Towers Watson's CEO Discusses F1Q2013 Results - Earnings Call Transcript

| About: Willis Towers (WLTW)

Towers Watson & Co. (TW) F1Q13 Earnings Call November 6, 2012 9:00 AM ET

Executives

Aida Sukys - Director, IR

John Haley - CEO

Roger Millay - VP & CFO

Analysts

Tobey Sommer – SunTrust

Tim McHugh - William Blair

Paul Ginocchio - Deutsche Bank

Shlomo Rosenbaum - Stifel Nicolaus

Jeff Volshteyn - JP Morgan

Julio Quinteros - Goldman Sachs

David Ridley-Lane - Bank of America Merrill Lynch

Mark Marcon - Robert W Baird

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2013 Towers Watson earnings conference call. My name is Santali and I will be your facilitator for today’s call. 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 would now like to turn the conference over to your host for today Ms. Aida Sukys, Director of Investor Relations. Please proceed.

Aida Sukys

Good morning. Welcome to the Towers Watson earnings call. I am 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 68111995. 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 call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involves risks and uncertainties. A discussion of forward-looking statements and the risk and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking results, investors should review the forward-looking statement section of the earnings press release issued this morning, a copy of which is available on our website at www.towerswatson.com as well as other disclosures under the heading of risk factors and forward-looking statements and our most recent Form 10-K and in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date of this earnings call.

During the call, we may discuss certain non-GAAP financial measures such as adjusted EBITDA, adjusted net income and adjusted earnings per share. For a discussion of these non-GAAP financial measures, as well as a reconciliation of these non-GAAP financial measures to the mostly closely comparable GAAP measures, investors should review the press release and the accompanying financial tables we posted this morning.

After our prepared remarks, we will open the conference call for your questions. Now I'll turn the call over to John Haley.

John Haley

Thanks Aida. Good morning and thank you for joining us. Today, we’ll review our results for the first quarter of fiscal 2013 and our guidance for the remainder of the fiscal year.

Before we get into the results, I just want to say a few words about Sandy, the storm that devastated so much of the east coast of the United States. Many of our associates and their families were directly in the path of the storm. Thankfully none of our associates or their families were injured. However many sustained property loss and continue to be without power and basic necessities as of today. It’s wonderful to see our colleagues join together to provide assistance to one another not just to cover claim work but to help each other as friends in this time in need. Our best wishes go out to each of you.

Now getting to the results. Reported revenues for the quarter were $834 million. Reported and organic revenues increased 3% over the prior year. On a constant currency basis, revenues increased 5%. Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures.

Our adjusted EBITDA for the quarter was $150 million or 17.9% of revenues. That’s a decrease of - from $162 million or 19.9% of revenues last year. The decrease was driven in large part by the business cycle of exchange solutions. As a reminder, the exchange solution business incurred significant costs in the first half of the fiscal year as we ramped up temporary staff to enroll new members during the annual enrolment period. Revenues are recognized over the annual policy period which is typically effective on January 1.

For the quarter, diluted earnings per share were $0.82 and adjusted diluted earnings per share were $1.30. The impact of exchange solutions on diluted earnings per share was $0.13 and the impact on adjusted diluted earnings per share was $0.07. We’re very pleased with the overall results this quarter and seeing good momentum in certain lines of business. However the momentum is not consistent across all segments or regions.

Discretionary spending in EMEA continues to be down and we’re seeing pockets of more conservative spending in the Asia Pacific and Americas regions. However despite the challenging economic indicators all regions posted revenue growth this quarter. Given the economic news and the cautionary messages being delivered during this earning season, we continue to monitor the global economic situation closely. Our global and regional leaders are working with the management teams on the ground actively managing the business market by market in this very dynamic environment. I remain confident in the strength of our management team and growth strategy to deliver profitable growth through this challenging economic environment.

Now let’s look at the performance of each of our segments. On an organic basis, Benefits grew 2.5%, Risk and Financial Services grew 1% and Talent and Rewards grew 3%. On a pro forma basis, Exchange Solutions grew 27%. For the quarter, the Benefits segment had revenues of $457 million. Benefits segment revenues were up 2.5% on a constant currency basis.

The Americas region constant currency revenues were up 5% and EMEA’s constant currency revenues decreased by 2%. The economic environment in EMEA has certainly had an impact on EMEA results as have some other one-off factors such as additional vacation during the Olympics in the UK.

Retirement revenues increased by 3% on a constant currency basis driven by a 7% increase in the Americas revenues. The pipeline of work continues to look good, particularly in the areas of derisking and lump-sum projects. Both the UK and Germany’s results were below expectations. While much of the revenue shortfall in Germany was related to timing, in the UK the auto enrolment activity has been slower to pick up than expected but we’re now seeing a stronger new business pipeline in that area.

