Willis Towers Watson Public Limited Company

Good morning, ladies and gentlemen, and welcome to the Willis Towers Watson fourth quarter 2018 earnings conference call. At this time, all participants are in the listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Rich Keefe, head of investor relations at Willis Towers Watson. Sir, you may begin.

Good morning. Welcome to the Willis Towers Watson earnings call. On the call with me today are John Haley, Willis Towers Watson's chief executive officer, and Mike Barwell, our chief financial officer. Please refer to our website for the press release and supplemental information that was issued earlier today. Today's call is being recorded. Some of the comments in today's call may constitute forward looking statements within the meaning of the Private Securities Reform Act of 1995. These forward looking statements are subject to risk and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements. For a more detailed discussion of these and other risk factors, investors should review the forward looking statement section of the earnings press release issued this morning, as well as other disclosures in our most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures, as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the investor relations section of the company's website. After our prepared remarks, we'll open the conference call for your questions. Now I'll turn the call over to John Haley.

Thanks, Rich, and good morning, everyone. Today we'll review our results for the fourth quarter of 2018 and for the full year, and then we'll provide a brief commentary on the outlook for 2019. Before discussing the 2018 financial results, I'd like to reflect on our journey since the merger. The fourth quarter of 2018 marked the end of Willis Towers Watson integration activities. Over the course of the last three years, we faced many challenges and I'm extremely proud of the progress we've made. Our success is evident in the financial results. We executed on our synergy goals for margin expansion, for revenue growth, and for lowering the tax rate, and we nearly doubled our free cash flow in 2018. In short, we made a commitment to create long-term shareholder value and we delivered. I believe that with our continuing focus on servicing clients and strategic investments in innovation, we're well positioned to deliver sustainable growth into the future. I'm also honored that Willis Towers Watson was recently included on Bloomberg's 2019 Gender Equality Index, as it demonstrates our commitment to equality and advancing women in the workplace. Gender equality is central to Willis Towers Watson's wider commitment to inclusion and diversity, as we strive to attract, retain, and develop the very best talent to best serve our clients. This year at the World Economics Forum at Davos, Willis Towers Watson was a co-sponsor of Bloomberg Live's The Year Ahead Davos event, where Julie Gaidauer, head of human capital and benefits, spoke about the value of broadening perspectives as part of the gender equality conversation. Participating in the World Economic Forum was an exciting opportunity for us to share our perspective on critical topics like the future of work, inclusion and diversity, climate finance, and cyber risk. It's clear that we're entering an era that will revolutionize the way we work and the way we think about inclusiveness. As trusted advisors and thought leaders in our increasingly socially conscious world, we're well positioned to help our clients and colleagues keep pace with the transition. Now let's turn to our results. Just as a reminder, as of January 1st, 2018, we adopted the new accounting standard, ASC 606. A detailed description of the impact of ASC 606 will be provided in our Form 10K filing and detailed explanations of how the new standard impacted our performance, and the presentation of our financial statements has been provided in our earnings release this morning. I will first report the results using the prior accounting standard, excluding the new accounting standard. Based on the prior accounting standard, without the impact of ASC 606, reported revenue for the fourth quarter was 2.1 billion, up 3% as compared to the prior year fourth quarter, and up 5% on a constant currency basis, and up 6% on an organic basis. Reported revenue included $49 million of negative currency movement. We experienced growth on an organic basis across all of our segments for the quarter. Net income was $174 million, down 31% for the fourth quarter as compared to the $253 million of net income in the prior year fourth quarter, which included a one-time tax benefit from tax reform. Adjusted EBITDA was $525 million, or .5% of revenue, as compared to the prior year adjusted EBITDA for the fourth quarter, was $484 million, or .3% of revenue, representing an 8% increase on an adjusted EBITDA dollar basis, and 120 basis points of margin improvement. For the quarter, diluted earnings per share were $1.29, and adjusted diluted earnings per share were $2.40. Overall, it was a good quarter. We grew revenue and earnings per share and had adjusted EBITDA margin performance. Now turning to the results based on ASC 606, or the new accounting standard. Reported revenues for the fourth quarter were $2.4 billion. Net income for the fourth quarter was $383 million. Adjusted EBITDA for the fourth quarter was $774 million, or .6% of revenue. For the quarter, diluted earnings per share were $2.89, and adjusted diluted earnings per share were $4. Now let's look at each of the segments in more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be based on the prior accounting standard and reflect revenues on a constant currency basis, unless specifically stated otherwise. Segment margins are calculated using segment revenues and exclude unallocated corporate costs, such as the amortization of the tangibles, restructuring costs, and certain transaction and integration expenses resulting from mergers and acquisitions, as well as other items which we consider non-quarter or operating results. The segment results include discretionary compensation. For the fourth quarter, total segment revenues grew 5% on both a constant currency basis and on an organic basis. Human capital and benefits, or HCB, had a solid quarter with a 4% constant currency and organic growth as compared to the prior year fourth quarter. The solid performance extended across all our businesses in the segment. We had the strongest growth in our health and benefits business, with revenue increasing by 7% as compared to the prior year fourth

quarter.

