 19.

For the quarter, we expect revenues will be in the range of $800 million to $825 million. We expect adjusted diluted earnings per share to be in the range of $1.02 to $1.07. Our adjusted EBITDA margin is expected to be around 18% for the quarter. This guidance assumes an economic and market environment similar to the fourth quarter. We are also conscious that we’re beginning to compare it to prior quarters where the topline momentum of the business and the market began to improve.

Internally, we're evaluating our results on a comparable basis for all periods using adjusted EBITDA and adjusted EPS. Our adjusted measures of income include a normalized income tax rate and exclude transaction and integration costs, stock-based compensation costs from restricted shares issued in conjunction with the merger, and the amortization of merger accounting intangible assets. Our adjusted measures of income also exclude non-recurring other income.

For the quarter, our guidance assumes an average exchange rate of $1.60 to the British pound and an average exchange rate of $1.40 to the Euro. We expect to have a normalized income tax rate of 37% to 38% and diluted shares outstanding of a little over $73 million. We expect GAAP diluted earnings per share to be significantly lower than our adjusted diluted earnings per share.

Now, we will review our first quarter guidance for the segments. Let's start with Benefits, for the first quarter of fiscal 2012, we expect revenues in the Benefits segment to grow in the low single digits on a constant currency basis, and our range is 2% to 5%. The NOI margin for Benefits is expected to be around 30% for the quarter. For Benefits, the first fiscal quarter is seasonally weaker.

Next in Risk and Financial Services, we expect constant currency revenue growth will be in the range of 7% to 11% for the first quarter. This guidance includes revenue from EMB. We expect the NOI margin to be in the low 20% range for the quarter.

Finally in Talent and Rewards, we’re forecasting that constant currency revenues will be up 6% to 9% for the quarter. We expect the NOI margin to be in the low 20% range. As we mentioned earlier, for this segment, the first half of the fiscal year is typically, seasonally stronger than the second half of the year. For fiscal year ’12 overall, we’re targeting mid single-digit constant currency revenue growth with an adjusted EBITDA margin between 18% and 19%. Our comparables will get more challenging as the year progresses and we’re vary of challenges from our systems implementation, which engages all of our front-end associates in new operational processes, and of the potential headwinds from the macro environment.

Overall, I'm very pleased with our performance for the quarter and for the year. I’ve been incredibly impressed with the ability of the Towers Watson team to do the work required to deliver strong financial results while also integrating the company.

Now, I will turn it back to John.

John Haley

Okay. Thanks, Roger. Before we move on to your questions, I’d like to take a moment to thank all of our associates. Our first full year as Towers Watson was a big success, thanks to their hard work. Now, we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Ginocchio with Deutsche Bank. Please proceed.

Paul Ginocchio – Deutsche Bank

Thanks for taking my question, just on the free cash flow, full-year bonus, what would that – can you try to size up for us and also maybe the CapEx, will that be the only – will that be the only sort of unusuals in what seems like very strong fiscal year ’11 free cash flow?

Roger F. Millay

Yes. So this year’s bonus and I think you see it on the schedule of the discretionary comp line, so that's for the year, this year $338 million. And we do pay out some taxes that go on top of that a bit. So I mean that's your reference point for full year and so that gives you a sense of what the difference might be in free cash flow for half-year versus a full year. I'm sorry the second piece, Paul?

Paul Ginocchio – Deutsche Bank

Can you size the increase in CapEx?

Roger F. Millay

I think we’ll have more detail on that in the September meeting. If you look at the cash flow statement, we came in around $77 million just without the software costs. I mean it's not going to be in the magnitude of double, but it could be $20 million or so higher than that. But again, we’ll give you more specific number in the Analyst Meeting.

