Willis Towers Watson Public Limited Company (WTW) Q3 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2017 Willis Towers Watson’s Earnings Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference call is being recorded and will run for 60 minutes. I would now like to turn the conference over to your host, Aida Sukys, Director of Investor Relations.

Thanks, Emily. Good morning, everyone. Welcome to the Willis Towers Watson Earnings Call. On the call today, with me on the call today are John Haley, Willis Towers Watson’s Chief Executive Officer; and Mike Burwell, 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 99179607. The replay will also be available for the next three months on our website. This call may include forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which may involve 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 our 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 annual -- recent report on Form 10-K and in other Willis Towers 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.

Thanks, Aida, and good morning, everyone. Today, we’ll review our results for the third quarter of 2017 and discuss the outlook for the remainder of 2017. However, before I get to the results this morning, I’d like to acknowledge those who’ve been impacted by any of the recent tragedies that have been experienced around the world. On behalf of all the Willis Towers Watson colleagues, I extend our heartfelt condolences to those who lost loved ones in the hurricanes, flooding, earthquakes, fires, landslides and the horrific events in Las Vegas and New York. Our thoughts are also with those who lost their homes and businesses and continue to deal with these life-changing events. A number of our own colleagues were also impacted by these events. Our thoughts are with them during this time of recovery. I also want to thank all of our colleagues for their swift action to help our clients before, during and in the aftermath of all of these events, with a special acknowledgment to our brokerage colleagues. Before the storms hit, our brokers were able to run proprietary models, which provided a cone of uncertainty to our clients, so they could focus resources on the locations which were most at risk. We were providing these updates five to six times a day. We contacted our clients with claim and contact data ahead of the storms and for those who were in the vicinity of the wildfires in California. Our forensic teams were out in full force within hours, and many more of our colleagues were called into the field to support them. Not only are our teams working with the carriers to try to expedite claim assessment and payment, but they’re also trying to minimize losses after the fact and get our clients back on their feet as quickly as possible. One example of this commitment came in the aftermath of Irma. A Willis Towers Watson broker worked with the carrier to track down a generator, so additional damage to a client’s facility could be prevented. Even as many of our own colleagues were impacted by these events and were out of pocket, our commitment to our clients was and remains steadfast. Contingency plans were implemented to ensure our clients in the impacted areas had a point of contact. The collaboration and support among all of our colleagues exemplified Willis Towers Watson values. It’s especially clear that in times like this, the commitment to our clients goes well beyond just securing an insurance policy. Now I’d like to move on to our third quarter results. Reported revenues for the quarter were $1.9 billion, up 4% as compared to the prior year third quarter and up 4% on both the constant-currency and organic basis. Reported revenues included $12 million of positive currency movement. We observed growth in all of our segments and regions for the quarter. Net loss for the quarter was $54 million, as compared to the prior year third quarter net loss of $31 million. Adjusted EBITDA for the quarter was up 17% and was $322 million, or 17.4% of total revenues, as compared to the prior year third quarter adjusted EBITDA of $275 million, or 15.5% of total revenues. For the quarter, diluted loss per share was $0.40 and adjusted diluted earnings per share were $1.12. Currency fluctuations net of hedging had no impact on the adjusted diluted EPS. 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. All of the revenue results discussed in the segment detail and guidance reflect commissions and fees constant currency, unless specifically stated otherwise. Our segment margins are calculated using total segment revenues and are before consideration of unallocated corporate cost, such as amortization of intangibles, restructuring cost and certain transaction and integration expenses, resulting from mergers and acquisition. The segment results include discretionary compensation. Total segment commissions and fees grew 3% on a constant-currency basis and 4% on an organic basis. Human Capital & Benefits, or HCB, commissions and fees growth was 2% and organic growth was 3%, as compared to the prior year third quarter. Our Technology and Administration