Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Towers Watson & Company (NYSE:TW)

Q2 2012 Earnings Call

February 6, 2012 9:00 am ET

Executives

John Haley – Chief Executive Officer

Roger Millay – Chief Financial Officer

Analysts

Paul Ginocchio – Deutsche Bank

Tobey Sommer – SunTrust

Tim McHugh – William Blair

Julio Quinteros – Goldman Sachs

Jeff Volshteyn – JP Morgan

Shlomo Rosenbaum – Stifel Nicolaus

Ashwin Shirvaikar – Citigroup

Mark Marcon – Robert W. Baird

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2012 Towers Watson Earnings conference call. My name is Karissa and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today’s conference, Ms. Ida Suches (phon), Director of Investor Relations. Please proceed.

Ida Suches

Thank you, Karissa. Good morning. This is Ida Suches, Director of Investor Relations at Towers Watson. Welcome to the Towers Watson Earnings call. I’m here today with John Haley, Towers Watson’s Chief Executive Officer; and Roger Millay, our Chief Financial Officer. Please refer to our website for this morning’s press release. Today’s call is being recorded and will be available for replay via telephone for the next week by dialing 617-801-6888, confirmation number 60342397. 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’ll open the conference call for your questions.

Now I’ll turn the call over to John Haley.

John Haley

Thanks, Ida. Good morning everyone and thank you for joining us. Today we’ll review our results for the second quarter of fiscal 2012 and our guidance for the remainder of the fiscal year.

We’re very pleased with our results this quarter as we continued to produce strong growth with increased margins. Reported revenues for the quarter were $880 million, an increase of 11% over prior year reported revenues and an increase of 10% 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. Our adjusted EBITDA for the quarter was $172 million, up 16% from last year, and our adjusted EBITDA margin for the quarter was 19.5%. Adjusted EBITDA excludes transaction and integration costs as well as non-cash stock-based compensation arising from the merger.

For the quarter, diluted earnings per share were $0.92 and adjusted diluted earnings per share were $1.35. Adjusted diluted earnings per share increased 22% over the prior year. Adjusted diluted earnings per share included normalized income tax rate and exclude non-recurring other income 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.

These results underscore the excellent work of our associates and our focus on marketplace opportunities. All of our segments delivered revenue growth above our expectations for this quarter. Staying close to our clients, understanding the complexities of the business environment, and delivering practical solutions have driven our results. Our results also speak to the strong business acumen of our management team throughout the organization. They are delivering top-line growth while carefully leveraging investments, and that has driven our margin growth. I’m confident that the depth of our talent pool, adhering to our management principles, and living the client-first values positions and prepares us for long-term profitable growth.

Now let’s look at the performance of each of our segments. All of our segments grew organically this quarter. Benefits grew 5%, risk and financial services 4%, and talent and rewards grew 15%; and revenue growth reflects wins from both new and existing clients. For the quarter, the benefits segment has revenues of $476 million. Including the revenues from Aliquant which we acquired in late December 2010, benefits segment revenues were up 7% on a constant currency basis.

On an organic basis, revenues were up 5%. Retirement, technology, and administration solutions and health and group benefits all grew this quarter. Retirement revenues increased 3% on a constant currency basis led by growth in North America with growth in our pension administration work from new clients and demand for our strategic work. 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. The revenue increases were in large part due to the acquisition of Aliquant. Additional growth resulted from demand for system modifications and new call center clients.

The integration of Aliquant into our U.S. business has gone well. This is the last quarter the year-over-year comparisons will exclude Aliquant in the organic results. We expect future growth in the mid-single digits.

We had low double-digit constant currency growth in health and group benefits this quarter. Growth was driven by an increase in U.S. client demand for strategy work such as plan management and product sales. The environment for health benefits consulting continues to be strong with regulatory uncertainty, market change and cost pressure. We expect to continue to deliver strong growth for the foreseeable future with constant currency increases averaging in the upper single digits.