Paul Ginocchio – Deutsche Bank

Great. And then just a couple of housekeeping follow-ups. The retirement liability was down, I think $135 million Q-on-Q, is that just due to the asset performance or something else? And then on discretionary bonus, it was up 42% year-on-year in the fourth quarter, it’s kind of flat in the third quarter. What should we be modelling that off of, segment income or EBITDA, how should we think about that?

Roger F. Millay

Yeah. So you're right on the retirement liability. The main driver there is asset performance. With respect to discretionary comp, I think that will probably be a little bit steadier in FY ’12. This year as we went through quarter-to-quarter, we were kind of adjusting to where we thought we should come out. And probably we measure it as a percentage of pre-bonus operating income, and if you look at it that way probably in the high 30% range is where you’ll see us circle.

Paul Ginocchio – Deutsche Bank

Thanks. If I could sneak one more and I apologize. You basically looks like you’re not projecting any operating margin improvement this year, is that just sort of the macro plus the IT or is there something else that would suggest you can do better incremental margins and you’ve done, then for some reason incremental margins are changing going forward than they have been in the past?

Roger F. Millay

Yeah. I’ll give my answer and then I don’t know, John, may have something he wants to add in. But the story isn't any different than what we've been saying in the last couple of quarters. We think the range that we’ve landed in is a range that is appropriate; it makes sense for the company based on our integration activities. We have been adding folks. We haven't added a lot of people, but the businesses that are growing; we have been adding some people and we had a pipeline to continue to add. So we think that range at this point is appropriate.

John Haley

Yes, I mean, I think Roger really captured that. As he said we’ll give more detail on the Analyst Meeting, but right now we’re targeting the EBITDA percent, adjusted EBITDA margin somewhere between 18% and 19%. We do have some integration activities, some important integration activities this year as we roll out some of our new systems and that will absorb some of the time of our front-end associates. And we are conscious of the changes in the macro environment and what that could bring. So we feel reasonably comfortable that we can keep to the margin improvement that we’ve show, but we’re not at this point prepared to project anything further.

Paul Ginocchio – Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Shlomo Rosenbaum with Stifel, Nicolaus. Please proceed.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Hi, thank you very much for taking my questions. I want to piggyback on some of the stuff that Paul asked. Just in terms of looking at the bonus comp and adjusting it for a full year. If I remember correctly, Towers Perrin had about a half-year adjustment, so should we think of it as kind of adjusting about a quarter of the number because of the full-year Watson Wyatt and then kind of a half-year of Towers Perrin?

John Haley

Yes, I’m not sure you’re saying about the quarter here, but last September because we closed the merger on January 1, we paid a half-year of bonuses in September 2010, so that was for Towers Watson. And we had settled prior to the merger, we had kind of settled up the legacy bonus situations for the two companies. So that’s why it’s a full-year versus a half-year comparison.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Okay, I’m going to follow-up with you on that after the call. But just following up also on the EBITDA numbers, should we think of it as kind of flat EBITDA, but could go down because of integration activities because the range actually implies that you guys would potentially be going down year-over-year?

Roger F. Millay

Yes, I mean, we’re down into point this and point that right, so we came up for the year at 18.9. I think we’ve characterized the puts and takes I suppose that we see for the year. And I think what we’re really saying is this is a range that we’ve landed in, although as you say at the high end this year and that’s a range that we think make sense going forward. So we are not trying to signal that we see things that are systemically going to push margins down, just that when you look at point ones and point twos, it’s not really manageable at that level.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Right, the reason I am asking the question is because I’ve talked to John and John you’ve said in the past that you’re comfortable with this range and you would actually prefer to be investing some incremental margins to really drive long-term sustainable revenue growth and that’s kind of the tact that I’m – of the question I’m asking?

John Haley

I think, Shlomo, you have that exactly right, I think that is what we would – that is what we’d be looking at doing. I think if Roger is answering it though, it really is the same perspective. If we’re talking about a tenth of a percent here there that we might come down to invest to do that, we would probably be willing to do that. We are not talking about necessarily moving something down whole percentage or something like that.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Okay.

