Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson's second quarter 2019 earnings conference call. Please refer to our website for press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next three months on our website. 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 on the companies undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release issued this morning, as well as other disclosures in our most recent forum, 10K, and other Willis Towers Watson SEC filings. During the call, we may discuss certain non-GAAP financial measures. For reconciliation of 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. I'll now turn the call over to Mr. John Haley, Willis Towers Watson's Chief Executive Officer. Please go ahead.

Okay, thanks very much, and good morning everyone, and thank you for joining us on our second quarter earnings call. Joining me here today is Mike Burwell, our Chief Financial Officer, and Mitch Keefe, Head of Investor Relations. Today, we'll review our results for the second quarter and the first half of 2019, as well as update the outlook for the remainder of the year. I'm pleased with our second quarter financial results and the continued momentum in our business. We generated strong organic top-line growth of 6% for the second quarter of 2019 and 160 basis points of adjusted operating margin expansion. This marks the fourth consecutive quarter in which we generated organic revenue growth of 5% or greater and improved margins. Likewise, we had revenue and operating margin growth in each of our business segments this quarter, reflecting solid demand for our solutions and services throughout our portfolio of businesses. This has been an exciting and productive quarter for Willis Towers Watson, and as I reflect on our second quarter and the -to-date results, I'm extremely pleased with the significant steps we've made to improve the company's growth profile and position the company for continued long-term growth. In our core businesses, we've had great success driven by new business generation, strong retention rates, and increased operating leverage across our core businesses. On the acquisition front, I'm delighted to announce that we completed the TransAct acquisition yesterday, and today we welcome over 1,300 talented colleagues from TransAct to the Willis Towers Watson community. There's tremendous energy and optimism around the benefits of this powerful combination. The TransAct acquisition rapidly accelerates Willis Towers Watson's -to-consumer U.S. health care strategy and significantly strengthens Willis Towers Watson's growth profile in the health care space. TransAct provides Willis Towers Watson with a true -to-end consumer acquisition and engagement platform for health care by adding scale, retail capabilities to our portfolio of expertise, and it significantly enhances our reach and agility in penetrating the expanse of the Medicare market. Also, this strategic acquisition positions us for success in the unsubsidized individual consumer portion of the Medicare market space that we currently do not widely serve, and it opens up new service offering opportunities. Similarly, it allows us to efficiently and effectively capitalize on the secular trends that are currently driving growth in the Medicare space. Together, we'll have tremendous capacity, with a licensed agent workforce of over 2,000. Moreover, TransAct's leading-edge digital technology capabilities and sales and marketing expertise, combined with Willis Towers Watson's scale and operational excellence, further strengthens our position as the leader in the growing private Medicare marketplace. Most important, we believe that this acquisition creates value for all stakeholders. For our clients and consumers, it broadens our client base so that we can help individuals in underserved markets navigate their health care options. For our business partners, it will allow us to develop deeper collaborative relationships, especially with our carrier partners, as well as deliver greater volume. And for our shareholders, it creates both immediate accretion, as well as significant long-term revenue and profitable growth opportunities. In addition to TransAct, we'll continue to execute our broader growth strategies around innovation. We believe our investments in innovation have helped further enhance our business portfolio and improve the integrated value proposition we deliver to clients. As well as help us continue our leading position in the areas in which we operate. Innovation at Willis Towers Watson is an important element of what it is that we bring to life. To that end, we're continuing to invest in new innovative solutions, as in recent years we've introduced several specialty solutions, such as LifeSite, AMX, Innovisc, and Connected Risk Intelligence. Building on this progress, we recently announced two initiatives that we've implemented that are targeted to create further organic and inorganic growth. The first is our launch of WTW Strategic Ventures, an initiative aimed at creating strategic growth opportunities by investing in emerging digital and technology-enabled businesses across insurance, risk, and human capital. The second initiative includes the formation of a new Growth Board, which will increase the company's organic innovation efforts by supporting early-stage ideas that have the potential to create new markets, new customer channels, and new business models. Working together with our existing New Venture Investment Committee, the Growth Board will help to expand Willis Towers Watson's innovation pipeline. WTW Strategic Ventures is core to the company's growth strategy by enhancing our capabilities to identify and develop strategic opportunities and alliances aimed at delivering tangible value to our clients. These new initiatives will source investments and utilize relationships within the venture capital community, clients, and industry connections to support innovation and organically with the Growth Board to create new offerings in areas of strategic interest to the company. Now let's move on to our second quarter 2019 results. Reported revenue for the second quarter was $2.0 billion, up 3% as compared to the prior year second quarter, and up 6% on a constant currency and organic basis. Reported revenue included $51 million of negative currency movement. Once again, this quarter we experienced growth on both an organic basis across all of our segments. Net income was $149 million, up 129% for the second quarter, as compared to the $65 million of net income in the prior year second quarter. Adjusted EBITDA was $425 million, or 21% of revenue, as compared to the prior year adjusted EBITDA for the second quarter of $392 million, or 20% of revenue, representing an 8% increase on an adjusted EBITDA dollar basis. For the quarter, diluted earnings per share were $1.06, an increase of 141% compared to the prior year. Adjusted diluted earnings per share were $1.78, reflecting an increase of 5% compared to prior year. Overall, it was a solid quarter. We grew revenue in earnings per share and had enhanced adjusted EBITDA