Nov 5, 2014
Executives
Aida Sukys - John J. Haley - Chairman, Chief Executive Officer and President Roger F.
Millay - Chief Financial Officer and Vice President
Analysts
Andre Benjamin - Goldman Sachs Group Inc., Research Division Paul Ginocchio - Deutsche Bank AG, Research Division Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division Jeffrey Y.
Volshteyn - JP Morgan Chase & Co, Research Division Keen Fai Tong - Piper Jaffray Companies, Research Division Sara Gubins - BofA Merrill Lynch, Research Division Matthew Hill Mark S. Marcon - Robert W.
Baird & Co. Incorporated, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Towers Watson Earnings Conference Call. My name is Katina, and I'll be your coordinator for today.
[Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms.
Aida Sukys, Director of Investor Relations. Please proceed.
Aida Sukys
Hi. Thank you.
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 2 days by dialing (617) 801-6888, confirmation number 68008534.
The replay will also be available for the next 3 months on our website. This call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties.
For a discussion of forward-looking statements and the risks and other factors that may cause actual results or even events to differ materially from those contemplated by forward-looking results, investors should review the forward-looking [Technical Difficulty]
Aida Sukys
Good morning. I'm sorry for the technical difficulties.
I think we got disconnected on our lines here. So I'll just start again.
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 2 days by dialing (617) 801-6888, confirmation number 68008534.
The replay will also be available for the next 3 months on our website. This call may include forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties.
For a discussion of forward-looking statements and the risks and other factors that may cause actual events to differ materially from those contemplated by forward-looking results, investors should review the Forward-Looking Statements section of the 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 in our most recent Form 10-K and 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 net income and adjusted earnings per share. For a discussion of these non-GAAP financial measures, as well as the reconciliation of these non-GAAP financial measures under Regulation G to the most closely comparable GAAP measures, investors should review the press release and the accompanying financial tables we posted on our website 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 J. Haley
All right. Thanks very much, Aida.
Good morning, everyone, and thank you for joining us. Today, we'll review our results for the first quarter of fiscal 2015 and our guidance for the remainder of the fiscal year.
Reported revenues for the quarter were $878 million, an increase of 8% over the prior year first quarter reported revenues and up 7% on an organic basis. On a constant-currency basis, revenues increased 7%.
Our organic growth rate adjusts for changes in foreign currency exchange rates, acquisitions and divestitures. Our EBITDA for the quarter was $171 million or 19.5% of revenues.
The prior first quarter EBITDA was $146 million or 18.0% of revenues. For the quarter, diluted earnings per share were $1.16 and adjusted diluted earnings per share were $1.32.
We are very pleased with the overall results this quarter. For the second consecutive quarter, despite continued global economic uncertainty, all regions reported constant currency revenue growth.
The Benefits and Exchange Solutions segments delivered strong results. Bulk lump sum, health care consulting and pension administration drove revenue growth in the Benefits segment.
A strong off-cycle enrollment period for OneExchange and increased client work in Health and Welfare Administration drove revenue growth in the Exchange Solutions segment. Now let's look at the performance of each of our segments.
As a reminder, the results for the Benefits and Exchange Solutions segment have been updated to reflect the expansion of the Exchange segment. Please refer to our 8 K-letter SEC filing on September 16, 2014, for a quarterly view of the impacted results.
On an organic basis, Benefits revenues increased 7%, Risk and Financial services increased 1%, Talent and Rewards was flat and Exchange Solutions increased 37%. For the quarter, the Benefits segment had revenues of $466 million.
Retirement revenues increased by 6% on a constant currency basis, primarily as a result of bulk lump sum work. Health and Group Benefits revenues grew 7% on a constant currency basis due to new client and project work.
Technology and Administration Solutions revenues increased by 20% on a constant currency basis due to bulk lump sum projects and new client work. We anticipate that the Benefits segment will show solid growth for the full year with a strong first half of the fiscal year and lower growth in the second half of the fiscal year, as bulk lump sum project activities slows.
Now let me turn to Risk and Financial services. For the quarter, the Risk and Financial Services segment had revenues of $148 million as compared to $142 million for the first quarter of fiscal '14.
Revenues were up 1% on a constant-currency basis, driven by an increase in Risk Consulting and Software revenue. Risk Consulting and Software revenue increased 5% on a constant currency basis.
The growth was led by EMEA due to an increase in utilization as a result of the restructuring, better project management and continued market stabilization. Software revenues continue to be strong.
The sales pipeline looks solid in the Americas, and Asia Pacific continues to be more cyclical due to the reliance on project work in that region. Investment had a 4% constant currency revenue decline as compared to an 11% growth in the first quarter of fiscal '14.
Project work in Canada was softer than anticipated. We also saw some softness in the pipeline in EMEA, which we believe to be a timing issue.
We continue to feel confident in the investment business. The Risk Consulting and Software business continues to perform as expected and overall conditions seem to have solidified as compared to a year ago.
