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Executives

John J. Haley - Chairman, President, and CEO

Roger F. Millay - VP and CFO

Aida Sukys - Director of Investor Relations

Analysts

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Timothy McHugh - William Blair & Company, LLC

Sara Gubins - Bank of America/Merrill Lynch

Frank Atkins - SunTrust Robinson Humphrey, Inc

Julio Quinteros - Goldman Sachs & Co.

Jeffrey Volshteyn – JPMorgan Chase & Co.

Ato Garrett - Deutsche Bank

Towers Watson & Co. (TW) Q3 2012 Earnings Conference Call May 7, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Towers Watson’s Earnings Conference Call. My name is [Tahisha] and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today Ms. Aida Sukys. Please proceed.

Aida Sukys

Thank you. Good morning. This is Aida Sukys, Director of Investor Relations of 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, 58909166. 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 J. Haley

Thank you, Aida. Good morning, everyone, and thank you for joining us. Today we will review our results for the third quarter of fiscal 2012 and our guidance for the remainder of the fiscal year. We’re pleased with our results this quarter as we continue to produce solid growth with increased margins.

Reported revenues for the quarter were $902 million, an increase of 4% 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 4% for the quarter. Our adjusted EBITDA for the quarter was $180 million, up 1% from last year and our adjusted EBITDA margin for the quarter was 19.9%.

Margin was down versus last year’s peak quarterly margin, consistent with our expectations. The third quarter of fiscal 2011 was the first period post merger that each segment experienced organic growth. Workforce alignments had just been finalized as part of the merger and as such much of the revenue growth fell straight to margin.

As we’ve experienced continued revenue growth, it’s become necessary to reinvest back in the businesses to align the workforce for sustainable long-term growth. Adjusted EBITDA excludes transaction integration cost as well as non-cash stock-based compensation arising from the merger.

For the quarter, diluted earnings per share were $0.95, an adjusted diluted earnings per share were a $1.39. Adjusted diluted earnings per share increased 2% 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 cost from restricted shares issued in conjunction with the merger and the amortization of merger accounting intangible assets.

The business produced favorable results in light of challenging growth calls due to a strong quarter in 2011. There were added pressures during the quarter, such as the continuing challenging environment in Europe, mixed economic news regarding China and trying to balance the investment strategies to fuel future growth while maintaining margins.

Our management team and by that I mean the management team throughout the organization is doing a great job with continuing to develop product and service strategies that align with our client needs. After all many of our clients are facing the same challenges we see in the economic and legislative environment. I’m confident that the foundation we’re building will provide for solid long-term growth and profitability.

Now let’s look at the performance of each of our segments. All of our segments grew organically this quarter. Benefits grew 3%, Risk and Financial Services grew 2% and Talent and Rewards grew 7%. Revenue growth reflects wins from both new and existing clients.

For the quarter, the Benefits segment had revenues of $520 million. Benefits segment revenues were up 3% on a constant currency basis. The Americas region revenues grew by 6% led by double-digit growth in Health and Group Benefits. Retirement revenues were flat on a constant currency basis. The Americas region revenues increased with continued demand in our pension administration work from new clients and demand for our strategic work.

EMEA, Retirement revenues were down modestly this quarter. The decline was primarily driven by two issues, delayed legislation which in turn delayed project work and comparisons to exceptionally strong third quarter results in 2011. We continue to expect the retirement will have low single digit growth for the fiscal year.

Technology and Administration Solutions had a strong quarter with mid single digit constant currency growth. Additional growth resulted from demand for system modifications and new cost center clients. We continue to add new clients and expect future growth in the mid single digits.

We were pleased to learn that for the second year in a row Towers Watson has been named to the 2012 global outsourcing 100 list by the International Association of Outsourcing Professionals. We had low double-digit constant currency revenue growth in Health and Group Benefits. Growth was driven by an increase in U.S. client demand for strategy works, 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. The Supreme Court hearings and the anticipated ruling schedule for June have not dampened the demand for work. We expect to continue to deliver strong growth for the foreseeable future with constant currency increases averaging in the upper single digits.