The business environment in the UK is more challenging. While derisking is still a strong driver of business, we’re experiencing delays with clients’ decision making process, especially around discretionary projects and the competitive landscape is generally more difficult.

Technology and administration solutions revenues increased by mid-single digits on a constant currency basis. All regions experienced growth this quarter and the pipeline is strong especially in EMEA. We had low single digit constant currency revenue growth in health and group benefits. The slower growth this quarter is attributable to less special project work than in previous quarters likely due in part to employers seeming to have stayed on the sidelines waiting for the outcome of the November elections. Going forward the benefits segment should continue to show modest growth in all three lines of business.

Now let me turn to risk and financial services. For the quarter the risk and financial services segment had revenues of $192 million. Revenues were up 1% on a constant currency basis led by growth in EMEA. Risk consulting and software increased by 2% on a constant currency basis driven by consulting services in Americas and strong software revenues in EMEA. Increased M&A activity drove growth in life consulting while conditions remained challenging in EMEA. We’re pleased with the activity in the Americas and Asia-Pacific but remain cautious about Europe as discretionary spend continues to be tightening.

Brokerage revenues declined by 2% on a constant currency basis across all markets against strong comparables in quarter one of FY’12. Renewal revenues are higher than last year. However completed new business is running behind the prior year. Investment had low single-digit constant currency growth in both the Americas and EMEA regions. We continue to feel confident in the investment pipeline. Overall we expect risk and financial services to maintain its positive momentum.

Next, let's move onto talent and rewards. For the quarter the talent and rewards segment had revenues of $140 million with revenues up 3% on a constant currency basis. While market dynamics for this segment haven’t changed in the last few quarters in that slower decision-making, reductions in discretionary spending and pricing pressures continue to present challenges, our strong position and balanced portfolio provide stability to the business performance.

Rewards, talent and communication, the portion of our T&R business that’s the most project oriented, declined by 5%. Revenue declines in the Americas and EMEA region were partially offset by strong growth in Asia-Pacific. Data surveys and technology revenues increased by 14% on a constant basis driven by the Americas and Asia-Pacific. This growth is primarily due to timing of revenue recognition as a number of our compensation surveys were delivered to clients earlier than forecasted this year.

Executive compensation revenues slightly declined on a constant currency basis. With the neutral regulatory environment and stable client base, we feel we’re well-positioned in this area in spite of the uncertain economic environment. We will most likely continue to see mixed results in the talent and rewards lines of businesses over the next few quarters given the uncertainty in the market and the pressure most global organizations are experiencing. While our first-quarter performance gives us more confidence about the year we’re still expecting a modest overall decline in this segment’s revenues for the whole year.

Lastly, I would like to move to the exchange solutions segment. For the quarter the exchange solutions segment had revenues of $14 million net of deferral revenue required by purchase accounting rules. On a pro forma basis, excluding the $6 million deferred revenue write-off from the acquired balance sheet required by purchase accounting rules, revenues were $20 million for a 27% growth rate.

We had a very successful sales season. In our first 25 business days, we've already enrolled more than 50,000 new members more than we enrolled during the entire annual enrolment process last year. We anticipate having approximately 350,000 members for the January 1st policy period. We continue to be very excited about the future of exchange solutions. Given the strong momentum and our market and thought leadership position in the exchange industry, we anticipate strong and profitable revenue growth over the next few years.

In conclusion, we had a very good first quarter but certainly feel the need for prudent management during this environment. We feel positive about the pipeline activity and have every confidence in our long-term growth strategies and our leadership team.

Before I turn the call over Roger, I’d like to congratulate Linda Rabbitt, our lead director for being awarded the Director of The Year for 2012 by the National Association of Corporate Directors. This award recognizes two distinguished individual directors a year who serve as role models in promoting exemplary board leadership, oversight excellence, and courage in the board room. This is a tremendous honor, and we’ve been extremely fortunate to have Linda on our board for the last 10 years.

Now I will turn the call over to Roger.

Roger Millay

Thanks John and good morning to everyone. As John mentioned, our business had a strong first quarter as a result of top line growth which helped drive the adjusted EBITDA margin ahead of our guidance. As a reminder, our segment margins are before consideration of discretionary compensation and other unallocated corporate costs, such as amortization of intangibles resulting from merger and acquisition accounting and transaction and integration costs.