Investments should continue to provide solid long-term growth. Now let's move on to Talent and Rewards.
For the quarter, the Talent and Rewards segment had revenues of $153 million with revenues flat on a constant currency basis. Data, Surveys and Technology revenues decreased by 4% on a constant currency basis as expected.
There were 2 drivers: strong comparables and the planned timing of survey delivery between the first and second quarters. Last fiscal year, constant currency revenue growth was 17%.
Surveys were delivered in the first quarter last year as composed to the second quarter this fiscal year. Rewards Talent and Communication revenues decreased by 1% on a constant currency basis.
The EMEA region posted 2% growth, but this was offset primarily by OneExchange-related projects, where the revenues are deferred until the annual benefit enrollment is completed and policies are effective. Executive compensation revenues were up 10% on a constant currency basis, with all regions posting growth.
The Americas region continues to see project work driven by M&A and IPOs. EMEA's growth also continues to be driven by M&A activity and new industry wins due to specific marketing initiatives.
We are generally seeing some positive momentum in all lines of business in this segment. Lastly, I'd like to move to the Exchange Solutions segment.
For the quarter, the Exchange Solutions segment had revenues of $86 million, an increase of 41% on a constant currency basis. Our Retiree and Access exchange revenues increased 49%.
Health and Welfare Administration grew 16%. Active Exchanges grew $3.8 million.
We enrolled approximately 40,000 new OneExchange Retiree members and approximately 14,500 OneExchange Active employees in the first quarter of this fiscal year, or what are generally referred to as off-cycle enrollments. We're now underway with our annual enrollment process and are pleased with the progress to date.
Annual enrollments are effective as of January 1. We're also very pleased to report that Towers Watson's OneExchange was selected to be the retiree medical exchange provider for the Ohio Public Employee Retirement System, OPERS, Medicare Connector, effective January 2016.
We're very excited by this announcement and look forward to the opportunity to serve the OPERS retirees. As we move into the 2015 enrollment period, we've assessed the results of our OneExchange Active 2014 savings and the inflation rates for 2015.
Employers are saving approximately $1,400 per active employee with $500 passing through to the employee. Original assumptions assumed a savings of approximately $900 per active employee.
Due to the plans and programs built into OneExchange, such as intensive chronic disease management, we've seen best practices bend the cost curve. OneExchange employers are projected to experience a 1.8% increase of total spending on health care in 2015 as compared to 2014.
Total spend includes funding for coverage from employers as well as employee contributions and out-of-pocket costs. For comparison, midsize to large employers not using a private exchange expect a 4% increase in 2015 health care costs for active employees after some planned design changes.
If no plan changes are made, employers project a 5.2% growth rate. Our growth rate of only 1.8% is very close to the latest CPI, and it's an important metric in order to help our clients avoid the excise tax on high-value plans, known as the Cadillac Tax, which goes into effect in 2018.
We're very proud of these results as they're a testament to our associate’s deep expertise in health care, strong relationships with the carriers and most of all, the client focus. As discussed on previous earnings calls, the Health and Welfare Administration group won a number of new client projects during FY '14.
Most of the revenue associated with these projects is deferred until the system implementations are complete and the systems go live. Due to the great work of our Health and Welfare team, a couple of implementations were completed ahead of schedule this quarter, thus allowing us to recognize revenues sooner than originally estimated.
We continue to be in the markets selling OneExchange Retiree and Active clients for fiscal '15 and all OneExchange Solutions for FY '16. The Health and Welfare Administration business has a strong pipeline, and we feel positive about all the business -- all the lines of business in this segment.
On a personal note, I just wanted to give my thanks to Bryce Williams, the CEO and Co-Founder of Extend Health, and wish him all the best in his newest business challenge. In his 2.5 years with Towers Watson, Bryce helped establish OneExchange Retiree and Access.
We've built a strong brand with a reputation for excellence in the overall exchange market. We fully expect that our momentum will carry on and our leadership position will get only stronger.
So we had a first -- great first quarter, and I'd like to thank all of our employees for their dedication to the market and our clients. By always keeping our clients' needs first and focusing on their success, we've built a strong brand and have been honored with client relationships that span decades and build a framework for long-term sustainable and profitable growth.
Now I'll turn the call over to Roger.
Roger F. Millay
Great. Thanks, John, and good morning to everyone.
I'd also like to add my thanks and congratulations to our associates for delivering strong quarterly results. Now let's turn to the financial overview.
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 costs. For the quarter, the Benefits segment had a 33% NOI margin, up from 30% in last year's quarter, as bulk lump sum projects drove margin growth for both the retirement and the Technology and Administration lines of business.
Risk and Financial services had a 24% NOI margin, an increase from 16% last year. At this time last year, the restructuring of the Risk Consulting and Software line of business was just getting underway.
This is now the third consecutive quarter where margins have exceeded prior year comparisons and have stabilized to historical levels. Talent and Rewards had a 24% NOI margin as compared to a 29% margin in last year's first quarter.
