Willis Towers Watson Public Limited Company (WTW) Q2 2017 Earnings Report, Transcript and Summary

Good morning, my name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2, 2017 Willis Towers Watson Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session [Operator Instructions] Thank you. Ms. Aida Sukys, Director of Investor Relations, you may begin your conference.

Thanks, Rob, good morning, everyone. Welcome to the Willis Towers Watson earnings call. On the call today are John Haley, Willis Towers Watson’s Chief Executive Officer and Roger Millay, our Chief Financial Officer. Please refer to our website for the press release issued earlier today. Today’s call is being recorded and will be available for replay via telephone through tomorrow by dialing (404) 537-3406, conference ID 51174595. The replay will also be available for the next three months at our website. This call may include forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, involving risks and uncertainties. For a discussion of forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking statements, investors should review the forward-looking statements section of the earnings press release issued this morning, a copy of which is available on our website at willistowerswatson.com as well as other disclosures under the heading of Risk Factors and Forward-looking Statements in our most recent annual report on Form 10-K and in other Willis Watson filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we may discuss certain non-GAAP financial measures. For a discussion of the non-GAAP financial measures as well as reconciliations to the non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures, investors should review the press release we posted on our website. After our prepared remarks, we’ll open the conference call for your questions. Now I’ll turn the call over to John Haley.