Solutions, or TAS, revenues increased by almost 30%. All regions had strong growth, as we continued to implement new clients and provided additional support to existing clients in Great Britain with respect to the legislative changes. Health and Benefits commissions and fees growth was 2%, contributing to the year-to-date growth of 8%. This quarter’s results were driven by the major increase in new global benefit appointments. North America’s large market also continued to see strong growth in both project work and product sales, and middle market revenues grew modestly. Notably, these results were partially offset, as international revenues decreased due to the sale of our Global Wealth Solutions business. On an organic basis, international grew by 16%. Talent and Rewards commissions and fees grew 1%, primarily due to strong software sales, increased project work related to corporate transactions and growth in compensation surveys. This growth was somewhat offset by lower demand in the rewards advisory business. As expected, retirement commissions and fees were down by 2%. The lower demand for Bulk Lump Sum work in North America and a decline in special projects in Western Europe were partially offset by very strong growth in Great Britain. The growth in Great Britain was related to pension legislation and continued demand for derisking services. International also had strong growth, in large part due to our acquisition of Russell’s actuarial business, earlier this year. The operating margin for the HCB segment was 19%, an increase of 1% from the prior year third quarter. Revenue growth in disciplined expense management contributed to the margin growth. Overall, we continued to have a very 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 4% as compared to the prior year third quarter. North America CRB had solid growth of 4%, driven by increased new business and strong retention in all regions. International had 15% growth as a result of increased new recurring business as well as excellent retention driven by Russia, South Africa and Asia, offset by softness in Latin America. Western Europe had solid growth led by Sweden and Benelux. Great Britain commissions and fees declined by about 1%, as a result of declines in transport and a strong comparable from the prior year. Client retention was approximately 92% this quarter. On a side note, I’d like to say how pleased I am with the progress the management team and all of our colleagues have made over the last few quarters. To see the growth in North America is a very positive sign. Not only do we have the management and regional market structure finalized, but I believe this is a turning point for the segment as exhibited by our results this quarter. The job of our leadership certainly doesn’t end with the restructuring. Moving forward, the business will be managed in a continuous improving environment or what we call business as usual. The CRB segment had an 8% operating margin, flat to the prior year third quarter. The third quarter margin remained flat despite the revenue shortfall in Great Britain. We’re very pleased with the momentum in our CRB business globally. Now to Investment, Risk and Reinsurance, or IRR. Constant currency and organic commissions and fees increased 2% as compared to the prior year third quarter. As a reminder, the Reinsurance line of business represents Treaty-based Reinsurance only. The Facultative Reinsurance results are captured in the CRB segment. Insurance, Consulting and Technology, or ICT, formally called Risk, Consulting and Software, lead the growth for the segment as a result of strong software sales, Reinsurance commissions and fees growth was flat as a result of positive timing in previous quarters and continued pricing pressure on renewals. However, overall renewals increased as a result of higher returns on U.S. investment income. Investment commission and fees were flat but revenues increased as a result of increased performance fees. Wholesale, Securities and Max Matthiessen grew slightly due to an increase in performance fees and new business as well as positive timing on some contracting. Commissions and fees were offset by a decline in the portfolio in underwriting business, driven by a loss of profit commissions following the Atlantic hurricanes, the cancellation of a contract and the divestiture of a number of our small programs in the portfolio. For the quarter, the Investment, Risk & Reinsurance segment had a 12% operating margin, flat to the prior year third quarter. We continue to feel very positive about the momentum of the IRR business for 2017. Not only is the core business doing well, but we’re excited about some of the innovation taking place. For example -- well, I guess, one prominent example is the development of the Asset Management Exchange, or AMX. This exchange is a more efficient way for institutional investors and investment managers to transact with one another. It offers investors a smarter, easier and less expensive way to access their preferred investment managers by cutting the time needed and the expense occurred in operational