As John mentioned earlier, the change in timing of our compensation survey delivery impacted the first quarter revenues. This impact fell to margin.
We also observed restructuring costs in the first quarter. Exchange Solutions had a 16% NOI margin.
The OneExchange Retiree margin increased year-over-year due to growth leverage, process improvements and engaging more full-time call center associates as off-cycle enrollments have become more common. Full-time associates are about 3x as effective as seasonal workers.
The overall Exchange Solutions margin also reflected the absorption of continuing investments. As a reminder, Liazon wasn't acquired until November of 2013.
Our strong growth in the Health and Welfare Administration business also pressured margin. While the team completed 2 implementation projects earlier than anticipated, and we were able to recognize revenues sooner than expected, as a result of additional new client wins, there are other ongoing implementation projects which will be completed later this fiscal year.
Net income attributable to common stockholders for the quarter was $82 million, adjusted net income was $93 million. The tax rate for continuing operations for the quarter was 35% as compared to our guided rate of 33% to 34%.
The quarterly tax rate was impacted by a onetime discrete item, but we continue to maintain our full year tax rate expectations. As a reminder, the tax rate in the first quarter of last year was 15% as a result of onetime favorable tax settlements.
Moving to the balance sheet. We continue to have a strong financial position.
At September 30, we had $517 million in cash and $127 million of short-term investments available for our use. Approximately 95% of the available cash and short-term investments are outside the U.S.
For the first quarter of fiscal '15, our free cash outflow was $221 million as compared to an outflow of $178 million for the first quarter of fiscal '14. As a reminder, the first quarter of the fiscal year is seasonally a heavy period of cash use for the company due to the payment of discretionary bonuses.
Several factors impacted our first quarter free cash flow: a onetime tax payment related to the sale of the brokerage business, timing of the E&O insurance payment and strong collections in fiscal year '14. These items were partially offset by lower discretionary compensation and benefit -- pension benefits.
Free cash flow generally improves through each consecutive quarter during the fiscal year. We continue to anticipate free cash flow to be in the neighborhood of net income.
We had $135 million of borrowings outstanding from our credit facility at the end of the quarter as a result of the bonus payments. While we don't have a public debt offering, we target investment grade status on a rating agency basis.
This translates into a target range of 2x to 3x debt to EBITDAR, when including retirement and leasing obligations. We are currently at the lower end of that range.
We weigh the balance sheet flexibility and cash returns to shareholders on a quarterly basis. Based on our most recent review last quarter, we once again enhanced the return of cash to shareholders for fiscal '15 and the board approved a $300 million share repurchase authority.
This authority replaces our previous share repurchase authorities. During this quarter, we repurchased approximately 350,000 shares for about $37 million.
The board also approved a 7% dividend increase. Let me turn now to the fiscal year '15 guidance.
Overall, we continue to expect revenues to be around $3.6 billion. Given the strong first quarter results, we've enhanced our view of adjusted EPS and EBITDA margins.
We're now expecting our fiscal '15 adjusted diluted earnings per share to be in -- within the range of $5.85 to $5.97. We expect our EBITDA margin for the year to be around 20%.
We continue expect the fiscal '15 income tax rate to be in the range of 33% to 34%. This estimated range doesn't include the impact of potential tax examinations or other items that could settle in this fiscal year.
For the fiscal year, our guidance assumes an average exchange rate of USD 1.62 to the British pound and an average exchange rate of USD 1.28 to the euro. In our previous fiscal year '15 guidance, we used an estimate of $1.30 to the euro.
The estimate for the British pound remains unchanged. We expect average diluted shares outstanding to be between 70 million and 70.5 million.
GAAP diluted earnings per share will continue to be lower than our adjusted diluted earnings per share. Given the strong first quarter results and the demand we're seeing for bulk lump sum projects in the second quarter of the fiscal year, we've increased our expectation for constant currency revenue growth to the mid-single digits for the Benefits segment.
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 in the low single digits.
The risk consulting and software market continues to stabilize. However, given the current economic conditions in EMEA, where both the RCS and the investment business are heavily weighted, we're maintaining our fiscal year '15 guidance.
We expect the NOI margin to be in the low to mid-20% range. In the Talent and Rewards segment, we continue to expect constant currency revenue growth to be flat to low single-digit growth.
Market conditions have not changed significantly. There are geographies where we've seen some stabilization, but not enough to move our overall view.
We expect the NOI margin to be in the low-20% range. Finally, in the Exchange Solutions segment, we continue to expect revenue growth in the high-20% range.
We continue to feel positive about the overall fiscal year '15 OneExchange enrollments. We expect the NOI margin to be in the high-teens range.
As a reminder, Exchange Solutions profitability is seasonally low in the first half of the fiscal year. The profitability of the first quarter is not indicative of a change in trend.
I'd like to conclude by reiterating how pleased I am with the quarterly results. I'm also impressed with the agility of our associates that keep abreast of market trends and the speed at which we can adapt to these trends to develop solutions that help in our clients' success.