Thank you, Aida, and good morning, everyone. Today, we’ll review our results for the second quarter of 2017 and discuss outlook for the remainder of 2017. Reported revenues for the quarter were $1.95 billion, that’s flat as compared to the prior year second quarter, up 2% on both a constant currency and organic basis. Adjusted revenues for the quarter declined 1% as compared to the prior year second quarter, but were up 1% on both the constant currency and organic basis. Reported and adjusted revenues include $43 million of negative currency movement. As a reminder, adjusted revenues for the second quarter of 2016 include $26 million of revenue, which was not recognized as GAAP revenue due to purchase accounting rules. The second quarter of 2016 was the last quarter for such adjustments. As a reminder, the $41 million settlement we received from JLT for the Fine Arts and Jewelry business was included in the second quarter 2016 revenues. In the second quarter of 2017, we received $6 million in settlement payments, primarily related to the loss of a team in South Florida. As we mentioned in the first quarter, revenues were positively impacted due to the timing of the Easter holiday, timing of renewals and work that derived from regulatory changes. Therefore, in reviewing the results, our six month results more accurately reflect the business momentum. For the first half of 2017, reported total revenue growth was 2% as compared to the same period in the prior year, and up 4% on both the constant currency and organic basis. Adjusted revenues for the first half of 2017 increased 1% as compared to the same period in the prior year, up 3% on both a constant currency and organic basis. Adjusted revenues for the first half of a 2016 include $58 million of revenue not recognized due to purchase accounting rules. Reported and adjusted revenues include $93 million of negative currency movement for the first half of the year. Net income for the quarter was $41 million as compared to the prior year's second quarter net income of $76 million. Adjusted EBITDA for the quarter was $387 million or 19.8% of revenues as compared to the prior year second quarter adjusted EBITDA of $406 million or 20.6% of adjusted revenues. Net income for the first half of 2017 was $393 million as compared to the same period and the prior year net income of $321 million. Adjusted EBITDA for the first half of 2017 was $1.10 or -- sorry, $1.1 billion or 25.6% of revenues as compared to the first half in the prior year adjusted EBITDA of $1.08 billion or 25.4% of adjusted revenues. As a reminder, the first quarter is seasonally strong and margin is seasonally lower in subsequent quarters. As expected, the second quarter margin came in softer than the first. In addition to the seasonality, the 2016 JLT settlement negatively impacted margin comparison by 2 percentage points. While the second quarter margin enhancement may be masked somewhat by the JLT settlement, we're very pleased with our efforts this quarter with expense management. For the quarter, diluted earnings per share were $0.24 and adjusted diluted earnings per share were $1.45. Currency fluctuations net of hedging had a negative impact of $0.06 on adjusted diluted EPS. Before moving on to the segment results, I'd like to provide an update on 3 areas of integration: revenue synergies, cost synergies and tax savings. I'll start with revenue synergies. Our merger objective identified 3 specific areas of revenue synergies: global health solutions, the U.S. REIT market exchange and large market P&C. We've already achieved approximately 46% of our 3-year global health solutions synergies sales goal, and the sales pipeline continues to be robust. Integrated global management of employee health benefits brings a clear value-add to our clients, and that is showing through in the results of our sales effort. It's still a bit early to make any conclusions on the mid-market exchange progress as the sales season continues into November. However, we have a strong sales pipeline as we see the interest in the mid-market maintaining the momentum we experienced last year. Finally, we've won 18 large company P&C broker assignments in the first half of this year. We've been refining our marketing strategy into a more targeted approach and are pleased with the number of wins we've had to date. Our win rates in the large market are somewhat higher than the mid-market, but there are fewer proposals in the large market. While the initial wins are generating modest revenues, we feel positive about the development of key relationships, which we hope to expand on in an effort to help us achieve our long-term growth objectives. As we mentioned previously, we surpassed our original goal of a 25% adjusted tax rate a full year ahead of schedule. Our 2017 guidance anticipated achieving $30 million in merger-related savings. We continue to feel confident in achieving our 2017 savings objective and the overall savings goal of $125 million as we exit 2018. Now turning to the Operational Improvement Program or OIP. We continue to anticipate generating an additional $95 million of savings as we exit 2017. Most of the benefits associated with the saving program will impact 2018, and many of these programs are weighted to the second half of 2017. The program remains on track to be completed at the end of 2017. We continue to see progress in driving OIP and merger-related savings to the bottom line, but cost in margin management will remain a priority. Now let's look at each of the segments in more detail. As a reminder, beginning in 2017, we made certain changes that affected our segment results. These changes were detailed in the Form 8-K we filed with the SEC on April 7, 2017. For the quarter, total segment constant currency commissions and fees grew 2%. Constant currency commissions and fees for Human Capital & Benefits increased 1%; Corporate Risk and Broking increased 1%; Investment, Risk & Reinsurance increased 3%; and Exchange Solutions increased 15%. All of the revenue results discussed in the segment detail and guidance reflect commission and fees constant currency, unless specifically stated otherwise. So turning to Human Capital & Benefits or HCB. Commissions and fees constant currency growth was 1% and organic growth was flat. For the first half of the year, on an organic basis, HCB commissions and fees growth was 3%. As I mentioned earlier, due to the timing of Easter and early renewals, comparing the first half results year-over-year is a better indicator of business momentum than quarter-over-quarter. Retirement commissions and fees were down by 2%. Great Britain experienced strong growth this quarter, however, was offset by declines in Western Europe due to the timing of Easter and in North America, as a result of lower demand for both lump-sum projects. The growth in Great Britain was a result of increased actuarial project demand, primarily work relating to legislative changes. Talent and Rewards commissions and fees were down 1%, primarily due to a decline in new business in North America with an overall increase of commissions and fees in the three other regions. As we discussed in our previous earnings call, the implementation of our new organizational structure and restructuring impeded our market focus at the end of last year. We're still on track to generate growth as the year progresses and have already seen progress in our new business efforts, with steady increases in our pipeline each month. Health and Benefits have a strong commission and fee growth as a result of increased service to large market clients in North America, implementation and expansion of our global benefit management for multi-national clients and strong client retention in new business outside North America. Notably, timing of renewals in France and Spain created some softness in Western Europe for the quarter, though the year-to-date growth was nearly double-digit. Technology and Administration Solutions or TAS continue to produce strong results globally as we on boarded new clients in Great Britain and Western Europe and provided additional support to existing clients with respect to the UK