tasks, like negotiating contracts, while at the same time, introducing an extra layer of risk monitoring. It also provides many of the same efficiencies for investment managers and it reduces their compliance burden while opening up a marketplace for a potentially new business. AMX is currently available in the UK, in Ireland and Australia and has only been operational for eight months. We already have more than $2 billion of assets on the exchange and are getting great traction in adding both investors and investment managers. So last, we’ve changed the name of Exchange Solutions to Benefit, Delivery and Administration, or BDA. Commissions and fees for BDA increased by 11% from the prior year third quarter. Driven by increased enrollment at our Individual Marketplace, which was formerly known as the Retiree and Access Exchanges. The Individual Marketplace commissions and fees increased by 9%. The rest of the segment increased by 15%. Increased membership and new clients drove the revenue increase in our Group Marketplace, and that was what was formerly known as the active employee exchange. The Health and Welfare in North America, pension outsourcing business continued to grow, primarily due to new clients and customized Active Exchange projects. So let me turn to the 2018 enrollments. As we mentioned in our previous earnings calls, we have six large clients with about 150,000 total lives that have committed for the 2018 enrollment period in our Group Marketplace. The mid-market sales season is winding down, and it won’t be finalized really until later this month, but we expect to have enrolled approximately 35,000 lives by the end of December 2017. As we mentioned in our previous call, the Individual Marketplace exchange enrollment process is changing as the business matures. Enrollments will be spread more evenly throughout the year, so that while we may have 70,000 to 80,000 retirees enrolled during 2018, only about 30,000 are scheduled to enroll for January 1, 2018. The BDA segment had a 20% operating margin, as compared to 14% in the prior year third quarter. The Individual Marketplace business was primarily responsible for the increase in margin, as our seasonal staffing models were aligned with the expected pacing of enrollments during the year. While there are elements of this business, which continue to evolve, we like the direction the business is taking and continued to be optimistic about the long-term growth of the BDA business. So moving on to our merger synergy objectives in the Operational Improvement Program, or OIP. As we’ve discussed in past calls, we surpassed our tax rate objective of obtaining a 25% tax rate by the end of calendar 2017, and we’re on track to achieve the net $125 million in cost synergies when we exit 2018. All savings initiatives will be completed and project management resources and costs will be eliminated as of this December 31, 2017. We expect to meet our savings goals of $95 million, and this is an important driver in achieving our 25% adjusted EBITDA margin. Our merger objectives also identified three specific areas of revenue synergies: Global Health solutions: the U.S. mid-market exchange; and large market P&C. We’ve already achieved nearly 60% of our three year Global Health solutions synergy sales goals. The average sale size has increased over 2016, and the sales pipeline continues to be quite strong. We’re extremely pleased with the progress we’ve made in this service offering. The mid-market sales exchange process for the January 2018, enrollment implementations is winding down, and unlike the large market sales, we expect to see a decrease in our year-over-year sales. The sales pipeline, that remain strong, but we’ve seen clients delaying decisions, and we think this may be related to the long-running ACA debate. Now the ACA [technical difficulty] impact our clients, but we seem to experience a pause whenever there’s debate around healthcare legislation. We continue to believe their significant potential for the mid-market exchange business and that we continue to be focused on its growth. Finally turning to the P&C synergies. We’ve won almost 40 assignments in the large market. As discussed in the last earnings call, most of the wins are generating modest revenue, but we have a strong pipeline, are adding key resources and continue to enhance our marketing strategies. Overall, we like the momentum in the large market space. So I’d like to thank all of our clients for placing their trust in our company to assist them with important risk and human capital issues. I also want to thank our colleagues for their continued client focus, collaboration engagement and to congratulate everyone on a very good quarter. I’m also pleased to introduce Mike Burwell, our new CFO. For those of you who’ve not seen the press release announcing Mike’s appointment, he has extensive experience in accounting, finance, M&A and organizational transformation. We couldn’t possibly have asked for a better fit for Willis Towers Watson, and I couldn’t be happier to have Mike as part of the team. Now I’ll turn the call over to Mike.