margin performance. For the first half of the year, we're very pleased with our financial results. Reported revenue growth for the first half of 2019 was up 2% as compared to the same period in the prior year and up 5% on both a constant currency and organic basis. Adjusted EBITDA for the first half of 2019 was $1.0 billion, or .5% of revenue, an increase from adjusted EBITDA of $949 million, or .2% of revenue, for the same period in the prior year, representing an increase of 130 basis points in adjusted EBITDA margin over the same period in the prior year. Now, let's look at each of the segments in some more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. Segment margins are calculated using segment revenues, and they exclude unallocated corporate costs, such as amortization of intangibles, certain transaction and integration expenses resulting from M&A, as well as other items which we consider non-core to our operating results. The segment results do include discretionary compensation. Revenue for our largest segment, Human Capital and Benefits, HCB, was up 5% on an organic and constant currency basis compared to the second quarter of the prior year. For the first half of the year, HCB revenues grew 4% organically. The Health and Benefits business delivered another strong performance this quarter, with revenue growth of 12%. New business and product revenue continue to drive revenue expansion in North America, while our accelerating market share in global benefit management appointments contributed to the growth in other geographies. Health and Benefits revenue growth was also aided by the lower revenue comparable in the prior year second quarter. The prior year results reflect the impact of adopting the new revenue standard, ASC 606, which resulted in certain revenue not being recognized. Talented rewards revenue increased 5% as a result of increased advisory and survey work in North America and Great Britain. Technology and administration solutions revenue increased 6% this quarter. The growth was built on new business activity, primarily in Western Europe and Great Britain. While most of HCB's businesses grew, we did experience a decline in retirement revenue of 1%. This is mainly as a result of the impact of a tough comparable from the prior year, which benefited from non-recurring project work. HCB's operating margin improved by 200 basis points to 21% compared to the prior year second quarter. HCB has the services, products, and intellectual capital that match the many issues our clients are facing. HCB is anchored by its strength in core service offerings and we remain confident in the segment's ability to deliver growth well into the future. Now let's look at corporate risk and broking, or CRB, which had a revenue increase of 5% on a constant currency and organic basis as compared to the prior year second quarter. For the first half of the year, CRB revenues grew 5% organically. North America's revenue grew by 6% in the second quarter, primarily as a result of new business. The international region's revenue climbed 8% compared to prior year. This growth was largely driven by new business wins and higher renewals in Central America and the Caribbean, as well as new business wins in Asia and Australasia. Western Europe contributed 5% revenue growth with the growth led by strong renewals in Sweden, in addition to new business wins in large and mid-market accounts in Iberia and France. Great Britain had 4% revenue growth, predominantly from aerospace business, driven by satellite launches and transit activity. CRB revenue was $690 million with an operating margin of 15% as compared to a 14% operating margin in the prior year second quarter. The margin expanded due to the top-line performance coupled with continued cost management efforts. As a side note, I'd like to say how pleased I am with the progress the management team and all of our colleagues in CRB have made over the last year to see the steady top-line growth and continued margin expansion. Our outlook on our CRB business remains positive going forward. Turning to investment risk and reinsurance, or IRR, revenue for the second quarter increased 9% to $409 million on a constant currency basis and increased 8% on an organic basis as compared to the prior year second quarter, with clear acceleration in all lines of business. For the first half of the year, IRR revenues grew 6% organically. Reinsurance, with growth of 10%, continued to lead the segment's growth through a combination of net new business and favorable renewals. Insurance consulting and technology grew by 7%, mainly from technology product sales. Investment revenue increased 4%, with continued expansion of the delegated investment services portfolio. Assets under delegated management reached $135 billion at quarter end. On an organic basis, wholesale revenues increased by 11%, driven by growth in specialty and overall wholesale business was up 20%, including results from Miller's acquisition of Alston Gaylor. Our Max Matissean business grew 6%, primarily from increased commission income. IRR had revenue of $409 million and an operating margin of 27%, compared to 23% for the prior year second quarter. This improvement reflects top line growth, alongside scaling of successful businesses. Overall, we continue to feel positive about the momentum of our IRR business for 2019. Revenues for the BDA segment increased by 6% from the prior year second quarter, primarily due to increasing membership counts and client base. Project work and out of scope services further enhanced the segment's revenue growth. Individual marketplace revenue returned to growth this quarter, as seasonality for this business continues to shift. Benefit outsourcing revenues grew 13% as a result of new client wins and special projects. For the first half of the year, BDA revenue grew 8% organically. The BDA segment had revenue of $126 million with a negative 20% operating margin, up approximately 600 basis points from a negative 26% in the prior year second quarter. Top line growth and greater operating leverage both contributed to the segment's margin improvement. Our BDA offerings remain fundamental to our business growth engines of our enterprise strategy. The addition of TransAct will further boost their growth. We're excited about the long-term growth potential of this business. So, in summary, I'm very pleased with our continued progress in the second quarter. We produced strong revenue growth, meaningful margin expansion, and adjusted EPS growth, all while continuing to invest in our future and return capital to shareholders through dividends. I'd like to thank our 43,000 plus colleagues for their contributions. Our talented colleagues and the way they serve clients are a quarter of our long-term success, and they delivered another quarter of strong results. I continue to be inspired by their energy and passion for serving our clients and their unwavering dedication to creating a truly winning client experience. As we look forward to the remainder of 2019 and beyond, our future remains bright. Now I'll turn the call over to Mike.

