Towers Watson's CEO Discusses F1Q2012 Results - Earnings Call Transcript

| About: Willis Towers (WLTW)

Towers Watson & Co. (TW) F1Q2012 Earnings Call November 7, 2011 9:00 AM ET

Executives

John Haley - Chairman and Chief Executive Officer

Roger Millay - Vice President and Chief Financial Officer

Analysts

Jeffrey Volshteyn - JPMorgan

Sara Gubins - Bank of America Merrill Lynch

Paul Ginocchio - Deutsche Bank

Timothy McHugh - William Blair & Company

Julio Quinteros - Goldman Sachs

Tobey Sommer - SunTrust Robinson Humphrey

Mark Marcon - Robert W. Baird

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Ashwin Shirvaikar - Citigroup

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Towers Watson & Co. Earnings Conference Call. My name is Santaly and I will be your facilitator for today’s call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Roger Millay

Thank you. Good morning. 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, 18511771. 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

Thanks, Roger. Good morning, everyone and thank you for joining us. Today we will review our results for the first quarter of 2012 and our guidance for the full fiscal year. We are pleased with our results this quarter as we continued to produce growth and maintain our strong margins. Reported revenues for the quarter were $810 million, an increase of 8% over prior year reported revenues and an increase of 5% on a constant currency basis.

Our organic growth rate, which adjusts for changes in foreign currency exchange rates, acquisitions and divestitures, was 2% for the quarter. Our adjusted EBITDA for the quarter was $162 million, up 23% from last year and our adjusted EBITDA margin for the quarter was 20%. For the quarter, diluted earnings per share were $0.82 and our adjusted diluted earnings per share were $1.19.

Adjusted diluted earnings per share increased 29% over the prior year. Adjusted diluted earnings per share include a normalized income tax rate and exclude non-recurring other income, transaction and integration cost, non-cash stock-based compensation costs from restricted shares issued in conjunction with the merger, and the amortization of merger accounting intangible assets.

Our results reflect the excellent work of our associates. They are striking the right balance between managing cost and growing the business. Consequently, we are well positioned and prepared for long-term profitable growth. We are the trusted advisor to many of our clients, and in this complicated environment we can offer them practical actionable solutions and advise.

We just held our annual client conference in Chicago, where we hosted over 300 of our clients. This event is highly rated by our clients every year as we showcase some of our best consulting work, offer clients the opportunity to network with each other and hear about best practices and creative ideas. It is just one example of how we live our value of clients first.

I think our results reflect the nature of our client relationships and the client first attitude. We remain focused on profitable growth, investing for the future and ensuring we are well positioned to take advantage of market opportunities. Now let's take a look at the performance of each of our segments.

In the face of continued economic uncertainty and in some cases legislative changes, many clients are reviewing their benefit plans to ensure that they are as efficient as possible, and that the plans are communicated effectively to employees. We see this particularly in the Benefits and Talent and Rewards segments.

All of our segments grew organically this quarter. Benefits grew 2%, Risk and Financial Services 3% and Talent and Rewards grew 2%. Our revenue growth reflects wins from both new and existing clients.

Turning to Benefits. For the quarter, the Benefits segment had revenues of $455 million, including the revenues from Aliquant, which we acquired in late December 2010. Benefits segment revenues were 4% on a constant currency basis. On an organic basis, revenues were up 2%. Retirement, technology and administration solutions and health and group benefits all grew this quarter. Retirement revenues increased 2% on a constant currency basis and were led by growth in North America.

Additional work with existing clients contributed to the growth. We expect retirement will continue to have low single digit growth. Technology and administration solutions had a very strong quarter with double-digit constant currency growth. Revenues increased in the U.S. due to the acquisition of Aliquant and new client activity. The integration of Aliquant into our U.S. business has gone well and our pipeline continues to look strong.

We had mid-single digit constant currency growth in health and group benefits this quarter. Growth was driven by an increase in U.S. client demand for some of our high value solutions and healthcare strategy work. We expect continued strong growth in the second quarter.

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 13% on a constant currency basis. Revenues were up 3% on an organic basis. Risk consulting and software revenues continued to benefit from the EMB acquisition and had double-digit constant currency growth. On an organic basis revenues grew in the low single digits. Regulatory changes and M&A activity continued to drive demand.