John Haley

The message we would give is this. Look we – this was recently much better year than we thought we were going to have coming into it and the margins are historically high. We’re pretty comfortable with the way we’re operating. We have a little bit of a concern about just the macro economy coming into this next year probably a much bigger concern now than we might have had only two or three months ago. We have a little bit of a concern just about the whole rolling out of our new billing systems and everything with associates around the world and just that at the margin that might sap a little bit. And we want to invest but as we want to invest what we wanted to do is take what might have been margin improvements and investments as generally what we’re going to be looking to do, but we have just a little bit of concern around the margin about what we might be achieving for this coming year.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

Okay, and if I could sneak in one another one, reinsurance brokerage showed some improvements, it look like positive pricing, are you guys seeing this as kind of taken some market share or are you seeing beginning to see a change in the market overall?

John Haley

I think we’re seeing a bit of a change in the tone in the market I think is the way we would characterize it Shlomo. I don’t think we’re ready to proclaim that it’s a definite sea change at this moment, but it could be the beginning, we might look back later and say may be this was the beginning.

Shlomo Rosenbaum – Stifel, Nicolaus & Company

All right. Thanks a lot guys.

Operator

Your next question comes from the line of Tim McHugh with William Blair & Company. Please proceed.

Timothy McHugh – William Blair & Company

Yes, thank you. First I wanted to ask about Investment Services business, can you talk a little bit more about what’s causing the longer sale cycle and you mentioned that there is a plan to improve it. Can you give a little more color on what you’re going to do this next year?

John Haley

Sure, I think that the Investment Services are something that we’re seeing procurement of the services becoming more formalized, and there is a lot more maybe company purchasing, departments etcetera being involved in and then there is just somewhat more who’s people are jumping through to get that. I mean that’s probably leading to somewhat longer sale cycle. We’ve seen a new competitors that maybe, if there is more to choose from, there is a little bit more of that there. I think what our folks had been working on is, one, in making sure that we’re in position to respond quickly and efficiently to some of these extra requests, and also maybe going after some of this ad hoc work a little bit more aggressively than we had in the past.

Timothy McHugh – William Blair & Company

Okay. And just in the context you mentioned the macro environment is making you somewhat cautious about the margins, but it sounds like you’re expecting the continuation of a relatively similar revenue growth for what you’re seeing in the last quarter, is there a reason why you’re more confident in the revenue growth sustaining than I guess necessarily and also – incremental, but at the margin front?

John Haley

No, I think look, if you look at the last couple of recessions that we’ve had in the early 2000s and then in the 2008 era, what happens is things suffer at the topline and then that will translate into pressure on the margins. So we’ve been talking about the macro environment in the context of the resulting impact on the margins, but it starts at the topline.

Timothy McHugh – William Blair & Company

Okay. In the context of the market volatility or at least in the stock markets, I mean, I guess you gave your Q-on-Q guidance, it doesn’t seem like you’ve seen much of an impact, but can you comment at all in terms of trends in July and in the early half of August here in terms of what you’ve seen from client behavior?

John Haley

I think what we’ve seen is that things still continue to be reasonably strong for us and so we feel pretty good about what this first quarter is going to be. I think the concern we have is that in the last couple of months with the turmoil in Europe with the US and the downgrade and everything, those kind of things affect business confidence and business confidence may affect how they’re willing to spend and I think that’s the only caution we’re saying. I don’t think we know anything more than anybody else about that so.

Timothy McHugh – William Blair & Company

Okay. And then if I could just slip in one or two number of questions, just Roger you declared the $450 million in available cash that’s netting out some of the reinsurance payable and things like that, is that netting out cash for bonus payment as well or…

Roger F. Millay

What that nets out is both the – and you see it’s aggregated on the balance sheet actually, but the reinsurance payables but also the cash that’s sitting on our captives, our Insurance Captives.