Now let’s move on to risk and financial services. For the quarter, the risk and financial services segment had revenues of $205 million. Including EMB, revenues were up 18% on a constant currency basis. Revenues were up 4% on an organic basis. We’re very pleased that Towers Watson Risk Consulting and Software won the Transaction of the Year Award in the 2011 Insurance Day London’s market award for the acquisition of EMB. The award recognizes the synergy between Towers Watson and EMB as well as the business opportunities created by the acquisition, particularly in the London insurance market.

Risk consulting and software continues to benefit from the EMB acquisition and had 25% constant currency revenue growth. We acquired EMB about a year ago and are pleased with the integration. As we hoped, EMB provided additional capabilities which are now paying off in the marketplace, particularly the strong P&C software offerings. Also, regulatory changes and M&A activity continue to drive demand in RCS.

We were really pleased to see the continued trend of growth in brokerage this quarter. Brokerage had mid-single digit growth and grew in both Europe and the Americas. New business and favorable pricing conditions contributed to the growth this quarter.

Investment services led organic segment growth due to solid demand worldwide for advice on investment strategy, delegated services, and alternative assets. Second quarter growth was in the low double digits and we expect strong growth to continue in the second half of the year, particularly in North America and Asia. We expect solid growth to continue in RFS led by risk consulting and software and the capabilities they’ve added through EMB.

Next let me turn to talent and rewards. For the quarter, the talent and rewards segment had revenues of $169 million. On a constant currency basis, revenues increased by 14%. All lines of business saw revenue growth this quarter – executive compensation, rewards talent and communication, and data surveys and technology. The executive compensation consulting environment continues to be strong globally. In the U.S. and Europe, we continue to see opportunities consulting to both boards and management. Continued focus on aligning pay and performance, increasing focus on risk mitigation, and efforts to gauge shareholders’ opinion have driven demand for our services.

Executive compensation, particularly at the board level, is less prone to economic influences than other parts of the talent and rewards segment. Constant currency revenue growth for rewards talent and communication was in the mid-single digits. The Americas drove growth, benefiting from strong client demand. Revenues were soft in Europe mainly due to weakness on the Continent; however, the U.K.’s pipeline is good and we anticipate growth for EMEA and other regions for the balance of the year.

As expected, data surveys and technology led this segment with double-digit constant currency revenue growth in all regions. We delivered the bulk of our compensation benchmarking surveys this quarter, resolving the timing issues that we mentioned in last quarter’s call, and successfully completed our first delivery cycle for our consolidated Towers Watson offering.

Overall, we continue to see good opportunities in talent and rewards. While this business is traditionally the most vulnerable to changes in the economy and there are some pockets of softness, we have not seen an overall slowdown in demand; therefore, we’re forecasting high single-digit growth for the balance of the year.

In conclusion, we’re very pleased with our results this quarter and especially pleased with the terrific job our associates do every day. They not only serve the needs of our clients today but also keep a close watch on the business environment so that they’re positioned to serve our clients’ needs in the future. I continue to be very optimistic about our future prospects.

Before turning the call over to Roger, I’d like to note that Towers Watson has been named one of America’s greatest brands for 2011 by the American Brands Council. Our company and 45 other top brands were selected out of 600 different U.S. companies. This is quite an honor given that our brand is relatively new in the marketplace. This is another testament to our consultants who demonstrate our brand values in the marketplace each and every day.

Now I’ll turn the call over to Roger.

Roger Millay

Thanks, John. As John mentioned, our business really delivered this quarter and we significantly outpaced our own expectations. We continued to post top-line growth with a very healthy increase in operating earnings. Our adjusted EBITDA margin for the quarter was 19.5%.

Our 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 34% NOI margin for the quarter. Risk and financial services had a 26% margin and talent and rewards had a 33% margin for the quarter. Net income attributable to controlling interest for the quarter was $67 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 assuming a normalized income tax rate, adjusted net income was $98 million.