The growth was primarily a result of solid growth in North America, driven by increased advisory work and growth in our specialty products. In addition, we experienced continued momentum outside of North America, related to global benefit management appointments, as well as increases in local and regional market share. Talent and rewards fourth quarter revenue increased by 7% as compared to the prior year fourth quarter. The net growth was primarily due to strong market demand for compensation surveys globally and for advisory work in North America, Western Europe, and international. As expected, the retirement business experienced nominal growth compared to the prior year fourth quarter. A lower level of de-risking projects like bulk lump sums in North America was more than offset by growth in Great Britain related to more favorable on consulting projects and growth in international from strong project activity in Asia. Our technology and administration solutions, or TAS revenue, grew moderately compared to the prior year fourth quarter, with increased revenues in Germany from new client implementations. The operating margin for the HCB segment was 24%, an increase of 3% from the prior year fourth quarter. Revenue growth and disciplined expense management contributed to the margin growth. Now turning to the HCB results, including the impact of the new revenue standard, the HCB segment had revenues of $843 million and an operating margin of 30%. Now let's look at corporate risk and growth in your CRB, which had a revenue increase of 5% on both a constant currency and organic basis as compared to the prior year fourth quarter. North America's revenue grew by 7% in the fourth quarter, with strong results across all lines of business. International, Western Europe, and Great Britain each contributed 4% revenue growth. International continued its momentum, driven primarily by new business ribs in Asia and Latin America. Great Britain and Western Europe generated several new business wins in construction, energy, and claims management. CRB revenues were $812 million, with an operating margin of 30% as compared to a 27% operating margin in the prior year fourth quarter. The margin expanded due to the top line performance coupled with continued cost management efforts. Now turning to the CRB results, including the impact of the new revenue standard. For the quarter, CRB had revenues of $816 million and an operating margin of 29%. We continue to be optimistic about the momentum in our CRB business going forward. Turning to investment risk and reinsurance, or IRR. Revenue for the fourth quarter increased 5% to $297 million on a constant currency basis and increased 8% on an organic basis as compared to the prior year fourth quarter. Operating margins were negative 1%, a slight improvement versus the same period last year. This was driven by revenue growth in the reinsurance, insurance consulting and technology, investment, and wholesale businesses, which all delivered mid single-digit growth or better. Reinsurance had strong growth, primarily driven by net new business performance in North America. While the insurance consulting and technology growth was driven by technology sales in EMEA and consulting project activity in the Americas. Investment grew due to new client wins and continued growth in delegated investment services. Wholesale growth was driven mainly through the specialty business unit. Overall, the fourth quarter 2018 margin expanded due to the robust revenue growth for the quarter. Now turning to the IRR results, including the impact of the new revenue standard. IRR had revenues of $280 million and an operating margin of 2%. We continue to feel very positive about the momentum of the IRR business in 2019. Revenues for the BDA segment increased by 8% from the prior year fourth quarter. Driven by increased enrollments, our individual marketplace revenues increased by 5%, while the remaining businesses in the segment generated 11% growth led by benefits outsourcing. Increased membership and new clients drove the revenue increase in benefits outsourcing, while the group marketplace business continued to grow, primarily due to new clients and customized active exchange projects. So let me turn to the 2019 enrollments. As we mentioned in our previous earnings call, enrollment continued to look strong in both the mid-market and large market space. We added about 300,000 lives during the 2019 enrollment period. The individual marketplace exchange enrollment seasonality has been shifting as the business matures. We're seeing enrollment spread more evenly throughout the year due to off-cycle enrollments and agents and a more modest increase in enrollments during the fall enrollment season. To that end, we expect to enroll another 55,000 to 65,000 retirees during 2019 via off-cycle enrollments and agents. The BDA segment had revenues of $209 million with a 28% operating margin, up 5% as compared to the prior fourth quarter. The expansion in margin was a result of the strong revenue growth, as well as our ability to continue to scale these businesses. The BDA segment reflecting the new revenue standard had revenue of $390 million and an operating margin of 61%. The primary driver of this difference is due to the effect of the new revenue accounting standard in the individual marketplace. These revenues must now be recognized at the data placement rather than pro-rating them starting at their effective date. So under the new standard, the majority of the revenue generated by annual enrollment activity in the fall is now recognized immediately. Whereas under the old standard, this revenue would have started to be recognized in January 2018 on a pro-rata basis throughout the year. So this change results in higher revenue recognition of the fourth quarter of the calendar year under the new standard. In summary, I'm very pleased with our progress. We produced strong earnings growth in the fourth quarter and for the full year, we have strong revenue growth, a meaningful margin expansion, and significant adjusted EPS growth, all while continuing to invest in our future and return capital to shareholders through dividends and share repurchases. I'd like to thank all of our colleagues for their unwavering commitment to delivering outstanding service and also our clients for their continued support of Willis Towers Watson. Now I'll turn the call over to Mike. Thanks, John.