Thanks, John. And I'd like to add my congratulations to our colleagues for another good quarter, as well as thank our clients for their continued support and trust in us. As John mentioned, we are very excited about the completion of the TransAct acquisition, as this transaction shows Willis Towers Watson's renewed focus on strategic M&A opportunities. Our second quarter represented another positive result with strong organic revenue growth, robust margin expansion, and underlying adjusted EPS growth. Now I'll turn to the overall detailed financial results. Let me first discuss income from operations. Income from operations for the second quarter was $176 million, or .6% of revenue, up 540 basis points from the prior year's second quarter. Adjusted operating income for the second quarter was $299 million, or .6% of revenue, up 160 basis points from the prior year's second quarter. Let me turn to earnings per share, or EPS. For the second quarter of 2019 and 18, our diluted EPS was $1.06 and 44 cents respectively. The prior year quarter was impacted by 55 cents of transaction integration expenses. For the second quarter of 2019, our adjusted EPS was up 5% to $1.78 per share, as compared to $1.70 per share in the prior year's second quarter. Foreign currency caused a decrease in our consolidated revenue of $51 million for the quarter compared to the prior year's second quarter, but had no impact to adjust the diluted earnings per share this quarter. As previously guided, we were adversely impacted by a decrease in non-cash pension income compared to the prior year, which resulted in a -over-year decline of 14 cents this quarter, excluding the combined headwinds for reduced pension returns of 14 cents and higher taxes of 4 cents versus the prior year's second quarter. Adjusted EPS growth was approximately 15%. Talking about our effective tax rate, our U.S. tax rate for the second quarter was .7% versus .7% in the prior year's second quarter. Our adjusted income tax rate for the second quarter was .4% up from the .7% rate in the prior year's second quarter. The increase in the effective tax rate for the quarter compared to the prior year was primarily due to additional taxes on global intangible low-tax income, or GILTI. We continue to evaluate the impact of global 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 various taxing authorities. As a result of the effective tax rate, it is subject to movements and will continue to be updated as more analysis of the information becomes available. Moving to the balance sheet. We continue to have a strong financial position. As a reminder, in the first quarter, we implemented the new lease accounting standard. This result had no material impact to our operating income, but did result in an increase in liabilities on our balance sheet, which are largely offset by a corresponding increase in assets. The gross up totaled approximately $1.5 billion. During the quarter, we generated $287 million of free cash flow, bringing our -to-date free cash flow to $183 million, a decrease from free cash flow of $254 million for the first half of the prior year. The -over-year decline in free cash flow is due to higher compensation payments, as well as some timing related to cash tax payments. We're expecting free cash flow to build over the remainder of 2019. In May, our board of directors approved our quarterly cash dividend of $0.65 per share. In terms of capital allocation, we paid approximately $84 million in dividends and repurchased $51 million of Willis Towers Watson stock in the second quarter of 2019. Related to the Transact acquisition, we have principally financed the purchase through debt. As part of the acquisition of Transact, we have secured financing up to $1.1 billion in the form of a one-year unsecured term loan. We're committed to deleveraging in the near term, returning our leverage ratio to historic levels. As we move ahead into the third quarter, I'd like to review our revised outlook. Willis Towers Watson is raising its 2019 guidance primarily to reflect the acquisition of Transact. For the company, we now expect constant currency revenue growth for 2019 to be in the range of 7 to 8 percent, and organic revenue growth in the range from 4 to 5 percent. Full year adjusted operating income margin is expected to be around 20 percent. The adjusted effective tax rate is still expected to be around 22 percent, excluding any potential discrete items, and we expect free cash flow growth of 15 percent or better. Now, moving on to transaction integration expenses. We expect to incur between $20 million to $25 million of cost as a result of the Transact acquisition, primarily related to transaction costs associated with the deal. Foreign exchange was immaterial to adjust the EPS in the second quarter of 2019, but was 12-cent headwind to adjust the EPS in the first quarter of 2019. We expect FX to be around 3 cents headwind to adjust the EPS for the remainder of the year, resulting in an overall headwind of about 15 cents for the full year 2019. We are raising our adjusted diluted earnings per share guidance to a range of $10.75 to $11.10 for the full year, for 2019 versus our previous guidance of $10.60 to $10.85. Overall, we delivered solid financial performance in the second quarter. While I'm pleased with the results and the continued momentum of our businesses, there's still a lot of opportunity ahead, and we remain focused on driving and making sure we execute. And I'll turn the call back to you, John.