This quarter we had $23 million of transaction and integration costs versus 21 million last quarter and $31 million in last year’s second quarter. As we’ve mentioned before, these costs are difficult to forecast precisely quarter-to-quarter but we still expect to see a gradually slowing trend in these costs over the next year.

In the second quarter, we had a several million dollar one-time settlement cost of a non-compete issue with an affiliate of one of our legacy companies that is included in integration expenses. Otherwise, the majority of the costs continue to be related to our large IT initiatives, integrating both the ERP software and hardware platforms of the Company. We have now successfully launched the new Oracle ERP system in Canada and the United States and are moving on with the global deployment that will continue for about another 12 months.

During our analyst day event in September, we presented a range of $75 million to $105 million for the completion of the transaction and integration costs. We now believe we’ll be at the higher end of this range.

The normalized tax rate for the quarter was 36%. If the fiscal year ’12 geographic mix of income is consistent with fiscal year ’11, we expect the normalized tax rate to be approximately 37% for the fiscal year.

Diluted earnings per share for the quarter were $0.92, up 42% from $0.65 last year. Adjusted diluted earnings per share were $1.35, up 22% versus last year. The Company clearly continues to execute our integration and growth strategy very successfully.

During the quarter, we recorded a non-recurring gain of $2.5 million related to the increase in the carrying value of our investment in Fifth Quadrant, our joint venture in South Africa. Towers Watson acquired an additional 11% interest in Fifth Quadrant for a total of 51% ownership, and we now include Fifth Quadrant in our consolidated financials. This gain was not included in adjusted net income.

Moving to the balance sheet, we continue to have a very strong financial position. As of December 31, we had $306 million in cash available for our use. We had $65 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 the former B1 shareholders due in March 2012 from the tender offer that was completed in June 2010. As of mid-January, we completed the remainder of our $100 million repurchase authorization, repurchasing a total of 1.64 million shares of Class A stock over the life of the authorization.

Now let’s review our guidance for the fiscal year 2012. Given the recent decline in the British pound and the euro, we’ve slightly decreased our exchange rate expectations for this fiscal year. For the full year, we’re now assuming an average exchange rate of 1.57 U.S. dollars to the British pound and an average exchange rate of 1.35 U.S. dollars to the euro. We’ve also narrowed our revenue guidance range and now expect that our fiscal year 2012 revenues will be in the range of $3.41 billion to $3.46 billion. We’re also increasing our adjusted diluted earnings per share guidance to a range of $5.05 to $5.15. We expect our adjusted EBITDA margin to be in the range of 19% to 19.5%. We expect to have a normalized income tax rate of approximately 37% and diluted shares outstanding of about 72.5 million. We expect GAAP diluted earnings per share to continue to be lower than our adjusted diluted earnings per share.

Now we’ll review our fiscal year guidance for the segments. We expect revenues in the benefit segment to grow around 4% on a constant currency basis. We continue to expect that organic growth will be led by health and group benefits. The NOI margin for benefits is expected to be in the low to mid-30% range.

Next in the risk and financial services segment, we expect constant currency revenue growth will be in the range of 10% to 12% for the fiscal year. RFS continues to benefit from comparisons to a period in which we did not own EMB for the full quarter, given that the acquisition was closed in late January last year. We expect the NOI margin to be in the mid-20% range.

Lastly, in the talent and rewards segment, we’re forecasting constant currency growth of 6% to 8% for the fiscal year. As we mentioned earlier, the first half of the year is typically seasonally stronger than the second half of the year. We expect the NOI margin to be about 20%.

I’m very pleased with our overall performance this quarter. While we’re keeping a close watch on variables that could impact our performance going forward, the business has good momentum and I continue to be optimistic about our future performance.

Now I’ll turn it back to John.

John Haley

Thanks, Roger. We’re excited about our opportunities for growth and our continued strong results. Now we’ll take your questions.

Question and Answer Session

Operator

Ladies and gentlemen, if you wish to pose a question, please key star, one. If your topic has been addressed or you wish to withdraw your question, please key star, two. Please key star, one for audio questions.

