Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson third quarter 2019 earnings conference call. Please refer to our website for the 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 or with the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company 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 form, 10-K, and in other Willis Towers Watson SEC filings. During the call, you 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. I'll now turn the call over to John Haley, Willis Towers Watson's chief executive officer. Please go ahead.

Okay. Good morning. Oh, sorry. Hello, everyone. Thanks for joining us on our third quarter earnings call. So with me here today is Mike Burwell, our Chief Financial Officer, and Rich Keith, Head of Investor Relations. We'll start by providing an overview of our results for the third quarter of 2019, and then we'll discuss the outlook for the remainder of the year. For the third quarter of 2019, we continued to deliver solid financial performance with 9% overall constant currency revenue growth, 6% organic revenue growth, and 120 basis points of adjusted operating margin expansion. Likewise, we had revenue and operating margin growth in each of our business segments again this quarter. Now, overall, this marks the fifth consecutive quarter in which we generated organic revenue growth of 5% or greater, along with improved margins. Our third quarter results reflect our focus to deliver consistent financial results across the company and and create value for our clients, colleagues, and shareholders. This has been another successful quarter for Willis Towers Watson. We continue to see solid performance in key high-value-added areas, and of course, we also completed the acquisition of Transact, which generated measurable revenue growth in the two months that followed. Overall, I'm pleased with the progress we've made toward our full-year goals. We continue to see strong demand for our services and solutions. I feel good about our business and our ability to deliver a solid fourth quarter. Before taking you through the details of our third quarter results, I'd like to tell you about some exciting work we're doing related to climate resilience as part of a public-private collaboration along with leading organizations from across the global financial sector, various governments, and other international institutions. Climate change poses a global threat from the world's most vulnerable nations to even the most advanced economies' critical infrastructure. I'm honored that Willis Towers Watson recently participated in the UN Climate Action Summit, launching the Coalition for Climate Resilient Investment. At launch, the coalition already had commitments from over 30 organizations across the infrastructure investment value chain, with assets under management totaling $5 trillion U.S., and those numbers are growing. We believe there is a crucial need to better understand the risk posed by climate change to our societies and economies and to reflect proper pricing for climate risk in financial decision-making. This will better direct investments towards infrastructures capable of withstanding a changing climate. Providing a methodology to quantify the economic and financial benefits will enable financial markets to embed resilience up front. To that end, Willis Towers Watson, as part of the coalition, is committing to three main initiatives. The first is the development of analytical tools, including a physical risk pricing framework, and the methodology to prioritize national resilient investment needs. Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructures in high-, medium-, and low-income countries, enabling us to better prevent future human and financial disasters. The second is the creation of innovative investments, such as resilience bonds. There are six country pilot projects where innovations such as these will be trialed. The third is working in close collaboration with other related initiatives, such as the Coalition for Disaster Resilient Infrastructure and the Coalition of Finance Ministers for Climate Action. Working with the coalition, we'll be able to harness a unique combination of the rapid advancement of climate risk analytics, coupled with ambitious regulatory and investor-led initiatives, so that vulnerable geographies continue to attract investment and that infrastructure is built to withstand future climatic risks. We're well positioned to do our part to help prevent human and financial disasters, transform mainstream infrastructure investment, and drive a shift towards a climate resilient economy for all countries, all of which is aligned with our purpose to create clarity and confidence today for a more sustainable tomorrow. So now let's turn to our third quarter results. Reported revenue for the third quarter was $2 billion, up 7% as compared to the prior year third quarter, and up 9% on a constant currency basis and up 6% on organic basis. Reported revenue included $36 million of negative currency movement. Once again this quarter, we experienced growth on an organic basis across all segments and all geographies. Net income was $80 million, up 74% for the third quarter, as compared to $46 million of net income in the prior year of third quarter. Adjusted EBITDA was $344 million as compared to the prior year third quarter adjusted EBITDA of $313 million, representing a 10% increase. For the quarter, diluted earnings per share were 58 cents, an increase of 76% compared to prior year. Adjusted diluted earnings per share were $1.31. Reported revenue for the first nine months of 2019 increased 3% as compared to the same period in the prior year, increased 6% on a constant currency basis, and was up 5% on an organic basis. Now let's look at each of the segments in more detail. To provide clear comparability with prior periods, all commentary regarding results of our segments will be on an organic basis unless specifically stated otherwise. Segment margins are calculated using segment revenues and exclude unallocated corporate costs, such as amortization of