And good morning to everyone. Thanks to all of you for joining us. I'd like to add my thanks and congratulations to all our colleagues for their efforts and contributions to our strong finish and our overall financial performance in 2018 and thank our clients as well for their continued support. My comments around our 2018 results will discuss our results without the impact of ASE 606, unless otherwise stated, in order to assist with comparability over the prior year periods. Now let's turn to the financial overview. Let me first discuss income from operations. Income from operations for the fourth quarter was 210 million or .8% of revenue up 163% from the prior year fourth quarter income from operations of 80 million or .8% of revenue. Adjusted operating income for the fourth quarter was 390 million or .2% of revenue up 5% from the prior year fourth quarter. Adjusted operating income of 370 million or .8% of revenue. Income from operations for the full year 2018 was 907 million or .5% of revenue up 76% from the same period in the prior year of 516 million or .3% of revenue. Adjusted operating income for the full year of 2018 was 1.6 billion or .1% of revenue and up 9% as compared to the same period in the prior year in which adjusted operating income was 1.5 billion or .4% of revenue. Now let me turn to EPS or earnings per share. For the fourth quarter of 2018 and 17, our diluted EPS was $1.29 and $1.84 respectively. The year over year decline in diluted EPS was due to the inclusion of the aforementioned one-time tax benefit in the comparable period which was incurred in connection with the U.S. tax reform. For the fourth quarter of 2018, our adjusted EPS was up 9% to $2.40 per share as compared to $2.21 per share in the prior year fourth quarter. For the full year 2018 and 17, diluted EPS was $5.87 and $4.18 respectively. For the full year 2018, adjusted EPS was up 21% to $10.33 per share versus $8.51 per share in the same period in the prior year. Under the new revenue recognition standard, our diluted EPS was $2.89 for the quarter and $5.27 for the full year 2018. Our adjusted EPS was $4.00 per share for the quarter and $9.73 for the full year. Moving to taxes, I'd like to provide you with some additional insight into our U.S. GAAP and adjusted tax rates. Without the impact of ASC 606, the U.S. GAAP tax rate for the fourth quarter was .9% as compared to negative .4% for the prior year fourth quarter. As a reminder, with respect to our fourth quarter prior year rate, we had booked a one-time discrete net tax benefit from U.S. tax reform in the prior year which resulted in a significantly lower U.S. GAAP tax rate for both Q4 17 and for the full year 2017. Our adjusted tax rate for the fourth quarter was 20.9%, a slight increase from the .6% rate in the prior year fourth quarter. For the full year, the U.S. GAAP tax rate was .2% for 2018 and the adjusted tax rate was 19.4%, which was slightly lower than our guided adjusted tax rate of 20 to 21%. Moving to the balance sheet, we continue to have a strong financial position. For the full year 2018, without the impact of the new revenue standard, our full year free cash flow was 1.1 billion, an increase of 508 million or 90% compared to the prior year. Including the impact of the new revenue standard, our free cash flow was 1 billion, an increase of 81% compared to the same period in the prior year. Our balance sheet position continues to strengthen. During the year, we successfully issued 1 billion in senior notes to help with the efficiency of our capital structure, provide additional financial flexibility. Moreover, as a result of our increased profitability, our debt to adjust the EBITDA leverage ratio decreased to 2.1 times at fiscal year end 2018 from 2.4 times at the end of the prior year, the beginning of the prior year. In terms of the capital allocation, we purchased approximately 201 million shares during the quarter and 602 million for the full year. Since the merger, we have repurchased or retired approximately 12.3 million shares and paid approximately 784 million in dividends. Now that we've summarized last year's performance, let's take a look ahead to our guidance for 2019. Having moved past the initial adoption year for the new revenue standard, we will no longer report our financial results based on both the old accounting standard and the ASC 606 accounting standard. Starting in 2019, all our financial results will be reported based solely on the ASC 606 standard. Accordingly, the 2019 guidance we will provide you today is based on the ASC 606 rules. For the company, we expect organic revenue growth of around 4%. Our non-cash pension income, which is classified within the other income net line, is expected to decline due primarily to declining returns on planned assets. We will provide you some further guidance on how to think about other income net line in our supplemental materials. We're changing our margin guidance to focus on adjusted operating margin so investors can get a better sense of our core margin performance going forward. We expect our full year 2019 adjusted operating income margin to be around 20%. Retaining to tax, we expect our adjusted effective tax rate to be around 22% for fiscal year 2019, excluding any potential discrete items compared to 19-4 in 2018. This increase stems from changes related to the effects of the tax reform legislation. We continue to evaluate the impact of tax reform on our effective tax rate, including the effect of new taxes associated with computations for changes resulting from updated interpretations and assumptions issued by the taxing authorities. As a result, the effective tax rate is subject to volatility and will continue to be updated as more analysis and information becomes available. We will continue to look at tax planning strategies which may lower the rate beyond this year's guided rate. We expect another year of strong free cash flow. We're changing the way we categorize our long term free cash flow growth expectations to indicate a longer term view. In general, we expect free cash flow to grow 15% or greater in each year over the next three year period measured from our 605 amounts. And what guidance assumes average currency rates of $1.29 to the pound and $1.14 to the euro. Assuming exchange rates remain at the current level, we expect FX to be a headwind to adjust the EPS for 2019 by approximately 10 cents per share. And we expect the majority of this impact in the first quarter. Adjusted diluted earnings per share is projected to be in line with the range of $10.60 to $10.85. This guidance includes the impact from the expected headwind items to adjust the diluted earnings per share such as currency, the 10 cents reduction, lower non-cash pension income around 36 cents reduction, and a higher adjusted tax rate in 2019 of around 35 cents reduction. Excluding these items, our expected adjusted EPS growth for 2019 will be at the double digit adjusted EPS growth rate which we have provided as a long term growth objective. In summary, we're pleased with our 2018 results and continue momentum into 2019. There's still a lot of opportunity ahead and we remain focused on driving execution. So before I turn the call back to John, I want to remind you this year we'll be hosting an Analyst's Day in Washington, D.C. on March 22, 2019. And we look forward to seeing you there.