legislative changes I mentioned earlier. As a side note, HCB revenues included a $5 million settlement related to the departure of Health and Benefits Brokerage teams. As you may recall, the company recognizes brokerage team settlements as revenues, which are included in adjusted earnings. We continue to have a positive outlook for the HCB business in 2017. Now, turning to Corporate Risk and Broking or CRB. Constant currency and organic commissions and fees were up 1% as compared to the prior year. For the first half of the year, CRB grew 2%. Commissions and fees growth was led by Great Britain, with wins in transportation, financial lines and natural resources. Western Europe up had solid growth, primarily led by Ireland and Iberia. Additionally, international experienced solid growth in Asia and Latin America, but experienced some softness related to the accelerated timing of policy placements and renewals in the first quarter due to regulatory changes. Commissions and fees declined in North America as a result of several large, onetime projects booked in 2016 as well as unfavorable rate and risk exposure changes. New business levels continued to grow as expected, and client retention stayed strong. We continue to be optimistic about the momentum in our CRB business going forward as we expected North American revenues to build in the second half of the year. Now to Investment, Risk & Reinsurance. Constant currency and organic commissions and fees increased 3% as compared to the prior year quarter. As a reminder, the Reinsurance line of business represents premiums based reinsurance only. The facultative reinsurance results are captured in the CRB segment. Reinsurance commissions and fees growth was a result of strong new business in international and favorable timing in specialty and in North America. Wholesale was soft in the second quarter due to the timing of renewals booked in the first quarter, which had been booked in the second quarter in the prior year. For the first half of 2017, wholesale commissions and fees grew by 4%. Risk Consulting and Software or RCS also experienced strong growth as a result of greater demand for project work in EMEA and software sales. Investment commissions and fees increased as a result of new delegated investment clients and increased performance fees. Max Matthiessen delivered strong growth due to higher performance fees as a result of new business and a more robust European equity market. As a reminder, we received a onetime $41 million settlement for the fine arts and jewelry business in the second quarter of 2016. As expected, we had a decline in total segment revenues due to this large onetime event. This also enhanced the second quarter 2016 segment margin by 8 percentage points. We continue to feel very positive about the momentum of the IRR business for 2017. And lastly, Exchange Solutions. Commissions and fees increased by 15% from the prior year. Driven by increased enrollments, our retiree and access exchange revenue increased 14%, and the rest of the segment increased 17%. Increased membership and new clients drove the revenue increase in our active employee exchange. The Health and Welfare in North American Pension Outsourcing business continue to grow, primarily due to new clients and customized active exchange projects. As the active exchange market evolves, we’re seeing the work we do for our clients split between the exchange and the administration teams, as well as all our health and benefits lob. As large companies make the initial move to exchanges for health benefit delivery, they’re opting for a more customized approach. The benefits administration group is currently more effective at providing this customization, as our outsourcing clients have unique requirements. As we move towards the 2018 enrollment period, it will become increasingly difficult to separate active exchange revenues from administration revenues and H&B revenues as we see these three groups working in collaboration with each other. Our 2018 active sales pipeline continues to look strong in both the mid-market and large market. As we mentioned in our previous earnings call, we have 6 large clients with about 150,000 total lives that have committed for the 2018 enrollment period and 1 large client committed for the 2019 enrollment period. The mid-market sales season will not be finalized until early November. Our channel brokers are keeping pace with prior year sales. The retiree exchange enrollment process is changing somewhat for 2018. We're seeing enrollments more evenly spread throughout the year, with a slight bump in enrollments in the fall of 2017, and the sales season is continuing as some larger companies are contemplating off-cycle enrollments. We're also seeing an impact from the current health care debate, and yet there are some clients who have held off this year until there is more clarity. Now while ACA doesn't generally impact Medicare retirees, it has a significant impact on the pre-65 retirees, and many companies are looking for a coordinated solution for both groups. We continue to be optimistic about the long-term growth of this business. So I'm excited to see the progress we've made in building Willis Towers Watson, not only evidenced by our first half results, but with the commitment of our colleagues as well. We recently received the results of our employee engagement survey, and I was most impressed with a couple of factors. First, the response rate was higher than we'd anticipated. This, alone, highlights to me that we have strong colleague engagement across the globe. Second, we scored very well in the areas that are key to our long-term success, such as positive responses relating to colleagues who are proud to be part of Willis Towers Watson, strong alignment to our values, colleagues who believe in our commitment to inclusion, having an environment where we value differences and colleagues who feel supported by their managers. We've also identified areas that need more focus as we work through our company's evolution and integration, but we now have a clear roadmap to move forward. I'm extremely proud of our colleagues, all 42,000, who've been instrumental in creating Willis Towers Watson. We've been given a unique opportunity to build an organization which reflects our values and a strong client commitment and also provides distinctive, integrated market-leading solution. The changes we have experienced in the last 18 months have been significant. I believe the financial results for the first half of this year reflect the engagement and commitment of our colleagues. As we move forward through the integration process, we can now shift greater focus to the market and build on the fundamentals of a merger strategy, which we believe will create more value for our clients, colleagues and shareholders. Based on what we've accomplished in the first 18 months, I'm excited as I look forward to the progress we can make together in the next 18 months. On a bittersweet note, this may be Roger's last conference call. And I say, maybe his last call, as Roger has been very gracious to remain flexible to ensure a smooth transition with a new CFO. Roger joined Watson Wyatt, a $2 billion company, just before the merger of equals that created Towers Watson. He played a key role in shaping that business and in enhancing the financial profile of the company. There were a host of acquisitions and mergers along the way. Perhaps, one of the most significant acquisitions, Extend Health, brought us the advent of the exchange business. Then, about 2 years ago, Roger was asked to take on the challenge of yet another merger of equals with the creation of Willis Towers Watson. As Roger retires from Willis Towers Watson, he leaves behind a $20 billion organization. We've experienced a great deal of change in Roger's tenure as CFO, but some things have remained rocksteady, such as Roger's pragmatic counsel and his desire to win. I want to thank Roger for his many contributions, guidance and his partnership over the last several years and hope that he and Robin have a long, healthy and rewarding retirement. Now I'll turn the call over to Roger.

