Towers Watson & Co. Earnings Call Insights: Benefits, Acquisition Pipeline

On Monday, Towers Watson & Co. (NYSE:TW) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.


Shlomo Rosenbaum – Stifel Nicolaus: John, I just wanted to ask a little bit about the Benefits segment. You guys had 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 Haley – CEO: Yeah, I think – 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 lob in the Americas had strong growth in pension admin through new clients and it had good activity with our bulk lump sum offering. The healthcare consulting work 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 our revenue performance. The margin rates are going to fluctuate based on the seasonality and the mix of our business.

Shlomo Rosenbaum – Stifel Nicolaus: 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 Haley – CEO: So, let me give you on the latest forecast, we are anticipating hiring 362 folks in quarter four, and see, that’s how you can tell we are an (actuarial firm. Those firms would) say 360, but we are 362. Anyway, we have – Talent and Rewards, we are 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 are looking to hire about 24 people and Rewards, Talent and Communication about 33. Benefits, we are looking to hire about 178 people. It’s reasonably proportional across the lines of business, Retirement 72, Health and Group Benefits 40, and (indiscernible) 60, and then RFS, we are looking to hire 47, pretty much all in RCS.

Shlomo Rosenbaum – Stifel Nicolaus: 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 it. How much is in the U.S. that you wouldn’t have to repatriate?

Roger F. Millay – VP and CFO: Yeah. Very little of the available cash is in the U.S. and most of it is outside the U.S.

Shlomo Rosenbaum – Stifel Nicolaus: Would there be tax implications to bring it back?

Roger F. Millay – VP and CFO: Yeah, there would.

Shlomo Rosenbaum – Stifel Nicolaus: What is your sense as to what’s going to happen in Europe? How are you thinking about that, not just over the next quarter, but over the next quarter but over the next year since you have 36% of your revenue from there?

John Haley – CEO: I think, Shlomo, we continue to look very carefully in Europe. If you think about as we ran through the various segments and what’s going on, it was usually the 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 would like it to be and I think probably most businesses are facing the same thing with Europe today.

Acquisition Pipeline

Timothy McHugh – William Blair: Just following up on that last question, I want to ask – may be if we could talk about how 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 a little bit in there at kind of a steady lower – steady state but a lower level than before?

John Haley – CEO: 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 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 would characterize it.

Timothy McHugh – William Blair: 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 which is kind of consistent with the macro environment.

John Haley – CEO: I think that’s absolutely right. That’s exactly how I would characterize it.

Timothy McHugh – William Blair: Any signs there that that’s picking back up or starting to improve or is it kind of status quo?

John Haley – CEO: No, I think it’s about – I mean, I think we feel Asia-Pacific is fine, it’s not as robust as it was a year ago, but in fact we didn’t anticipate that. So, it’s right about what we are expecting it to be and we’re comfortable with where things are preceding there.

Timothy McHugh – William Blair: Lastly, just update us on your acquisition pipeline and what that looks out there? 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 Haley – CEO: I think, as we’ve said continually, we always want to be in a position of looking for potential acquisitions. We would prefer to have acquisitions that we – the tuck-ins or the relatively smaller ones compared to the whole organization, and particularly ones that are in businesses we’re already in, like Aliquant and 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 like that just because we were trying to integrate the two larger firms to begin with. I think we’re in the position now where we can consider larger acquisitions and we’ve always said that we want to be somebody who’s out there in the market looking at potential acquisitions, but we do want to be careful about anyone’s we make. We feel that if you do one bad acquisition and one good acquisition, that doesn’t put you back when you started, that puts you significantly behind. So, we like to be real careful about that. We look at cultural fit and strategic fit and then finally at the price, but that’s decidedly the third thing we would look at.