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

Paul Ginocchio – Deutsche Bank

Thanks. John, just wondering about European growth rate versus the U.S. growth rate. Are you seeing any benefit yet from Solvency II in your risk and software? Then I have one follow-up, thanks.

John Haley

Yeah, I think we’re seeing a little bit of benefit from Solvency II, not a big bump right at the moment but that is something that we’re watching and we think that’s a potential upside there. I think as we talked there, in some areas we’re seeing a little bit of softness in Europe but we’re still reasonably optimistic about what the remainder of the year will look like.

Paul Ginocchio – Deutsche Bank

And then just a follow-up – I’m having a hard time getting to the margin guidance you’re giving for the March quarter. It seems like it’s going to be down year-on-year. Can you maybe just—is it because of headcount growth, and can you give us an update on where that is? Thanks.

Roger Millay

Yeah, maybe just taking the headcount, we do continue to invest in similar kinds of areas that we’ve talked about before in parts of the business that are growing and expect to do that gradually through the remainder of the year, not a dramatic rate that’s really been different than the last few quarters but gradual investment.

The margin guidance – I think in that range of 19 to 19.5% for the full year, and I think that still puts us around 19.5% for the third quarter, is about where our run rate is; and again, it’s very consistent with what we realized in the second quarter with the fourth quarter being seasonally softer generally.

Paul Ginocchio – Deutsche Bank

Okay, thank you.

Operator

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

Tobey Sommer – SunTrust

Thanks. I wonder if you could comment about something you touched on in your analyst day, the idea that you may be encouraging incubating ideas for new services and products; and I was wondering if you could give us an update whether there’s some of that in the works currently. Thanks.

John Haley

Yeah, so as we said at analyst day, we want to be better at developing ideas and bringing them to market, and we’ve started addressing that in the organization. I think it’s in the early stages. This is not something that was a play where we were thinking that we would be developing things and bringing them out within the next quarter or so, but this is to build organizational competence around developing ideas and bringing them to market. So we’ve started that. We’ve formed our new venture in investment counsel and we’ve hired somebody from outside to lead that, and we’re excited about that and building some future prospects there. But it’s something that we think will pay off in coming years, not immediately.

Tobey Sommer – SunTrust

Thank you. Could you describe how you see healthcare reform impacting different parts of the business currently? Thanks.

John Haley

Sure. So I guess the first thing to say is that change is good for us because when there is a lot of change, our clients are looking for people who can understand the impact of change and can quantify it for them. So we expect that overall healthcare reform is going to drive revenue growth.

At this point, it’s too early for us to quantify the amount or to know the exact timing. The provisions that take effect first don’t require as much consulting activity as, say, some of the broader, more strategic items that are effective in later years.

Just thinking overall about healthcare reform initially, it’s our health and group benefits business that’s going to be most impacted. That team will assist companies with analyzing new regulations, advising on plan design changes. The retirement business can also be involved as these issues impact retirees and as companies look to redesign their broader rewards programs as a result of the changes. After companies determine what changes they need to make, there could be opportunities for our communications team to assist with company-wide communications of healthcare plan changes.

We could also have some additional project work around the modification of healthcare plans in our technology administration solutions business, which administers healthcare plans for some of our clients.

Tobey Sommer – SunTrust

Thank you.

Operator

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

Tim McHugh – William Blair

Yes, hi. Wanted to ask about investment consulting – it seems like you had a much more positive tone to the trends there versus the last couple quarters. Just kind of talk at a high level what’s driving improved performance relative to what you’ve been seeing.

John Haley

Yeah, so I think—as we have said in the prior quarters, we thought that demand had taken a bit of a dip but that some of the solutions we were working on, particularly in the implemented consulting, were things that we thought had some traction. We thought there was a little bit more of a longer sales cycle in some of those coming out of the financial crisis than we thought, but we continued to remain optimistic about the long-term impact or the long-term outlook for investment. I think what’s happened here just says that—you know, we feel good about what happened. We feel like this is suggesting that we had that right.