Well, thanks, John for those very nice, kind words. And good morning to everyone. Before getting to the results, I'd also like to comment on my retirement. I have had some of the best experiences of my career as CFO of Willis Towers Watson. It's really been an honor and a pleasure to work with a group of such bright and innovative people. And more importantly, people with such deep values and strong sense of commitment to their colleagues, clients and value creation. I've truly entered the challenges, the success and, most of all, the journey. Thank you for the opportunity to share in that experience. As I leave Willis Towers Watson, I feel confident that the team will continue the journey to even greater heights. In addition, I’ve really enjoyed the opportunity to participate in the capital markets and all the back and forth that entails, over time, and the relationships that were built as a result. Now for our financial results. As a reminder, our segment margins are before consideration of unallocated corporate costs, such as amortization of intangibles, restructuring costs and certain integration expenses resulting from mergers and acquisitions. The segment results include discretionary compensation. Income from operations for the quarter was $124 million or 6.3% of revenues. The prior year second quarter operating income was $136 million or 7.0% of revenues. Adjusted operating income for the quarter was $363 million or 18.6% of revenues, an increase over the prior year quarter adjusted operating income of $357 million or 18.1% of adjusted revenues. The GAAP tax rate for the quarter was 16.8% and the adjusted tax rate was 29.1%. As we discussed last quarter, the first quarter tax rate is generally the lowest of the year. As expected, after reiterating our 2017 tax guidance of 23% to 24% in our last earnings call, we experienced a significant increase in the tax rate for the second quarter. Our first half tax rate is on plan. I would also like to address one point regarding the other expense and income line on our income statement. This quarter we had a $30 million expense on this line versus $6 million of income in Q2 '16. This variance is primarily due to a favorable balance sheet re-measurement in the prior year and greater operational FX hedging cost in 2017. Before we discuss the segment operating margins, I'd like to remind you that we provided recast segment operating income with the prior periods in the Form 8-K we filed on April 7, 2017. Additionally, our segment margins are calculated using total segment revenues. In Q1, HCB, CRB and IRR all experienced very strong revenue performance, some of which was timing related, and the corresponding increase in operating margin. In Q2, these businesses had dampened margin results due to the Q1 timing factors as well as a very difficult Q2 2016 comparative in the case of IRR. Overall, these businesses continue to perform well in managing cost levels to drive margin enhancement. For the second quarter, the operating margin for the HCB segment was 17%, flat to the prior year. Despite a drop in reported revenues, margins stayed level due to the restructuring which took place in late 2016 and general expense management. For the first half of 2017, operating margin was 28% as compared to 26% in the prior year. The CRB segment had a 16% operating margin, flat to the prior year. As a result of cost management, the second quarter margin remained flat despite the annual pay increases as of April 1 and planned phase in of expense allocations related to acquisitions. For the first half in 2017, operating margin was 17% as compared with 16% in the prior year. For the quarter, the IRR segment had a 25% operating margin as compared to a 29% margin in the second quarter of 2016. As a reminder, the $41 million JLT settlement enhanced the IRR segment Q2, 2016 margin by 8 percentage points. Excluding the impact of the settlement, the 2017 margin would have been almost 4 points higher year-over-year. The first half 2017 operating margin was 36% as compared to 35% in the prior year, including the JLT settlement. The Exchange Solutions segment had a 19% operating margin as compared to 22% in the prior year second quarter. The benefits administration business was primarily responsible for the decline in margin. As we prepare for the 2018 healthcare enrollment season and continue phasing in new clients, compensation expenses ramp up to prepare for the enrollment, and revenues are deferred until projects go live. The first half of 2017 operating margin was 20% as compared to 24% last year. This decline was anticipated as strong growth typically dampens operating margin on a temporary basis. Moving to the balance sheet, we continue to have a strong financial position. In May, we issued $650 million -- a $650 million seven year note with a coupon of 3.60%. The proceeds were used to reduce the outstanding balance of the current revolving credit facility. Free cash flow for the first half of 2017 was $200 million an expected decrease from $344 million for the first half of the prior year. The decrease was driven by higher capital expenditures, changes in working capital and increased discretionary bonus payments. As a result of the merger, the legacy Towers Watson colleagues experienced a change in fiscal year, which resulted in a partial year payout of bonuses in 2016. We continue to focus on enhancing free cash flow in 2017. This quarter, we repurchased approximately $140 million of Willis Towers Watson stock, bringing the total for the year to $296 million. As of June 30, 2017, the remaining stock repurchase authority was approximately $837 million. Now let's review our guidance for 2017. We continue to expect constant currency revenue growth for the year to be in the 2% to 3% range. Constant currency and organic revenue will be closely aligned as we now have a full year comparative results for all of the 2015 acquisitions. This guidance includes the impact of the divestiture of the Charles Monat business, or Global Wealth Solutions, which closed in July. We expect the adjusted EBITDA margin to be in the 23% to 24% range for the full year. As a reminder, the first quarter margin is seasonally high, and we expect seasonally lower margins as the year progresses. For segment revenues, we continue to expect low single-digit constant currency commissions and fees growth for HCB and CRB. We're increasing the IRR commissions and fees expectation to a range of low to mid-single-digit growth. Exchange Solutions should have commissions and fees growth of approximately 10%, with good growth in the benefits administration and the actives exchange, supplemented by moderated growth in retiree. Integration costs are expected to approach $200 million for the year. The expected increase in cost related to enhancement of the global benefit solution platform, the cost of shareholder lawsuit related to the merger, and balance sheet provisions related to operational harmonization. We continue to expect the adjusted tax rate to be in the 23% to 24% range. As a reminder, there were some onetime discrete items in 2016 that will not be repeated in 2017. We expect the adjusted tax rate in the second half of the year to be similar to the Q2 '17 adjusted tax rate. In 2016, our discrete item benefits were concentrated in the second half of the year, so the third and fourth quarter tax rates of 2016 should not be considered a good benchmark for the second half of 2017. Adjusted diluted EPS is expected to be in the range of $8.36 to $8.51. The guidance range has dropped by $0.04 due to the divestiture of the Global Wealth Solutions business, which was sold in July. Annual guidance assumes average currency exchange rates of $1.28 to the pound and $1.13 to the euro. We also expect approximately $20 million to $25 million of expense associated with our FX hedging programs in the second half of the year. This expense flows through other expense and income, below the income from operations line. The hedging program excludes the potential impact for balance sheet movements. I believe the results for the first half of 2017 indicate the continued progress of our integration efforts and the ability of our colleagues to adapt to change. This is a testament to the strong collaboration of our colleagues and our unrelenting client focus. Every dynamic organization must adapt to ever-changing global markets, political and economic risks, and most importantly, for Willis Towers Watson, our clients' needs. As I've watched the integration progress and our ability to adapt to change becoming stronger and stronger with each quarter, it gives me great confidence in the long-term success of the company. I've been very proud to be part of this unique opportunity, and I wish all of our colleagues the best of luck and much success. And now I'll turn it back to John.