intangibles, certain transaction and integration expenses resulting from mergers and acquisitions, 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, or HDB, was up 6% on an organic and constant currency basis compared to the third quarter of the prior year. For the first nine months of 2019, HCB revenues grew 4% organically. The health and benefit business grew 7% this quarter. New business and product revenue continued to drive revenue expansion in North America, while our increasing market share and global benefits management appointments and new local and regional wins contributed to the growth in other geographies. Health and benefits revenue growth was also aided by the lower revenue comparable in the prior year third quarter. The prior year results reflect the impact of adopting new revenue standard, ASC 606, which resulted in certain revenue not being recognized. Talent and rewards revenue grew 9% as a result of increased advisory work in North America and international. Technology and administration solutions revenue increased 11% this quarter. This growth was built on new business activity, primarily in Western Europe and Great Britain, on top of high client retention rates. Retirement returned to revenue growth this quarter with an increase of 1%, which was primarily driven by robust pension de-risking activity in the large plan market. HCB's operating margin improved by 160 basis points to 27% compared to the prior year third quarter. As a trusted advisor, HCB combines research data and strategic insight to address our clients' most complex workforce challenges. employers must constantly adapt to the inevitable changes brought on by today's business landscape. As HCB's results indicate, the segment's well-positioned to continue growing profitably while providing solutions that keep pace with our clients' evolving values. Now let's look at our corporate risk and broking, or CRB, which had a revenue increase of 7% on a constant currency and organic basis as compared to the prior year third quarter. For the first nine months of 2019, CRB revenues grew 5% organically. North America's revenue grew by 9% in the third quarter, primarily as a result of new business and improved retention. The international region's revenue climbed 14% compared to the prior year. There was notably strong performance in construction and natural resources in Central and Eastern Europe, Middle East, and Africa compared to combined with continued momentum in Latin America, particularly in Brazil and in Central America and the Caribbean. Western Europe contributed 2% revenue growth with the growth driven by strong new business in France, Denmark, and Iberia. Great Britain had 2% revenue growth driven by new business in aerospace construction and FinEx. CRB revenue was $651 million. with an operating margin of 12% as compared to an 11% operating margin in the prior year third quarter. The margin expanded due to top-line performance coupled with continued cost management efforts. We're pleased with the CRB top-line growth for the year as well as the margin expansion for the quarter and the overall year. CRB continues to make solid progress towards profitable growth. Turning to investment risk and reinsurance, or IRR, revenue for the quarter was $325 million, an increase of 3% on an organic basis and 5% on a constant currency basis as compared to the prior year third quarter, with meaningful growth across all core businesses. For the first nine months of 2019, IRR revenues grew 5% organically. Reinsurance, with growth of 3%, continued to lead the segment's growth, through a combination of net new business and favorable renewals. Insurance consulting and technology grew by 4%, mainly from technology product sales. Investment revenue increased 2%, with continued expansion of the delegated investment services portfolio. On an organic basis, wholesale revenue increased by 2%, driven by growth in specialty. Overall, the wholesale business was up 14%, including the results from Miller's acquisition of Alston Gaylor. Our Max Matisse in business grew 1%, primarily from increased commission income. IRR had an operating margin of 9% for both the current year and the prior year third quarter. Overall, we're pleased with the financial results of our IRR businesses. We expect a solid finish to the year as the segment remains focused on executing against its goals while continuing to develop innovative products and solutions which will drive long-term performance. Revenues for the Benefits Delivery and Administration segment, or BDA, increased by 42% from the prior year third quarter on a constant currency basis. On an organic basis, revenue grew 2% compared to the prior year third quarter. BDA's expanded mid- and large-market client base and increased project work led the segment's growth. We continued to see strong demand for Benefit Outsourcing's core service offerings resulting in several new client wins. The segment's third quarter growth was muted due to a revenue timing shift in individual marketplace. For the first nine months of 2019, BDA revenue grew 6% organically. BDA's operating margin improved by 14% to a negative 12% compared to a negative 26% in the prior year third quarter. Top-line growth and greater operating leverage both contributed to the segment's margin improvement. Transact's revenue growth tracked nicely in the two months following the acquisition. We are very encouraged by Transact's performance in their first couple of months with us, and we continue to be excited about their future prospects as this business continues to gain momentum. So in summary, I'm very pleased with our continued progress. We delivered another quarter of solid financial performance, and we expect a strong finish in the fourth quarter, placing us on track to deliver another positive financial performance for 2019. For the full year, we continually expect strong revenue growth, meaningful margin expansion, and significant EPS growth. Finally, I'd like to thank our colleagues for their continued client focus, collaboration, engagement, and congratulate everyone on a good quarter. 