Okay. Thanks, Mike. And now we'll take your questions.

Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Kai Pan with Morgan Stanley. Your line is open.

Thank you and good morning. My first question, just want to make sure the $60 reduction in all the income line for 2019, would that be just one off or is it going forward? The lower the level of other income will be lower.

Yeah, based on 19, you know, that's we think it's, you know, a reasonable amount that we would think that that would be a similar line item, that kind of range, Kai, in terms of thinking about the number going forward.

Okay, that's very clear. Then John, for the organic growth guidance, 4%, this year it did 5%. Just wondering if anything sort of in your mind that could be headwind into 2019?

Well, I think, you know, if you look, I think generally the industry as a whole is projecting growth around 4% and we're saying we think we'll grow as fast as our competitors, if not faster. That's how we have the 4%. We did very well in 2019 and, you know, we expect to continue, I mean, in 2018 we expect to continue to build on that in 2019. Nothing special that we've built into that.

Okay, great. One more, it's this last one, the larger picture question is that looking back last three years, your $10.33 that you over deliver your 10-10 target. So John, looking next two years, you extended your contracts for another two years through 2020. There are two part questions. Number one is that what will you be focusing on in the next two years? Number two, you have a new stock unit award. Are they tied to specific performance like 10-10 target for the past two years, past three years?

So let me answer that first, the second part of the question first. The new stock awards will, the way we did the one-time mega grant of the three years was special and the particular set of metrics we used there was that we'll focus more on just total shareholder return for the new awards. So over the next two years, I think the story of the last three years was really bringing the two firms together. We had some synergy goals we wanted to get in terms of revenue. We had some efficiency goals we wanted to get in terms of lowering our overall costs. We had some tax savings we wanted to get. I think we want to continue to press in all three of those areas, but I think even more what we want to focus on is bringing Willis Towers who are Watson together and getting the synergies across all of our operations. So as I said, in 2018, we grew as fast as competitors or a little bit faster when we look on an organic basis against them. And we want to build off of that in 2019 and 2020. I think one of the things that from a financial perspective, one of the main focuses we're going to have is growing our free cash flow. And as Mike referenced in his remarks, we expect that for the short to medium term, we should be able to grow free cash flow by 15 percent a year. And that's one of the key new metrics we're focusing on. That's great. Thank

you so much and good luck.

Thanks.

Our next question comes from the line of Greg Peters with Raven James. Your line is open.

Great. Thanks for the call and taking my questions. I guess, John, just to build on your last answer when you're talking about free cash flow, I was hoping maybe you could spend a minute and sort of give us some of the components that you would expect near term and longer term to drive free cash flow growth because it's clearly growing in a faster clip than your earnings per share guidance might suggest. And embedded in that, I'm curious if you could give us an update on some of the pieces of the puzzle like DSOs.

Well, yeah, I think so. First

of all, profit is something that we expect to be growing significantly over the years. And one of the things to notice is that, you know, Mike referenced some of the headwind we have for lower pension income. But what that means is we actually are getting more free cash flow. It's a larger percentage of our profit that we're getting there. So that's going to be helping us. We have no integration costs going forward. We're going to be focusing on our working capital. And we successfully lowered our DSOs this year. And we're going to continue to press on that in coming years, Greg.

And, you know, just to build on that answer, can you talk about the balance between investing in your operations and extracting margin improvement? It seems like many of your peers are, you know, talking about investing in things like InsureTech and other initiatives to help drive improved efficiency. And of course, that's an upfront expense.

Yeah, I mean, we've actually referenced this on some of the calls over the last couple of years. But the single largest investments we have as a company are in InsureTech. We're continuing to push on this in this area and in others. We have a lot of work we do on that already. We consider ourselves one of the leaders in this area. And it's going to continue to be an important part of what we do.