We were really pleased to see the growth in brokerage this quarter. Next, let me turn to Talent and Rewards. For the quarter, the Talent and Rewards segment had revenues of $140 million. On a constant currency basis, revenues were flat from the prior quarter and were up 2% organically. On an organic basis, revenues increased in executive compensation and rewards, talent and communication.

Data surveys and technology revenues were lower than expected. We are still projecting strong growth for Talent and Rewards. The Dodd-Frank Bill and other legislative issues continued to drive companies to re-examine their executive compensation plans. Clients are looking for help navigating legislative changes and ensuring that their compensation programs are aligned with both new rules and their company's strategic objectives.

We continue to see strong activity in Asia Pacific as well. Revenues increased in all regions for rewards, talent and communication. We are seeing strong activity around preparations for the annual benefits open enrollment period. Companies are focused on helping their employees understand the value of their health and benefit packages which requires communication expertise.

We have won business with new clients and have increased the scope of services performed with existing clients. Overall, we continue to see good opportunities in this segment and we are forecasting continued solid growth in the second quarter, given our projects already underway and in the pipeline. This business is traditionally the most vulnerable to changes in the economy, but at this time we are not seeing signs of client’s significantly cutting their budgets.

Finally, for the firm overall, we remain optimistic about continuing our momentum for the next quarter and the remainder of the fiscal year. Now, I will turn the call over to Roger.

Roger Millay

Thanks John. As John mentioned we continued our strong business performance this quarter. We continued to deliver top line growth with a very healthy increase in operating earnings. Our adjusted EBITDA margin for the quarter was above our expectation and 20%. I should note that we had a professional liability insurance reserve adjustment that contributed about one point of that margin.

The top line revenue growth translated into good segment margins as well. 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.

The benefits segment had a 32% NOI margin for the quarter. Risk and Financial Services had a 26% margin for the quarter, and Talent and Rewards had an 18% margin. Net income attributed to controlling interest for the quarter was $60 million. Excluding transaction and integration costs, non-cash stock-based compensation arising from the merger, the amortization of merger accounting intangible assets, non-recurring other income and in this quarter we had $21 million of transaction and integration cost versus $23 million last quarter and $18 million in last year’s first quarter.

As we have mentioned before, these costs are choppy and difficult to precisely predict quarter to quarter. But we still expect to see a gradually slowing trend over the next year. This quarter the majority of the costs related to our large IT initiatives, integration both the ERP software and hardware platforms of the company. We are continuing with the global deployment phases of these projects.

We also had some real estate and HR related cost this quarter. Although, not at the level of last quarter. The normalized tax rate for the quarter was 37%. If the fiscal year ‘12 geographical mix is consistent with fiscal year ’11, we continue to expect the normalized tax rate to be in the range of 37% to 38% for the fiscal year. Diluted earnings per share for the quarter were $0.82, an increase from $0.45 last year, adjusted diluted earnings per share were $1.19, up 29% versus last year.

Moving to the balance sheet, we continued to have a very strong financial position. We ended the quarter with about $284 million of cash that is available for our use. We have $75 million of borrowings outstanding from our credit facility at the end of the quarter. We still have $100 million of notes plus accrued interest payable to B1 shareholders, due in March 2012, from the tender offer that was completed in June 2010.

We have now repurchased about 1.2 million shares under our $100 million repurchase authorization, and used about 75% of the authorization. Now let’s review our guidance for fiscal year 2012. Overall, we continue to expect revenue to fall in the range of $3.4 billion $3.5 billion. We are increasing our adjusted diluted earnings per share guidance to a range of $4.95 to $5.10., and exclude transaction and integration costs, non-cash 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 fiscal year, our guidance assumes an average exchange rate of 1.60 U.S. dollars to the British pound and an average exchange rate of 1.40 U.S. dollars to the euro. We expect to have a normalized income tax rate of 37% to 38% and diluted shares outstanding of about 73 million. We expected GAAP diluted earnings per share (audio gap).

Now we will review our fiscal year guidance for the segments. We expect revenues in the Benefits segment to grow in the low to mid single digits on a constant currency basis. And our range is 2% to 5%. We expect organic growth will be led by health and group benefits. The NOI margin for benefits is expected to be in the low 30% range.