I would also like to highlight our international line of business this quarter. Our International Consulting Group is the largest team in the industry focus specifically on managing multinational challenges. We track their efforts to help us keep ahead of global trends and to ensure we provide our clients the best local and regional advice, especially in these challenging times. The international line of business has had double-digit growth this quarter and on a year-to-date basis. As important, they fuel growth for many of our other lines of business.

Let’s move on to Risk and Financial Services. For the quarter, the Risk and Financial Services segment had revenues of $220 million, including EMB revenues were up 6% on a constant currency basis, revenues were up 2% organically. Risk Consulting and Software revenue continues to benefit from the EMB acquisition and had 6% constant currency revenue growth. We acquired EMB at the end of January 2011 and the integration has gone well. This will be the last quarter the year-over-year comparisons do not include a full quarter of EMB results.

Demand continues to be strong in Asia Pacific and there is good activity on the [life] side for M&A in the Americas. The decision to implement to delay – excuse me, to delay the implementation date for Solvency II to January 2014 was confirmed earlier in the quarter. As expected, we’ve seen a slight pull back in the demand for this work in EMEA.

We were pleased to see the continued trend of growth in brokerage in both the Americas and EMEA. Brokerage led the segment revenue growth in both constant currency and organic growth. A strong renewal season with favorable pricing conditions drove the growth this quarter.

Investment had low single-digit growth. The Americas region had low double-digit growth and Asia Pacific had low single-digit growth. EMEA experienced a slight decline year-over-year. We have a strong focus on marketing there and are seeing increased activity. We continue to expect low double-digit growth for this segment, this fiscal year.

Now let me turn to Talent and Rewards. For the quarter, the Talent and Rewards segment had revenues of $131 million and on a constant currency basis, revenues increased by 7%. Rewards, Talent and Communication and Data, Surveys and Technologies had low double-digit growth in the Americas and Asia Pacific where demand continues to be strong.

We see some market softness in the EMEA region with longer sales cycles and reduced project scopes, resulting in a slight revenue drop year-over-year.

The Executive Compensation Consulting environment continues to be strong in the U.S. and in Asia Pacific, but there’s some softening throughout Europe. Overall we continue to see good opportunities in Talent and Rewards. Since this business is traditionally the most vulnerable to changes in the economy we’re seeing variances in market demand by region reflecting differences in economic conditions. We continue to forecast mid-to-high single-digit growth for the segment.

We’re pleased with our results this quarter and appreciate the challenges facing our consultants and the management team. They continue to monitor and manage the business in a very challenging and fast moving global environment. This is a time where our global coverage can be very attractive to clients as they work to cope with different challenges around the world.

Finally, I am proud to announce that Towers Watson has been ranked number one in its industry category on Fortune magazine’s list of the, “Worlds Most Admired Companies for 2012”. This recognition is a true testament to the commitment and dedication of the entire Towers Watson community.

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

Roger F. Millay

Thanks, John, and good morning everyone. As John mentioned we performed well this quarter and are pleased with our results. We continue to post top-line growth and strong profitability. Our adjusted EBITDA margin for the quarter was 19.9%. 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 merger accounting and transaction and integration costs. For the quarter, the Benefits segment had a 37% NOI margin. Risk and Financial Services had a 30% margin, and Talent and Rewards had a 13% margin.

Net income attributable to controlling interests for the quarter was $68 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, the impact of a change in accounting method for our North America pension plans and assuming a normalized income tax rate, adjusted net income was $100 million.

During the quarter we merged the legacy Towers Perrin and Watson Wyatt pension plans and conformed the accounting to the approach used in the Watson Wyatt plan. The cumulative impact of this change in accounting method, which was calculated and as if this new method was applied as of January 1, 2010 was $6 million in pension expense this quarter, which is reflected in GAAP earnings, but not adjusted earnings.

In the fourth quarter, we estimate a reduction of pension expense of $3 million related to the change in accounting methods. This quarter we had $21 million of transaction and integration costs versus $23 million last quarter and $29 million in last year’s third 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 over the next three quarters as we complete our integration.