Thanks, John. Thanks very much for those kind words, and good morning to everyone. I’m very excited to be here as well. I’m looking forward to executing the role of CFO, working with our board, John and the entire leadership team as well as our 41,000 colleagues around the world here at Willis Towers Watson, as we look to deliver 2018 merger objectives and share our long-term vision well beyond next year. So now for some additional insight into our financial results. Income from operations for the quarter was 41 million, or 2.2% of revenues. The prior year third quarter operating income was 1 million, or 0.1% of total revenues. Adjusted operating income for the quarter was 287 million or 15.5% of total revenues, an increase of 18% over the prior year quarter, adjusted operating income of 243 million or 13.7% of total revenues. The key drivers were strong revenue growth and prudent expense management. I’ll also like to touch base on taxes. I’ll like to provide you with some additional insight, as it relates to our U.S. GAAP and adjusted tax rates. U.S. GAAP tax rate for the quarter was negative 53%, and the adjusted tax rate was 32.1%. The negative 53% U.S. GAAP tax rate is primarily a result of tax expense associated with the discrete tax item recorded in the third quarter regarding an internal tax restructuring. The adjusted tax rate of 32.1% is a result of our seasonality in our earnings. We continue to reiterate our 2017 adjusted tax rate guidance of 23% to 24% for the entire year. Included in other expense, income line -- on our income statement is $10 million loss on the sale of our Global Wealth Solutions business. This line item also includes the impact of our currency hedging program. Moving on to our balance sheet. We continue to have a very strong financial position. This quarter, we repurchased approximately $166 million of Willis Towers Watson stock, bringing the total for the year to $462 million. As it was discussed in our Form 10-Q, we also settled the shareholder appraisal lawsuit related to the Willis-Towers merger, this past quarter. As part of the settlement, we paid approximately $211 million to settle the shareholder lawsuit, which resulted in the cancellation of more than 1.4 million shares. This cancellation had the same impact as a buyback and then -- that reduced the number of outstanding shares. As of September 30, 2017, the remaining stock repurchase authority was $671 million. The canceled shares related to litigation are also excluded from the share buyback authority. As you may recall, our expectation was to buy back about $0.5 billion of shares for 2017. Through September 30, we’ve spent $669 million in stock buybacks, which includes the cancellation of shares relating to the settlement on the shareholder litigation. Free cash flow for the first nine months of 2017 was $317 million, a decrease from $470 million for the same period in the prior year. The year-over-year variance was related to an increase in days sales outstanding, specifically in the southern part of United States; our capital spending cost in the prior year for our increase in integration efforts; the interest charges and cost related to the shareholder appraisal settlement; and the 2017 bonus payments. As we mentioned in our last earnings call, on a year-to-date basis, we paid out full year of bonuses in March 2017, as compared to a partial bonus payments related to the timing of the merger in 2016. One additional note regarding the shareholder appraisal settlement. If we consider the total settlement of $211 million, which included the $33 million consisting of statutory interest and other charges, we were able to cancel the shares at approximately $150 per share, a discount from the current market pricing. The fourth quarter is generally a seasonally strong free cash generator for us, and we will continue to focus on enhancing free cash flow as we wind down fiscal of 2017. Now let’s review our guidance for 2017 for Willis Towers Watson. We now expect constant currency revenue growth for 2017 to be around 3%. We continue to expect adjusted EBITDA margin to be in the 23% to 24% range for the entire year. For segment revenues, we continue to expect low single-digit constant currency commissions and fees growth for HCB and CRB. IRR commissions and fees are expected to be in the range of low to mid-single-digit growth. Benefits, Delivery and Administration expects to have commissions and fee growth of approximately 10%. Before moving on to the rest of the guidance, I’d like to address the potential of pricing increases in the market. We’ll be issuing our Marketplace Realities annual report for North American insurance buyers shortly. This report, which is based on carrier discussions and update loss -- updated loss projections, states that we expect to see rate increases in the property CAT and property CAT with loss products. I’d highlight that the rate increases in a couple of products in an otherwise expansive market is not an indicator of an overall hardening market or that Willis Towers Watson will benefit from these increases in any meaningful way. There are many variables to assess, such as client reactions and carrier competition, to fully understand the impact to our future results. Now moving on to transaction integration expenses. We had projected integration expenses of approximately $200 million earlier this year. We’re now expecting this to approach $240 million for 2017 due to the $33 million transaction expense incurred related to the shareholder appraisal settlement. We continue to expect the adjusted tax rate to be 23% to 24% for the full year, adjusted diluted EPS is expected to be in the range of $8.36 to $8.51. Again, annual guidance assumes average currency exchange rates of $1.28 to the pound and $1.13 to the euro. We expect approximately $10 million of expense associated with our currency hedging programs in the fourth quarter. This expense flows through other expense income below the income from operations line. The hedging program excludes the potential impact for balance sheet movements. Before I turn the call back to John, I’d like to address plans to communicate how the forthcoming revenue recognition standards will impact our results. We anticipate filing an 8-K and hosting a call to review the changes later this year. Consistent with transition requirements, we plan to report our results in parallel with our current methodology and under that the new guidelines, for all 4 quarters of 2018. This will allow the investment community to track changes in the quarter. There’ll be no need to recalibrate our 2018 merger objectives. Additionally, we’ll be hosting Analyst Day on March 16, 2018. I also look forward to meeting our analysts and investors in the following months. I’ll turn it back to John.