Next, in the Risk and Financial Services segment, we expect constant currency revenue growth will be in the range of 8% to 12% for the fiscal year. This guidance includes revenue from EMB. We expect the NOI margin to be in the mid-20% range. Lastly, in the Talent and Rewards segment, we have lowered our revenue forecast slightly in light of the first quarter results are now forecasting constant currency growth of 5% to 8% for the fiscal year.

We expect the NOI margin to be about 20%. We are cognizant of several variables that could impact our performance including the challenges of our systems implementation and potential headwinds from the macro environment. But as of now our pipelines are strong and the business is performing very well. Overall, I am very pleased with our performance for the quarter.

Finally, I am pleased to announce our new Head of Investor Relations, Aida Sukys. Aida has been a strong leader in Towers Watson finance business operations for many years. She knows our business well and is a pleasure to work with. She will gradually transition to the IR role beginning in January.

Now I will turn it back to John.

John Haley

Thanks, John. We are excited about our opportunities for growth and our continued strong results. Now we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeffrey Volshteyn of JPMorgan. Please proceed.

Jeffrey Volshteyn - JPMorgan

Good morning, and thanks for taking my question. The first question has to do with expenses, specifically employee expenses came in quite a bit lower than we expected. Roger, I think you mentioned changes in professional liability insurance. Can you talk about, is that the only explanation or are there other reasons?

Roger Millay

Well, I will say that -- I think you are dealing with two things. So the professional liability expense is related to claims that we have for professional liability and so those are reserves that go up and down quarter-to-quarter, I think we have highlighted that as an element of volatility since we did the merger. And you may recall that, I think it was in the March quarter, we talked about a couple of claims that settled. As a result of that just some of the projections of future liabilities and what they call incurred but not reported claims have come down. That’s separate from an employee matter, so that’s what I was referring to there. And you see actually in the cash flow statement, both the impact of the payment of claims and then on the balance sheet you see the reserves, the overall reserve level coming down. So that’s that matter.

On the employee cost level, I am not sure -- of course I can't really answer why it’s lower then what you had projected but I think overall we had talked about adding people. We did add people in the quarter. Roughly 400 or so folks. Perhaps that addition came in a little more slowly, I don’t know, but we have added people. Costs actually were a little bit lower overall then we had projected which was a part of the EBITDA margin out performance as well.

Jeffrey Volshteyn - JPMorgan

Thanks, that’s really helpful. But when I look at discretionary comp, that went up to sort of 41%. Is that the new level -- it’s up from sort of 34% in the last couple of quarters. How should we think about discretionary comp going forward?

Roger Millay

I mean, I think that there will be some movement in the discretionary comp levels probably, but this is kind of getting towards the upper 30s as a percent of pre-bonus operating income is about where we expect it to be.

Jeffrey Volshteyn - JPMorgan

Nice. Thank you.

Roger Millay

I’m sorry, did you say 41, it was 39%, I believe, our pre-bonus operating income.

Jeffrey Volshteyn - JPMorgan

I’ll double check. Yeah. Thank you.

Operator

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

Sara Gubins - Bank of America Merrill Lynch

Hi, thanks. Good morning. You mentioned in your prepared remarks that data survey and technology within Talent and Rewards was below your expectations. Can you give us some more color on that and how you think it will trend over the next couple of quarters?

John Haley

Yeah, sure. So, I think there’s two things that were responsible for that. One is HR technology which is a piece of that. It was lower. We were waiting for the release of Talent|REWARD version 7.0 to ramp up our selling efforts. So that I think delayed things a little bit.

In addition, some of the surveys that are typically delivered in this quarter have been delayed due to longer than expected data collection cycles with some of the clients who have been participating there. So I think we have some timing around the surveys. We expect that we will get most of that back as we go through the year.

Sara Gubins - Bank of America Merrill Lynch

Okay. And then what’s your guidance for the second quarter? Are you expecting a pickup in organic revenue trends, for most segments?

Roger Millay

Yeah, we are expecting a bit of a pickup. So we think that, particularly John just mentioned in what we call DST or data, surveys and technology, we think that will be stronger next quarter, particularly given the timing matters that John mentioned. We also think that the Health and Group Benefits business particularly, will be stronger in the next quarter. So we are expecting a pickup.

Sara Gubins - Bank of America Merrill Lynch

Okay. And then just last question. On the share buybacks that you did, were they open market purchases or was it in anyway related to the lock-up expiration, and if you can share any thoughts that you have around the coming lock-up expiration in January?