For the quarter, the benefits segment had a 30% NOI margin. Risk and financial services had a 19% NOI margin and talent and rewards had an 18% NOI margin. Exchange solutions had an NOI loss as a result of their seasonal ramp-up for the annual enrolment period.

Net income attributable to controlling interest for the quarter was $59 million. Adjusted net income was $82 million. This quarter we had $9 million of transaction and integration costs versus $21 million last quarter and $21 million in last year's first quarter. The majority of the costs in this line continue to be related to our large IT initiatives, integrating both the ERP software and hardware platforms of the company.

The hardware platform project has been completed. The New Oracle ERP system is deployed throughout the Americas and virtually all of EMEA. We’ve started our phase deployment in the Asia-Pacific region as well. The ERP system now covers more than 95% of our revenues and we’re on schedule to complete the last phase of deployment in February 2013.

The tax rate for the quarter was 36% and the forecasted rate was 37%. Diluted earnings per share for the quarter were $0.82. Adjusted diluted earnings per share were $1.13. The impact of exchange solutions on diluted earnings per share was $0.13 and the impact on adjusted diluted earnings per share was $0.07, including the interest charges associated with financing the Extend Health acquisition.

Moving to the balance sheet, we continue to have a strong financial position. At September 30 we had $329 million in cash available for our use. We had a free cash outflow of $202 million as we paid our bonuses and funded our pension plans this quarter. The first quarter of the fiscal year is seasonally a heavy period of cash used for the company and free cash flow generally improves through each of the consecutive quarters of the fiscal year.

As we conclude our global ERP deployment and integration work, we expect to see strong free cash flow towards the end of fiscal year ’13. We had $339 million of borrowings outstanding from our credit facility at the end of the quarter, which is related to the acquisition of Extend Health, the payment of bonuses and pension funding. This quarter was the heaviest quarter for contributions to our defined benefit pension plans driven by a $50 million contribution to the funded U.S. pension plans in order to maintain fully funded status.

We also have $250 million outstanding in our five year term loan which was used to fund the Extend Health purchase. The term loan amortizes at a rate of $6.25 million per quarter beginning in the September quarter of 2013 with a final maturity date of June 1, 2017.

Receivables and related reserves increased modestly between June 30 and September 30. We're seeing improved process in North America, but some stress in more recently deployed regions although not at the same level as we initially experienced in North America. We continue to anticipate bringing DSO levels to more normalized levels in the next few quarters. In the third quarter of fiscal 2012, the board authorized a $150 million stock repurchase program. We have not utilized that authority and are assessing the use of capital on a quarterly basis. Under our anti-dilution repurchase authorization, we purchased 136,000 shares during the fourth quarter and 292,000 shares in the first quarter, a total of 428,000 shares overall to offset the dilution related to the Extend Health options and other stock-based compensation programs.

Now let’s review our guidance for fiscal year 2013. Overall we expect revenue to fall in the range of $3.52 billion to $3.6 billion. We're expecting our adjusted diluted earnings per share to be within the range of $5.12 to $5.20. We expect our adjusted EBITDA margin to be within the range of 18.5% to 19%. For the fiscal year, our guidance assumes an average exchange rate of US$1.55 to the British pound at an average exchange rate of US$1.25 to the euro.

We expect the fiscal year ‘13 income tax rate to be within the range of 36% to 37% before any impact of resolving ongoing tax examinations. There may be some volatility in the effective tax rate quarter to quarter. The second-quarter income tax rate is expected to be in the 37% to 38% range due to the restructuring of legal entities related to the merger integration and the ERP deployment. The restructuring may negatively impact our adjusted diluted earnings per share by $0.03, which has been incorporated into our second-quarter guidance.

As noted above, the completion of tax examinations which may lower the rate in upcoming quarters is not included in the fiscal year guidance. We expect diluted shares outstanding to be about 72 million. We expect GAAP diluted earnings per share to continue to be lower than our adjusted diluted earnings per share.

Now we will review our fiscal year guidance for the segments. We expect constant currency revenue growth in the benefits segment to be in the low single digit range for the fiscal year. 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 to be in the range of 2% to 5% for the fiscal year. This business is highly dependent on project work and where we come out on this range is dependent on the business environment and related project activity. We expect the NOI margin to be in the mid-20% range.

In the talent and rewards segment, we expect constant currency revenue to be flat to a low single digit decline for the fiscal year. We expect the NOI margin to be in the low to mid-teens range. Lastly, in the exchange solutions segment, we expect pro forma revenue growth of around 30% for the fiscal year, which is net of about $12 million of deferred revenue write-off required by GAAP purchase accounting rules. We expect the NOI margin to be in the mid-to high single digit range which includes the impact of the deferred revenue write-off.