Thanks, Mike. And with that, I'd like to open the call to questions.

Thank you. Ladies and gentlemen, at this time, if you have a question, please press star then 1 on your touchtone phone. If your question has been answered or you would like to remove yourself from the queue, you may 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 Slow Mo Rosenbaum of Stiefel. Your line is open.

Hi. Thank you very much for taking your questions. Hey, John. It seems like you've had a pretty good run here for the last four quarters with really good organic growth that has accelerated. And I don't usually ask this kind of question, but 4% to 5% organic growth does imply like you're expecting something else to decelerate from the first half of the year and the second half of the year. But it seems like the momentum is pretty good. Is there just tougher comms? I just want to make sure you're 100% of ability to deliver. Can you just give us a little bit more of your outlook for the second half of the year in that context?

Yeah, sure. Thanks, Slow Mo. I think we're not suggesting really that we think anything is going to decelerate here. I guess when we came out with the – we initially had the 4% growth that we said we'd be at for the year. So the first is – the first half came in at 5, and so we said, well, we think we'll be 4 to 5. When we first came out with the 4% growth, I know there were some of our competitors had some higher growth projections, and we said, well, the fact that we're at 4 shouldn't be interpreted as we think we're going to grow slower than the market. And I would say the same thing here. We've just sort of taken the floor and raised it up to reflect what happened in the first half. You shouldn't think we think we're going to grow slower than the market.

Okay, great. And then could you mind just discussing a little bit about the operating environment in the UK given the political situation and the Brexit items? It seems like there was some slowdown just in general in the UK in the first quarter, but it seems like things are – seem a lot better right now if you could just comment on that.

Yeah, I mean, our growth – we had some good growth in the UK. It was 4% this quarter, and we feel pretty good about that. In fact, actually, particularly in CRB, we were seeing some declines last year, so we feel much better about that. I think Brexit is still a bit of an uncertainty. We have done a lot of planning around Brexit ourselves, though, and we feel like we're prepared for that. And so we'll have to see what happens, but we feel we're about as prepared as we could be.

Okay, great. Thank you so much.

Thank you. And our next question comes from Mark Marcon of RW Baird. Your line is open.

Good morning, and congrats on the strong progress that we continue to see. I was wondering if you could talk a little bit about the three different questions. One, free cash flow growth of 15%. How confident are you still in the ability to generate that for this year and then for the next few years? That's the first question.