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 congratulations to my fellow colleagues for another good quarter, as well as thank our clients for their continued support and trust in us. Now let's turn to the financial overview. Our third quarter continued to represent more positive results, recognizing it's our seasonally lowest quarter with strong organic revenue growth and robust margin expansion. Let me first discuss income from operations. Income from operations for the third quarter was $107 million, or 5.4% of revenue, up 450 basis points from the prior year. Third quarter income from operations was $17 million, or 0.9% of revenue. Adjusted operating income for the third quarter was $231 million, or 11.6% of revenue, up 120 basis points from the prior year of $194 million, or 10.4% as a percentage of revenue. Now let me turn to earnings per share, or EPS. For the third quarters of 2019 and 2018, our diluted EPS was $0.58 and $0.33, respectively. For the third quarter of 2019... Our adjusted EPS decreased nominally by less than 1% to $1.31 per share as compared to $1.32 per share in the prior year third quarter. Foreign currency caused a decrease in our consolidated revenue of $36 million for the quarter compared to the prior year third quarter with a one cent positive impact to adjusted diluted earnings per share of this quarter. As previously guided, we continue to be adversely impacted by a decrease in non-cash pension income and a higher adjusted income tax rate this year. For the third quarter of 2019, reduced pension income resulted in a 10-cent adjusted EPS decrease compared to the prior year third quarter, while the higher adjusted income tax rate in the third quarter of 2019 also resulted in a 10-cent adjusted EPS decrease compared to the prior year third quarter. Excluding the combined headwinds from the reduced pension returns of 10-cents, higher taxes of 10-cents, and transact dilution of 4-cents, Our underlying adjusted EPS growth compared to the prior year third quarter would have been approximately 15% higher. Let's turn to our effective tax rate. Our U.S. cap tax rate for the third quarter was 20.4% versus negative 28.1% in the prior year third quarter. Our adjusted income tax rate for the third quarter was 22.2%, up from 15.9% in the prior year third quarter. As a reminder, the prior year third quarter included a one-time tax benefit from the release of evaluation allowance on certain state deferred tax assets. 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 taxing authorities. As a result, the effective tax rate is subject to movement and we will continue to update as more analysis and 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 were largely offset by a corresponding increase in assets. The gross up totaled approximately $1.5 billion. Later in the quarter, we successfully issued a $1 billion in senior notes comprised of $450 million of 10-year notes and $550 million of 30-year notes. We're very pleased with the results of this financing. We feel that this transaction helps with our efficiency of our capital structure and provides additional financial flexibility. The bond proceeds were used to prepay a portion of the amount outstanding under our term loan commitment, resulting from the transact acquisition and repay borrowings under our revolving credit facility. During the quarter, we generated $262 million of free cash flow, up from the prior year third quarter free cash flow of $253 million, bringing our year-to-date free cash flow to $445 million, a decrease in free cash flow of $507 million for the first nine months of the prior year. The year-over-year decline in free cash flow is primarily due to higher cash tax payments for income taxes, resulting from U.S. and global tax reform, 2019 first quarter bonus payments, and working capital changes. We're expecting free cash flow to finish strongly in the fourth quarter, which is our highest generating quarter. In terms of capital allocation, we've paid approximately $85 million in dividends and and repurchased $96 million of Willis Towers Watson stock in the third quarter of 2019. For the first nine months of 2019, we repurchased approximately $147 million in Willis Towers Watson stock and paid approximately $245 million in dividends. We remain committed to deleveraging in the near term and returning our leverage ratio to historic levels. As we move ahead into the fourth quarter, let's review our full year 2019 guidance. For the company, we continue to expect constant currency revenue growth for 2019 to be in the range of 7% to 8% and organic revenue growth in the range of 4% to 5%. Full-year adjusted operating income margin is expected to be around 20%. The adjusted effective tax rate is still expected to be around 22%, excluding any potential discrete items. We continue to look at tax planning strategies which might lower the rate on a longer-term basis. We'll provide an update on this in our fourth quarter earnings call. We expect free cash flow to be in the $1.1 to $1.2 billion range for the current year. Now moving on to transaction integration expenses. We expect to incur about $20 million in costs as a result of the Transact acquisition, primarily related to transaction costs associated with the deal. For an exchange, it was $0.01 tailwind to adjust EPS in the third quarter of 2019, but it was $0.11 headwind to adjust EPS for the first nine months of 2019. We expect FX to be around $0.04 headwind adjusted EPS for the remainder of the year, resulting in an overall headwind of around $0.15 for the full year of 2019. We continue to expect adjusted diluted earnings per share to be in the $10.75 to $11.10 range for the full year of 2019. In summary, we've seen good acceleration in revenue growth and positive operating leverage this quarter, which should continue to position us well to execute on our plans this year. I'm pleased with the results and continued momentum of our businesses. There's still a lot of opportunity ahead, and we remain focused on driving execution. And I'll turn the call back over to John.