Timothy McHugh – William Blair & Company

Okay. And then can you give us a specific number you said, headcount grew slightly I think, what’s your comment?

Roger F. Millay

Yes, I mean it’s like a 100 or 200...

John Haley

I think in the quarter it was 200, about 2%, 204 I mean to be precise.

Timothy McHugh – William Blair & Company

Okay. Thank you.

Operator

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

Unidentified Analyst

Hi, this is Frank in for Tobey, I wanted to ask in Talent and Rewards, you mentioned strong performance in Asia-Pacific, how much visibility do you have there? Do you see that continuing and kind of where could that affect margins?

John Haley

Yes, I don't think, Talent and Rewards, it's the most cyclical, it's the most project oriented of our segments, and so it’s the one where I think overall we have the least visibility. There are probably different lines of businesses between some of the other segments where we don't have the best visibility either, but overall it’s the segment Talent and Rewards would clearly be the one. I don't think that’s any different in Asia than it is in any other region in the world, but it's just not a segment, it is a very project-based business.

Unidentified Analyst

Okay. And then, kind of going back to the market volatility question over the last month or so, has there been any positive impact on either Investment Services, clients looking at their portfolios or even on their retirement side as people consider it is from work related to the market swings?

John Haley

We haven’t seen anything like that. Although to be fair we haven't actually gone and looked at it either. So I can't tell you that didn't occur, but I can tell you it's not something that we’ve had any comments on it at the moment.

Unidentified Analyst

Okay, great, and maybe one quick numbers question. What do you have baked in for transaction or integration expense for the guidance for the next quarter?

Roger F. Millay

Yeah, we haven't given anything more specific other than the comments I made in my script which are that we expect that over the next several quarters we're going to see it continue to gradually decrease. It has dropped versus the third quarter of fiscal '11 and it’s dropped versus last year. It seems like this range in the low to mid 20s is about where we’re running, but as I said these things tend to be choppy and you can get them spiking up and down, so I think that’s about as precise as we can be.

Unidentified Analyst

Okay. Great, thank you very much.

Operator

Your next question comes from the line of Sara Gubins with Bank of America/Merrill Lynch. Please proceed.

Sara Gubins – Bank of America/Merrill Lynch

Thanks, good morning, could you talk about what you’re seeing in terms of trends in your U.K. business?

Roger F. Millay

We haven’t looked quite honestly, the U.K. specifically of course when we talk about investment services the biggest part of investment is the U.K., so they would be a big driver of the U.K. market. I’m also aware that when we talk about strength in the reinsurance brokerage business our U.K. operation, which really it’s serving clients that are outside the U.K. as well, but that piece is doing well.

In general, Europe was overall a little bit softer at the end of the year, still growing, but I think there is, I’m not aware of anything specific other than that.

John Haley

Yeah, I think Roger has captured that correctly, Europe was about where we thought it would be for the quarter and the year, about, but about but a little bit below. And so it’s got a little bit more softness there and I think that is true across most of the segment certainly for benefits and tasks, we saw a little bit softer there.

Sara Gubins – Bank of America/Merrill Lynch

Okay. Thanks and then, just other question about fiscal year 2012 outlook, I know we’ll get more details in about a month or so. But with that 18% to 19% EBITDA margin range, you did mention that you wary of the economic as you’re thinking about that. So I’m wondering is the thought at 18% that things could get a little bit softer than you’re expecting, you need still be able to do that, or that the economy would need to be where it is right now, and if it wasn’t then we would see margins perhaps coming in lower than that?

John Haley

I think we probably feel that the economy could get somewhat softer and we’d still be in the 18% to 19% range.

Sara Gubins – Bank of America/Merrill Lynch

Okay. Thanks a lot.

Operator

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

Jeffrey Volshteyn – JPMorgan

Good morning. Thanks for taking my question. Let me also ask about the fiscal 2012 revenue guidance by segment and I know you probably going to be talking about at the Investor Day, but sort of maybe directionally within segments where do you see revenues going on an organic basis?