Roger Millay

Yeah, they were open market purchases under both the programs that we execute, which is to offset dilution as well as the $100 million program that was authorized earlier this year. Going forward, right now, we don’t have any particular initiatives that we are planning on, relative to lock-up exercise. We are pleased with how that’s gone this year, and again at the moment for the lock-up coming in -- or the unlock coming in January, don’t have any specific plans in place, given that we have managed through that quite well so far.

John Haley

Yeah, January 2011 went by without a hitch there. And so we are going to continue to monitor this situation but we don’t have any plans in place right now.

Operator

Your next question comes from the line of Paul Ginocchio of Deutsche Bank. Please proceed.

Paul Ginocchio - Deutsche Bank

Two things. You mentioned legislative changes driving some of your revenue. Was that in your Risk and Financial Services division around risk consulting software, is that what you were talking about or there’s some other changes also driving it?

John Haley

Risk and Financial Services or the risk consulting is driven by some of the Solvency II. But I don’t think that was what we were really referring to. We’re thinking more things like Dodd-Frank.

Paul Ginocchio - Deutsche Bank

Okay. And then could you go back to that liability adjustment, where will we see that in the P&L, is there any way to -- can you size that?

Roger Millay

For the professional liability?

Paul Ginocchio - Deutsche Bank

Correct.

Roger Millay

Yeah, it’s in the general and administrative costs. I mean it’s not big enough to pop out as a separate item, but that’s where it is.

Paul Ginocchio - Deutsche Bank

Great. And John, if I can sneak one more in. There was some recent -- an article about how Solvency II in the U.K. is driving demand for actuaries. Is that causing any issues hiring people or is that driving up rates and underlying salaries?

John Haley

Well, I think that that phenomenon has been there for a while and we probably experienced it a little more last year. But I think it’s still hard to find good actuarial talent. There is probably more of a demand for that in Europe and the U.K. than there has been for a while. But we’re pleased with the group we had, and we think we are well positioned to take advantage of Solvency II.

Operator

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

Timothy McHugh - William Blair & Company

Hi, guys. First, I wanted to ask about the new ERP system you’re implementing this year. Can you give us an update on, I guess, how that’s going and how the costs are tracking relative to what you expected?

Roger Millay

Yeah, I think in general we’re on track. As I said, we’re continuing with the deployments. I think we may have mentioned earlier at the analyst meeting that this is a staged deployment with six or so stages over the next few quarters. And we’re preparing -- we did the pilot in Canada and are now preparing to rollout in the U.S. and then after that we’ll be moving over to Europe. So it’s a very active program. The costs are generally in the neighborhood and again we showed you those in the analyst meeting, generally in the neighborhood of where we expected. And we’ll keep pushing forward here.

Timothy McHugh - William Blair & Company

Okay. And then can I ask about the data surveys and HR technology. It seems like you attributed that mostly to timing issues, but I think you also said you lowered kind of your organic growth assumptions for the Talent and Rewards segment for the year. I guess why -- is there another factor in there or you are just trying to be conservative given the Q1 number. Can you talk a little about that?

John Haley

Well, I think we lowered the Talent and Rewards about 1% overall. So we think that there is probably a little bit that we won’t get back, but we think it’s mostly timing.

Timothy McHugh - William Blair & Company

Okay. And then lastly can I ask, even if we adjust for the professional liability, your margins seem to expand pretty nicely year-over-year. And I think, again, even if we adjust that, it seems like your full year margin guidance is in line with Q1 which I normally think of as a seasonally weaker margin quarter then I guess relative to some of the others. So I guess are there any other factors? Any costs that would, I guess, are you going to pick up spending somewhere? I guess just kind of talk about the Q1 performance versus what you’re expecting from margins for the rest of the year.

Roger Millay

Sure. I think there are two principal things to think about there. One is that, October 1, is our merit increase date. So salaries went up at that point. Also, I mentioned that we hired about 400 people during the quarter, so the full rate of that will come in in the next quarter. So, of course the trick with both of those is matching that to revenues, but we do think that this -- around 19% rate as we mentioned, we did increase the guidance, of course, for the EBITDA margin for the year that it’s a reasonable level for the year.

Timothy McHugh - William Blair & Company

Okay. Can you give the -- what is the quarter-end headcount?