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

At this time, if you have a question, please press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by. We'll come back. while we compile the Q&A roster. Your first question comes from Mike Zaremski.

Hey, good morning. First question, when we think about the guidance range in 4Q, any kind of... items we should be thinking about, about the biggest drivers from high versus low end. You know, I know there's a lot of visibility on a good part of your business, given the recurring nature of it. Just kind of curious if there's maybe some technical items, accounting items we should be thinking about, or is it just, you know, blocking and tackling and seeing how revenues turn out?

Yeah, Mike, I don't think there's anything that we would point to like that. I think it'll be, you know, a quarter with the normal sorts of things. I mean, there's always issues around, particularly in CRB, when you can recognize revenue for projects. You know, if something gets delivered December 30th versus January 3rd or something like that, there's issues when things go into quarter. But... That's it. Mike, is there anything?

Yeah, the only thing I would add to your comments, John, would be the annual enrollment period that you see happen. But, again, it's blocking and tackling, as you said, John, in terms of the normal process. But, obviously, with Transact being on board and what we do overall in benefits delivery and administration, obviously that will drive in the fourth quarter.

Yeah, I mean, the fourth quarter is a really big quarter for us, so it's an outsized importance for the rest of it. But there's nothing that we think is a special feature, I guess, that we would direct your attention to.

Okay, understood. And last question, in terms of the big decrease in interest rates globally kind of this year versus last year, does that offer any kind of tailwinds to your defined benefit consulting practice in 4Q, I guess? And also kind of related maybe for Mike, should we be thinking about a, an impact to 2020 expenses or free cash flow as a result of that? Thanks.

Yeah. So I think the level of interest rates, you know, with lower interest rates, it can have a negative effect on how well-funded a plan appears to be. So that's a bit of an issue. I don't think that necessarily drives a lot of extra activity one way or another, though. And it's not so much the level of interest rates as it's sort of the path they've been following. That can lead to increased bulk lump sum work. And I think, you know, we called out that we did see some increased bulk lump sum work in the third quarter this year. We expect to see maybe not as much, but still some increased bulk lump sum work year over year in the fourth quarter. So we're seeing that effect, but not particularly big effects one way or another.

Yeah, John, and I would just add, when you look at, you know, we run and think about our guidance for the year, and as you said, a big portion of it comes in the fourth quarter in terms of revenue and profits, and we're up 150 basis points of margin improvement for the first nine months. You know, we'll update everyone at our year-end call in terms of what we think about in terms of looking at fiscal year 20 and beyond. Thank you. Okay, thanks.

Your next question comes from Mark Marcon from Bayard.

Good morning. Nice quarter. I was wondering if you could talk a little bit about what you're seeing in HC&B with regards to the more discretionary elements given the macro environment. It sounds like everything is going really well. I'm just wondering if there's any headwinds out there that you sense or or the level of confidence in terms of, you know, being able to navigate the environment.

Yeah, you know, Mark, thanks for the question. I think that sort of the way you phrased it reflects how I feel about that. I was talking with somebody the other day and saying that I thought that given some of the noises you hear about the macro environment, things are going surprisingly well in HCB generally. And as you notice, talent and rewards are which is really the most discretionary part that we have there. It was up, I think it was 9% for the quarter. So we're not seeing a pullback of that. I think there's probably a couple of effects from that, but one of them is I think over the years we have really delivered on the value of our talent and rewards business business in both good times and bad times. And it's becoming a more critical part of what I think employers are looking to. So maybe we, you know, we still have opportunities to do that across all the different macroeconomic environments. Mike, anything you'd like to add?

No, John, I think you covered it. I mean, there's only maybe one comment I would just say is, you know, our retirement business, you know, the team continues to work very hard and is well received in the marketplace. And so, you know, we see that continuing into the future.

Terrific. Mike, can you talk a little bit about the free cash flow guidance for this year? It's a pretty wide range with one quarter to go. It sounds like, you know, maybe there's some timing aspects, but You know, longer term, multi-year, we're still looking at 15% or better. But just wondering if you could just elaborate.

Maybe I'll just make a quick comment before I turn it over. And then Mike will jump in on some of the details. But I think, Mark, you're right. It is a relatively broad range. And, you know, we're on pace for about a billion one, we think, right now. But we have some opportunities, we think, to – and Mike will talk a little bit about them – to get it up above that. We've been hit by greater cash tax payments this year than we originally expected. And so that's been a real drag here, and that's not going away. We're going to have that – that's going to be there for the rest of the year. But we have some working capital efforts that we think we could – maybe improve. Mike, do you want to?

Yeah, John, so just to emphasize that point, so one, you know, fourth quarter is a very large quarter. When you look at us in terms of free cash flow, as you probably know, Mark, you know, it was greater than $500 million last year for us. It was over half our free cash flow, and so that's the, John talked about the pacing that's going on there. We did have higher cash tax payments that happened in the current year. As you saw, our effective rate was up on a year-over-year basis, and that ultimately translated into more cash tax payments as we filed our returns in the various countries in which we operate. We are very focused on our working capital management. It's something that we are continuing to focus on and believe that we will see those improvements, and that's why we gave that collective range in terms of where we are.