Now I'll turn it back to John.
John J. Haley
Okay. Thanks very much, Roger, and now we'll open it for your questions.
Operator
[Operator Instructions] Your first question will come from the line of Andre Benjamin.
Andre Benjamin - Goldman Sachs Group Inc., Research Division
First question was on the Benefits segment. You said a lot of growth was driven by lump sum payment work which you expect to be strong in the first half of the year and then decelerate in the second half.
I was just wondering, is there any way that you can maybe put a little context around your view of how much of client base in general still has potential to do some work here either today or at some point in the future?
John J. Haley
I guess -- so we can look at trying to give some additional color around that, Andre. I would say though that bulk lump sums are something that there's only been modest inroads into that business.
So there's enormous potential, I think, left to do that. But why don't we go back and see if we can give you some more color -- go back and see what we can provide you with.
Andre Benjamin - Goldman Sachs Group Inc., Research Division
Okay. And then in light of the midterm elections last night, not necessarily looking for personal views on the outcome.
But I just wondering if there any notable trends or commentaries from your clients that you heard in the lead up to the election that may indicate, if any of them were thinking about changing their business activity either in the near or medium term if the Senate, indeed, swung to GOP control like it did last night?
John J. Haley
Yes. I don't think -- we haven't heard anything like that, that would affect our business one way or the other.
I mean, the only thing that really comes up at all is speculation about whether there would be changes made to the Cadillac Tax, if the Republicans were in control. And I think anything around that is really just speculation, I think at this moment.
Operator
Your next question comes from the line of Paul Ginocchio.
Paul Ginocchio - Deutsche Bank AG, Research Division
Yes. First of all, just 2 Exchange questions, please.
You had some pretty significant Q-on-Q growth in Exchange Solutions revenue. Was that mainly the off-cycle enrollments you talked about?
Or was there anything else driving that revenue, obviously, excluding Benefit outsourcing? And then second, Mercer had a great enrollment here in the fall, I think, roughly 800,000 lives.
I know maybe that number is not directly comparable to the number you reported, maybe you could talk to that also. But with that sort of 800,000, I think what they would say eligible employees that they reported this year.
Does that sort of change your view on next year? And what do you think you need to do in the fall of '15 to be competitive with what Mercer just reported.
John J. Haley
Yes. Okay.
Thanks very much, Paul. So I think on the first question, that really was the off-cycle enrollments that drove that.
On the second question, I would say that -- just to think about this, if there's a case, let's say, we have a client that maybe has 10,000 employees and we sign them up for the exchanges, what we'll do is we'll look and say, okay, out of those 10,000 employees, what do we think is the likely number that will enroll with us. And so, if we say we think we're going to get 7,000 out of the 10,000, and people might, for various reasons, might not sign up, they might be on a spouse's plan or there's a myriad of other reasons.
So if we might say that 7,000 out of the 10,000 we think are the likely ones who will sign up first, then we'll report 7,000 there. I think the numbers you're referring to they came about because instead of taking the 10,000 employees, you multiply that by 2.2 to get all possible covered employees or covered individuals including dependents or something like that and report a number of 22,000.
So you're right, they're not apples to apples there. We think that giving you the number that we're getting the revenue based on is more meaningful for assessing how we're doing.
But I mean, I leave it up to each company to figure out what the most useful reporting is. But I think to the larger case, I think we've said all along that we thought this would be a market that, the health care exchanges, where there would be a few large competitors that would pretty much dominate the market.
We talked in May in terms of maybe 3 or 4 competitors. We always thought that we would be one of them and that Aon would be one of them and there would be at least one, probably, from Amerigroup, and Mercer looks to be doing well and could be one of them.
But I don't think that changes our view overall. We are looking to get somewhere in the 25% to 30% of the market.
And we still think we'll continue to do that. Interestingly enough, we do see Aon a lot in competitive situations and relatively, rarely run into Mercer.
Paul Ginocchio - Deutsche Bank AG, Research Division
Does their success in this enrollment period change your view on the adoption rate? Or does that give -- make you more positive on adoption next year?
John J. Haley
I don't think it really changes things one way or the other. I mean, I think we still look at the market the same way that it's a very big market.
It's got lots of opportunities. There's probably going to be a few winners and we're just focused on being one of them.
Operator
Your next question comes from the line of Shlomo Rosenbaum.
Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division
One of the things that I'm looking for, and I think a lot of investors are looking for, are the potential for a really big marquee client on the Active side that puts full-time employees on there. Can you talk about, are there in the pipeline deals are a piece, that are out there that would constitute something like that, like an IBM -- that it's just really a matter of kind of timing?
Or how do you see the potential for something like that to show up?
John J. Haley
Shlomo, I don't -- we're talking to clients that -- potential clients that run the gamut. But there are certainly a number that I would consider marquee names there.