Okay, I think Michael will take care

of that. So thank you for the question, Mark. You know, like prior years, we expect the second half of the year to be seasonally stronger from a free cash flow standpoint. During the first half of the year, we had higher compensation payments as well as timing related to cash payments for income taxes, which had an adverse effect on our free cash flow. But some of the last year, we knew coming into 2019 that we had a continued challenge around improving working capital, and we're taking actions to improve free cash flow during the remainder of the year and specifically focused on working capital.

Great. And then can you talk a little bit about TransAct and how we should think about that, particularly as it relates to the fourth quarter? Obviously, that's the time when we get the enrollments and the benefit from that.

Go

ahead,

John.

I'd

just say, you know, look, we did raise our guidance, as Mike said, and that was mostly the result of TransAct, not 100%. But in TransAct, most of the impact of TransAct, the overwhelming impact will be in the fourth quarter.

Can you just talk a little bit about the margins? I mean, obviously, that's seasonally high, so just from a modeling perspective, how we should think about it?

Yeah, I mean, TransAct from a margin standpoint, we see it consistent with what we've targeted for the overall company from a margin standpoint, Mark, so we don't see it different.

Okay, great. And then the last thing, Mercer, with JLT, yesterday there was some discussion about how their book was looking. I was wondering what you're seeing in terms of opportunities, in terms of share gains as a result of that transaction, both in terms of people and business.

Yeah, I think, you know, we've seen our reinsurance business, you know, being very strong. John commented in his comments, or repaired comments, at 10% overall, and so, you know, part of that's coming from continued wins and strong market conditions that we've seen out there. So, you know, I think it's encapsulated in those numbers,

Mark. Terrific. Thank you.

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

Hi. Good morning. My first question goes back to the TransAct acquisition as well. When you guys announced this deal earlier this year, I know you had said that it would be accretive, you know, relative to earnings, but that was, you know, assuming no buyback. And so you guys returned to the market and did buyback some stock in the Q2, which seemed sooner, I think, than you guys in the street had expected. Can you just give us a thought around buybacks? And because you're now buying back shares sooner, it does seem like the deal might be more accretive relative to your initial expectations?

No, Elise, I mean, we'd always said, and maybe just to make sure that was understood previously, that we would buy back shares to make sure we manage dilution in regards to our benefit programs to be in place. And that's what we've continued to do. You know, so there's no different assumptions that's been there. Obviously, you know, we're very excited about TransAct and what we see it's going to do for us in the future. And, you know, that's what we reflected in taking the earnings guidance up. So, you know, we're very excited about what TransAct brings to the company. And as John said, we welcome those colleagues to the company and we're very excited about it.

But just to be clear, you know, going forward here, while we're basically paying down the debt for TransAct, the only stock buybacks we'll do will be anti-dilution ones.

Okay, that's helpful. And then also on TransAct, you know, could you give us a sense of what the organic revenue growth has been through the first half of the year? I know when you guys announced the deal, you said, you know, you were expecting 25 to 30% revenue growth. How does that compare to those expectations?

Yeah, it's right in that range. We're very excited about it. Obviously, it's right spot into that range and maybe pushing the top end of it to be fair. I mean, the market is very strong. We've seen that reflected overall in demand. Obviously, the big piece comes in the fourth quarter, but that's what we're seeing overall in terms of individuals. So, you know, we've kind of put that 25 to 30% that we touched on over the next five years was, you know, what we're thinking about.

And we see no reason to change that. That's still our expectation going forward.

Okay. And then lastly on TransAct, the margins within your BDA segment are seasonally highest in the fourth quarter. Obviously, negative earnings through the first three quarters. So I just want to get a sense that we're all setting our models correctly. I'm assuming your updated guidance, assuming TransAct follows that same seasonality, so would report a loss and be margin dilutive for two months in the third quarter since it just closed and then be accretive to your margins in the fourth quarter. Am I thinking about that correctly or am I missing anything there and thinking about the guide and how to update for the next couple quarters?

Nope, you got it. That's right.

Okay.

Thank you

very

much. Thank you. Our next question comes from Greg Peters with Raymond James. Your line is open.

Good morning, John. Good morning, Mike. This is Marko. I was calling in for Greg. I had a couple questions. First on HCB, you guys singled out the revenue that was in there last year. I'm just curious if we were to back that revenue in last quarter, what would operating margin expansion look like this quarter?

It would be roughly about 2%.