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 North America and several countries in EMEA; including the U.K. This represents about 80% of the Company in terms of revenues. We’re moving forward with the global deployment as planned. We projected a range of $75 million to $105 million for the completion of the transaction and integration costs and believe we’ll ultimately come in around the high-end of this range.

The normalized income tax rate for the quarter was 37%. If the geographic mix of the income for the remainder of fiscal year ’12 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 $0.95, up 1% from $0.94 last year. Adjusted diluted earnings per share were $1.39, up 2% versus last year’s very strong comparison. The Company continues to execute our integration and growth strategy successfully.

Moving to the balance sheet, we continue to have a very strong financial position. As of March 31st, we had $328 million in cash available for our use. However, our free cash flow came in softer than expected in the March quarter due to increased accounts receivable balances. The March quarter is normally a seasonally stronger revenue period in which we see an increase in receivables, but focused on the ERP deployment activities in North America and the U.K. have driven the increase as well. This is a result of the impacts of the process change from the ERP deployment rather than a business or credit issue. We think we understand the actions needed and we’ve refocused resources to bring the receivables down. However, balances may remain elevated for the next few quarters as we finalize the global deployment.

For the full fiscal year we may come in slightly below our guided range of $275 million to $300 million in free cash flow. We had $63 million in borrowings outstanding from our credit facility at the end of the quarter. In March, we paid off $100 million of notes plus accrued interest payable to B1 shareholders from the tender offer that was completed in June 2010.

During the quarter the Board authorized $150 million stock repurchase program. We plan to use that repurchase authority opportunistically. We have not purchased any shares under this authority today. On January 1st, $5.6 million Class B2 shares issued at the time of the merger were converted to Class A shares.

Now let’s review our guidance for fiscal year, 2012. Given the recent changes in exchange rates, we’ve slightly adjusted our exchange rate expectations for this fiscal year. For the full-year we’re now assuming an average exchange rate of $1.59 -- or $1.59, to the British pound at an average exchange rate of $1.37 to the euro.

We expect our fiscal year 2012 revenue to be around $3.45 billion and are increasing our adjusted diluted earnings per share guidance to a range of $5.14 to $5.19. We expect our adjusted EBITDA margin to be around 19.5%. For the full fiscal year 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 I’ll review our fiscal year guidance for the segments. We expect revenues in the Benefits 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 mid 30% range.

Next, in the Risk and Financial Services segment, we expect constant currency revenue growth will be around 10% for the fiscal year with growth driven by the impact of the EMB acquisition. We expect the NOI margin to be in the mid 20% range.

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

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

Now, I’ll turn it back to, John.

John J. Haley

Thanks, Roger. I’d like to announce that we will be holding our Analyst Day in Washington DC on September 14, 2012. As we conclude the call, I would just like to thank our associates for all of their efforts and especially for their continued dedication to our clients. Now, we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Shlomo Rosenbaum from Stifel. Please proceed.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Hi. Thank you very much for taking my questions this morning. John, I just want to ask a little bit about the Benefits segment, you guys had a flatness in retirement, but you had a really high operating margin. Are you guys running kind of hot there in utilization and some of the other areas of your business?

John J. Haley

Yeah, I think – let me just pull up my – sorry. So, the Benefits performance if I think about quarter three, it was really driven by growth in all of the lines of our businesses in the Americas region. The retirement law in the Americas had strong growth in the pension admin through new clients and had good activity with our bulk lump sum offering.

The healthcare consulting work, is continues to be robust with the clients addressing the impact of U.S. Healthcare reform, focusing on plan management design and utilizing some of our high value solutions. So that was really what drove a lot of that. The higher segment margin compared to the full-year guidance was principally driven by a revenue performance. The margin rate is going to fluctuate based on the seasonality and the mix of our business.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Okay. And just where are you hiring both segment wise and geographically, usually that’s the best indicator of where management expects to see their growth?

John J. Haley

Yeah. So let me give you on the latest forecast. We’re anticipating hiring 362 folks in quarter four, and see that’s how you can tell we’re an actuarial firm. Most companies say 360, but we’re 362. That event we have a talent in rewards, we’re expecting to hire about 137 folks and the DS&T is attributable to the majority of the increase. There are 82 forecasted hires, a lot of that is related to the GRC staffing in the Philippines.