But the fact that we're talking to them how close they are to adoption, whether they are once that might sign up for 1/1/2016, I mean, I think the only thing I could say is it wouldn't surprise me if they did, but it wouldn't necessarily surprise me if they waited another year too. So I don't really know what to say about really big marquee clients like that.
Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division
But they are in the discussion levels with you guys in there or...
John J. Haley
Yes. I mean, people are intrigued and interested by this concept.
I think we've gotten a lot of traction talking to folks also about the 1.8% medical cost inflation rate that we had. I think that's something that people are very interested in, in how we were able to achieve that.
Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division
Okay. And then for the last, probably bunch of quarters, we kept hearing about European weakness.
And while you touched on it a little bit, you really -- like in your press release, you really didn't talk about that at all. Are you seeing stabilization or you're just seeing outperformance?
Or can you -- from execution, could you just give us some color over there.
John J. Haley
Yes. I mean, I think -- and this is one where you almost have to go through this by the line of business.
When I was mentioning the Risk and Financial services, I was talking about the improvement in RCS and the market stabilizing for RCS in Europe. And that's one of the things where we've seen a lot of improvement there.
Now we had the tough comparables I talked about and those we're -- that was related to Europe mostly and the investment side of things. But still, that -- the investment continues to chug along and perform well, we think, in the longer term there.
Talent and Rewards, when you look at it, we had expected that, that would be a little bit -- I think we -- I think I probably expected that might have been a little bit weaker in Europe than it has been. So I think we've been gratified to see the results there.
TAS in Europe has really just performed incredibly well again. So when we look at it overall, I don't think we're necessarily encouraged by the macroeconomic results in Europe, but our businesses are holding up a little better than we had expected.
Operator
Your next question comes from the line of Tobey Sommer.
Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division
Question for you about the enrollment season and selling season for January 1, 2016, starts. You had talked in the last conference call and the Analyst Day about how conversations in that selling season began much earlier.
And obviously, the OPERS announcement underscores that. Where do you think -- how our things progressing right now?
And does the OPERS announcement kind of maybe prompt some of those discussions to some earlier resolution as your potential customers see your queue kind of getting busy?
John J. Haley
Yes. We haven't actually seen that occurring from the OPERS things.
But we have been -- since we've been out talking to clients and since we've been having this dialogues much earlier than we did in prior years, we've been encouraging people not to just take the fact that they started longer to mean we have a longer dialogue, but to take the earlier start as a chance to reach some conclusions about what they like to do so that we can get the lineup set, maybe earlier in the year. And one of the things we talk to clients about is, if there is a very big wave, we can promise those who decide in the first part of the year that they can -- we can accommodate them.
We can't necessarily do that if it gets to be late in the year. So we've been encouraging people to think about things earlier.
But I mean, we'll have to see how that plays out.
Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division
As a follow-up, since you kind of intimated a theoretical throughput in your response, how many people could you enroll next year before you kind of had to go to a client and say, we might -- we're approaching full?
John J. Haley
I don't know what that answer is. I think the -- what I was really trying to get to was if we didn't have -- if we were nowhere near capacity, we would certainly probably contemplate taking somebody on later in the year than we might otherwise.
But there's a lot of things that would impact that. I mean, part of it might be the complexity of their client.
As we've mentioned in the -- for clients that we're implementing on Liazon, we actually would take them up to about Thanksgiving. But for clients that we were -- that were more complex that we're implementing, we might need an answer by July -- a commitment by July or so.
Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division
Okay. And then one last question about some of the data you gave on cost savings, $1,400 per active employee including, I think, you said $500 flows through the employee.
Is that something that you think was a feature of this early phase of Active employee enrollments? Or do you think that customers are intending to share this about 1/3 of the cost savings with the employees?
John J. Haley
I don't know. We see employers adopting different approaches.
There are some that are clearly interested in sharing a significant part of the savings with the employees. Some who are driven to looking at this, because of some severe cost pressures, want to keep all or most of it.
And how that will play out over time, I'm not really sure. I do think, to the extent that employers are doing this, they're getting significant savings and they're doing it -- it makes any kind of change which you, moving to an exchange, is a bit of a change.
It makes it a little bit easier. But I think our job is to make sure that we make the plans as efficient as we can and then the employer really tells us how they want to split it.
Operator
Your next question comes from the line of Jeff Volshteyn.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
I wanted to follow-up on the competitive environment. Just looking at recent transactions, Aetna purchasing the health care exchange platform.
How should we think about the -- all the technology plays in the segment? And is it really -- are they really competing for the same business as you are?
John J. Haley
Yes. So I think there are different -- some of these are different.
I think one of the most recent acquisitions we just saw was one that had an exchange component to it but also had a lot of just health care administration that was being done. I think there are some folks out there that we think do a nice job of either plan administration or running some exchanges.
When we purchased Liazon last year, we were looking at, I guess, last year right around this time was when we purchased Liazon. When we did that we went through a very extensive review of all the different providers out there.