Go ahead, Rick. Hey, Greg, it's Rich. Are you referring just to HCB, what would be the margin? I think that's your question. Yeah, you guys

picked up 200 basis points this quarter, so I'm just curious if that revenue were to be there last year, what would the pick up be this year?

Yeah, it's roughly flat.

Okay. My second question is on free cash flow and it's related to Transac. If we understand it correctly, the EMA and MS businesses' free cash flow negative the first two or three years, and you guys reiterated your free cash flow guidance. So, if we were to back Transac, would that imply that free cash flow could be growing in the high teens over the next couple

years? The overall Transac business is about, it's pretty much neutral. It's pretty close to zero. Okay. It's

not a negative. Okay. And then, Mike, can you just revisit your comments around pension? And that's all I have. Thanks, guys.

Yeah. So, on pension, if you remember, we talked about, you know, the pension got valued at December 31st, 2018, which obviously the market was way down at that point in time. And we had to deal with that, you know, that portion of it. That obviously gave a headwind offsetting our pension income that we would have in the current year. And, you know, that's what we reflected in our results. Had we not had that amount included in there, it would have been roughly $23 million, you know, that would have impacted those numbers had you taken that out. So, when you adjust for that pension amount of that 14 cents and equally you added back the headwind that we had on taxes, you know, it said our growth rate for the quarter would have been, you know, greater than or approximately 15%. So, that's what I was trying to comment on. Got it. Thank you. Thank you.

Our next question comes from Mark Hughes of Centros. Your line is open.

Yeah. Thank you very much. The quarterly revenue spread for TransAct, is it similar to the underlying BDA business?

Yes.

And then, did you consider maybe stepping up your investment in TransAct and the call centers to accelerate growth? Seems like the market opportunity is quite strong. Do you maybe try to grab some sharing here early on?

Well, when we think about it today, you know, we have over 2,000 agents that are in place. And obviously, you know, the individuals may come through online, they may come through, you know, call centers, they're coming through various aspects of it. Clearly, we're seeing the market is strong in preparing for the annual enrollment period in the fourth quarter. And so, you know, our combined team under Gene Wicks leadership is really looking at and making sure we're well prepared, given the market dynamics that are in place and working with, you know, all the leaders associated with it. So, we definitely see, you know, opportunity and we think we're well prepared for it. And we feel good about, you know, the size of our organization to support that growth.

Yeah, I mean, I think that's the key. We think we're prepared to handle the growth that's out there. And so, we feel good.

Understood. And then a final question. Is there any concentration among the carrier partners you work with, with TransAct? Do you, is there any goal of increasing the breadth of the carrier partners?

You know, look, you know, we'll continue to evaluate it. I mean, you know, we'll do that with that leadership team. I mean, you want to be smart about, you know, doing anything when coming up to the annual enrollment period. I know, I mean, obviously, we just closed the transaction yesterday. So, we'll continue. I know Gene and the team will evaluate that, you know, all opportunities that are out there and we'll consider, you know, what makes sense.

Having said that, though, we like the way things are set now. So, I wouldn't expect to necessarily see any changes. We'll always continue to evaluate it. Thank

you. Thank you. And our next question comes from Meyer Shields of KBW. Your line is open.

Great, thanks. Good morning. John, I was hoping you could talk about the thought process underlying the changing exposure to incentive payments for the Trans-ACU.

Yeah, so, look, I think from our standpoint, we had a, we got some certainty in the payments that we were making there. And, you know, we feel pretty good about getting that because, frankly, we're pretty bullish on Trans-ACU. And so, we felt that, we felt this serves us better doing that. And I think, you know, as in all different cases, it has to be something that works for both sides. But I think the other side liked the idea of getting some certainty in what they had, too. And so, we were able to come to an agreement on that, and we're delighted.

Okay, understood. That makes sense. Also, and maybe this is a question for Mike, can we get an update on the margin expansion initiatives specific to CRB?

Yeah, I mean, I think if we went back to the last quarter call, we had touched on, that we would consistently see improvement in CRB margins, and that's what we can continue to see. So, we're up one point in the current quarter. You know, Todd and the team, you know, are working that. And, you know, as I said, it is going to see some giant ramp ups, just slow and steady, and continue to see that progress. And I think that's what you're seeing in the 1% growth this quarter.

Okay, thank you very much.

Thank you. And our next question comes from Yaron Kinnar of Goldman Sachs. Your line is open.

Thank you. Good morning. First question, just going back to the AFC 606 catch-up, can you quantify what the dollar impact was?

It was roughly $23 million.