Now, one of the things about the investment services is they had double-digit growth in all regions this quarter. That compares to a relatively weak comparable quarter last year, but still it’s overall strong and we feel pretty good that we’ve got the right services for the marketplace.

Tim McHugh – William Blair

Okay, great. And then Roger, just wanted to ask – the Fifth Quadrant consolidation, what’s the impact on revenue that we should expect, and should we be assuming a lower contribution going forward from the non-controlling interest line because of that?

Roger Millay

Yeah, so they come out of equity investments and there’s roughly 16 million or so of revenue in Fifth Quadrant, so it’s pretty small.

Tim McHugh – William Blair

Okay, thank you.

Operator

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

Julio Quinteros – Goldman Sachs

Great. Hey guys. So really strong results across the board, here. Maybe just to sort of frame the major benefits section, first of all – when you guys say you’re seeing increased client demand across the board, can you characterize how much of that is cross-selling into the old sort of Watson Wyatt base and vice versa into the old Towers base, just to get a sense for how much of that traction is coming from potentially increased cross-selling success, or is it more the cycle itself helping you drive some of the success and the increased demand here?

John Haley

Yeah, we actually don’t track our revenue at all that way; and in fact even if we tried to, it would be difficult to do that. Working for these large companies are often some things that both companies did in one respect or another, and it’s a little bit harder to say. Having said that it’s hard to track that exactly, I would say, though, that the broader and deeper and more comprehensive services that we said were the rationale for doing the merger are clearly having traction in the marketplace, and we are hearing that in spades from our clients. I travel around to all the different regions to visit with clients of our different segments, and it’s been a constant drumbeat that I’ve heard in the last year or so about how pleased they are with the broad range and the quality and depth of services that we can bring to the marketplace. So while I can’t quantify it, I’m sure that’s a large part of what we’re seeing.

Julio Quinteros – Goldman Sachs

Okay. And maybe just one quick follow-up on the discretionary compensation side – as a percent of segment operating income, it was a little bit lower this quarter. Are we still expecting about 38% for the full year?

John Haley

Yeah, I’ll let Roger talk about what it will be for the full year. I would say that there’s artifacts of the way we do it, the way it shows up in the reported numbers. Internally, the way we allocate our distributable earnings between what goes to shareholders and taxes and what goes to compensation, that hasn’t changed at all. That’s on a level field.

Roger, do you want to--?

Roger Millay

Yeah, so the first and second quarter, you can see a pretty big difference in the percentages of discretionary comp. I think as you’re suggesting, the roughly 38%, or 38 to 39% level on a year-to-date basis is in the ballpark of what we expect for the year.

Julio Quinteros – Goldman Sachs

Okay, great. Thanks guys. Good luck.

Operator

Your next question comes from the line of Jeff Volshteyn of JP Morgan. Please proceed.

Jeff Volshteyn – JP Morgan

Thank you for taking my question. Let me follow up on that previous question. When you talk about the strategic projects that generated revenue growth this quarter, do you feel that these are more discretionary projects work that brings better margin than in the past?

Roger Millay

Yeah, I think when you refer to the strategic projects, I think we referenced that in retirement. Is that what--?

Jeff Volshteyn – JP Morgan

Correct.

Roger Millay

Yeah.

John Haley

Yeah, so I think the strategic projects are probably what—you know, that adds a little bit, and that’s what makes our revenue growth look a little better than it would have otherwise. But I don’t know that the margins are different between them. If you look at the margins for the retirement segment as a whole, they’re not that different from one quarter to the next; and any kind of additional 1% increase would probably bring it up a little bit anyway. So no, I don’t think there’s any fundamental difference there.

Jeff Volshteyn – JP Morgan

Okay, all right. And on the foreign exchange, how much of your revenue comes from euro and pound revenue, meaning in your annual guidance, how much of the revenue would be impacted by a change in assumptions for foreign exchange?