And we were quite convinced that Liazon was hands down better than all the others. And we've seen nothing to make us change that opinion.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
That's helpful. And Roger, I just wanted to follow-up on your comments.
You've tweaked up Benefits revenue guidance in constant currency. But it was brought down on the reported numbers.
Is it all due to foreign exchange? Or is there anything else that's in there?
Roger F. Millay
Yes. It's really -- I noted the change in foreign exchange and that would be the impact there.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
And do you have your assumptions for the second quarter guidance as far as euro and the pound?
Roger F. Millay
Yes. We haven't provided that.
And I don't have it off hand. So what we provide is the full year FX guidance.
So we don't have a specific guidance for the second quarter on FX.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
Understood. And the last question.
There is a change in your line -- in differences in allocation methods that went up significantly. What's in that line?
Roger F. Millay
Yes. We -- so that's where we have -- like all companies, or most companies at least, we have an internal cost allocation methodology down into the businesses.
You -- and I think you see, although I think the number did increase as you noted, a fair amount we're typically positive in that line in the first quarter. It's really a result -- what we allocate is budgeted costs and we actually we're typically -- in costs that we're going to allocate, we're typically under budget in the first half.
I think, broadly, we've talked quite a bit over the last year or 2 about efficiency initiatives that we have kicked off which, again, are driving improvements in EBITDA margin. And I would say that these numbers you see here in the cost over allocations are indicative of the momentum that we have around cost control.
Operator
Your next question comes from the line of George Tong.
Keen Fai Tong - Piper Jaffray Companies, Research Division
It's George from Piper. Based on the tone of conversations you're having with employers on the Active side, can you comment on whether you're seeing the traction that supports your existing view on expected adoption rates?
And then discuss how your expectations for Exchange enrollments for fiscal '15 have evolved, if at all?
John J. Haley
Yes. So first of all, welcome, George.
Good to have you covering us. I think, I'll maybe make a comment and see if Roger wants to add anything about our guidance and our view.
But I think the conversations we've had with employers so far, I don't think have done anything to alter the views we've had about the market and how it's going to unfold. We're gratified that the really 1/1/2016 season started early because we think that's important in making big decisions like this for employers to have plenty of time to think about it.
But there's nothing there that is altered it, I would say, one way or another. Roger, anything you'd like to add?
Roger F. Millay
Yes. The only thing I'd say maybe just to put a broader context on it, we've done a lot in 2 years.
I think we started off in the Active side with the expectation that there was an opportunity to add millions of participants on to our Actives Exchange. And we feel good about the things we've done.
We feel good about the conversations we're engaged in with clients in the market. And I think the message, which we had at Analyst Day, which was we still see a big opportunity here.
And as we've talked about earlier, that hasn't changed. So we know we have a lot of work to do and we're in the middle of it.
Keen Fai Tong - Piper Jaffray Companies, Research Division
That's helpful. And can you describe your progress in scaling your direct sales force in your Active Exchange business, where you are now and where you hope to be?
Roger F. Millay
Yes. I'll take that first, and then we'll see if John has anything add.
I mean, so the restructuring that we did, George, in the -- to position ourselves in the Exchange Solutions segment back in the winter was all about providing that market focus, was about having the appropriate aligned sales focus for the different products. And also having the appropriate connections into our global client development group and -- that leverages the deep penetration we have into large and medium-sized clients around the world.
So that's been a major focus of the group since we established Exchange Solutions as a fully integrated segment, and we're pleased with where that is. And I think the fact that I said that we have a good pipeline of activity there is indicative that that's coming together.
I mean, I think, it will continue to develop over the near and medium term. But we're pleased with where we are now.
John J. Haley
And I mean, I think, George, the only thing I'd add just about the outlook for that, we did just recently release a survey where nearly 1 in 4 employers said that private health insurance exchanges could provide a viable alternative for their full-time active employees in 2016. So we had 24% of them said that they could provide alternatives for their active employees as soon as 2016.
Now that doesn't mean they are going to move or anything like that, but it does give you some indication of the way people are looking at that. And when you -- I mentioned earlier, the Cadillac Tax.
I mean, the -- that is something that is out there. Of course, we don't know whether that will change or not.
But the -- about half, 48% of U.S. employers are expected to hit the health care Cadillac Tax in 2018.
And by 5 years later, in 2023, 82% of them are expected to hit that. So there are some things that make us believe that this is a market that there will be real reasons for people to be switching to.
Keen Fai Tong - Piper Jaffray Companies, Research Division
Great. Very helpful.
And then last question. At your Analyst Day, you guidance to around 10% NOI margins in the Exchange business for this quarter.
You came in at 16%. Can you describe what surprised you on the upside or even downside this quarter with margins?
And if you see any persistent sources of potential margin upside?
Roger F. Millay
Look. I think, if you go back on exchanges, they have performed very well relative to expectations over time.
And it's not surprising for them to outperform. There were -- the revenue is above what we expected.