Roger F. Millay

Well, so we haven’t, you’re talking for the whole year?

Jeffrey Volshteyn – JPMorgan

Right, right.

Roger F. Millay

And so...

Jeffrey Volshteyn – JPMorgan

Within the mid-single digit constant currency revenue sort of outlook?

Roger F. Millay

Yes, I think, we are holding that specific guidance. I mean, I think, we – John foreshadowed a little bit in some of his remarks with respect to continuing growth in benefits, the hope for some enhanced growth performance in RFS, which had a bit of a tough organic growth year. And I think we’ve been talking quite a bit on the call about the wariness I suppose in Talent and Rewards although right now they are seeing good strength of course as a mark-to-mark cyclical segment, they are also potentially subject to more volatility. With respect to more specific numbers that’s what we’ll be doing in September.

Jeffrey Volshteyn – JPMorgan

Okay. I appreciate that. When I look at the turnover of associates or any sort of obvious hiring needs within new businesses or with the new geographies where would those be?

John Haley

Well I think in Health and Group Benefits, we’ve been doing some hiring, we’ve been doing some hiring in Talent and Rewards, and within Talent and Rewards, I think, particularly in data surveys and technologies, we’ve also done fair amount of hiring, for the year we’ve done a fair amount of hiring in Tax, not so much in the fourth quarter, yeah, driven by eloquent right. And so I think if we look at it though Health and Group Benefits and Talent and Rewards would be the areas.

Jeffrey Volshteyn – JPMorgan

And geographically?

John Haley

Its really, well, Health and Group Benefits is largely North America.

Jeffrey Volshteyn – JPMorgan

Okay.

John Haley

That’s where that is. The Talent and Rewards hiring is really across the globe.

Jeffrey Volshteyn – JPMorgan

It makes sense. Thank you very much.

Operator

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

Tobey Sommer – SunTrust Robinson Humphrey

Thanks. This is actually Tobey in for Frank. I wanted to ask an additional question on the hiring, could you describe the competitive landscape for experienced people, just to get your comment there? Thanks.

John Haley

Well, I think this is a market, which is always somewhat competitive or the kind of high performing folks that we are looking at. And so that probably never changes really. I think the value proposition that Towers Watson offers has become a lot clear to people who are in other organizations and I think that has really helped us quite a bit, and the fact that, we’ve gotten through the integration so smoothly and so successfully is something that has, it’s not lost on people and so that's helped our competitive positioning.

Tobey Sommer – SunTrust Robinson Humphrey

Would you characterize the transparency of the compensation formula, as we talk about it, asking about pre-tax profit et cetera, is that a driver for hiring?

John Haley

Well, I mean, I think one of the things we’ve done as an organization is to try to be as clear and transparent with our associates about where Rewards come from and how all stakeholders are served by the way we distribute Rewards. And so it's sort of one of the core values we have as an organization, we think that is one of our strengths and we think it helps us a lot, yeah.

Tobey Sommer – SunTrust Robinson Humphrey

Thanks, and then just a question about the tax rate, which geographies were a little bit weaker in the phase of what was little bit better performance out of the higher tax region in the U.S.?

Roger F. Millay

I think John mentioned and maybe both of us did, while the U.S. came in quite a bit higher than forecast, Europe did come in a little bit lower, so European countries most part.

Tobey Sommer – SunTrust Robinson Humphrey

Okay. Thanks a lot.

Operator

Your next question comes from the line of Mark Marcon with Robert W. Baird. Please proceed.

Mark S. Marcon – Robert W. Baird & Co.

Hi, good morning, I was wondering, as you look out over the next year what sort of legislative changes or regulatory changes, do you see that could potentially be drivers and either the Benefits or in Talent?