Terrific. And then lastly, can you just talk a little bit more?

By the way, Mark, could I just maybe just to interject, though, One point that I don't think we addressed in your question, we do feel good about the 15% going forward generally. Yeah. Thanks.

Can you just talk about Transact? I mean, it sounds like that's got good momentum. It's how you see that building out over a multi-year horizon.

Yeah, I mean, thank you for asking, Mark. I mean, we're very excited about Transact and to have them in the fold. I mean, that started, obviously, when we were going through the process and and working that as Gene Wicks and the team were really going through that. And what we continued to see was a very strong market. You know, we see that, you know, 10,000 retirees are hitting every single day. When we look at our enrollment levels, they continue to move at a very, very strong pace. The management team at Transact is doing a, you know, great job and being supported by others in VDA. And so all signs are just really, really positive in terms of what we're seeing. So very strong market. We're seeing, you know, what we've got set up both in terms of technology that people want to be able to, you know, come online and think about Medicare Advantage or Medicare supplement, you know, policies and programs or whether they want to call an agent. You know, we feel very well positioned in terms of supporting that, and, you know, we're seeing that already starting out, and obviously we'll report that in the fourth quarter as we go through the open enrollment period that started here in mid-October. So I've got to tell you, we couldn't be more excited about having Transact in the family, and early signs are very positive, which is what we thought when we brought them and did the acquisition.

Yeah, I'd just say from my perspective, there were three things we liked about it. We liked the business model. We liked the management team. We liked the people. We felt better about all three of them today than we did when we did the deal. Great to hear. Thank you.

Your next question comes from Elise Greenspan from Wells Fargo.

Hi. Good morning. My first question, I guess, is following up on the Transact deal. Is there any way – I know it was only in numbers for two months – to give us a sense of both, A, you know, what the revenue growth was for those two months, and then also I know, Transact, I think you had expected to follow the same seasonality as BDA in terms of losing money in every quarter but the fourth quarter. Is there a sense, could you just give us a sense of what the drag on earnings was in the third quarter? Sure.

Yeah, Elise, so just going back, I mean, what we said, you know, if you go back, originally on Transact was that we would have 25% to 30%, you know, CAGR growth rates for Transact, and that's what we had anticipated happening, and frankly, that's what we're seeing. you know, really running at those rates, you know, so far, and that's not changing in terms of what we had said, and that was reflected in our revised guidance that we did at the end of the second quarter. But the fourth quarter is really the big quarter. The fourth quarter is the big quarter, but we anticipated, you know, moving in that direction. On the on-transact impact in the third quarter was a four-cent dilution, and I guess I was highlighting that in my comments, so that's That's how we saw it for the third quarter.

Okay, that's helpful. Thanks. Sorry, I missed that number. And then, you know, on the pension side, I know the question was asked a little bit earlier in terms of the impact of interest rates, but obviously equity markets have been up while interest rates have gone down this year. I'm just trying to get a sense. I know you said you want to wait until the fourth quarter, but could you just help us think about the opposing impacts and how we should think about – you know, the potential impact on pension income for 2020.

Yeah, you know, Elise, we'd like to be more helpful, but frankly, we don't do continuous valuations of the plan. And, you know, there's a complex interplay between them. They're moving in opposite directions. I think if you were to ask us right now as a rough guess, we expect the situation will look better at the end of this year than it did at the end of last year. But beyond that, the situation is so volatile anyway. I mean, last year, the fourth quarter completely changed everything for us. So we don't bother trying to do projections mid-year.

Okay. And then in terms of the organic revenue, you guys are at five year to date. You left the guide at four to five cents – four to five percent, I'm sorry – Does anything – you know, I know you guys don't always update that every quarter. Does anything indicate to you that, you know, Q4 wouldn't be as good as, you know, what you've seen for the rest – for the other three quarters of the year?

No, I think we said we expect to be where we were for – you know, we expect to hit our yearly target. So, yeah. But there's nothing to suggest – I mean, look, we said two things that I think at the beginning of the year. One was we said – We put our growth rate at 4% to 5% we thought we would grow at. And there was some question about whether the market generally thought they were going to grow faster. And we said, well, look, we're budgeting for 4% to 5% because that's the basis on which we think it's the most prudent to budget. But we also think we'll do at least as well as the market. And I think, you know, both of those are still troubles.

Okay, and then one last thing. The unallocated expenses, I know that that bounces around a little bit between what goes to the segment and what goes to the corporate level. Was there anything, you know, one off in that number in the quarter or just typical seasonal, typical quarterly volatility?

Yeah, typical volatility for the quarter lease. I mean, it was, you know, it was nothing of any, just normal. There was no big item, right? Yeah.

Okay, thank you very much.

Thanks, Liz.