Okay. And then, going back to... Roughly

offsets the pension, yes.

Right, right. Okay. And in line was prior guidance, I guess, for the quarter. Then on free cash flow, I guess on previous question around 15% growth this year, I think I heard kind of the moving elements in the second half of the year, and I fully recognize that second half tends to be much larger. But can you confirm that you're still expecting 15% or greater growth this year?

Well, that's what we're working towards. We know it's a challenge just like it was for us last year in terms of moving in that direction. We have the entire team very focused on it, like we did similar to last year. But yes, it is a challenge for us, and we recognize that. And that's where we're going to work our tails off as a collective team, just do everything we can to achieve that.

Okay. And then finally, the transact revenues, they will not be going through organic this coming year, right? They're going to come in through acquired?

That's correct.

Okay. Thank you very much. Best of luck.

Thanks. Thank you. And our next question comes from Brian Meredith of UBS. Your line is open.

Yes, thanks. One quick numbers question and one more broader question. First, just quickly numbers. Mike, does the Stanford litigation payment, that's still factored in the free cash flow kind of guidance for this year?

Yes, as of right now, it is. We're continuing to work on that. If that changes, we will update you.

By the way, the Stanford payment may occur this year, but it may not also.

All right. Well, I guess the question would be, would free cash flow growth be greater than the 15% without Stanford?

Yeah. I mean, right now, we had always looked at, you had the integration cost rolling in, you had Stanford coming in there, you got a mix of things in there. We've always said 15% was kind of where we were, and if we were lucky, we'd be better. Gotcha. Terrific.

And then, John, just quickly, I'm just curious. You briefly talked a little bit about pricing, what you're seeing pricing in commercial insurance, great growth obviously in the wholesale millers. What impact are you seeing from a revenue perspective, from pricing, and perhaps maybe, do we see that potentially having a better impact going forward, particularly from millers, as you start to see maybe capital freed up at Lloyd's?

Well, I think, look, this is a better environment than we've had for a while. We've had these years of the rates going down, and now we're seeing most lines, you know, workers' comp is probably one of the key examples. Workers' comp and international liability are the ones where we're seeing rates going down continuing. But the rest of them, we're seeing some pricing uplift, and that's probably good news for the insurance industry. You know, for a long time, insurers were really competing for market share by driving down prices, and they probably got to something that wasn't really that sustainable, and so that's why we're seeing some of these rate increases. You know, for us, it's one of the things we have to do in the face of some rate increases is see what we can do to get as good a bargain for our clients as possible, and sometimes that suggests moving in some business or looking for other alternatives, or maybe buying a little less insurance. So it's not clear we always get the effect of all the rates, and then sometimes, you know, only a portion of our business is commission based, a lot of it's in fees also. So it doesn't automatically flow through, but when there's rate increases generally, it does tend to improve our results.

Great. Thanks for the answer.

Thank you. And our next question comes from Mike Zyrimsky of Credit Suisse. Your line is open.

Hey, this is actually Charlie on for Mike. Just one quick question. Can you guys talk about the mix of cyber business as far as the proportion of consulting versus broking and how the performance or trends in those businesses have been differing, or what trends you're seeing if they're similar? Thanks.

Yeah, I mean, obviously cyber has been very strong. It's not huge in terms of its aggregate size. Most of it has been brokering and sitting in a brokering business. It's not to say we aren't doing some consulting, but the majority of it is in the brokering business. And, you know, it continues to grow at, you know, double digit type of numbers, but off a small base. But we continue to see that opportunity as the marketplace is looking for that solution. And we continue to see that growing in the foreseeable future.

I guess the only thing I'd add to that is that, and as Mike said, this is that we're at the beginning stages of this market really growing. But in addition to North America and Great Britain, we're now seeing some good growth in the emerging cyber insurance markets like Western Europe, Latin America, and Southeast Asia. Got it. Thank you.

Thank you. And I have a follow-up with Sloan Rosenthal. Steve, your line is open.

Hi. Thank you for letting me back in. Hey, first one, I just want to ask Mike, if you could just help us out a little bit more on the transact acquisition just in terms of modeling, just because it seems like there's an outsized contribution in 2019 because you're going to have a really big fourth quarter and not really get the losses that you would get for most of the rest of the year, would you be able to just kind of help us in terms of contribution that you're expecting in earnings specifically from the acquisition? And if we were to have it for the whole year, what it would be so that we can kind of model this appropriately for 2020?