Thanks, Roger. And now we'll take your questions.

[Operator Instructions] And your first question comes from the line of Greg Peters from Raymond James.

Good morning. Before I begin with my two questions, congratulations on your retirement, Roger. Certainly enjoyed talking with you through the years.

Great. Thank, Greg, and have enjoyed working with you as well, certainly.

Obviously, there's a lot of questions I have around the release. But why don't I zero-in on to, John, in your comments, you mentioned, I think, $94 million, $95 million of OIP savings. Is that what you expect to fall for the bottom line or is that just a general savings? I know, in the past, we've been challenged to figure out how much of that actually falls to the bottom line?

Yes. I think that's the amount of gross savings that we expect to come out of OIP, Greg. I think as Roger and I have talked about in the prior calls, one of our big focuses is to make sure that we get the bulk of that dropping to the bottom line. But we don't -- we don't have numbers for that until we get our 2018 guidance.

Maybe, Greg, just to add to that, because as John alluded to, we're most focused on margins. So as we look at the first half of the year and the enhancement of operating -- adjusted operating margin, that's where we look to see if the savings, both for integration and for OIP, whether they're impacting the company, which is why I spent the time I did going through the first half margins.

Yes. I mean, and just to maybe emphasize that, if you look at the first half margins, in HCB, it's up from 26% to 28%; CRB, it's up from 16% to 17%; IRR was up from the 31% to 32% range, without the JLT settlement to 36%; and Exchange Solutions was down a little bit due to growth from 24% to 20%. But we're seeing a lot of these things drop to the bottom line this year already and we expect to see that continue next year. But that's where our push is going to be.

Right. And then as it relates to the OIP, is there savings that -- are you going to come when some of the reinvestments that were made previously expire and are not remade? Does that make sense to you?

Yes, it does. I think -- we haven't actually gone back and examined all of the different reinvestments that were made with some of the OIP things. And so I think I don't want to make a blanket statement about how these things are going to be. I think one of the things that we're very much focused on going forward is making sure that we prioritize and rationalize all of the investments we have within the company. And we're embarking on some new investments today. We're consolidating some old ones and we're eliminating some old ones. And so, we're doing all of that and we expect them all to pay off in the future.