Your next question comes from Shlomo Rosenbaum from Stifel.

Hi, thank you very much for taking my questions. Hey, Mike, talk a little bit. What was the timing issue that impacted the IRR growth, and how should that impact the fourth quarter?

Yeah, so when we think about IRR, Shlomo – You know, you've got to look at the comp. I mean, if you looked at the comp last year, you know, it was 9%. You know, it happened. So we had, you know, looking at 3% for the current year. I mean, you know, the third quarter is one of our lower quarters for the business overall. So we're not uncomfortable with what's happened in terms of looking at that. So, you know, I think you've got to really look at the business on an annual basis. And when you look on a year-to-date basis, You know, standpoint, we're at, you know, 5%, and we continue to, you know, believe in IRR in terms of where it is. So I just think it's, you know, just, you know, kind of where we stand, and we had a very difficult comp looking at this compared to the prior year.

So revenue recognition was not something that was signed but just wasn't recognized? It was just – the item was just not comp year over year? That's correct. Okay, okay. Thanks for clarifying that. And then, John – Whenever you have a big acquisition, you know, a key question is retention of, you know, both the key people and then also, you know, the broader base. Is there any – can you just comment on what you're seeing in the first couple months over there?

I mean, I think, you know – thanks, Shem, for the question. Look, as I mentioned earlier, we like the business model, we like the management team, we like the people at Transact, and we continue to feel really good about all three. One of the reasons we were excited about it was we just thought there was a good fit between us, and we thought Transact fit well within our structure and would be, you know, a valued part of it. We thought they would like being part of Willis Towers Watson. So far, that's been realized.

Okay. So you're comfortable with the retention that you've had in terms of the employees?

Yes, we are.

Okay, good. And then just the growth was very good in the brokerage side, clearly in line to better than some of the comps publicly. Is there any indication in terms of competitively that you guys are doing better, or can you just comment on that side of it?

No, I don't think we have much we can comment on that. I mean, I do think, you know, you saw, look, North America had a fantastic quarter, North America CRB, as well as our international, both very strong growth rates. And those were something that I think coming into the year, we expected both of those regions to do very well. We think we have a great value proposition there. And so we We think that's going to be something that we're going to be able to sustain. I mean, maybe not at the exact levels we're at, but we expect to get very good growth from both of those regions. And, you know, we expect to see CRB generally grow very strongly.

And I would just add, John, to your comments. I mean, we've also saw the 1% margin improvement as well. So, you know, we continue to focus on, the CRB team continues to focus on And we'll continue to see margin improvement in that segment, as well as all our segments, but just to highlight that.

And that's going to be a multi-year phenomenon, I think, where we'll continue to see margin improvement year over year over year.

Okay, great. And if you don't mind me just squeezing in one last one, just in terms of business momentum, it seems to be pretty good. Do you see the business momentum, you know, carrying forward kind of sustainable at current levels? Do you see a higher risk, less risk going forward, just – What's your gut sense, John?

So, I mean, I think we're where we wanted to be as a business when we first did the merger back in the beginning of 2016, and we were looking at what we could put together and the kind of momentum we could achieve. This is the kind of position we want it to be in. We feel good about where we are. We're very pleased with the results, but frankly, we're not satisfied. We think we can see more improvement in the future. So, you know, every business has to deal with the changes in the macroeconomic environment, and we'll be the same as others, and that will contribute to ups and downs, but we feel like we're well-placed to deal with it.

Great. Thank you so much.

Your next question comes from Greg Peters with Raymond James.

Good morning. I'm going to start with a house cleaning item. In your slide deck presentation, I think you mentioned on the call, you said that, well, you pointed out to higher debts at the end of the third quarter. And I assume that was used in part to finance your acquisition. And at the time of the acquisition, I thought you said you were going to suspend share repurchase and use that free cash flow for the acquisition. So I'm trying to reconcile that. And then in the language used in the call and on your slide deck, you said return leverage, the leverage ratio to its historical level. And I'm wondering what you meant by that. And then Not to pile on, but I'm going to. The language seems to have adjusted a little bit in your free cash flow guidance, where you accelerate to 15% or better longer term. I thought it was 15% or better for the next three years. So, if you can add some color to that, that would be helpful.