Executive Comp, we’re looking to hire about 24 people, and Rewards, Talent and Communication about 33. Benefits, we’re looking to hire about 178 people. It’s reasonably proportional across the lines of business, retirement 72, Heath and Group Benefits, 40 and TAS 60. And then RFS, we’re looking to hire 47, pretty much all in RCS.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Okay. And just in terms of the cash available in the U.S. for general corporate purposes, can you just talk – give me that number again I think I missed, how much is in the U.S. that we wouldn’t have to repatriate?

Roger F. Millay

Yeah, very little of the available cash is in the U.S. So, most of it is outside the U.S.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Would there be tax implications to bring it back?

Roger F. Millay

Yeah, there would.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Okay. And what is your senses to what’s going to happen in Europe, how you’re thinking about that, not just over the next quarter, but over the next year since you’ve about 36% of your revenue from there?

John J. Haley

Yeah, I mean, I think Shlomo, we continue to look very carefully at Europe. If you think about as we ran through the various segments and what’s going on, it was usually that things were pretty much on target in Asia Pacific and in the Americas and that we’re seeing various signs of softness in Europe. It’s not anything that is a major problem at the moment, but I mean it’s obviously something we continue to monitor. It’s softer than we’d like it to be, and I think probably most businesses are facing the same thing with Europe today.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

All right. Thanks a lot guys.

Operator

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

Timothy McHugh - William Blair & Company, LLC

Hi, guys, thanks. Just following up on that last question, I want to ask, maybe we could talk about how kind of the pipeline or the backlog, I know it’s not a specific number, but just anecdotally, what your consultants said about that as the quarter progressed in Europe? Are things still getting worse or is it kind of just a pullback little bit in there at kind of a steady, lower – steady state, but a lower level than before?

John J. Haley

No, I think it’s more of a – so, look we see a little softness as we’ve said. I don’t think we’re seeing anything more than that, but when you see a little softness, it always makes you – it’s a heightened sense of awareness of what’s going on is I guess the way I’d characterize it.

Timothy McHugh - William Blair & Company, LLC

Okay. And in Asia, it’s – I know you said it’s pretty much on target, but probably a little slower growth than you saw a year-ago, which is kind of consistent with the macro environment?

John J. Haley

I think that’s absolutely right. That’s exactly how I’d characterize it.

Timothy McHugh - William Blair & Company, LLC

Any signs that that’s picking back up or starting to improve or is it kind of status quo?

John J. Haley

No, I think it’s about, I mean I think we’re – we feel Asia Pacific is fine. It’s not as robust as it was a year-ago. But in fact we don’t anticipate that. So, it’s right about where we expected it to be and we’re comfortable with where things are proceeding there.

Timothy McHugh - William Blair & Company, LLC

Okay. And then, lastly just the – update us on your acquisition pipeline and what that looks out there, and are you looking for more tuck-ins or you’re willing to consider larger deals now that you’re starting to wrap-up more of the integration stuff with [that]?

John J. Haley

Yeah. Well, I mean I think as we said continually, we always wanted to be in a position of looking for potential acquisitions. We would prefer to have acquisitions that, I mean, we – the tuck-ins or the relatively smaller ones compared to the whole organization and particularly ones in our business as we’re already in, like Aliquant or EMB, we’re always in the market for those.

In the first year or two after doing the merger of Towers Perrin and Watson Wyatt, all we could do were relatively smaller ones with that just because we were trying to integrate the two larger firms to begin with. I think we’re in a position now where we can consider larger acquisitions and we’ve always said that we want to be somebody who is out there in the market looking at potential acquisitions, but we do want to be careful about any ones we make.

We feel that if you do one bad acquisition and one good acquisition, that doesn’t put you back where you started, that puts you significantly behind. So we like to be real careful about that. We look at cultural fit, its strategic fit and then finally at the price, but that’s decidedly the third thing we’d look at.

Timothy McHugh - William Blair & Company, LLC

Okay, great. Thank you.