And I think, also, just in our planning approach last year rather than go back and try and figure out history and make kind of tactical decisions based on what had happened in the past, we think that by putting emphasis, going forward, in the organization on margin enhancement, the prioritization process will naturally come out. If there were investments, two, three years ago that aren’t paying off, that, that’s where people will go to enhance margins. If those investments were working, then they’ll go somewhere else. So, that’s the – we thought the most productive approach.

Thanks for that color. Now, my second question was just around tax. It is moving around a little bit and I know you cited two numbers: the 16.8% and the 29.1%. Can you give us some additional color around what’s causing all the movements within the tax rate? And what sort of the long-term targets are?

Yeah. So maybe, kind of do a macro thing first and then a little bit on the seasonality. So, we continue to view this kind of range that we’ve talked about, 23% to 24% as being the landing point from a run rate, without any discrete items of where Willis Towers Watson began its life, so to speak. And last year, as you know, we came in a bit lower than that because of discrete benefits that we talked about last year and that I talked about in my remarks. And so we particularly wanted to highlight this quarter that those discrete benefits last year came mostly in the second half of the year. So, when you step back from the tax rate, and if you’d seen last year, without those discrete benefits, the first quarter, we expect going forward will be below mark for the adjusted tax rate. And then quarters two, three, and four will be higher. And it is kind of unfortunate the way the dynamics of the accounting work between the operating results and the adjusting items, but because the adjusting items are in higher tax locations, when you add those back, they add to the tax rate, so that’s what you see between the GAAP rate and the adjusted rate. But also then, in periods of lower operating profitably, you get this big spike, so that’s what you get in quarters two, three and four. So I think that’s going to be the trend, and I think this year, it’s looking like the quarter-to-quarter-to-quarter-to-quarter rates are going to be pretty true to that trend.

And just on the follow-up on that point. When I think about -- push aside the first quarter estimate or results, when I think about the second quarter, third quarter and fourth quarter, how much variability will we see in the tax rate on a go-forward basis between those 3 quarters?

So we would expect -- and this is without getting into predicting kind of plus or minus one point, or maybe even plus or minus two points, but the high 20s rate that we came in for the second quarter, we would expect to be in the higher 20s in the third quarter and fourth quarters as well. I mean and if you do the arithmetic for 23% to 24% versus where we are for the first half, that’s what you get as well.

Perfect. Thank you for your answer.

Thanks, Greg.

Your next question comes from the line of the Ryan Tunis from Crédit Suisse. Your line is open

This is Crystal Lu, in for Ryan. My first question is on the constant currency growth guidance. I think last quarter, you guided to the high end of the two to three full year revenue growth range. And you said that organic growth was expected to accelerate in the second half of the year. We've now achieved about 3% in the first half, but you still maintain the 2% to 3% guide. Are you no longer expecting that growth acceleration in the second half?

No. I don't think -- we weren't saying anything different, I think, than what we've said in the first half of the year. So what we said after the first quarter was we maintained our guidance at 2% to 3%, and I think, then, in a question, somebody asked and we said "Well, we're more likely to be at the high side of that." I think if you asked the question today, I'd say, "Yes, we're more likely to be at the high side of that." We think our outlook is pretty much where it had been. Maybe it's even a little more positive after the whole strong first half. But we don't think there's anything that's calling for us to necessarily raise our guidance now, but we feel very encouraged by the results of the first half.

Okay, great. And then also, John, in your comments in the press release, you alluded to reaching the full potential. And we were just wondering if this full potential refers to achieving that $10 EPS 2018 target discussed before at the Investor Day, or it refers to some other metrics of the company?

Yes, let me just pull up the press release here. So, I'm sorry, I just had to take a quick look at that to refresh my mind. When I was talking about that, I was actually talking about the much broader thing. And I think, as we talk to our colleagues and to our investors and our analysts, there's 2 things we focus on: one is, some of the short-term commitments that we made, relatively short-term commitments we made when we were trying to do the deal as to what we were going to work on, and those are around the synergies, those are around the -- achieving some of those results. And those have -- those are very important to us. We take commitments we make to our colleagues and to investors seriously, so we want to make sure we live up to them. But frankly, when we think about the vision of what we can create at Willis Towers Watson, and what we can do in the longer run, that's much greater than the short-term commitments, and that's what I was referring to in the press release.

Your next question comes from the line of Shlomo Rosenbaum from Stifel.

Before I ask my questions, just to make a point of when you went through the litany of things you put Roger through over the last 10 years, you sounded like you just flat-out wore him out.