Okay, thanks very much, Mike. And now we’ll take your questions.

[Operator Instructions] Your first question comes from Greg Peters from Raymond James.

I wanted to follow up on your comments around the margin improvement -- the operating margin, or lack thereof, of improvement in CRB. As we look forward to future quarters, is there any seasonality around the expected rate of improvement in adjusted EBITDA or operating margins?

I don’t know, Greg. We have -- We certainly have seasonality in the revenues overall through the quarters. Seasonality in the margin improvement, I think, is probably a little less pronounced than that. So we’ll be looking to -- in some ways, some of those -- the margin improvements are a lot like the tax rate, where we focus on the annual result as opposed to its distribution among the quarters too much.

Right. Well, and I -- and I’ve observed, if I just look at the adjusted EBITDA on a year-to-date basis, there’s only a 60 basis point improvement. And I would’ve expected to track a little bit higher than that, but it’s in line with your guidance.

Yes.

Maybe you can came at it from a different way. I know you’ve established 25% adjusted EBITDA margin as, sort of, your longer-term target. And I think some of the integration savings are expected to be fully realized when you exit 2018. So, can you provide us some perspective on that longer-term target? And where you are in that process?

Yes. So I think I’ll make a couple comments and Mike may want to weigh in on this too. But -- look, a lot of the -- as you know, we’re winding down OIP now. And we’ve had some of our -- I referenced the $95 million in savings, we expected from OIP -- or the $95 million we spent for some of the savings to come in, and I think we’ll probably get a little less than half of that flowing through to margins. But we see some of that has come in already, but actually a big chunk of that will be coming in, in 2018. So we’ll see some of the savings that’ll continue to come in there. I think overall though, as we look at the -- we’ll come out with our guidance for 2018 on the next call, but there’s nothing that we’ve seen that makes us back off our 25% EBITDA for the next year. Mike, do you want to...

Yes, I would just add, John. I mean, if you look at through quarter, you see the reduction in salaries and benefits overall. You see it in terms of other cost reductions, that are happening. Uniquely, it’s offset, obviously, by inflation that’s come into place, but you’re seeing that overall improvement happening. So I think that glide path, there’s nothing there right now that tells us -- that suggests to us that we shouldn’t meet that EBITDA margin of 25% by the end of 2018.

So that, John, just to clarify, the 25% target was by the end of 2018. It wasn’t for the full year, I believe?

That’s correct. Yes.

That’s correct.

Your next question comes from Dave Styblo from Jefferies. Your line is open.

Just come back on organic growth, you guys had a strong quarter, 4%. I think, it was better than the 3%, what the industry were looking for. And to come back on the margin, I guess, I would’ve expected margins to be a little bit better and outperform on that side. A couple of the areas I know, Greg was just asking about CRB seemed not to have the uplift that we would’ve thought and the same thing in IRR, where margins were up nicely year-over-year in the first and -- first quarter and second quarter, if you adjust for JLT, but the third quarter margins in IRR were actually down if you back out the $7 million of higher interest and other income. So, just curious to understand again, why we didn’t see more leverage in the business, was there a timing aspect and then as you go forward and realize more of these synergies, should we expect more of that future flow of -- through in the fourth quarter, as you exit the year? Or when you talk about exiting this year, is the impact more as you get into 2018?

Yes, I mean, I -- we’re continuing to see the directional improvement happening overall. We definitely see IRR having higher revenues in the first half of the year and in terms of what those numbers actually drive to. And I’ve -- you see pretty good EBITDA growth overall in terms of the numbers themselves. So look, we’d always love more, but we feel pretty good about with the numbers are.

Mike, maybe, as you are stepping into the seat, I just -- I’m curious to hear what your mandate is? What are the top three or four priorities that you’re working through? And maybe some early takes of what you’ve observed so far being in the CFO seat.

Well, I mean, the mandates aren’t different than the objectives that John has laid out in -- from previously, in terms of execution on that and executing in the CFO role. I’ve been really frankly pleased with the depth and breadth of the people that exist at Willis Towers Watson. The individual leaders of individual business segments are very strong individuals, and my impressions of them and their ability to be able to drive and lead us to the objectives that we’ve put forth, I’ve felt a lot of confidence in them, and I really look forward to working with them. So I’ve been even more pleased then I went through the interview process in terms of interacting with people and what that means. And I think, I’ll go back to what John said at the outset of this call, when he talked about colleagues and what they do for our clients, and how they help and work with each other. I mean, the culture at Willis Towers Watson is one about serving clients, and ultimately, that’s what it’s about and I’ve been truly impressed with how people have serviced and worked with their clients and the various stakeholders that we have overall. So I guess, my initial views, like I am continuing to formulate in terms of what those specifically mean, but I’ve been very impressed that -- I was just starting week four here in terms of being here at Willis Towers Watson.

Okay. And then lastly, just on the portfolio itself, it sounds like you guys made a little bit of pruning a couple of divestitures at least. If you go forward, how much more trimming or reshaping of the portfolio do you think you have to go? And as you look forward to M&A opportunities, are there things in the pipeline that look very attractive to you guys? Or do you have more of a bias towards buyback, as you just want to continue to work on integrating the two businesses and not get distracted by another other deal, potentially?

Yes, I mean, I think, as we said in the press release, overall, I mean, we’ll continue to look at the portfolio where things -- whether they make the right strategic alignment for us or not. But we don’t see anything big or imminent that’s there in terms of our overall thinking. But we will continue to refine and align our strategies and look at assets that make sense. We’ll equally look at as you’ve seen throughout the year, look at acquisitions where they make sense to be niche businesses and tie back into it. Really, our focus is continue to deliver, what we’ve put forth in our integration efforts and synergies, going forward. So that’s my thoughts, John, anything you’d add to that?