Overall I am very pleased with our performance for the quarter and I am optimistic about our continued growth. Before I turn the call back to John, I'd like to echo John’s best wishes for our associates and their families who were impacted by the devastating storm that hit the East Coast last week. The recovery from the damage and related infrastructure issues has been gradual and difficult. It isn’t really possible to say at this point how much this will impact our business.

Now I will turn it back to John.

John Haley

Thanks Roger and now we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tobey Sommer of SunTrust.

Tobey Sommer – SunTrust

Roger, you described some disruption in the more recent markets that you've rolled out the ERP but not quite as much as the U.S. Could you give us a little color on the kind of impact that’s having and then where you sit as far as recovering some of the older receivables?

Roger Millay

So in general, we are seeing as you might expect as we go from region to region, we’re seeing some stabilization of the earlier regions that were deployed particularly Canada and the U.S. And reserve levels of didn't move anywhere near the way they moved in the June quarter and a real stabilization in process, and actually as we turned the corner on the quarter into October we just started to see the impact -- positive impact of those developments. And so hence again our expectations for the year at this point continue to be that we'll see progress in the earliest deployed regions.

As you go kind of location by location or country by country as we’ve been deploying in Europe, you see some of the same sort of stresses that it takes folks some time to get used to the new billing processes and there might be some lag in the unbilled as a result of that, we’re seeing a little bit of a spike up in the age receivables, but again nowhere near the level that we saw in the early days in North America.

John Haley

If I could just maybe add – I guess we always thought as we rolled it out that if things went pretty well, we would just see a little disruption. There would always be some frictional costs to rolling this thing out and I think what we're seeing in the latest rollouts is close to that situation that we were hoping for. So we feel pretty good about those.

Tobey Sommer – SunTrust

And then John, I think in your prepared remarks, I heard you describe competitive environment in the UK that was a little bit I guess more competitive. I was wondering if you could give us some color on what you meant by that?

John Haley

I think I was thinking about talent and rewards, so wasn’t I there when I was talking about the slower decision-making, reduction in discretionary spending and pricing pressures continuing to present challenges that was really around the market dynamics for talent and rewards. And I think we’re seeing all of those. I think with the talent and rewards, we’ve seen particularly in rewards, talent and communication we’ve seen some declines in both the Americas and EMEA. We've had some somewhat strong growth in Asia-Pacific, but that's the dynamic.

Europe, I am not sure that we can characterize Europe just one way for the organization as a whole, because although it's more competitive – or there are some of market dynamics that are putting pressure on us in talent and rewards particularly in rewards, talent and communication. Actually RCS has done reasonably well in EMEA, that was one of the leaders there and then the retirement or the benefits in EMEA has really been held back us as much by some regulatory delays as anything.

Tobey Sommer – SunTrust

And my last question to you Roger, I think you described some initiatives that over a period of time may reduce the tax rate and I was wondering if you could tell us what your expectation is for kind of the ultimate impact of the initiatives you have underway?

Roger Millay

So I am not sure when you say I described some initiatives, and maybe you’re referring to earlier discussions of the merger. So maybe I will answer in two things and one of the two of them will your question. For this year actually we do have the potential of a lower tax rate as a result of we expect to have some year settled with IRS here in the next quarter or two and that may result in the release of some reserves Fin 48 reserves that we had. So that’s kind of the item that I talked about for this year.

I think in the longer-term I did reference a write-off and a tax cost that we expect here in the December quarter as a result of consolidation of legal entities. That's something that's been ongoing as a result of merger activity kind of paralleling the ERP rollout and as we continue to kind of get the platform that we expect longer-term from a legal entity point of view that's one of the activities that we think will lead to a lower tax rate. And actually I think I really didn’t go back and look at it but I think the guidance now of 36% to 37% for the year is one of the lower tax rates we’ve had or perhaps the lowest tax rate we’ve had for a year since we merged. So I think we’re been gradually winding things up. Where it's going to end up is difficult to say this point, but we are hopeful of getting a point or two here this year and perhaps more in the future years.

Operator

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

Tim McHugh - William Blair

First just wanted to ask, relative to the investor day in mid September, I think you had said that you thought you would be towards the lower part of the guidance range and you obviously came above. And so is that a signal that you finished on a pretty strong note or I guess what came in better than you thought at that time?

Roger Millay

I think the big thing Tim, was around and I think John described it the strength in data services and around the surveys. When we looked in August and early September at the results that we were achieving and that we expected where we were going to come out in surveys delivered, which is what drives revenue recognition that was the real difficult to call end of September versus October. We ended up closing and delivering a lot of the surveys into September so that was really the biggest item that was kind of a jump ball and we were little conservative where we gave the guidance.