John Haley

I think it’s about 36% roughly of our revenues are from the whole European Union; but of those revenues, about two-thirds are in pounds sterling and then about one-third are in euros. So it’s about 24% are in pounds and about 12% of overall Company is in euros; and of course in the euro zone, it tends to be the northern part – Germany and Netherlands in particular – where we have the biggest operation.

Jeff Volshteyn – JP Morgan

And remind us – do you hedge for foreign exchange?

Roger Millay

We do a little kind of transactional hedging, but nothing significant.

Jeff Volshteyn – JP Morgan

Okay, makes sense. Thank you.

Operator

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

Shlomo Rosenbaum – Stifel Nicolaus

Hi. Thank you very much for taking my questions. John, I thought you mentioned in the beginning of the call that you had some new client wins on the benefits side, and I was wondering if any of that is in retirement. I know that retirement doesn’t turn over that often.

John Haley

Yeah, we’ve had some wins in the retirement sector; but as you said, that doesn’t turn over that often. One of the things that we continue to focus on in retirement is to make sure that we have a steady net increase in clients there, and we’ve continued to see that; but that’s not the biggest deal.

Shlomo Rosenbaum – Stifel Nicolaus

Okay. And then I’m noticing that some of your larger competitors have been losing people. Are you guys experiencing a tick-up of hires directly from some of your competitors?

John Haley

We are hiring folks, and we’re continuing to see some good folks that are on the market and that have been interested in joining us. So yeah, we’re doing that and we’re probably doing a little more of that than maybe we were a year or two ago. I think part of that is a natural consequence of we weren’t doing as much right after the merger when we were more focused with just bringing the two organizations together; but we really feel like we’ve got everything working the way we had hoped it would now, and of course we have a pretty attractive proposition for our clients and when we have an attractive proposition for our clients, I think that also makes consultants want to join an organization like that.

Shlomo Rosenbaum – Stifel Nicolaus

Okay, thanks for the color. And then Roger, the AR DSO was higher than expected. We usually get a seasonal tick-down that’s pretty nice in the second quarter, and we just didn’t see that. Can you talk a little bit about what’s going on there?

Roger Millay

Yeah, DSO actually, as we track it, is pretty flat; so we had a big spike in revenue this quarter and consistent with the revenue being relatively flat, AR is up about the amount that revenues were up versus the September quarter. So we think it spiked but it’s for a good reason – we’re investing in working capital because we’re growing the business.

Shlomo Rosenbaum – Stifel Nicolaus

I understand that it’s flat, but if I look back to, say, the last three or four years, I saw between a four and seven-day sequential decline. Is there anything different about including the Towers prior results in the numbers that would lead the seasonality to be different?

Roger Millay

I don’t think so; and again, not the way—you know, we’re not tracking it really the way you are, so I’d have to go back and take a look at those prior years. But again, as we manage receivables relative to the momentum of the business, it all seems in appropriate shape to us.

Shlomo Rosenbaum- Stifel Nicolaus

Okay, I’m going to sneak in one last housekeeping question. In the reconciliation of operating income to the segment income, you have $22 million of expenses under other. Can you just talk a little bit about what that is?

Roger Millay

Yeah, there’s really two main drivers there, and as you probably point out, it’s a little bit different that we normally have on that line. One is that—so the items that pop up there are items that we would adjust for at the corporate level outside of the segment NOI results, and one item here—or one of the items that’s in there that had an impact this quarter is our long-term stock compensation incentive program, the accounting for that which will bounce around depending on company results and depending on whether there are any changes with participants in that program. So we had – and I think I mentioned it in my script, I think – but we had several million dollars of additional expense this quarter, again just as a result of the timing of recognition of stock compensation expense.

The other item that’s again an item of true-up at the corporate level is reserves for revenue and receivables, and the way we book that is again there’s a policy at the segment level, but there’s an overall umbrella policy for GAAP compliance. This quarter, we added reserves at the corporate level, again not indicative of any issues relative to underlying receivables, just really the way that the relationship of the two formulae came out. So those are the two things, really, main things that are driving that $22 million.