Roger Millay

Quarter-end total headcount. Actually we’ll pull that number, I don’t have it right in from of me. And we’ll...

Timothy McHugh - William Blair & Company

The 400, the net number, is that correct or is that a growth?

Roger Millay

400 was the increase during the quarter. Yeah.

Operator

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

Julio Quinteros - Goldman Sachs

Great. Good morning, guys. I wanted to check in couple of things real quickly. So just on the P&L impact of the special liability adjustment. It sounds like you said that was one point benefit to EBITDA, and just to confirm, all that was in your G&A line? Is that correct?

Roger Millay

Yes.

Julio Quinteros - Goldman Sachs

Okay. Got it. Great. And then, going back to sort of the pricing environment. Is there a way that you maybe just across the three major segments, talk a little bit about pricing and pricing leverage you are seeing by segment?

John Haley

I don’t think the pricing situation has really changed at all this quarter. I mean, I think we continue to see an environment where clients are reasonably price sensitive and we feel comfortable competing in that environment.

Julio Quinteros - Goldman Sachs

Okay. But no significant callouts in terms of incremental pricing pressure or even leverage to the upside in terms of...?

John Haley

No, I don’t think there is anything that’s changed this quarter from, say, the last several quarters or in the last year.

Roger Millay

I guess, the only thing we’d note, right, that we haven’t talked about is in brokerage business turn. Again, things have seemed to turn and are progressing positively as opposed to a year ago, where we were kind of holding a negative trend. But that’s a little different than the consulting business that I think John was mainly referring to.

Julio Quinteros - Goldman Sachs

Understood. And then just kind of thinking, stepping back and kind of thinking about post the merger here, and thinking about the upside in the margins and the way that you guys have progressed. I think your initial target was somewhere in the 16 to 17 range, obviously we are moving way ahead of that as kind of where we stand now. If we think about room related to the kind of post-merger versus incremental sources of earnings, where is that source right now, in terms of what’s really driving the upside for you guys? Is it just finding better cost savings after the merger, or are there other sources of earnings that you guys have gone through this merger now that are paying better sort of results as we sort of go through the process here?

Roger Millay

I am not sure I fully -- I’ll answer first, I think John has got a comment too. But I think in terms of what we are -- if the question was really in essence what are we getting the enhancement from now in margins, I think a part of that is the success that we have had on the growth front. Again, about a year ago, we were talking about having some incremental capacity and I think as I said earlier, costs went up less than we expected this quarter and the revenues were pretty close to about what we expected. So I think we are getting a little bit more leverage out of the system.

John Haley

And I think the other part of your question maybe is longer run, what would see as the margin growth. And I think as we have said in prior quarters, we are not necessarily even looking for margins to expand in the future. I think what we would like to target is, maybe top line revenue growth a little bit more, and trying to get that up, and maintaining our margins.

Operator

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

Tobey Sommer - SunTrust Robinson Humphrey

Thank you. I was wondering if you could give us some context for the hiring that you executed in the quarter, up 400. How does that compare to recent quarters, and is that a pace that you feel is sustainable for the next couple of quarters?

Roger Millay

Yeah, I think it’s been a bit more than the last couple of quarters and again we’ve been foreshadowing it, I think for a while. I don’t think it’s necessarily a pace. I think our expectation for the next quarter is actually a little bit lower than that. But we are -- and I don’t think it’s changed that much in the areas where we’ve seen opportunity, particularly in Talent Rewards, in the health and group benefits business, areas where we see opportunity we’ve been adding people and we’ll continue to monitor that. But it’s not really a strong across the board for us, so I wouldn’t expect a big change in that momentum.

Tobey Sommer - SunTrust Robinson Humphrey

Could you give us some color on that 400 you described, I figure is a net number? What the gross adds and losses look like, any changes to kind of voluntary attrition in recent period?

Roger Millay

Yeah. Again, I don’t have the voluntary -- that’s pretty -- we can talk about that, I suppose separately, but I really don’t have that in front of me. The other color I do have is, from a business breakdown point of view, it was driven by areas like Talent Rewards, RCS as well as the technology business and some in health and group benefits as well. So, again, in areas where we see some growth coming.

Tobey Sommer - SunTrust Robinson Humphrey

Okay. And I guess my last -- because we heard from you from the analyst day not too long ago, but where do -- could you give us an update as to the M&A opportunities that you’re seeing? Any changes either for the positive or the negative, relative to a few months ago?