Roger is shaking his head vigorously, yes.

He's quite the task master, so...

John, could you just talk a little bit more about the Corporate Risk & Broking. In North America, the commentary was the revenue was flat, you had tough comps year-on-year because of some projects. Could you just talk about, sometimes there's movement between quarters and then, sometimes there's a talk about what does it feel like you're growing at, just in the general sense? Can you make some commentary about that in North America?

Yes, so I think, and Roger, you may want to add to this, too, but I think the -- we had a few really large projects that we had worked on last year in 2016 that we knew were not going to be repeating. And, let me just, we had…

There's some big real estate projects, and particularly, things in the Northeast.

Particularly big things in the Northeast. And so in the second quarter of 2016, we had 6 accounts over $500,000 and it was a total revenue of nearly $4.6 million. And we knew that these were big projects that weren't necessarily going repeated, or well just weren't going to repeat. In quarter two, we have two accounts that are $1.8 million there. So there's a bit of a decline there. But if we just step back from those and look at the business overall, I think we're pretty optimistic about the rest of the business and what is going on there. So as I said in the script, we feel pretty good about the momentum in the CRB business going forward and in particular, I called out North America as a place where we expect the revenues to build in the second half of the year.

Okay. So you feel like you're in an upswing right now in what's it’s called -- in CRB in North America in particular?

Yes. I think that -- I do think that we've sort of passed an inflection point. I think 2016 was a tough year, overall, particularly for North America, but I think it's trending up this year. And again, remember, we did, overall CRB, we did grow by 2% for the first half of the year.

Great. And then you made a comment about the settlements, you had a loss in the team in South Florida. Was that a higher wave, a whole team? Where was it exactly? I don't usually hear about this coming out of your company.

Yes, it was a whole team in South Florida here, and that was in -- gosh, I want to say the fall, maybe October of last year or something like that.

And we had talked about that, I think, when people have asked us questions about some of the turnover and things like that. So it's nothing new from what we've talked about.

But it's healthcare brokerage, it's not insurance brokerage?

Well, it's a mix, but it was more.

I mean, just, Shlomo, just to be clear about that, I think we did talk about that in some of the earnings call because we talked about the fact that we lost the people in that revenue.

We have talked about that, a lot. Because it's the one area -- it's really the one specific thing that we've identified consistently that was a departure kind of out of the norm.

And your next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Hi. Good morning. My first question is on the margin side. So based on my math to hit the whirlwind or the 22% of your margin target for this year, you probably need to see about 130 basis points of margin improvement in the second half, I calculate around 90 ex-JLT in the first half of these year. So I guess what I'm trying to tie together is what's driving the margin improvement in the second half of the year? And also, what drove the unallocated net, that $9 million benefit that hit margins this quarter?

Yes, so let me deal with the second one first. So when you look at the unallocated net, we typically will expect that to run at an expense level that's probably more in the range of what you see for the six month period. When you look at those numbers, it is more consistent six month over six month. The reason for the volatility between the first quarter and the second quarter is that we did have some movement between expenses booked at the corporate level in the first quarter that were then pushed out to the business, so released or created income in that non-operating line, and pushed out to the businesses, the segments in the second quarter. So that’s not a net impact to margins of the company, and something that you generally wouldn’t expect to happen. We just had that movement this period between the first quarter and the second quarters. In terms of overall margins, and maybe just to go back to what we talked about with Greg’s question. So I think the clearest way to look at the margin management success of the company is to look at operating margins. And if you step back from first half operating margins, our operating margin was up some 50 basis points, 60 basis points by itself. But then, if you adjust for the fine arts and jewelry settlement, that will give you another 100 basis points or so, or actually, I think it was up 70 basis points without that. So you have about 170 basis points of operating margin improvement without fine arts and jewelry, which was not operating last year, so you do have to back that out. So, I think that’s the best indicator of our margin momentum. I think when you look at EBITDA margin, it is complicated this quarter because of this FX related hit that we took for intercompany and balance sheet items which does bounce around, but it’s non-operating in nature. So, I think you have to back that out, and that's why I think operating margin is a clear indicator. So, we think we’re on track. As you've said, we've maintained the guidance. In our plans, we think the second half is achievable, the organization is very focused on it, I think, John talked about some of the segment progress, you can see everybody's focused, I think.

So just a follow-up to that. So as you think about the second half margin improvement, it seems like depending upon what level of OIP savings do essentially fall to the bottom line, that’s more of a 2018 margin benefit based off of your comments during previously in the call. So I guess, there could be some benefit from merger savings, but you see yourself hitting your full year margin goal just by greater margins throughout all of your segments, is that how you think about it?