Shlomo Rosenbaum – Stifel Nicolaus

Okay, thanks a lot. Good quarter, guys.

Operator

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

Ashwin Shirvaikar – Citigroup

Good morning, guys, and congratulations on the solid quarter. I guess my first question is asking about the sequential guide for 3Q. Even though it is normally your strongest seasonal quarter, the guide—even after I adjust for the tax rate in 2Q, seems to be more flattish as opposed to up. I’m kind of wondering how much of that is—if you could quantify continued investments versus potentially some talks to the uncertainty of timing on more elevated costs.

Roger Millay

Well, I think there should be growth in there, Ashwin. I guess I’ll say that as we looked at the guidance, the underlying assumptions show organic revenue growth consistent with what we’ve shown in the first half, adjusted EBITDA margins in the range of where we’ve been operating; so we think it shows continued good execution, again consistent with where we’ve been. And there is an impact of currency, of course, in there as well that knocks off a few cents.

Ashwin Shirvaikar – Citigroup

Right, right. No, I mean, it’s just I already adjusted my model for currency, so I was just curious.

John Haley

No, I think—Ashwin, we had a very strong quarter last year, too, and so we weren’t necessarily projecting that we would grow off that. But when we look at the margin for the whole year, saying that we’re coming out in the 19 to 19.5% on adjusted EBITDA, we feel that’s a pretty strong result.

Ashwin Shirvaikar – Citigroup

Okay, okay. Yeah. No, that would be. I mean, it would kind of put you about where you talked for, for margins. The use of cash – you finished your buyback. I guess you might at some point decide to do more of one, potentially a dividend increase again this year. How does the M&A pipeline look? If you could talk about those factors.

John Haley

So I think—look, we’re always on the lookout for whether there are some good acquisitions that we can bring into the organization, and we want to be in a position where if we find them, we can act on them. We feel like we’re well-placed for that right now, so we continue to investigate opportunities. As we’ve said before, of course, we’re relatively cautious. We want to make sure we only do good acquisitions, and so we have a reasonably high bar for that; but we continue to be active looking there.

We’re not sure what we’re going to be doing, what other plans we might have for capital, but certainly we could do another buyback of the kind we’ve done so far and we don’t think that would have much impact on our ability to execute on some M&A transactions. Whether we’re going to do that or not is something I think the Board will be thinking about during the coming months.

Ashwin Shirvaikar – Citigroup

Okay. And clearly if you don’t know yet, then it’s not in your guidance, just to be clear, right?

Roger Millay

Right. Nothing is in our guidance.

Ashwin Shirvaikar – Citigroup

Okay. One last question – as we see sort of a continued low interest rate environment and continued stock market volatility, are you seeing maybe a higher number of plan sponsors come to you about their pension plans and wanting to discuss the outcome—eventual outcome of those?

John Haley

Well, I think the whole issue of plan funding, of de-risking of pension plans, of planning for different environments is something that there’s a lot of work going on in that right now, and so plan sponsors are interested. I think it’s one of the things that’s probably helped retirement revenues. There’s a lot of wanting to think about different what-ifs and scenarios.

Ashwin Shirvaikar – Citigroup

Okay, great. This is a good quarter, guys. Thank you.

John Haley

Thank you.

Operator

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

Mark Marcon – Robert W. Baird

Good morning, and let me add my congratulations. I was wondering if you could talk a little bit about your consultants across the different practice areas. Just wondering a couple of elements – one, what are you seeing just in terms of retention rates, compensation expectations among those existing consultants? Are things getting any more expensive now that the environment seems to be improving? And then secondly, where were the areas where the headcount grew the strongest during this past quarter, and what should we expect over the course of this coming year along the headcount front?

John Haley

Well I’ll let Roger talk about the headcount in a second. Let me just address – I mean, I think we’ve sort of alluded to it a few times in the script as we were going through it, but we just couldn’t be prouder of the work that our associates are doing. They’re delivering phenomenal results. Our clients are continually expressing appreciation for the work they’re doing, and I think the high-quality work they’re doing shows up in the results that we have.