OK, my second question and the last question I have is just around the organic revenue guides. And I was wondering if you could. And I know you don't want to get nailed down to specific guidance by segment, but I'm wondering if you could give us a sense or some sort of feel for how the different segments might perform in this upcoming year.

Well, I think, you know, one of the things that we feel much more confident in giving some overall guidance for the company, the further you break it down, the more likely it is to be to be, you know, we just we just don't have as much visibility into every last little thing. We feel pretty good about the guidance at the company level. And that's why we're trying to trying to stick to that. I would note, though, that all of our segments grew this year and we expect all of our segments to grow again next year.

OK, great. Thanks for your answers.

Our next question is from Shlomo Rosemond, Stiefel. Your line is open.

Hi, good morning. Thank you very much for taking my questions. I just wanted a couple of things I just want to jump into. And Mike, maybe you can just give us just a little bit more detail on the pension stuff. I had to jump back and forth on the call, so I might have missed that. But the reason why you have this hit is because we're expected to return on assets. And that's something that we should expect on just a go forward basis. Is that correct?

Well, no, if you look at, you know, we have obviously we have an actuary and actual world services that we provide to many clients. We obviously provide that to ourselves in terms of going through that determination. It's no secret in terms of some of the asset performance that happened last year in 2018. And that had a direct impact in terms of, you know, what the returns would be for us going forward and calculating that actual valuation. So really, that's the direct piece of it.

And maybe I'll just make maybe just make a couple of comments quickly on that, Shlomo. So first of all, you know, markets tank in December. So we just have a lot less pension assets at the end of December when we do the measurement. Interestingly enough, during the same time, you might have thought that the interest rates would be going up, but in fact, they went down the longer term rates just a little bit. So our liabilities increased at the same time that our assets were going down. We are a mark to market company, so we don't smooth the assets. So if you look at companies that smooth the asset performance over the years, they get hit a little bit by some of the drop that we experienced in the fourth quarter, but they're all setting that by maybe some increases from prior years. So it's not as big a difference. The companies that mark the markets see bigger differences year to year. And the

cash implications of this is nominal, very small.

So this could it's really a fourth quarter event that impacted that. And we could see that turning around next year, you know, this year as well, the same way it went down this year could go up next

year. Well, let me just let me just say if we had measured the assets at the end of January, we would have a different result.

OK, OK. And then on the free cash flow side, did you make the litigation settlement in 2018 or that's still coming in 2019?

That's still coming, we hope, in 2019.

OK. And just one of the things that I'm looking at, just if I step back with a lot less integration impact and really, if you go ahead and peel out the fact that, you know, the pension stuff is non-cash, shouldn't you be having a little bit faster free cash flow growth? Because the margin is, the underlying margin is continuing to expand. You're continuing to work on the working capital and, you know, the business, you know, without the cash costs from the integration, shouldn't you be getting faster growth than that, certainly in the near term?

Well, I mean, one thing to keep in mind, Shromo, is that we do have, we are expecting to pay the 120 million, as you said, in 2019. And so we're not trying to, you know, we're not saying adjust for the 120 million. We're saying we'll get 15 percent.

Minimum, or plus. Minimum

would be the 15 percent, Shromo. Oh, got it. So 15 percent, including the hit of 120 million?

Including the hit of 120 million, yep.

Got it, got it. And then is there, if you could just talk a little bit holistically, the organic growth of the business is, as you said, been basically in line to, you know, ahead of peers recently. Is there some, any reason to expect any difference going forward? Do you feel comfortable with some of the changes that you've made over the last several years in leadership and the trajectory of the brokerage business that you should be able to achieve that on a go-forward basis?

Yeah, I feel great about the leadership we have in place from the operating committee on down. I think we have terrific leaders across, really across all of our segments and geographies. I'm very optimistic about what we can achieve. And I think, you know, there's, every year has its own issues that you have to deal with. But frankly, in some ways, some of the harder things are behind us.

Okay, great. If I could just squeeze the last one in. Just on capital allocation, historically, you know, the legacy Watson-Wyatt and then Tellers-Watson business has always been very, had a conservative posture on debt and wanted a lot of powder dry for acquisitions. Is that the way we should think about it going forward or should we expect that the company might step up some of their share repurchase activity?

Well,

I think what we would be looking at is share repurchase. What we're looking at about $800 million or so that we should have available that we could use for acquisitions if we found some really great acquisitions we wanted to do. If we didn't do that, we'll repurchase shares.

Okay, thank you very much.

And our next question comes from the line of Mark McCone with Baird. Your line is open.

Good morning and congratulations on the three years. There were a lot of people who were doubters three years ago and you obviously had everything. I'm wondering if you could just talk about a couple of things. John, you had mentioned one of the organizational goals on a go forward basis is just to continue to improve the way that the organization works together. I'm wondering if you can just talk about some of the, how you're viewing the internal alignment, the incentives, the culture. What are some of the major goals that you have over the next two years that could actually be observable from the outside or that people on the inside should certainly see in terms of the change in terms of the way of operating?