The cost were a little bit lower than expected. This is a very difficult quarter for us to forecast because the ramp-up -- there's volatility around or a range of outcomes around what the cost ramp-up will ultimately look like for the annual enrollment period.
And we're typically cautious in how we project that. So it's just -- I think it really comes back to good performance and good execution as they've built up for the annual enrollment period.
And good execution as they -- in these off-cycle enrollments that came through and the revenue generation there.
John J. Haley
I think, Roger, we have also been helped by the model of having more full time -- keeping our best agents on through the year.
Operator
Your next question comes from the line of Sara Gubins.
Sara Gubins - BofA Merrill Lynch, Research Division
So on Exchanges, you've now got Ohio and Rhode Island. Do you think we're at a tipping point for the public sector?
John J. Haley
I don't know. We've always -- we've worked with a number of public sector clients, Nevada and Rhode Island.
We did Louisiana, although that was on an open plan basis, which is not the method that we like a lot. And we've done other things, like local entities in California and other states.
So we have a fair amount of experience with them. But a big plan like Ohio going is the kind of thing that I think will make -- will guarantee that there will be interest in other states too.
So I don't know if it's quite a tipping point, Sara, but we're really quite encouraged by this. And we spent a long time talking to Ohio about exactly how to do this and they've been great to work with.
So we're very excited about the prospect of serving their retirees.
Sara Gubins - BofA Merrill Lynch, Research Division
Great. And then in terms of the updated fiscal '15 guidance, it wasn't as much as the first quarter beat.
And I'm wondering if that was mostly because of the timing shift you mentioned in the Health and Welfare business in the Exchange segment or is it something else?
Roger F. Millay
Well -- and I think, Sara, it was not just the Health and Welfare Administration, it was that as well as Retiree that were driving -- that drove that excess of that beat.
Sara Gubins - BofA Merrill Lynch, Research Division
But as I -- but Retiree, presumably, continues now that you have those lives signed up. Maybe if you could give us more color around your thinking around fiscal '15 guidance in light of the nice beat that you had in the first quarter.
Roger F. Millay
Yes. I think -- look.
The momentum is very good. I think, as you say, that as participants come in, in the off-cycle, if they -- whether it's the Administration business or Retiree, that's indicative of positive momentum for the year.
So we did -- we've reflected that, I guess, overall in our expectations for the year. And I'd say that if it continues, obviously that's a trend that could lead to further outperformance.
Sara Gubins - BofA Merrill Lynch, Research Division
Okay. And then you had talked last quarter, I believe, about spending $13 million more in investment and exchanges.
Did that come through?
Roger F. Millay
Yes. It did.
It came in right around where we expected. So we're on track for the year.
And I think we may have talked about this a little bit either last quarter or in Analyst Day. But those investments we expect will be similar in the second quarter.
And then after we get past the annual enrollment period and the revenues start coming in, the level of net investment will decline in the second half of the year.
Operator
Your next question comes from the line of Tim McHugh.
Matthew Hill
This is Matt Hill in for Tim. My first question was around lump sum work and the expected slowdown in the second half of the year.
Is there a structural reason behind that similar to couple of years ago with the rush to get work done by the end of the year? Or is it just simply a matter of not having the visibility into these projects quite yet?
John J. Haley
Yes. This really more of the latter, Matt.
I think we saw a lot of people looking at lump sums and we thought there were be a number that would go around this time of year, and we don't have quite the same visibility into that for the remainder of the year. As I think we've mentioned in the past couple of years, the specific quarters in which we see spikes of lump sum work are really hard to predict.
What we know is that it will probably add -- it would average adding a couple of percent a year maybe to Benefits revenues, but it will be lumpy in different quarters. But it's harder for us to predict exactly when that occurs than maybe just what the overall average might be over several years.
So we think this was clearly a very good quarter. We expect to see bulk lump sum work continuing for the rest of the year.
But we don't think it will be quite the same level but again, not great visibility.
Matthew Hill
Okay. Sure.
And then in the Health and Welfare Administration business, talking about a couple of the projects coming in earlier. I just wonder if you can comment on any effect on the pipeline going forward.
Or is there a lot of demand there for you guys to continue to kind roll through these projects throughout the year?
John J. Haley
So yes. We don't think that there's any -- that's anything that -- that there's plenty of demand, plenty of work.
We've had some very good selling seasons over the last year or so in the Health and Welfare Administration work. We've been taking on a great deal of extra of that and we continue to see some good opportunities for future sales going forward.
So we're not concerned at all about that. I mean, the fact that we were able to do it efficiently and do it ahead of time is something we feel very good about and it makes us more confident as we take on more work.
Matthew Hill
Sure. And then just one final one.
The rates you're seeing on exchanges, are they still in the ranges that you had provided previously? Any differences there?
John J. Haley
No. No differences.
Operator
Your final question comes from the line of Mark Marcon.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
It's Mark Marcon from Baird. With regards to the first year savings that you've been able to generate on the Active side, can you talk a little bit about what the prospects are for generating similar savings for new clients that may end up signing up.