Sure. Why don't we unpack those? So, first is on the debt itself. So, We had borrowed – we had a term loan outstanding from the acquisition of Transact. As you can see in our cash flow statement, we paid roughly $1.3 billion round numbers for Transact. We had taken a term loan for $1.1 billion. We had taken out financing – or we had gone to the market and done financing of which we turned out a portion of that $1.1 billion, and we paid off any outstanding amounts we had on our credit line. So that's why that debt then, if you look at it on a pure debt to EBITDA ratio, Greg, it went up to 2.7, where historically it's been in that 2.1 to 2.3 range, which I would say historically, which is where we'd like to get back to. We said on purchase of shares, share repurchases, that we would buy shares in the marketplace to make sure that we weren't anti-dilutive given our employee benefit plans that we have to be in place. And we had estimated, you know, those go from time to time. In this case, as we said, for the third quarter, year to date, share repurchases have been $147 million. And that then therefore covers those repurchases consistent with what we had said previously. On our free cash flow, you know, we, you know, I guess when you think about longer term, you asked the question as it relates to three years. or longer term. Right now, we're saying three years is, in our mind, a bit longer term. If you want to go beyond that, I guess right now we're saying three years. That's where we have been in terms of 15% or better. Great. Thank you for the clarification.

I'm going to circle back to the HCB business because I used to think of it as sort of a single-digit organic revenue growth business. Clearly, that's a changed this year. And so, you know, as I'm thinking about it, I'm wondering if the calculus has changed behind the business as we think about 2020 and 2021, or will next year just be difficult comps because talent rewards has a tendency to be more volatile?

Yeah, I mean, so, Greg, I would say I don't think the business – It's a mid-single-digit growth business just on average, but I think that means that there are some years you can see growth up in the high single digits, you know, where we are now. So that's not particularly surprising. It'll be a slightly more difficult comp for us, but overall we feel pretty good about the business and, frankly, feel pretty good about the prospects for next year, too.

Yeah. A final point I'd like to just get some clarification on is that you're reporting margin improvement without any major corresponding restructuring plan or big restructuring charges that are flowing through your income statement. So, I was wondering if you could give us some color on the drivers of this margin improvement. I think you mentioned in the slide deck it's sustainable. and give us sort of size up what the opportunity is going forward, and that would be helpful.

Do you want to? Yeah, so, you know, we'll obviously update, you know, as you rightly pointed out, we're up 150 basis points, you know, through the nine months and 120 basis points in the third quarter as it relates to margin. You know, it starts, obviously, Greg, with the revenue growth. And, you know, I think as John, you know, commented on in terms of what we're seeing in terms of revenue growth and then driving that operating leverage is managing our cost base. And so, you know, with our leadership team and operating committee, you know, very focused as well as all our colleagues, you know, are very sensitive to managing our cost base and driving our revenue growth. You know, we'll update guidance at Q4 in terms of, you know, what we see going forward, but our track record has been to continue to deliver, you know, that revenue growth and that operating margin. And so, you know, we're very focused on managing that differential.

And by the way, Greg, just one thing, you know, to be clear, as we think about this going forward, we may very well have some – restructuring programs that we'll put in place. But what we think we're not going to do is we're not going to be trying to exclude them from income and try to play games like that. If we have restructuring programs, we'll just tell you about them and tell you what they cost. Right. So I should assume if you're able to... Greg? Greg, we lost you there.

I'm sorry. Your next question is from David Stibelo from Jefferies.

Hi there. Thanks for the questions. I'm sure we'll get Greg back here in a second. I'm showing late, so I apologize if this is asked, but I wanted to talk a little bit about HCV again there and make sure I understand the organic growth. To what extent, if at all, was that lifted by ASC 606? What was the impact from that?

So, overall, that was roughly 2% of that, or $48 million for the year-to-date period through 9-30-2019. Okay.

Okay. You'll see that in the Q&A.

If you look in our Q&A and the press release, you'll see it in there, Dave.

Okay. Got it. But for the third quarter specifically?

Rich will get that back to you. I think it's $14 million, I think is the number. $14 million, yes.

Okay. Great. Thanks for that. And then I guess it sounds like there's been some questions on the free cash flow that I caught towards the end here. I guess the $1.1 to $1.2 billion implies a yearly overgrowth rate of maybe 8% to 18%. So it seems like you're possibly going to be below your 15% annual target. If it does fall short of that goal, can you help us understand what some of the factors might be, what perhaps part of that might be due to transaction costs, which were obviously not known when you provided that guidance initially? Sure.

Yes. I would say really maybe three things that would impact it. One would be additional cash tax payments. Two would be for some reason we weren't as successful as we anticipate being as it relates to working capital. And three, the transact costs that were never anticipated or forecasted at the outset of the year.

Right. Okay. And then lastly, obviously organic growth was broadly strong across the larger segments. I guess if you could give us an update on what you're seeing from a competitive standpoint and to the extent that you still might be benefiting from dislocation, from murders among competitors versus the backdrop of the macroeconomic background being maybe a little bit stronger in price hardening versus just core fundamentals that you guys are doing with retention and new business wins.