John Haley

And I think the other thing is that when we were looking at this in September, we were looking at some results from July and then partially from August. But that those were months where in Europe we believe we were impacted by the Olympics and so it was probably a little bit lower that we were projecting on, then it ultimately came out.

Tim McHugh - William Blair

I guess just the bonus accruals year over year looked to be down a little. Can you talk about how you approach that, is that a reflection of some of this seasonality of the revenue or is it a reflection of just trying to be conservative about maintaining margins, what would be the outlook kind of for the year as we think about those bonus accruals versus last year?

John Haley

We’re accruing this year on the right at the percentage of NOI that we target. And that we've been targeting in all of our discussions over the last several years. Last year during the first quarter, which was a very first quarter we were looking forward to uncertain results for the less of the last year, we had a much higher than normal accrual.

Tim McHugh - William Blair

So this is just more normal?

John Haley

This is a normal one this year.

Tim McHugh - William Blair

For the exchange business, is the deferred revenue impact going to be similar in the second quarter here?

Roger Millay

Yeah I think it’s about the same, so $6 million in the first quarter and it was what $14 million for the year. So yeah second quarter it will be lower in the second half of the year. So we expect this quarter – this second quarter to be about the same.

Tim McHugh - William Blair

And can you give us a sense that you talked about more new enrolments in that business in just the last few weeks, then off less enrolment period, what’s kind of – I assume you have a pretty good idea now at this point, what the overall enrolment growth if you will is going to be by the end of this enrolment period. So what’s the underlying type of growth rate in the number of enrolments on the platform at this point?

John Haley

Well, as we mentioned, we are expecting to be at about 350,000 enrollments as of January 1 and last year I believe we were somewhere around, it was below 250,000, was maybe in the 220,000 range or something like that. So that gives you a sense of the enrollment increase there. It’s a pretty hefty increase. It’s one of the reasons we’re so excited about this business.

Operator

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

Paul Ginocchio - Deutsche Bank

Just wondering if there is any way to size the impact from those surveys, was it worth the three points to growth that we saw or is it less than that? And then second, just to follow up on Tobey’s questions on the ERP recovery, I think we’re all thinking of a $20 million number that was written off. I just wondered if you'd written – were that write off or stood relative to the $20 million we talked about last quarter?

Roger Millay

Yeah, so and you will have to remind me probably what both questions were as I get going here. But that’s right. So in terms of the $20 million from last quarter, of course that comparison changes every quarter as we had reserve activity in September did not come down. So in fact, they increased a bit but they also increased a bit in the September quarter last year. So the reserves didn’t – again if you think of revenues and the P&L reserves didn't really have an impact this quarter and we haven't brought reserves down. So that's still to come, hopefully as we continue to wind things up. The good news is that we stabilized much more this quarter.

In terms of the 3%, in terms of the impact of the surveys, I mean that was the area of the business that most outperformed what T&R would have been with -- I think that was your question without that excess it certainly accounted for most of the growth. I think we could look but it may well have been negative without that outperformance of surveys.

John Haley

But maybe your question Paul, is that real growth that will contribute to the whole year and the answer is no. Some of it was released in a large portion that was really growth that was brought forward because surveys that would've been delivered in either the end of September or early October got delivered in September.

Paul Ginocchio - Deutsche Bank

And I know that European PMI this morning looked a little bit weak. Not your same end market but Decko (ph) was saying that Europe seemed to be stabilizing particularly southern Europe. But I know you think things are spotty but does that sound right to you or you think of it – you’re not thinking it’s that clear?

John Haley

I think it – I guess what, I might say it a different way. It doesn’t seem wrong to us. It's just that I think we just don't know. We’re just uncertain about Europe. And I think I mentioned it at analyst day the difficulty we had in doing guidance this year more so than in any other year. I've seen where we see lots of opportunities for growth sort of grafted onto this really uncertain and troubling macroeconomic environment. And it gives us some pause and exactly what to project. So we see things in Europe that we see as real growth opportunities but then we also see some real problems among our clients. So it’s a bit of a mixed bag like that. I think that's one reason why we’re not projecting, things are falling off a cliff by any means at all in Europe but we’re just somewhat cautious about it.

Operator

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

Shlomo Rosenbaum - Stifel Nicolaus

Just to continue to beat the horse of ERP, what’s going on? DSO were flat sequentially and was there any progress in general to bring it down or can you just give us a little bit more color in terms of the reserves going up through the quarter? Was that in the issue of Americas going down and some of the newer regions going up, can you just give us more detail there?