So I think certainly from the inside we'll see as we go to market, and this is particularly in the US in talking to some of the large companies. Going to market with our integrated proposition has led to us penetrating in particular the CRV market in companies that we traditionally have not worked for. I mean just in the fourth quarter in the November, December time frame we had a couple of large organizations that we won the CRV work for. I think that integrated approach, and it couldn't have occurred without both the CRV and some of the other parts of the organization working together. So I think we'll start to see that pay off. That will be more visible to people inside, but I think outside you'll probably see it growth in our large market and CRV in North America in particular. I think we're increasingly seeing chances to work together between our insurance consulting and technology operation and reinsurance, and those took off right away working together. Increasingly we're seeing the tools and analytics that we have available from ICT. We're introducing them into CRV and bringing them together. In response to an earlier question I talked about InsureTech. A lot of what we do in ICT is really on the InsureTech forefront there, and so we expect to see some of that coming in.

Great. And then two more questions if I may. Just with regards to the segment growth, you mentioned the overall 4% organic revenue growth. Maybe without being very specific about the specific expectations, could you just talk about rank ordering from strongest to perhaps most modest in terms of what your revenue growth expectations are among the four major segments? And then also where are you investing the most? And then the last question is for Mike, can you get a little bit more specific in terms of the DSOs and what the goal is there and how we should think about the EBITDA, the free cash flow conversion? Thank you.

Okay. Thanks, Mark. So let me start off and say from the segments, I think the earnings growth rate is actually reasonably consistent across all of the segments. I think BDA is a segment that we talked about. We're having the great growth in the new enrollments, but of course that's also a segment with when you're selling to retirees there, there's a mortality element that you have to take into account too. So you lose some of your customers every year. And some of the premiums that we got when we first enrolled people only last for a certain number of years, so they fade off too. So my point is I think BDA has been by far the fastest growing of our segments over the last couple of years. We'll see that more in the same pack, I think, with the rest of them. And at a broad brush 30,000 foot level, they all look more like, all look about the same as the company overall. I think IRR is the one that probably has the most volatility. Within segments, we'll see things like health and benefits, which I think will be very fast growing, but then that could be offset by other parts. The 4% is probably not a bad thing to think about for all the segments. In terms of what are we... Excuse me? Which one would you invest in the most? So yeah, so the ones we're investing in, I think we're investing in health and benefits. That's an area that, as I said, is incredibly fast growing. We're investing in IRR and in CRD also. And a lot of ways we're investing in IRR and CRD are through the, you know, some of the insure tech or some of the ICT materials that we're doing. The two largest investments that we have in the company are insure tech around the InnoVisqa that we have, that we announced last year. And then we also, the AMX for the asset management exchange is an area we're investing in. So those are some of the areas that we're investing in for big growth. I should also mention though, there are areas that are, that may not have large growth, that it still pays for us to invest in to make sure that we can maintain our market share or to make sure that we can improve our efficiency and grow. And so retirement, for example, would be a case like that where we continue to invest in that because it's a great business to be in.

Great. And then on the DSO question, I mean, you know, obviously you saw the improvement in free cash flow that you commented on in our prepared remarks, you know, and we targeted, you know, a five-day reduction last year and we're looking at a similar number to continue to drive that kind of improvement going into this next year. So as we said, we're really kind of focused on 15% or better, you know, in terms of free cash flow growth and that's what we're really targeting. And obviously DSO is a big part of that in terms of really looking at working capital overall and working capital management.

Terrific. Thank you.

Our next question comes from a line of Mark Hughes with SunTrust. Your line is open.

Yeah, thank you. Good morning. The CRV growth of 7% in North America seems like a very strong number. You had alluded to some new business wins that came through kind of an integrated approach. How much of that 7% would you, was there any timing benefit there or could you quantify how much might have come through revenue synergies this quarter?

No, because we don't really, we don't actually record them or break them down. So we don't even have that data, you know, that we can describe, we'll get this win because of synergies and we got this win for a different reason. So some of these, these just happen to be big name companies and so there's some anecdotal evidence about that. But I would say there wasn't anything special about timing. We had, I mean, one of the things I mentioned is we had a really good fourth quarter in 2017. And so our growth in this fourth quarter in 2018 was, I think, all the more impressive because it was off a strong quarter there. But I mean, we had areas like construction, which is a traditional strength of ours. That was very strong in the fourth quarter this year. But really, particularly in North America, this was an across the board good result.

And then the share repurchase activity. How should we think about the total share count in 2019? Are you just going to be repurchasing issued shares and so hold steady or are you going to make progress on reducing the share count?

Well, I think as I said in response to, I think it was Shlomo's question or Mark's question about the 800, I said, you know, we expect to spend about 800 million. If we did no acquisitions, we would use the whole 800 million to repurchase shares. That would lower the share count. If we do some acquisitions, it could even into that. So we expect that we would do at least half, if not more of that, in share repurchase.