No. I think that’s right. I think, look, this has been a relatively complex merger, and this is required all of our time and attention during this first couple of years. We always said that in the longer run, we thought M&A would be a part of it and I think we’re at the point now where we could potentially contemplate some things, but we are still mostly focused on just making this merger as successful as we can. Let me just make a one quick point too, about -- I think, as we talk about the margins, I mean, I think, one of the things we looked at is the 17% increase in EBITDA. So we’re pretty excited about the margins we had overall. There are some things that happened underneath this thing as to how things get allocated. So for example, I think with the aggressive line integration last year, we didn’t allocate a lot of corporate expenses to them, and we had them in other places. This year, we’re allocating corporate expenses to them. So it’s makes the margins is CRB look a little bit worse, but we are really focused on the overall 17% increase in EBITDA. We have a next question?

Your next question comes from Kai Pan from Morgan Stanley. Your line is open.

And first, congrats to Mike for the new role. My first question is, sort of, if you’re looking back a year ago where you have your Analyst Day, you layout like three like drivers for your 10-10 target in 2018. How do you feel like a year later, your confidence level in each of those?

Yes. So I think, if you look at our EBITDA, the 25%, getting to that by the end of 2018. That’s still something that we are -- that’s just something that we’re continuing to drive towards. And as I said it, that’s not anything that we’ve been backing off there. We talked about share repurchase also, and I think we talked about share repurchase between -- somewhere between 2 million and 8 million, or something like that. So far, we’ve repurchased I think through September 30, 4.8 million -- 4.7 million, 4.8 million, somewhere around there. So we’re well into where we’d intended to be there. We look at the revenue growth, and we were looking at revenue growth figures between -- somewhere between 2.5% and 4.5% or so, or something like that. And we’re now delivering solid margin growth in the 3% to 4% for each quarter. So I think, as we look at all of those, we still have work -- we have not yet put together our 2018 guidance on the specific things, but when we look at the different targets we’ve been setting ourselves -- oh, and finally, the other one, of course, was the tax rate, but as we talked about, you’ve already gotten to where we wanted to there. We look at all these things, and we say, we feel some confidence that we can attack these and get to where we want to be.

Okay, that’s great. My follow-up question is on your free cash flow. I think you’re talking about in the past of getting to that $1.3 billion run rate by the end of 2018. I just wonder, as your free cash will grow, how do you allocate then in term of the buybacks and maybe on the deleverage side or acquisitions and also on the buybacks, as your stock has appreciated quite a bit so far this year? And do you think it’s still attractive return for you guys to continue to the buybacks?

Yes, so I think, look we had talked about wanting to maintain a low investor grade rating -- investment grade rating. And so I think, we’ll continue to do that. I don’t think we’ll see -- we’re not anticipating to do significant deleveraging or anything there. But to keep that -- but to be solidly in that low investment grade rating, that’ll free up a lot of our free cash flow for other purposes. We -- as we said earlier, well, we’ve been looking at potential acquisitions and we’ll continue to do that. When we model it there, we still find our stock to be an attractive use of our cash and buying that back. And so we have to balance all of those. But I wouldn’t -- I think, unless something unusual were to come along, I wouldn’t expect to see any significant decline in our buying back shares, and I think, we’d continue to use most of our free cash flow for that.

Your next question comes from Shlomo Rosenbaum from Stifel.

John, is there anything that was pulled forward into the third quarter or anything that was unusual in terms of the 4% organic growth? And what I’m driving at over here is the organic -- the growth guidance was nudged up from like 2% to 3% to 3%, but you’ve grown 3% plus, I think, a little bit in the first half of the year, now 4%, and is there any reason, why you shouldn’t be above 3% for the whole year?

No, I think, look, we -- Shlomo, we had 3%, I guess, for the whole fourth quarter here, and we did 4% -- we had 2% to 3%, I guess, for the fourth quarter, and we did 4% and we nudged it up to 3%. We’re not trying to fine tune this all that much beyond that, but somewhere around 3%, we think sounds reasonable.

Okay, that’s fair. And then can you just give us a little bit of a free cash flow walk just talking about some of the, maybe, onetime items in the year to date. I think you talked about the $211 million on the settlement, but are there other thing we should talk about in terms of getting a good baseline in 2018, as we think about the exit 2019 -- excuse me, 2017 as we talk about the exit 2019 target of somewhere around $1.3 billion?

Sure, I’ll get a -- I think I’ll turn it over to Mike, Shlomo, to take you through that but actually [best] before I move on to that, I might mention something from your previous question, which triggered a thought that the third quarter of 2017 is an unusual quarter for Willis Towers Watson, in that there’s nothing unusual about it. This is the first time that we don’t have some really big distorting event in either our current quarter or the quarter a year ago or something like that. And so when you asked about things being pulled forward or something, I mean there’s always the little things around the margin. But by and large, it’s a relatively clean quarter, and we couldn’t be happier about that.