Roger Millay

I think it was more – I think the Americas were kind of flattish really, so again I used the word stabilized earlier, and I think that's the way we think about it. And if I would characterize the improvement we definitely saw an improvement in process and again where our goals were it translate that improvement in process into an improvement in DSO levels in this 12/31 quarter. So that’s what we’re targeting there. It is offset by a little bit of increase in reserves and agings in EMEA, again which I think John characterized it well is not shocking probably at levels that are more what we anticipated but not a big increase.

John Haley

Shlomo, the real question is are we going to be able to recover some of this? And it’s really in the next quarter that we’re going to have to try to do this we think in the Americas. Now you may remember at analyst day, we set our guidance for the quarter didn’t they contain anything for improvement in the reserves in the Americas. We’re just looking to stabilize it this quarter and we’ve done that but I don’t whether we will be able to recover any of that but if we do, we’re going to have to do it reasonably quickly.

Shlomo Rosenbaum - Stifel Nicolaus

So the past 12/31 basically whatever you get and then after that the Americans you shouldn't expect lowering of DSOs because of the ERP, is that what you are saying?

Roger Millay

Well, I am not sure when you say lowering of DSOs because of the ERP, I mean we should -- we have to get ourselves to a point where we’re at more normal levels and I think what John is saying is really the longer things they age, there is a point at which you just don't go back and clients get passed the budget here and it’s just too old. So our press is very hard right now to collect as much as possible in December quarter.

Shlomo Rosenbaum - Stifel Nicolaus

Let me ask you directly. Besides what’s going on with the ERP system is there any other change in the underlying levels of DSO, are there any issues that are going on there to make DSO elevated?

Roger Millay

No.

Shlomo Rosenbaum - Stifel Nicolaus

And then in terms of your guidance, are you expecting Europe to continue to decline in particular areas? What have you factored for your guidance?

Roger Millay

Well, I think John characterized it well and I think we projected pretty much a continuation of where we are now. So talent and rewards has been declining in EMEA and we expect that in our guidance to continue for this year, and that's probably the biggest area of decline.

John Haley

Right. I think benefits we noted a decline in EMEA but we think some of that has been related as I said to the auto enrollment work was slow because of delay in implementing regulations. Some the work on the specific forms of derisking to take place in the UK, that’s been hampered by some statements from the pensions minister but I think people are beyond that now. And so we think that those have been delayed, we don't expect to see the same kind declines in the remainder of the year there.

Shlomo Rosenbaum - Stifel Nicolaus

And then reinsurance brokerage, I think all the other major public competitors showed quote from between 1% and 7%. What’s going on over there, why did you guys have a decline?

Roger Millay

I mean I will say just from a numbers point of view to start. I think John probably has other things to add. But they had a very strong quarter last year and so really as we look at it I think we were down a couple percent or so and really the new business that came in didn't offset the strength that they saw last year.

John Haley

Yeah, actually that's pretty much what I was going to say so.

Shlomo Rosenbaum - Stifel Nicolaus

And my last question is are you assuming a reasonable amount of lump sum project in retirement to carry you through the rest of this fiscal year or is there something else in retirement that’s picking up?

John Haley

Well, we think there’s going to be continuing lump sum or – I should just say derisking work throughout the remainder the year. The pipeline still seems pretty strong at the moment. It’s not clear to us that it will be as much over the remainder of the fiscal year and so there'll certainly be some that will be helpful to have that. It’s not clear to us that it will necessarily be at the same level. There were some regions around the arbitrage of the interest rate that could be used for lump-sums that cause more activity in the early part of our fiscal year won't necessarily be there for the second half of the fiscal year when people go out and do settlements with insurance companies, that's episodic. So there is no doubt that there’s going to be a fair amount of work whether it will be quite at the level, that’s just not clear.

Operator

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

Jeff Volshteyn - JP Morgan

Could you give a little color on the discretionary spend on project work in the Americas and particularly in the benefits business?

Roger Millay

I don’t know – I think John was just talking about the other than, if you call the lump-sum or discretionary certainly that’s the driver in retirement.

John Haley

We don’t tend to characterize – we don’t characterize our work otherwise as what’s sort of normal ongoing work or discretionary, there's always a fair amount of discretionary work underlying things. I think that my feeling -- we've looked at the lump-sum just because we had to do those differently and we had a different group working on that. But my feeling is that those things eat a little bit into other project work that you might have and so you probably have other discretionary work is lower than it might have been in the absence of the lump-sum. But overall the total discretionary work is higher.