Roger Millay

As far as our opportunities in M&A?

Tobey Sommer - SunTrust Robinson Humphrey

Correct. Thank you.

Roger Millay

Well, I think -- and again I am sure John will want to comment on this area, I think we do as we -- I don’t think much has changed since the analyst meeting. It is one of our three key strategic growth initiatives and we think there are likely to be opportunities that are close to the core, as well as some areas that perhaps will not be dramatically new but adjacent to the core.

John Haley

Yeah, I think that’s right, (inaudible). I think it’s something we are always interested in looking at and it is one of our growth initiatives. I think the one thing that I would say is that we’re focused on -- and we talked a little bit about this at the analyst meeting -- is taking a more proactive approach. And I think we’ve had good disciplined approach as to acquisitions generally but we have maybe not been quite as proactive as we’d like to in sort of prioritizing what they are and making sure that when anything came along we were well prepared for it.

Operator

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

Mark Marcon - Robert W. Baird

Good morning. Thanks for taking my question. How much did Aliquant contribute during the quarter?

John Haley

I think they are about $8 million of -- for the quarter.

Roger Millay

Yeah. (inaudible).

Mark Marcon - Robert W. Baird

Okay. And so when I take a look at the Benefits and I take a look at the estimate for the second quarter in terms of the constant currency growth rate. On an organic basis, is that basically around the same level or is that slightly accelerating?

Roger Millay

It’ slightly accelerating. Again, we think health and group benefits will be -- principally, will be stronger in the next quarter.

Mark Marcon - Robert W. Baird

Okay.

John Haley

We’re projecting retirement and technology and administration solutions about the same.

Mark Marcon - Robert W. Baird

Okay. Got it. And then in terms of that professional liability adjustment, which division did that predominantly go into? Was it equally balanced or -- I’m assuming it wasn’t.

Roger Millay

You mean like the underlying. So here is how it works, right. You get a claim that would obviously relate to the business and relate to a particular line of business.

Mark Marcon - Robert W. Baird

Right.

Roger Millay

The overall reserves in the incurred but not reported reserves are done in the aggregate through actuarial calculations.

Mark Marcon - Robert W. Baird

Sure.

Roger Millay

So I suppose we could dig in and isolate movements, but I have to tell you that I didn’t really do that. So the experience has been good recently. We’ve settled some claims and those settlements have not been offset by significant new claims and that’s what generally, over time, leads to lower reserve balances.

Mark Marcon - Robert W. Baird

Is there a possibility for more along those lines?

Roger Millay

Well, this is kind of highlights, if you remember. I don’t know, it might have been when we announced the merger we said that with the consolidation of PCIC that we expected more volatility in this area and this illustrates that. There could be more. It will over time cause the medium term, the reserves will move with the experience. So, extended periods of low claims activity will push the reserve balance down and new claims over time would push it up. And so, again, it illustrates why we have highlighted some volatility. It is unlikely to be totally steady for a long period of time.

John Haley

Yeah. But it won’t necessarily all be in one direction.

Mark Marcon - Robert W. Baird

Right. Got it. And just to go back and make sure I understand completely, the commentary around the margins on a longer-term basis. It sounds like we should still get some savings from the ERP system being fully put in place, you still have some real estate synergies that you could experience. In terms of the commentary around the margins staying relatively constant on a go-forward basis, are we to assume then that the -- whatever savings we end up getting from those other elements are going to get reinvested in terms of growth initiatives?

John Haley

I think, as I was responding to that question earlier, I wasn’t trying to make a statement necessarily about what we’re doing. But I was just -- I think the question was, what did we see as the drivers of the upside, and while we do see some potential drivers there, we have also said, if we can look for investments in the business that will grow the top line we would prefer to do it. So we are not -- we’re going to continue with that. We don’t want to see our margins go down at all, but if we see opportunities to invest some margin improvement in business growth, we are going to do that too. I don’t think we are prepared to say exactly how that’s going to unfold from year-to-year.

Mark Marcon - Robert W. Baird

I see. But, I mean, the margins could still continue to move up a little bit?

John Haley

Yeah, they could.

Mark Marcon - Robert W. Baird

All right. And what are the areas -- when you look longer term, what are the areas where you feel like there is the real potential to increase the revenue growth rates? Say in 2013-2014, as you look longer term?