Yes, and coming back on your free cash flow question, Shlomo, I mean, we still believe there’s nothing that’s changing our mind in terms of looking at the ‘18 target we’re had out there at $1.3 billion, $1.4 billion, free cash looking out through the end of ‘18. If you look specifically at ‘17 or this quarter, what the difference is -- as referenced in my comments, one is, really looking at bonus payments. So this year we had a full year of bonus payments where in the prior year, we only had a partial year of those bonus payments. We did see a DSO rise in the current quarter, and I referenced the southern part of the United States, but as you relate to certain parts of the hurricane and some of those disasters impacted the processing and payment abilities of certain of our clients and customers and stakeholders to get that money in, and we believe that we’ll see that return here in the fourth quarter, and equally we had integration spending happening as a key driver as you see in the numbers for the fourth quarter. So those are their principal things or the primary things that were really driving that change in free cash flow.

Your next question comes from James Naklicki from Citi.

Just a follow-up on the last question there. So on the free cash flow, the $1.3 billion to $1.4 billion, just to clarify that, is that a 2018 number or is that an exit 2018 number? And then, my second question -- well, I guess, you can answer that one and then we’ll go in the that -- so then I have a follow-up.

That there is a 2018 number.

And looking at the business, you just restructured it. You are our selling new business again. Then I look at the organic growth rates, it’s been 3% to 4% this year. Is that, sort of, what should we -- we should expect from the company in the future, or do you think it could actually improve from there?

Yes, I mean I, obviously -- I’m excited about the prospects of what you see happening in the marketplace and with clients or customers, but John, I’ll defer to your thoughts.

Yes, I mean, look, I think, if we look at our overall businesses that we’re in, we think that probably about 3% is what the market is growing at. Now, as we go through the different segments and the different lines of business, you can see that they all have their own individual growth rates. But probably about 3% is right for the organization as a whole. We’ve been focused on making sure we’re growing at least as fast as the market, and that’s what we’ve accomplished this year. We were slightly ahead, I think, this year with that. But in the long run, we won’t be satisfied with just growing at the market, we want to be growing faster than that.

Your next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

So my first question, I guess, just a little bit more color on the CRB segment, the 4% growth was a nice pick up in the quarter. Can that level of growth continue from here? I mean, is that what you have embedded in, kind of, your 3% overall outlook, you just mentioned? And included within that question, you alluded to maybe not potentially seeing a benefit in your growth from the improving property and property CAT pricing. And maybe this is a more broader brokerage question as opposed to just CRB, can we get a breakdown of your business mix between commissions and fees just on the brokerage side of the business?

Yes. So let’s see, let me deal with the second one first. It’s about 65% is the roughly commissions, right, I think?

Yes.

That’s not an exact number, Elyse, but it’s roughly right.

Oh, and then on the...

I’m sorry, the first part of the -- the first question was?

The first question was just in terms of the CRB growth, the 4%?

Growth, yes. Yes. Right, I mean, look, I think, I wouldn’t want to take one quarter and say that’s going to be exactly what we’re going to be doing. But we’ve been growing at about 3% or better this whole year, and I think that’s what we think -- that’s what we probably be planning for, for next year. And in the prior question, I said we want to be a company that’s going to be growing above the market in the long run. But I think what we’re focused now is making sure that we are solidly in it, that 3% area, year-after-year, and then we’ll try to move on from that. The third quarter is probably our lowest quarter anyway, so I don’t want read too much into that.

And then I have a tax question. So you guys alluded to achieving the tax saves associated with the merger. There is, obviously, some upcoming potential changes to the U.S. tax structure. So as the U.S. tax rate goes to 20% and interest deductibility is limited, how do you see that potential changes to the U.S. tax structure impacting Willis Towers Watson’s overall tax rates and kind of the 23% to 24% rate that you guys are running at?

Yes. So this is one of these things, Elyse, where the devil really is in the details. So I think, for example, when you say limits on interest deductibility, it depends very much on what those limits are, of how they do it -- as to how it would affect us. Here’s what I think we could tell you, and probably what we would look at as the worst case, if the U.S. went to a 20% rate, and there were severe limits on interest deductibility, it could actually make our tax rate go up 1% or so. That’s if we did nothing and presumably, we would be able to -- our current structures isn’t the best and so we would be able to get back to where we were eventually or maybe even a little better. But if you get to the 20% rate and depending on how some other things are done, some particular details there, we could actually be better off. So we don’t know for right now, we don’t think it’s going to be a major impact to us one way or another, and certainly, whatever happens, we’ll have to make sure that we have our taxes structured in the most-efficient tax planning we can.