Operator

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

Sara Gubins - Bank of America/Merrill Lynch

Hi, thanks. Good morning. Question about salaries and benefits line, it looks like more than all of the 80 basis points in EBITDA margin expansion that you’ve gotten so far this year has come from leverage on that line, which is now, I think down about 270 basis points for the year. I’m wondering if there is much left to leverage in salaries and benefits over time.

Roger F. Millay

Yeah. I mean, I think you’re hitting it – it’s consistent I think with what we’ve been saying over the past year or so, and to John’s comments about comparing at peak margins. We’re now in the range, I think we thought we’d be as far as EBITDA margin, we knew we’ll be hiring people, we did and there are some dynamics as you look at the press release and you look at the P&L related to salaries and benefits as the charge for the restricted stock units decreases. So that’s providing some leverage in the GAAP numbers that you don’t see in the adjusted numbers. But generally, we think we’re in a range that makes sense, both from an EBITDA margin and kind of a headcount relative to growth.

Sara Gubins - Bank of America/Merrill Lynch

Okay. Then another margin question for Talent and Rewards. If the Americas remain strong, but Europe declines, I’m wondering if margins could be up in that scenario or if they would necessarily be down?

Roger F. Millay

Well, I guess it depends on magnitude for one thing.

Sara Gubins - Bank of America/Merrill Lynch

Right, yeah.

Roger F. Millay

And we’ll have to – I mean we’re as I think John said, we’re adding in places of growth, when certainly North America is doing well and we’ll respond with agility I’d say, to what we see in Europe.

John J. Haley

But then Sara, I’d just add this though, the whole experience over a lot of years convinces us that we do much better when all of our businesses in all of our regions are profitable and the effect of one part not being profitable really drags down the whole.

Sara Gubins - Bank of America/Merrill Lynch

Okay, thank you.

Operator

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

Frank Atkins - SunTrust Robinson Humphrey, Inc

Hi, this is Frank in for Tobey. Kind of following up on that last question, can you talk a little bit about pricing in the competitive environment in Talent and Rewards, are you seeing any changes there?

John J. Haley

I think our business is one where I think pricing is always competitive and so we always need to make sure that we’re in line with what our competitors are doing and we try to monitor it carefully and make sure that we’re providing competitive rates to our clients. But having said that, I wouldn’t say that we’re noticing any difference now from, say, a year-ago.

Frank Atkins - SunTrust Robinson Humphrey, Inc

Okay, great. And then, Health and Group Benefits, you’ve been doing some nice strategy work there, recent changes going on in the Americas regulatory system, can you give us any particular views or scenarios you’ve for Supreme Court decisions coming out?

John J. Haley

Yeah. Well, that’s not – that’s not exactly our core competency, but I’d say, a couple of comments up. I mean first of all, the Supreme Court decisions are bit of a wildcard as you know they could weigh in on many different aspects of the current reform.

So we don’t really know what exactly might happen there. We’re finding that companies in the fast food and the retail sectors, which would be heavily impacted by the new healthcare law. They’re the ones that are out there actively modeling the effects of pay-or-play.

The employer strategy work we’re seeing however is really less related to the healthcare legislation and rather more aggressive mandates from the top of the organization. So, companies are looking to optimize cost and make the employee more accountable. The healthcare legislation was a catalyst in creating significant demand for strategy work, and we expect it to continue for the next several years. I think almost no matter what happens.

Frank Atkins - SunTrust Robinson Humphrey, Inc

Okay, great. And then, on investment consulting, can you talk a little bit about that in respect to EMEA?

John J. Haley

Yeah. So, the investment consulting in EMEA, that’s been our traditional strength of our investment practice, and it’s really where a lot of the intellectual capital has originally been formed for the investment practice.

We’ve a significant market share there, and I think that’s what we’ve seemed – hasn’t been growing in the last quarter or so. So, we’re looking to expand beyond our traditional client base of large defined benefit pension plans. We’re looking to expand to, say, other owners of large asset pools such as endowments, foundations and sovereign wealth funds as well as to insurance companies.