Jeff Volshteyn - JP Morgan

And then for the remainder of the year do you expect to make any additional payments towards the pension plan?

Roger Millay

Yeah, there will be some continuing contributions to the defined benefit pensions but the full contribution as I said the biggest quarter that we will have this year has been this past quarter. But there are still some to go particularly in the UK and in Canada but not at this – not anymore in the U.S.

Jeff Volshteyn - JP Morgan

Is there a way to quantify (inaudible) or what percentage of payment this quarter?

Roger Millay

I think we’ve made roughly like I don’t know 60% or 70% of what we’re going to do for the year. So it’s about $70 million contributions to the defined benefit plans this quarter, and that's about 60 or probably about two thirds of the year I think.

Operator

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

Julio Quinteros - Goldman Sachs

Just on a couple quick things. The DaVinci acquisition, where that segment is going to show up and what did you expect the contribution for this quarter or for this year?

John Haley

So the DaVinci that’s the consulting group that we acquired just on November 1, so that’s in the second quarter here. They'll be joining the RCS life group, they are in (inaudible). And what they do is they bring a specialty in the long-term care space.

Julio Quinteros - Goldman Sachs

And financial –

John Haley

It’s a couple million, it’s 2 to 2.5 million in incremental revenue for the whole fiscal year. A slight negative NOI due to some hiring bonuses.

Julio Quinteros - Goldman Sachs

Just thinking about the drivers at this point from a margin expansion perspective, when we think about the remainder of 2013 or fiscal ‘13 what are you guys sort of seeing as the most important drivers for the margin target that you played out right now?

Roger Millay

Well, we’re in an environment of low organic growth and so I would say cost management discipline given again at the topline expectations are pretty subdued. As you look at what will change margins the most for us as the year goes on I think it’s going to be the rolling in of the full picture on exchange solutions. Their margins and their impact on the company’s margins will be pretty notable in the second half of the year. So I think for our margins and the guidance that we’ve given around margin it’s bringing exchange solutions in the second half of the year.

Julio Quinteros - Goldman Sachs

And just remind me what was the NOI target for the exchange solutions part for fiscal ’13?

Roger Millay

Yeah what we have said was mid-to high single digit range.

Julio Quinteros - Goldman Sachs

And then just longer-term anything to call out on the potential impact of financial reform Dodd-Frank or anything around the healthcare reforms you guys are thinking about it and development changes in the way that clients are approaching you guys, can you address one of those issues?

John Haley

I think on healthcare I think clients are just waiting to see what the outcome of the election is. We've seen a noticeable downturn as a result of that. We expect things to pick up once there’s some certainty which way we’re headed.

Operator

Your next question comes from the line of Sara Gubins of Bank of America.

David Ridley-Lane - Bank of America Merrill Lynch

Hi this is David Ridley-Lane on behalf of Sara Gubins. John, when the ERP project is complete later this fiscal year, when could you start to see some of the cost savings from that come through? I am just trying to get a sense with the timing around the payback on the cost and that trouble of the ERP system?

Roger Millay

Yeah, so really the ERP system was mostly focused on finance IT and HR costs. We have been just like the regional rollout that we talked about in that regional impact on receivables, we have been gradually taking out some costs over time as a result of the deployments. It's not a huge number units, there is a big impact on margins but again that's multimillions of dollars but gradually sprinkle in over the 18 month deployment period and probably little bit after the deployment period because you tend to finalize the cost take-out after you see stabilization in the region.

David Ridley-Lane - Bank of America Merrill Lynch

I guess on the risk and consulting software sub-segment, with the acquisition of EMB the segment has I think one of the highest exposures to EMEA. So what are you seeing in that segment and how has the trends been in the last couple of months particularly for that segment in EMEA?

John Haley

Well, risk consulting and software is the segment that had a very good quarter in EMEA. We had very strong software revenues there and of course the software is a lot of that comes from EMB is where that happens. There was also in the life area there we saw increased M&A activity in EMEA. So we’re cautious about Europe but the quarter itself was pretty good for RCS.

Operator

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

Mark Marcon - Robert W Baird

I was just wondering if you could talk a little bit about the margins on the benefits side and specifically I am curious about the strength that you saw in retirement in the Americas driven by the lump-sum. I would've thought that that would have higher incremental margins than the base business. So I was wondering if you could talk a little bit about the margin profile for that part of the business and how we should think about the operating margins within benefits?