Thank

you. Our next question comes from Mike Zyromski with Credit Suisse. Share line is open.

Hey, good morning. Thanks. I know there's been a lot of talk on free Castro, but I apologize. I'm going to come back to it again. Given the applications were for free Castro to grow by closer to 25%. So maybe you can kind of talk to the long term goal of maybe capex as a percentage revenues. Is that what's keeping free Castro from growing further? Because you're looking at making, you know, more investments or is it maybe the, I think you alluded to the interest rates declining at the end of the year and so it's the pension contribution, maybe both. If you can kind of talk to why the gap between free Castro and not burning income levels is closing as fast as people expected.

I don't think we had any guidance of 25% increase in free cash flow. I'm sorry.

I'm blue bird.

I don't know. I mean, we think 15% per year is a pretty good result.

And some years will be much higher and some years, you know, lower. And we were excluding the view that there will be that settlement happening in 2019 is most likely, I mean, that that will happen in 2019 on Stanford litigation. And we have outstanding, obviously, you see the integration costs go away. And on top of that base 605 number, we see free cash flow going at a minimum of 15%. If not greater, but some years will be higher, some years will be lower. And so, you know, I think 15% is a pretty good target to have.

Okay, that's fair. My follow up and last question is, what do you think about organic growth and margins for 2019? In past quarters, your results have sometimes been a little bit more volatile than peers. I know the new accounting was sometimes tough to digest. So I'm just curious, are there any tough comps or nuance seasonality you think we should be aware of as we tweak our models for 2019?

I don't think so, no. Okay,

thank you.

Our next question is from Ian Canara with Goldman Sachs. Your line is open.

Hi, good morning. So question, I guess, going back to free cash flow. Looking at the 15% or more guidance for 2019 and growth, I think you said that you still expect five, extracting about five days of DSO in 2019. So I think that gets to about 100 million. So would the remainder just be due to EBITDA growth? Am I thinking about it correctly?

I mean, that's a, you know, look at some combination of all of them. We did not get into that specifically. We haven't broken it down that specifically.

Okay, but it is correct to think of the $100 million roughly of the 15% improvement coming from DSO improvement.

Yeah, I mean, I think we had a similar kind of target last year and that's, you know, we're putting a similar type of improvement, you know, last year. I mean, so that's a similar year on year kind of improvement and we had five days targeted out. But again,

we didn't break it down that specifically.

Okay, and do you think that improving DSO by five days a year is, should we expect that to start slowing down in the out years or is that a reasonable number to think about for the foreseeable future?

Yeah, I still would just come back to that 15% in terms of targeting some combination of all those things. Profits, you know, working capital management, managing how we manage overall cash flow. So, I mean, we're targeting 15% in a combination of all those. Okay.

And I mean, look, I think we do think we can continue to get DSO improvements in each of the coming years. They may not be as much in one year as the other, but we do think eventually it will slow down as we get closer to what our goal is. But we think there's at least several more years of improvement we can get.

Okay. And then on EDTA, I think in the past you had said that 25 and a half was kind of the income now. On the one hand, on the other hand, I'm assuming you have a little more clarity on potential other drivers for EBITDA improvement. How should we think of EBITDA? Guidance outlook thoughts for 2019?

Yeah, we're really not giving guidance on EBITDA. That's what we thought. It was more appropriate to really focus on operating income, which really focuses on the operations overall and then improvement. So you really take out that pension volatility that we had touched on earlier in our comments.

But I mean, if you think about that, the adjusted operating margin was I think it was .4% in 2017 and .1% for this year. And we're saying we're going to be close to 20% for next year. So we're expecting to continue to improve our margins significantly.

Okay. And one last quick one. The $60 million decrease in other income in 2019, that's compared to 2018's $250 million, right? Not the adjusted $283.

So just can you repeat the question back just to make sure we got it?

Sure. You're talking about a $60 million decrease in other income net in 2019. I just want to confirm that that $60 million decrease is off of other income net of $250 for full year 18, not off of the adjusted other income of $283.

That's correct.

You're correct. Thank you.

Our next question is from Meier Shields with KVW. Your line is open.

Great. Thanks. So one quick modeling question with regard to unallocated expenses. Should the full year 18 run rate of about $75 million a quarter, is that a good base next year?

Yeah. I mean we're really not given any, you know, further guidance on that number. I mean really focused on operating income in terms of the target number and really focused on those margin improvements that John mentioned earlier. There's really the way we're thinking about it.

Okay. Sure enough. I'm hoping you can give us just some update on specifically reinsurance demand, whether we're talking about one-one renewals overall, whether you're seeing a notable change in demand for reinsurance among seedings.

Yeah. I mean we have, we are definitely seeing, you know, strong demand for reinsurance, you know, overall, you know, consistent with what we've seen in the marketplace. And so, you know, that business has been very strong for us and performed well.