Thank you for the question, Dave. I mean, look, we have very strong competitors. They're well-run companies with good management teams. But we love our team and what our team's doing in the marketplace and how we're competing. And so, you know, as John and I have reiterated, that we aren't going to underperform to the market. And when you look at where we are through the nine months of this year, you know, we're right at or above, you know, where our competitors are from organic growth rate standpoint. So, you know, when we look at it across our portfolio, we feel very good of where we sit from a competitive standpoint. You know, and I think John made it in his comments. You look at the last five quarters, you know, our revenue growth, has been at least 5% overall, and we continue to see margin improvements. And so we're very proud of what our teams have been doing and how well they're doing in the marketplace. So hopefully that gives you some color, Dave.

Yep. Thanks much.

Your next question comes from Toby Sommer from SunTrust.

Thank you. With respect to the train vac business, I was wondering if you could, Share with us your thoughts of what the different versions of Medicare for All could mean for that business. Any color you can give or perspective would be helpful. Thank you.

Yeah, so, I mean, I think we've – I know there's been a lot of concern about the potential for Medicare for all, of course, Medicare for all is a pretty ill-defined concept. The proposals vary tremendously in scope, and there's a lot of unknowns. So for us to speculate, you know, on exactly what the outcome would be, it's pretty hard at this moment. I guess I would say, though, we've actually thought about a lot of some of these different scenarios as to what they could mean. We think the most reasonable thing is that changes in the country's health care model would create some new client needs. And given our positioning, and especially our positioning post the Transact acquisition, we feel pretty good about our prospects. Now, you know, some of the really extreme versions of this are ones that – frankly, which would be bad, I think, for everybody and for the country. I just don't think there's much chance of those coming into force, but, you know, who knows?

Okay. Thank you for that. In the HCB segment, your growth has, I think, been quite impressive. Could you describe how much that is being driven by market phenomena and increases in demand and maybe contrast that to headcount growth where you're able to attract seasoned talent from competitors who, for whatever reason, may not be as attractive platforms these days?

Yeah, I mean, I don't think we have that right offhand. I would say our growth, though, in the talent and rewards has been modest. There's a significant portion of that that's just come from demand and from, you know, winning work overall.

Your next question comes from Yaron Kinar of Goldman Sachs.

Thank you. Good morning. To start off with Free Cash Flow, I guess beating a dead horse here, I guess just to clarify on Greg's previous question, when you talk about the 15% long-term growth there, I think in the past you'd said it would be 15% or better growth. over a long-term period as well as each of the next three years. Is that each of the next three years still true today?

Well, I mean, look, looking from – we just gave you the guidance for 2019. If you're looking – if we're talking about over the course of the next couple of years here, we're saying we think those are going to be 15. We – I hope we didn't give the wrong impression. We never expected to be giving free cash flow forecasts for the next 20 years.

No, no, I understood. But I think when we were looking at the initial guidance for free cash flow for the next three years, I think one of the comments that was previously made was both an aggregate and for each of the years. And it sounds like at least for the next two years, you still expect at least 15% or better for each of those years.

That's correct.

Okay. And then on the higher cash tax payments, was that just a function of earnings coming in from higher jurisdictions or higher tax jurisdictions than you anticipated, or is there something else driving the increase?

I think it's two points. The first one, Jan, is the one you said, right? It's higher income in those higher tax jurisdictions than... what we originally anticipated. And the other piece of it is until you file the returns and you go through the adjustments and go through that process, we just had some of that happen as well in terms of, you know, just going through the process itself. So that drove our higher tax payments. So those two points.

Okay. Okay. And then if I can sneak one more in, the ASC 606 accounting catch-up. So do you still expect a roughly $10 million – That is yet to come in the fourth quarter?

Yes.

Okay. And that is basically all almost full margin as well, right?

Looking forward to that.

Okay. Thank you.

You're welcome.

Your next question comes from Mayor Shields from KBW.

Great. Thanks. Good morning. So two probably nitpicky questions. The first, is there any way of teasing out the contribution of facultative placements within CRV's organic growth in the quarter?

Mayor, we really don't disclose that. As you said, facultative is included in our CRV business as you try to think about comparabilities to others, but yeah, we don't disclose it.

I think generally, though, as we look at this, and it's probably not true every quarter, but annually, our growth tends to be about the same, or we think even sometimes higher than the others when we try to do as much as we can of an apples-to-apples comparison, but it's difficult.

Okay, that's perfectly fair, thanks. Second question, I'm trying to distinguish this. Obviously, the reimbursable expenses and other sort of augmented the organic growth for the quarter, and I was wondering if you could break out how much of that is reimbursable expense and how much of it is other that actually save for the company?

Yeah. I mean, look, there's a variety of little things that are included in there and the various pieces. You know, there's nothing that jumps out at you or, you know, really is driving at either in either period of time.

Okay. Thank you so much. You're welcome.

Ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to Mr. John Haley.

Okay, so thanks, everyone, for joining us this morning, and we look forward to updating you on our fourth quarter call in February 2020. So long.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.