Roger Millay

Just the general comment I guess I have about margins in benefits is you're perhaps not seeing the strength that you would have seen in comparison period over period because of the fact that we do allocate changes in benefits costs like pensions and medical costs and so that is dampening what comparison would've looked like. And we do have some additional resources particularly in the TAS business as they ramp up for the clients that they got in EMEA which we talked about in the last couple of quarters. So I think there are some offsetting factors that as you say you might have seen higher margins because of the lump-sum activity but it didn’t really show through.

Mark Marcon - Robert W Baird

And so how should we be thinking about the underlying margin?

Roger Millay

Well, not sure I totally followed your question –

Mark Marcon - Robert W Baird

In other words, had we not had those pension contribution and some of those other offsetting factors?

Roger Millay

Mark, you followed it pretty closely for a while. I think the – and the big part of benefits of course is both the TAS and the retirement business that came over from Watson Wyatt. But this low 30% range which we’re guiding to for benefits is that's a strong level of margins and still enhanced from the merger and that's still we think a reasonable range for that business to be in. And that's the guidance for this year.

Mark Marcon - Robert W Baird

With regard to your U.S. P&I 1000 type client, what percentage at this point would you anticipate would actually go through either derisking or lump-sum type of exercise? Any feel for that?

John Haley

We don’t have a feel where we could give you a number like that market. And the reason is it depends on how the economic environment involves. So it depends on if interest rates for example increase, then some of these things become cheaper to do. On the other hand, we still have the same opportunity cost maybe that you would have looked for. If interest rates increase people who have also sort of derisked from an investment standpoint won’t necessarily get a big benefit from that because the assets and liabilities will be in lockstep. But of it will depend on what happens there. It will depend on what kind of capacity we see in the market for doing some pension buyouts too. And so I think as we model things we could see it from just a relatively small percentage of them up to some significant percentage of our clients going through it and it depends a whole host of factors.

Mark Marcon - Robert W Baird

I was just thinking if things stay relatively steady, state it seems like the momentum is building up at least in terms of some of the really large Fortune 100 companies that are highly visible whether it’s GM or Ford or Dupont, making some of those steps. I don’t know whether that causes others to move things that same way, if you thought maybe it’s going to be –

John Haley

I think look, the lump-sum projects we think were clearly going to be seen more of those. Although as I said the biggest benefit to be gotten out to doing the lump-sums was actually if you acted reasonably quickly this year when you still had the arbitrage opportunities those won't necessarily be around. Looks like they won’t be around say going into calendar 2013. It might still be worth doing, but it won’t be as attractive as it had been. In the areas of derisking I think that depends a lot on the just what the overall interest rate environment is like and then again market capacity issues.

Mark Marcon - Robert W Baird

And would you say that what has occurred thus far is less than 5%.

John Haley

Yes. These are actually -- when these occur these are pretty big projects.

Mark Marcon - Robert W Baird

And then any greater sense for what the follow-on business is once they occur?

John Haley

Well I sense that the follow-on business more or less is – it’s more or less the same. After we have – there’s maybe a little less consulting on plan design and that occurs not a lot. But if the plant is smaller, and if you get rid of a whole class like by offering lump-sums or something folks that maybe you have less to worry about there. But the actuarial, the administration, the investment services, the compliance services that are needed by the plants, they pretty much remain the same. And when you're paying out the lump-sums, say to the retirees or the terminated vestige, what you're doing is you’re taking out the near-term folks, you're not impacting how long the plan’s going to be in existence. So there's not even an effect from that standpoint.

Mark Marcon - Robert W Baird

And then with regard to talent and rewards, you’ve given us the margin target for the year. How should we think about that from a seasonality perspective because seems like talent and rewards because of what you mentioned ended up being a little bit stronger with the communications piece coming online towards the end of the quarter. So are you being conservative with regard to talent and rewards margins for the balance of the year?

John Haley

Well, I guess I will let Roger comment on that but it’s maybe as an overall characterization, I think talent and rewards clearly did better in this quarter than we thought it would when we were talking at analyst day. Part of that is we think the fact that the projects got delivered but not all of it. Some of those, it’s just the business just did better than we thought it would at the time. But it's not -- so it’s not quite as much better as it looks but it certainly is better to some extent. We still think though that the kind of conditions that led us to be cautious about the year are still there, still largely there.

Roger Millay

Just I think to your point on or your question on seasonality, I think maybe your observation, clearly in talent and rewards the first half is the stronger margin half of the year and one of the drivers of that is the compensation survey activity, which comes in basically in this fall period as we have been discussing.

Operator

At this time there are no further questions in the audio queue.

John Haley

Okay. Well, thanks very much everyone for joining us on this call. And we look forward to updating you on our second-quarter results in February. Thanks very much.

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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