John Haley

I mean, I think we’re excited about Talent and Rewards as we mentioned at the analyst meeting and we do believe that that’s an area that we’ll see significant growth over say the, over the medium term here. I think generally RFS, we feel the same way. We feel the same way about healthcare. We don’t think -- we continue to say retirement and probably the technology administration solutions. We expect Retirement to probably be a low single-digit growth and technology administration solutions maybe a little bit higher than that. But the growth will come we think disproportionately from Talent and Rewards and Risk and Financial Services.

Mark Marcon - Robert W. Baird

Great. And then can you just comment a little bit about what you’re seeing in your European markets. Just in terms of commentary either around the austerity measures or around some of the macro uncertainty that exists out there. And what sort of implications does that have for some of the actuarial work that you do?

John Haley

Yeah. So it’s something that, we keep an eye on this, and I think it’s a situation that is probably susceptible to sharper turns in a short period of time then maybe we’ve seen in the past. But for the moment the business seems to be pretty good. I think one of the things that helps us, if you look at it where our strength is located, it tends to be in northern part of Europe. So we’re strong in the U.K., Netherlands, Germany, not necessarily the countries that are experiencing the difficulties.

Operator

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

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Hi, thank you very much for taking my questions. John, organic growth in the quarter was 2%, yet the year’s guidance is more of a 4% to 7%. So just want to ask you, how much of the increase as we go on or is some of the timing and maybe what other tricks you might have up your sleeve over there.

John Haley

Yeah, I don’t know about tricks up my sleeve, Shlomo, but I think as we think about it, look the Talent and Rewards is one that we think is going to have pretty good growth rates for the year and it was lower this quarter. And so we do think timing was a significant part of what happened this quarter. Although, as Roger said, we did lower the overall growth rate about a percentage point or so. But we still felt reasonably confident about getting into that range there. Risk and Financial Services has continued to have good growth.

As Roger said we do expect health and group benefits to grow faster over the rest of the year than it grew this quarter. Now it was in the mid-single digits and if you look at health and group benefits, it’s actually -- the growth rates have bounced around a little bit quarter-to-quarter, and it probably reflects this is a bit of a project business and they do fluctuate like that. I think the one thing that we’ve been feeling very good about is that we haven’t seen any margin fluctuation really in health and group benefits as that. But we do -- we’re not -- I don’t think in general we’re projecting anything like magic changes overall in what’s going to happen. We just think that the major thing is we think Talent and Rewards will be better than the rest of the year.

Shlomo Rosenbaum - Stifel, Nicolaus & Company

You’re still expecting improvements in the other businesses as well, right? The other businesses were 2% to 3%, the guidance is on a…

John Haley

Yes, we are expecting them to be a little bit better.

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Okay. And then one other thing that I found most interesting at the analyst day was the ventures part of the business where you’re trying to go ahead and come out with new products or quantify some of the work that you guys have done. Can you give us an update on what’s going on over there?

John Haley

Well, we’ve been working at that. This is an area where we said we’d like to look for maybe an external hire to bring in to help us -- help bring some learning in and help run that part of the operation. We’ve been out interviewing some folks and I think we’re reasonably close to making a decision in hiring somebody on that. So I think we’ve made good progress there. We have gotten some proposals for investments from different areas of the business. We had about half a dozen of those come in and make presentation to Roger and me, and some other members of a committee we’ve set up to do that. That was just last week and so we’ll be evaluating those over the coming month.

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Then can you just talk a little bit more about the strength in the retirement business. You talked about communications. Is there anything else going on in that business with U.S. government signaling that there is going to be low interest rates for an extended period of time. Are companies going ahead and reassessing what they need to do in terms of the asset side of the balance sheet?

John Haley

Yeah. In general, for retirement, what we would say if you look over a longer period of time, significant changes in regulation were probably the biggest growth driver, but there really aren’t any on the horizon right now. The other thing you might look at is plan design changes which can also create additional project work for us, but in this economic environment that’s not something that many companies are doing. The current projects tend to be related to the following activities as; one would be financial management and cost management. Second would be evaluation of hybrid plan alternatives and then third would be harmonization of accounting rules. Those are mostly where we are seeing people look out right now.

Roger Millay

And just to clarify, Shlomo, the comment which I think was in the script about communications--

John Haley

It was in Talent and Rewards.