You know, I mean, Sloan, I think your premise is right, obviously. We're not having 12 months of expenses for it since we closed on July, the end of July here, and would have only that portion of expenses. And obviously, most of the revenue, as we touched on, is coming through the AE Annual AROMA period. We had said total growth at 7% to 8%. We said we're at 4% to 5% in terms of organic growth. Obviously, that's not 100% the numbers, but it gives you a good direction to it. And most of that's coming in the fourth quarter in terms of what's to be in place. And maybe I'll have, Rich will follow back up with you, any further questions you may have. I

mean, the only other thing, Sloan, we're really not in a position to go through with a lot of detail, as Mike is saying right now, but I would say this, and I think I mentioned this in response to an earlier question. Most of the earnings guidance, the earnings increase that we did for guidance, that's almost all due to TransAct.

Okay. All right. I'm going to follow up afterwards also just to see if I can pull that little bit more out there. And then just one other thing. I mean,

we recognize that it's a little difficult because, as Mike said, your premise is right. It's the money's made in the fourth quarter and you have some losses in the beginning, but we just don't really feel we're in a position to do that right now. That's something we'll do when we do the 2020 guidance.

Okay. And then just one last one. John, just following up on Mayor's question on the renegotiation of the terms, do you feel like you can kind of hold the seller's feet to the fire with the earn out being all the way down to like 17 million or so? I mean, it seems like they kind of – I understand they're taking a lower purchase price, but why would – if there's the same kind of confidence on your side as there was on – as there is on their side to, you know, execute the way that they would, it's only a 2020 target. You're only talking about 18 months later. You know, it just seems interesting that they're kind of reducing their – almost their entire risk to that.

Yeah. I mean, I would say two things, though. One is I think they did very, very well already on the TransAct acquisition and getting rid of that. And if they had the money right away and some certainty around it, then they can invest that. And so, you know, that gives them some other opportunities. And I mean, you know, you really have to ask them exactly why they wanted to do what they wanted to do. But for us, TransAct is ahead of where we thought they would be, and we feel good about where they are. And so it was something that we were happy to do that. The management team at TransAct is still on the original deal that we had and the original incentives. So we feel that with them, with no change to their earn out at all, we feel very good about that.

Okay. Thank you. Thank

you. And our next question comes from Elise Greenspan with Wells Fargo. Your line is open.

Hi. Thanks for taking my question again. Just a few kind of number-related questions. First off, in terms of the RevRack and HCB coming back, you got $23 million this quarter. So is the assumption still that the remaining $25 million would come in the third quarter?

Most of it, yes. Almost all of it. Yeah. I mean, the vast majority of it.

Okay. That's helpful. And then in terms of minority interest ticked up to $11 million in the quarter, is there anything that caused that to just tick up from where it had been trending? And then what, you know, within that line item, how should we think about modeling forward?

Yeah. I mean, what drove that was Miller, you know, specifically. And yeah, I think, you know, that's the right, you know, to model it going forward. And again, if you want to give, you know, Rich can give you some more thoughts on that. But that Miller was the main driver there.

Okay. That's helpful. And then in terms of a couple questions on the BDA segment margin, so first off on the legacy BDA before TransAct, you guys have shown, I know obviously the margins are negative in that segment for the first three quarters, but they've actually been trending better year over year, less negative. Would you expect that to continue in the third quarter on kind of the legacy BDA business? And then do you still expect TransAct to run at about a 25% margin, which is what you said when the deal was announced?

Yeah. I mean, Elise, just as it relates to the overall margins of BDA, I mean, we've really gotten away from, you know, giving any segment guidance. We've kind of settled overall that we'll get our operating income around 20%. But, you know, we continue to focus on improvements in that business, and the leadership team will continue to do that. So there's still opportunity there, but I'd put it in that particular context. And your second question as it relates to TransAct, you know, what we see that is consistent with what we see for the overall company is in that, you know, type of range.

And the only other thing maybe, Elise, I would add to that is that we're looking to get margin improvement everywhere, and BDA is no different than that. Six hundred basis points is a lot. So I wouldn't necessarily assume that we'll continue to get six hundred basis points.

Okay. That's very helpful. I appreciate the color. Thank you.

Thank you. And this concludes the Q&A portion of today's conference. I'd like to turn the call back to Mr. Haley for closing comments.

Okay. Great. Thanks, everyone, for joining us this morning, and we look forward to updating you on our third quarter call in the fall. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone have a wonderful day.