Was there anything special about the clients that have been signing up that might make their experience in any way, shape or form untypical or atypical from what future signers might end up experiencing?
John J. Haley
No. So that's an interesting question, Mark.
I think when we look at it, there's -- the employers that come to an exchange come in different flavors, sort of. So for example, take Towers Watson, ourselves.
When we came to the exchange, we had already put in for ourselves all of the high-performing planned design features that we could. We had shifted to high-deductible plans years ago and had everybody on them.
We had the right kind of pharmacy and management, we have wellness things in there. So when we came to doing exchange, a lot of our savings were around the buying the most efficient plan in each of the different 40 markets as opposed to buying the most efficient plan overall.
And so we knew that our savings would be near the lower end of what they would be. If you have ones that are coming to an exchange getting the more efficient purchasing but in addition, also getting the planned design features, getting the pharmacy, getting wellness coming in there, you can expect to see a much bigger thing.
We generally talk in terms of about a 5% to 15% savings. And we were -- at Towers Watson, we came in at I think 6%, so we were right near the lower end of the savings where we'd expect it to be.
I don't -- we haven't really observed anything that the particular clients that have signed up earlier are necessarily any different than the others, we've seen them in all different flavors.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Great. So it sounds like that broad range should be applicable to virtually every other company that may end up signing up for you on a go-forward basis?
John J. Haley
Yes. We think that broad range should be applicable to them.
And when we're talking to clients about this, we are able to go through and give them a pretty good idea of what the savings is that they're likely to get. And moreover, we do it accurately.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
In broad strokes, can you identify the -- or provide color with regards to the specific areas that typically end up leading to these savings?
John J. Haley
Lead to the savings? I would say that they're probably the 4 that I mentioned.
There's the networks with the 40 pricing markets, which is applicable to everybody. There's the planned design, there's a pharmacy and then there's consumerism.
So as I said, when you looked at it -- with Towers Watson, we had only the first ones because we had built all these other features into our existing platform.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
And so even with just applying the first one, you could still generate 6% savings?
John J. Haley
Yes. We tend to talk of 4% or 5% as the minimum, but yes.
And even that depends if somebody is -- Towers Watson is a company that's in a lot of different markets around the country and so we can get that. If you have somebody who's all in one location in one city then, obviously, you're not getting any effect from that.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Great. And you've just formed, relatively recently, a sales team to discuss the benefits of these exchanges in a really organized manner.
Can you talk a little bit about some of the traction that they're getting and that you're seeing? And the comprehension of these very significant benefits.
How -- what's the reception among some of the larger organizations that could potentially end up being the blue chips that tip things.
John J. Haley
Yes. I mean, I think there's probably really not much to add, Mark, from what we've said before about that.
The savings -- the potential savings that are out there are extraordinarily attractive to potential clients. And it gets their interest, it gets meetings, it gets consideration.
Change is always difficult and particularly, change to health care plans. So -- and of course, when you run through the list of what's driving savings, the greater savings comes to those companies that have more change involved with them.
And so that -- the people have to think about that. But we are -- we're seeing a lot of interest and we continue to see interest.
We have virtually nobody that we've dealt with last year that said they didn't want to continue to pursue it. It was more just a matter of wanting to study it further.
And I think the other thing -- the only thing that's probably changed more recently is that we've now come out with what our cost increases have been for the people who are -- who would have been the Exchange clients. And that 1.8% compares pretty favorably to what they would see in other environments.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Do you think that's primarily due to the greater level of consumerism?
John J. Haley
I think that's a big part of it. We have -- I think our exchanges are very well designed.
I mentioned as I was going through the script, the focus of our folks on that, the focus of our folks on putting client needs first and designing exchanges to serve them. I mean, I think that's what really drove those savings or that -- those cost increases being held down the way they were.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Great. And if could ask one lump sum question.
With regards to the nature of the lump sum projects that you got done during the first quarter and those that you're going to be doing here in the second quarter, can you talk about the magnitude or size of those, and what sort of impact that might end up having on the recurring work once the lump sum program has gone through. Obviously, there's been some in the press that have been really large and some that are more modest.
So I was just wondering the ones that you've done, what are you seeing?
John J. Haley
I don't have good color on -- I mean, we have good color on the overall numbers, but the breakdowns of how many are in what. I would say this though, to maybe be responsive to the second part of your question, we don't see bulk lump sum work as something that tends to be affect our ongoing revenues too much.
Because the bulk lump sums when you do them, you're taking out people who are the near term recipients of payments from the plans anyway. The plan continues to exist for the same time that it would have anyway.
It continues to need all the same kind of services. So we don't see much impact at all from that, on ongoing work.
John J. Haley
Okay. Well, I guess that is it.
So let me just say thanks to all of you for joining us this morning, and we look forward to reviewing our second quarter results with you in February.
Operator
Thank you. Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the presentation. You may now disconnect.
Good day.