John Haley

Well, I mean, I think the biggest thing that we could have some interest in and it’s what's going to happen with Healthcare and you’ve got these dueling court cases in the Federal Appeals Courts and potential Supreme Court review of that, you’ve got to talk about whether that pieces of that get included in any of the debt discussions whatever. So I think that's something that is a little bit unsettled, I'm not sure that there is anything we could point to say that we actually think that there is going to be any new legislation or regulation that will for certain occur, but certainly that’s something that could possibly be the case. I don't think there is anything else that we would flag as saying that’s there is a big deal that's on the horizon.

Mark S. Marcon – Robert W. Baird & Co.

Okay. And how big could that be for this coming year? It seems like by 2013 we’ll have more clarity and then there will be this scramble, but do you think that this year...

John Haley

That's right. We probably don't expect to see much resolution in this coming fiscal year or this current fiscal year, I should say, on the healthcare debate, but I just mention that is the only one that we saw up there, that was a big deal.

Mark S. Marcon – Robert W. Baird & Co.

Got it. And then can you talk a little bit about leadership across the organization. You’ve clearly done a great job in terms of integrating the two cultures in the two organizations. Do you feel like at this point the leadership team is set?

John Haley

I do. I think one of the attractions for both Towers Perrin and Watson Wyatt as we came together was that we would have a – it’s an enhanced leadership and management team. And I think by bringing them together, and frankly the organization has done a very good job of integrating that management and leadership team together. We just had an event last month with a couple hundred of the most senior folks, and the leadership teams around the world. And I'll tell you, you go to that and you leave thinking that there is nothing this organization can do when you look at the leadership team we have here. So I feel that they’ve really come together well. I think we’re well placed. I mean, I think any organization there is always going to be change, we’ll have people that decide to leave or that people retire that’s one of the dynamism, and it’s a reflection also of a successful organization. But I think this is the best place we've ever been any time in my career and so I feel pretty good about where we are.

Mark S. Marcon – Robert W. Baird & Co.

Great. And then obviously there is a lot of macro uncertainty out there right now. In the possibility that the policymakers get it wrong and miscalculate and we end up having another downturn. Can you talk about the areas where you’ve got some levers to make some adjustments so that we could still do in the 18% to 19% EBITDA range?

John Haley

Yes, thanks for bringing the question because I think one of the things that you sometimes get off on these calls is you start talking about a subject that got mentioned and you talk about it a lot and after the call I sometimes think, did we give the impression of we were more concerned about that than we did, just because we got a lot of questions about it and I think we’re may be in danger of happening that we’re just talking about the macro economy.

We mentioned that it’s just one of the number of factors that we were thinking about that could affect margins there. And I think we have to mention that because its pretty clear that if the macro economy really goes south that does have some impact on how we are going to perform as a company. Frankly it’s not the kind of thing we’re obsessively worried about, if you look at what our organizations did in the 2008 downturn, we probably performed in the top 1% or 2% of all companies in terms of how we handled the downturn, how we handled our margins, and how we kept things up.

So it’s not something that we’re necessarily afraid of, it’s not something that we’re shirk from, I think that we’re better managed now than we were two or three years ago, and so we can probably doing better job, we’re not going to be immune from it, but I think we know how to run the business and I think we know the kinds of things to do. I think one of the things that we will not do though is we think it’s a bad move to all of a sudden layoff a lot of associates and have them bear the brunt of downturn. We think that’s best done by the company figuring out how to try to get new revenues and tightening our belts in other ways.

Mark S. Marcon – Robert W. Baird & Co.

And you certainly did a great job during the last one. Can you talk also with regard to the $338 million bonus payment that’s coming out, just to clarify, is that a clean full year bonus that will get paid out in September or would it be higher in future years because there was a stub, that was partially paid earlier.

Roger F. Millay

No, that’s a clean full year number.

Mark S. Marcon – Robert W. Baird & Co.