There’s a lot of reasons why I think you want to be running a profitable company. It’s one that enables you to reward your shareholders; it’s one that enables you to invest in tools and processes. But perhaps the most important is it enables you to reward your associates appropriately, and so one of the things we feel good about with the results we have is that we’re able to deliver good compensation to our associates. So I think that’s something that’s broadly appreciated, and we’ve talked about the fact that we’re a reasonably attractive organization for new folks to join and I think that’s been reflected I that. So our retention rates are right about where we’d like them to be, and we feel pretty good about that.

Roger, maybe you want to address the headcount?

Roger Millay

Yeah, I think similar to where we’ve been, headcount adds have been sprinkled around. This past quarter, it was more in the risk and financial services and talent and rewards segment, but overall not dramatically large numbers – kind of the 1 to 2% range.

Mark Marcon – Robert W. Baird

And where would you expect the year to end up?

Roger Millay

We don’t have a forecast on that at our fingertips here; but again, I think that single digit growth rate is what we would anticipate – lower single digits.

Mark Marcon – Robert W. Baird

Okay. And then with regards to the technology installation, you mentioned that the cost is going to be towards the upper end. Is there other things that you’re doing or additional modules that you’re putting in place that you weren’t previously planning on, or what’s driving that?

Roger Millay

Yeah, and again that’s for overall transaction and integration expenses, so as we mentioned this quarter—so one of the factors in there, we did have this settlement with a former affiliate of one of the companies, so that’s not something that was included in the guidance that we gave in September. That’s a factor. We’ve also—you know, as you go through these programs, we initially had some assumptions about how much might be CAPEX, how much might be operating expenses, and there’s been a little bit of a shift in that. So again, it’s not dramatic – we still expect to be in the range, but at the higher end of the range as opposed to targeting the middle of the range. There’s really not additional modules or projects or anything anticipated in that.

Mark Marcon – Robert W. Baird

Great. And then from a strategic perspective, John, you’ve done a great job in terms of growing the company over the years and making some great moves. Are you seeing things that look attractive? Is there anything that we should think about or—I mean, you haven’t let any moss grow under the stone here. Even with the integration, you’re still making moves. Should we anticipate that to continue?

John Haley

I think as a management team, we want to be always looking for opportunities and we want to make sure that we’re doing the right thing for the long-run future of the business so we’re continuing to do that. We don’t have anything on the drawing board right now that we’re looking at, but I think we’re always looking for opportunities and we’re always thinking about what’s the right thing for long-term success.

Mark Marcon – Robert W. Baird

Okay, so it doesn’t sound like there’s anything huge that just jumps out at you right now.

John Haley

That’s correct.

Mark Marcon – Robert W. Baird

Okay, great. And then finally, you’ve done a great job in terms of the margins. As we think longer term, is there still room for margin improvement or should we think that maybe more of the investments are going to go towards growing the top line in the future, and maybe the margins are in relatively good shape at this point?

John Haley

Well, we’ve been saying for a couple quarters now that if we had our druthers we would probably look to grow the top line a little more, even if that meant that we kept the margins flat as to where they were; and I think that would still be our preference. We’re going to be looking to get growth as opposed to margin expansion. Now, we don’t want to get unprofitable growth, for sure, so we’re looking to get things that are going to really add to the bottom line over the years. But I think that’s the trade-off we’re trying to evaluate right now.

Mark Marcon – Robert W. Baird

Appreciate the color. Thank you.

Operator

You have a follow-up question from the line of Tobey Sommer of SunTrust. Please proceed.

Tobey Sommer – SunTrust

Thank you, my question has been answered.

Operator

Again ladies and gentlemen, that is star, one for audio questions.

John Haley

Okay, well if there are no more questions, let me just say thank you for joining us this morning, and we look forward to reviewing our third quarter results with you in May.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Towers Watson's CEO Discusses F2Q12 Results - Earnings Call Transcript
This Transcript
All Transcripts