Yeah. I mean, I think it’s the whole company, is in the game. So it’s not just the segments, but it’s also all the functional areas, which you might recall, that’s where a lot of the integration activities are happening. So, it is by creating plans and managing the plans throughout the company to enhance margins. I mean, that’s how we’re going to steadily get there over the next 18 months.

And then my second question, I just want to follow up on one of the questions earlier on the call. I mean, you guys are leaving the organic growth outlook unchanged, but the half year itself probably seems to be, is at the high end. So, as you look to the pipeline and you get a feel for the business that should be coming over the next quarter, next couple of quarters, I’m just finding, why not just raise the target today to enforce the momentum that you’re seeing, or do you -- is there some timing or shifts that might cause you to come in below that 3% in the second half of the year?

No, I mean, look, I think we had a very strong first half. We still feel pretty confident about what we're going to achieve. But I think -- we don't want to keep on, when we do well, raise the target until we make sure at some point, we don't hit it. So I mean, that's just not the game we're interested in playing.

Your next question comes from the line of Mark Marcon from R. W. Baird. Q - Mark Marcon Good morning, thanks for taking my questions. Roger, it's been a pleasure working with you, congratulations and best wishes. Wondering if you can talk a little bit about the Exchange Solutions business? It sounds like it's evolving. How should we think about the margin profile, longer term, within that business as we end up having a bigger merger between what we used to think of as exchange -- pure exchange versus the benefits administration?

John, you probably have some thoughts on this, maybe I'll start. I mean I don't think there's been any change in how we view where Exchange Solutions should be. They should be at least at the overall average margin targets of the company, if not with growth, leveraging -- it is more of an operating type business than the administration and related exchanges areas, so as scale is built, with the opportunity, at some point, to have above average company margins.

Yes. I think that's right, Roger. And look, this is a business that is really in its infancy. And so there's a lot of cross currents that are occurring right now. We feel pretty good about being able to operate in what's a very high-growth business. We feel very good about being -- operate at a reasonable margin now. But we do think that when this builds scale and the market comes down, we are going to have an opportunity to achieve even higher margins.

Great. And then with IRR, you took up the guidance for the growth for the year. Can you comment on specific -- the specific areas that you're seeing the improved trends in? And then, separate from that, can you just discuss any sort of very specific timing issues that somebody should consider as it relates to just a very near-term Q3 outlook relative to Q4, if there's any particular items that we should be adjusting or incorporating into our estimates? Thank you.

Yes, sure, maybe just a comment from me first, and that maybe John will have something to add on. I think when you look across IRR, broadly, as John went through in his script remarks, you're seeing just better performance year-over-year in most of that segment. And reinsurance is performing well, the risk consulting business is performing well, and the investment business is performing well. So taking up the guidance just as a reflection both of first half performance as well as the expectation that trends will be better through the year than they were last year. John?

Yes, I think, to your second question, Mark, there's really nothing we see that are big flows between quarter three and quarter four at this time, so nothing to report there.

Ladies and gentlemen, please note that this call will be ending at 10:00 o’clock a.m. It’s a hard stop. Your next question comes from the line of Bob Glasspiegel from Janney.

Good morning. Thanks for squeezing me in. Cash flow, up nicely for six months was down in the second quarter, 41% versus 76% I calculate. I assume the legal settlement a year ago drove that. This is a relatively thin quarter typically for cash flow. Anything big pushes and shoves in the numbers? And where are you on sort of pension cash expenses for the year in your expectations versus last year?

Yes, so for pension specifically, I think there was roughly $250 million of outflow last year and we think it's going to be a bit below $200 million this year. Overall kind of puts and takes in the first half cash flows, we do have some absorption from working capital in the first half. You see that in the cash flow statement. We have a bid in CapEx, so I think we've talked about this in the past, but you would expect during integration to have a bit of a bump up in capital expenditures as a result of the big IT consolidation projects we have, as well as the big real estate projects, and you're starting to see that more in the first half of this year. And then, as I mentioned in my remarks, you also have an impact from the bonus payments year-over-year. so a bit more cash going out this year because of the half year only payment to the Legacy Towers Watson folks last year.

How much above normal would you say your IT CapEx for restructuring is running?

So CapEx was $20 million over last year. I mean, I don't know if I should call last year a fairly normal year, but we didn't have a lot because the CapEx projects themselves take a while to -- they tend to be more complex type areas. So that's probably the best benchmark that we have about how much in the first half was above normal.

Okay, thanks very much, everyone, for joining us this morning. And I look forward to talking to you at our third quarter earnings call in November.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.