Roger Millay

Talent and Rewards, yeah.

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Okay. Very good. And then just lastly, just in terms of the integration costs. When do you think that these costs are going to kind of run their course and we’re going to start looking a lot more towards the GAAP numbers?

Roger Millay

Well, we have always said that we targeted three years for integration and that’s the period that we’d have these accounting, kind of this accounting segregation of integration costs. As we looked at this year, a lot does depend on the momentum in these systems initiatives. So depending on the deployment track, and we are planning larger locations, I mentioned the U.S. for the earlier deployments. And as those deployments happen, again, both on the software and the hardware side, integration costs will start to come down. So we expect that when we look back at the four quarters of this fiscal year, the average will be, you will see some decrease in kind of the average quarter-to-quarter and then when we get into the beginning of fiscal year ‘13, I would expect the costs should be quite a bit lower.

Operator

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

Ashwin Shirvaikar - Citigroup

Thank you. I guess my first question is, the improvement in pricing in brokerage. Does that tend to hit the beginning of the calendar year, January, so it would be more of a 3Q event. Is that accurate?

John Haley

Well, there are two main times. One is July 1 renewals and the other is January 1 renewals.

Ashwin Shirvaikar - Citigroup

Okay. And so can you comment on the level and sustainability of the improved pricing, I’m certainly picking up from other brokerage houses as well, that could be low to mid single-digits. Would that be accurate?

John Haley

Yeah, I think Ashwin, that’s what we hear in the market. I mean as a practical matter, the forces that set the pricing are really a lot of these things around, what are the losses and what’s the financial situation for these large companies. So it’s not anything that we have any real control over. But I think that’s consistent with what we’re hearing from folks.

Ashwin Shirvaikar - Citigroup

Okay. And not specific to the 400 people you hired, but just generally speaking, what kind of a lag do you tend to have between hiring and revenue generation?

John Haley

It depends on the particular business and it probably depends on the particular cycle. But its several months is what we would really would think about, maybe more on the line of -- its three to six months, somewhere in there.

Ashwin Shirvaikar - Citigroup

Great. Just a couple more. One is, everyone seems so focused on cost savings and synergies, but lately, isn’t revenue productivity also a good source of margin improvement? I mean a lot of this might depend, improve margins might even depend on how the investments pan out. So as the year progress, we could actually see better margins but you just have to wait and see?

John Haley

Well, I mean, I think that’s always possible. We certainly wouldn’t -- we wouldn’t turn our noses up at that.

Ashwin Shirvaikar - Citigroup

Okay. And last question, why not proactively use the balance sheet to buyback stock here?

Roger Millay

Well, I think it goes to our standard answer of how we deploy free cash and when it goes back to, in my mind, when we first talked about why the merger really was exciting and that was the strategic opportunities. So again, the first thing we think about in financial flexibility is having the flexibility to optimally invest in the growth opportunities that we see on the horizon. I think we talked about a few of those on the call here. I think we have been active as a share repurchaser. We’ve also been active in increasing the dividend. But we like the kind of lower leverage levels we run at to give flexibility, particularly for growth.

Ashwin Shirvaikar - Citigroup

Okay. Fair enough. I will just look for an update as we go along the year. Good quarter, guys.

Operator

(Operator Instructions) Your next question is a follow-up from Mark Marcon of R.W. Baird. Please proceed.

Mark Marcon - Robert W. Baird

Just a quick question on the salaries and employee benefits. Between the 400 people that are going to be added along with the merit increases that went in effect on October 1. Roughly speaking, how much of an increase should we see on that line?

Roger Millay

I have to be honest, I don’t have a forecast of front of me. I mean we’re expecting -- it’s not a step change from our point of view.

Mark Marcon - Robert W. Baird

That’s primarily what I was getting at, Roger, is just trying to ascertain whether or not it’s a step change or not?

John Haley

Yeah, I think, Mark, one way to think about this is that we’ve had the October 1 pay increase cycle that goes back for years.

Mark Marcon - Robert W. Baird

Sure.

John Haley

Everything is on a consistent basis here.

Operator

At this time, there are no further questions in the queue and I would like to turn the conference back over to Mr. John Haley for closing remarks. Please proceed, sir.

John Haley

Okay. Thank you all for joining us this morning, and we look forward to reviewing our second quarter results with you in February. So long.

Operator

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

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