Okay, great. And then the last…

Roger F. Millay

That’s a good result for us to, so I mean I think it’s a good result for our associates. We’ve had good result for our shareholders, but we’ve had a good result for all of our stakeholders.

Mark S. Marcon – Robert W. Baird & Co.

Right. And then with regards to your pension liability can you talk about the impact from the recent reduction in terms of the outlook for rates over the next two years, as well as the recent market volatility, is that going to have much more impact in terms of just from an accounting perspective how we should think about that?

Roger F. Millay

Well again the biggest driver of the reduction in liability was in investment results, so we don’t have a forecast on that, but as you’re alluding both investments results as well as movements in discount rates, would have an impact, discount rates really didn’t move all that much from last year so.

John Haley

Yeah, the big thing was the asset movement and of course if we measure that a few weeks later and there is a difference. So, but I don’t think we have any predictions for what that might be like next June 30.

Roger F. Millay

Yeah and just as a reminder as John just kind of pointed out, I mean we only revalue every year at the end of the year. So we’re locked in now for this fiscal year.

Mark S. Marcon – Robert W. Baird & Co.

Great, I appreciate it. Thank you.

Operator

Your next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed.

Unidentified Analyst

This is (inaudible) for Ashwin, I just want to follow-up on some of the questions related to the margins projections for next year. I was wondering if you could quantify some of the investments that you’re planning on making in terms of the front-end adjustments and then perhaps talk about what the future benefits of those investments would be?

John Haley

No, actually, we don’t have anything to say about those, we’ll talk about that at Analyst Day.

Unidentified Analyst

Okay. And then on the synergies related to the IT transition, Roger, is there anything built in for that in fiscal ’12 or will that be more of a fiscal ’13 of that?

Roger F. Millay

Yeah, it’s more of a fiscal ’13 impact because as I mentioned really the deployment is, we’ll have deployments at this point planned quarterly as I said earlier for about the next 15 months so it’s more of fiscal ’13 impact.

Unidentified Analyst

Okay. And then just lastly on the, given the strength of the balance sheet and the cash flow so far, once you get pass the bonus payment in September could we see an accelerated buyback activity from you guys?

Roger F. Millay

Well, we’re not going to forecast anything other than what we’ve talked about at this point and we continue to look at balancing what we see is potential investment opportunities, particularly acquisitions with other uses of free cash. We have another $50 million or so to go on the $100 million buyback that we had approved a few months ago and we’ll be executing against that and that’s the outlook for the moment.

John Haley

It will take us a while to complete that extra $50 million anyway.

Unidentified Analyst

Okay. Great, thank you.

Operator

Your final question comes from the line of Vincent Lin with Goldman Sachs. Please proceed.

Vincent Lin – Goldman Sachs

Thanks, I just have a follow-up, I think John, you mentioned last quarter you had some under staffing issues, or capacity constraints in Asia, I think within the Talent and Rewards area, has the problem being resolved or what’s the staffing level that you’re seeing right now?

John Haley

I don’t recall...

Roger F. Millay

That may have been coming more in line of opportunity and we might be adding people.

John Haley

I think that might have been it, so yeah, that we had opportunity to add folks in Asia-Pacific and could do that. We have been, as I said particularly in Talent and Rewards, which is relatively bigger in Asia-Pacific than say Benefits or something like that. We have been adding folks there. Asia has been a real success story this year. We’ve had a lot of growth and we think that’s going to continue.

Vincent Lin – Goldman Sachs

And then just, one follow-up, on the mid single digit revenue growth for the full year, that’s constant currency including acquisitions. Is that correct?

John Haley

That’s correct.

Vincent Lin – Goldman Sachs

Okay. Great. Thanks.

Operator

I would now like to turn the call over to Mr. John Haley for closing remarks.

John Haley

Okay. Thanks everybody for joining us this morning. We look forward to reviewing our first quarter results with you in November and we hope to see you all at Analyst Day on September 19. Thanks a lot.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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