Yeah. And I think if you look at it, you know, you'll see as our competitors are reporting too, I think everybody said reinsurance is stronger than it was, you know, last year. There's some growth in that and we've participated in that. Okay. Excellent. Thank you.

Thank you. Our next question comes from Elise Greenspan with Wells Fargo. Your line is open.

Hi. Yes. I just have some follow-up questions, I guess, mostly related to some of the topics we've addressed on. But are you guys going away from that free cash flow target that was 75% to 80% of adjusted EBITDA and just looking at it on an annual growth level now? Or is it still the longer-term target if you continue to grow 15% a year that you will get to that 75% to 80% level?

Yeah. I think, Elise, the reason we are focusing on the growth so much is, A, we think that's probably more helpful to people. The problem with the 75% to 80% is that it depends on what portions say things like pension income are of your total income. And so rather than adjust the target each year as the pension income fluctuates up or down, we just thought we'd focus on the growth. We thought that'd be more meaningful for market participants also.

Okay. And then in terms of going back, I know we kind of really addressed the pension income impact, but you guys had pointed to really that .5% level. So is the right way to think about it for those of us that were thinking you would get to that EBITDA margin, which I know we're not talking about operating margin in 19, is it all that for, if not for December and the impact of the markets that, you know, the pension income would have gone the other direction and then we would still, we would be talking about 25.5%. I think some folks are just trying to reconcile comments about the margin improvement that you guys gave last quarter on an EBITDA basis with the guidance laid out today.

Yeah. I think that's a fair comment. I mean, that's a fair conclusion.

Okay. And then the unallocated expense line, that's pretty variable as well, picked up in the fourth quarter. If you can just comment on what you're over that and then in your guidance for 2019, are you assuming unallocated net is kind of, you know, flat on a -over-year basis for every quarter?

Yeah. I mean, what you see in that unallocated line item is corporate costs that aren't allocated back to the business such as Brexit just would be an example that we saw happen and activities happening in the fourth quarter, GPDR, you know, kinds of activities, you know, that were happening in terms of that improvement. We're really not giving any guidance, Elise, as it relates to that line item going forward as we're really focused, as I say, going forward on operating income and operating income improvement.

Okay. And then my last question on buybacks. So tying together some of the numbers you gave, it seems like there's $800 million in a bucket call for acquisition slash repurchases. Can you just talk about, you know, with your where your stock is trading, I would think that you would still want to put more dollars towards repurchase and how you kind of counterbalance that against, you know, what return deals might have to hit for you to take, you know, that bucket and use it towards M&A as opposed to buybacks?

Sure. I mean, look, every time we look at a deal, one of the things we consider is this is money that we could be using to buy back our own stock. And we think our stock is attractively priced for those people buying it. And so, you know, we think it's a good deal right now. It's something we know more about. So when we consider an acquisition, we probably have to have a somewhat higher expected return there just given that we could go and purchase our own shares. We take that into account every time we look at it, a potential acquisition.

Okay. Thank you for the color.

Our next question is from Adam Krobner with William Blair. Your line is open.

Thanks. On acquisitions, do you expect to be more aggressive that you have more cash and will be more bolt on or would you look at actually new areas to go into?

So I think we would be, you know, so

let me answer this quick. Historically, both Willis and Towers Watson were active in looking at acquisitions and, you know, growing that way. And during the last three years, as we've been bringing together three companies, Willis and Towers Watson, and Grass and Flock, we rightly had to focus our energies on that integration and not much at all on potential acquisitions. We feel that we're in a really good operating place right now and we can go back to our historical look at acquisitions. So, you know, the reason I wanted to put it in that circle thing is I want to be careful. When I say we're aggressive, I don't think we're going to be out there being super aggressive acquirers necessarily, but we'll certainly be a lot more aggressive than we have been in the last three years and I think it'll look like the pre-2016. So, you know, that's how we feel about that. We think that there's a number of, you know, there are areas where there are capabilities that would be hard for us to build on our own and we should be looking for acquisitions there. And so they might be bulk-ons. There's always things like that we're looking at, but, you know, we'd be open to lots of different size deals.

Great. And just one more follow-up. As far as restructuring charges, how much cash went out the door in 2018 and what's your expectation in 2019?

Yeah, so the cash that went out the door in 2018 was roughly $160 million and 2019 we're expecting zero.

Okay, so that should be a plus free cash rate.

Yes, I think just coming back though is we kind of touched on free cash flow. You know, you've got, we're going to grow it at minimum 15% over the next year. You got, you know, most likely the settlement of Stanford will happen next year. You'll have that coming back into it. So, you know, and we're looking at a baseline off the 605 free cash flow number. So that's in terms of thinking about it going forward. So,

okay. That's very helpful. Thank you.

Thank you.

Okay.

Thanks everyone for joining us this morning and I look forward to seeing all of you in March.

Ladies and gentlemen, this must include the programming may now disconnect. Everyone have a great day.