In addition, I think what we’re looking to do is extend our AIS offering, that’s the implemented consulting to mid-market companies in both the U.S. and EMEA by offering package solutions.

Frank Atkins - SunTrust Robinson Humphrey, Inc

Great. Thank you very much.

Operator

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

Julio Quinteros - Goldman Sachs & Co.

Great. Hey, guys. I know that we’re only one quarter left to go on fiscal ’12 and I know we haven’t gone around to fiscal ’13 yet, but maybe I can ask for a little bit of a sneak peek and a roadmap more on a calendarized basis in terms of how you guys are thinking about the remainder of calendar 2012 as we begin to turn the corner into fiscal ’13, maybe from a growth expectations perspective any type of roadmap that we should be thinking about in terms of major drivers for the segments right now?

John J. Haley

That’s quite fair to ask about that, but we’re actually not in – we’re not going to be saying anything beyond the end of the quarter.

Julio Quinteros - Goldman Sachs & Co.

Okay, all right. I thought I’d try. And then on the margins for the rest of this year, and then thinking about the longer-term targets, I mean clearly since the merger and where we’re now, the 19.5% adjusted EBITDA margin, any significant color out in terms of the segments there, I think, I guess I was mostly focused on the Talent and Reward segment from a margin perspective, is there anything more that could be done there to drive the margin there a little bit higher? Sorry, maybe I think – maybe it was the– which is the, I think it’s Risk and Financial Services margins the one I was worried about here.

Roger F. Millay

Risk and Financial Services?

Julio Quinteros - Goldman Sachs & Co.

Yes. Sorry.

Roger F. Millay

I mean I think, so our guidance for Risk and Financial Services is mid 20% margins, off the top of my head, I’d say that we think that margin is pretty reasonable for them. I’m sure as time goes by, I’ll think of things from a productivity point of view that we might push on, but I mean generally all the segment margins as part of the 19.5% or so EBITDA margins we think are in the range that are pretty reasonable.

John J. Haley

Yeah, I mean, let me just maybe add a little additional color to that. When we think about the 19.5% EBITDA margin, we think of that as being pretty high performance for the Company. That doesn’t mean that as we’re achieving that, there isn’t some line of business somewhere that could be doing a little better, but there is probably also some that are performing at about maybe a little higher than we might expect.

So if we look at things in RFS overall, yeah, there is probably some things here and there that we could improve, but as a whole package, the 19.5% we feel is pretty good.

Julio Quinteros - Goldman Sachs & Co.

Okay, great. Thanks for the color.

Operator

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

Jeffrey Volshteyn – JPMorgan Chase & Co.

Hi, good morning. Thanks for taking my question. Could you give us a sense of the healthcare strategic project that you see, and in general across different businesses, do you see more discretionary strategic type work or has it been steady?

John J. Haley

Yeah. So, I guess as we think about things, so with Health and Group Benefits, let’s think about healthcare reform, we assist companies with analyzing new regulations and then advising on plan design changes. Of course, one thing to keep in mind is that as you get healthcare reform, the Retirement business is also potentially involved as these issues impact retirees and as companies look to redesign their broader reward programs as a result of the changes.

Additionally, there are some communications work that comes in about this. But as I mentioned in response to one of the earlier questions, if we look at some of the strategy work we’re finding, as I said, companies in the fast food or the retail sectors are actively modeling the effects of play-or-pay. I also mentioned that the employer strategy work we’re seeing in general right now is a little less related to healthcare legislation, but its more to say some aggressive mandates from the top of the organization, about companies looking to optimize cost, make the employee more accountable. The healthcare legislation is also creating a momentum for retiree welfare work.

Jeffrey Volshteyn - JPMorgan Chase & Co.

And what about other parts of the business within Benefits and Risk and Financial services?

John J. Haley

Well, as I said the Retirement business is potentially pulled into these – into the healthcare changes and of course communications if that’s really – becomes a bigger deal if companies are making significant changes to their healthcare plan one way or another.

Jeffrey Volshteyn - JPMorgan Chase & Co.

Understood. If I wanted to ask about the cross-selling efforts, I know it’s very difficult to track the cross-selling opportunities, but have you got any sort of significant wins or significant new projects that come from cross-selling effort?

John J. Haley

Well, I think the cross-selling effort, I mean, one way to think about that is we do have a focus on our target market organizations, which is roughly the Fortune 1000 type of organization in the U.S. and other similar organizations like that. And the growth for the target market organizations with several percentage points higher than the growth for our – the overall firm which indicates that the kind of organizations that we’re going after with the cross-selling are the ones that are having a bigger impact.

Jeffrey Volshteyn - JPMorgan Chase & Co.

Thank you very much.

Operator

Your next question comes from the line of Ato Garrett from Deutsche Bank. Please proceed.

Ato Garrett - Deutsche Bank

I just had one more question on Europe and just going back to the issue, can you give us a little bit more color about how performance there trended through the quarter? Did that improve through the quarter, and that did you have any insights on how things looked in April?

John J. Haley

We didn’t have – but you know, obviously we’ll comment on April when we get to the fourth quarter results. But we don’t really do a lot of looking at month-by-month throughout the quarter because it varies so much, the effect of having an extra business day, one month in one-year versus the other. There’s nothing that is a big discernable trend, I would say, in Europe that we’re coming out of that, but in general we don’t analyze a lot at the monthly level.

Ato Garrett - Deutsche Bank

Okay, great. And also you gave an update on your free cash flow guidance for the year. I was wondering if you can give us like a range about what we could think about for that or just something relative, a little bit more specific on that relative to your previous guidance.

Roger F. Millay

Yeah, I – you know we held back from giving another number and so the language we used was we could come in slightly below. I mean predicting what working capital is going to look like at the end of the quarter is not nearly a science and it might not even be an art, I don’t know. So that the trends are just looking at free cash versus last year and this quarter, we’re doing okay. But again, as you see the receivables pop and you think about the fact that we’re deploying gradually our new system around the world. All we’re really saying is it wouldn’t surprise us for receivables to continue to be a bit elevated as we go through that process. So, we didn’t give a number, but we’re kind of thinking slightly below that 275 bottom end of the range is certainly possible.

Ato Garrett - Deutsche Bank

Okay. Thank you.

Operator

You have a follow-up question from the line of Shlomo Rosenbaum from Stifel. Please proceed.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

Hi. Thanks for letting me sneak in one more here. I just want to ask you for an update on the ventures area. You guys talked about in the Analyst Day last year that you were going to separate a – start a new area of where you’re going to kind of try to focus on certain projects, come out with the different business units, I believe you hired somebody to run that not that long ago. Can you talk about what’s going on over there?

John J. Haley

Yeah. So, we did hire somebody to be our director of innovation there. And we formed this new Venture Investment Committee, which is getting some suggestions of new businesses to pilot and to fund. We’ve looked at about a dozen or so of these smaller things that we might pilot. We have about four of them going on at the moment and, I mean, I think it will be – Shlomo, it will be a little while before we really see much of anything from that, but we’ve started the whole pipeline for that.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

And how many people are working in that area now? Is it just new hire to run it?

John J. Haley

You know we’ve got a handful of folks. I mean, the idea behind this is to take the innovation and ideation that we get from the whole businesses throughout their dealings with clients, and then have a group that can work with people who have the different ideas to develop them a little further, to develop a kind of business plan, to develop how we might project it.

But we don’t want to create some huge separate organization, that’s the one that’s responsible for innovation here. So we just have a small handful of folks that are doing that, but I think we have, as we brought Sharon Dunn in to head up this area. One of the great things we’re getting is a lot of understanding of process that we need to have that and making sure that we will have something that can work with the whole organization there. But yeah, it’s supposed to be a real smart group, we are not looking to build a real large operation here.

Shlomo Rosenbaum - Stifel, Nicolaus & Company, Inc

All right. Thanks a lot.

Operator

Ladies and gentlemen, we have no more questions at this time. I will now turn it back over to management for any closing remarks.

John J. Haley

Okay. So, thanks everyone for joining us this morning. We look forward to reviewing our fourth quarter results with you in August.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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