Okay, great. And then 1 more modeling question if I could ask. At unallocated expense line, there seems to be a lot of volatility on a quarterly basis. I believe earlier, you mentioned bringing some expenses down to the segments this year that maybe was not the case last year. Is that part of what we’re seeing? Also, there was a benefit this Q3 that was higher than last Q3. Just some, kind of, direction of how we could think about modeling that line going forward and what should we expect in the fourth quarter? Does your guidance assume corporate -- if that line would see expenses about in line with last Q4, the 36 million?

Okay. I mean, Mike is the expert on the expense line, so Mike I’ll pass it over to you.

So the number for this quarter that you’re reading, the 1 million in there is actually a benefit, and the benefit is principally related to bonus payments. So the segments have been charged the bonus amounts, and we have reversed a bit at the topside and, therefore, in the fourth quarter we’ll reallocate that back out to the actual segments themselves. So actually, their margins have been a bit penalized because it hasn’t been allocated fully out to them at this stage but that will get cleaned up. In the fourth quarter, I would expect a fairly small or modest number there on that line item because when we close the books out, everything has been allocated back out. And it’s just a timing issue in terms of how things are actually done from a bookkeeping standpoint.

But just to make it 100% clear, the margins at the organization level, at the whole company level are correct. What happens is, and we have some expenses that we don’t -- that are too high for the segments essentially is what happens and to the extent they’re too high, we just do that, we put that in the unallocated bucket and get back to the right ones.

Your next question comes from Mark Marcon from Baird. Your line is open.

Welcome, Mike. Just look forward to working with you. With regards to what is now called the DBA segment, how should we think about just the underlying savings that are being provided to the clients? Are they still seeing the same, sort of, savings on what was -- what used to be formerly called the Active Exchange? And how are you thinking about the prospects of those savings going forward? And should -- if there are in fact savings, shouldn’t we continue to see growth in that area over time?

Yes, I think the answer is that this is still an attractive business for the clients in that regard. We’re seeing -- certainly on the active side we’re seeing at least 5% I think for our clients there. Depending on what their particular configuration is and where they’re coming from, the 5% to 15% is certainly in the range. But we’re seeing at least 5%, so we’re continuing to see larger increases for the retirees. That’s still a very attractive proposition. So all of the financial advantages to -- and there’s nothing that’s happened that’s changed the financial advantages to going to exchanges. And so it’s one of the reasons why we said, despite the natural reticence of people to maybe make moves in the middle of a big debate about ACA or other potential healthcare legislation, we’re pretty excited about the longer-run future of exchanges.

Great. And then if I could just get a little bit of clarification in terms of the intent with regards to the -- your question three within the press release, specifically about rate increases within Property & Casualty. Generally speaking, all other things being equal. If we get rate increases, that would typically be better for business, no?

Oh, yes. If we get rate increases it would be better for business. I think the caution there is -- let me say this, rate increases will -- are like -- rate increases are in the first blush are likely to increase our commissions and fees. Now one thing that could happen is, of course, sometimes people might buy less insurance or buy less reinsurance if rates are higher, so you have to factor that potential behavior in there. The other thing we were saying is, you have to know which lines of business the rates increases are coming through to understand what the impact is on the company, and we just don’t want to rush to any conclusions about that.

Sure. And so you, just to clarify the intent of the comment. It’s basically in order to make sure that people don’t get ahead of themselves but at the end of the day, it’s hard to imagine how this wouldn’t be positive.

Well, yes. I mean, yes, yes, Mark, although there’s a -- potentially a lot of capital sitting on the sidelines that -- alternative capital that could flow into the market. And certainly, in 2006, after the big events in 2005, we saw an enormous influx of alternative capital. So I just -- I think anybody can who tells you they know what’s going to happen for sure is that -- the one thing you can be sure is they probably don’t know what they’re talking about.

Your next question comes from Jay Cohen from Bank of America.

Yes. Most of my questions were answered. Just one follow-up from the Elyse’s question on the unallocated. You kind of explained what happened this quarter, but looking forward, can you give us any guidance, should it be a positive number, a negative number, or should we just assume zero for that line?

Yes. I would say that assuming zero, I think the most important thing for this though to recognize is that, if for 1 reason or another, we’ve been accruing expenses inside a segment that is too large or too small, then we’re trying it up, so that we get to the right thing for the organization. And so at the organizational level, it’s -- it doesn’t matter whether we put it in the segments and we have unallocated at 0 or whether we charge it in the segments and then reverse it in unallocated, it -- you’re getting to the right number.

That makes sense. Really from a modeling standpoint, it makes sense to put the 0, and if it is different than 0, there’s an offset somewhere else, probably.

Exactly.

Exactly.

That’s great. And then the other question, benefits delivery. The margin there increased pretty significantly, year-over-year. Anything unusual happening in that number or hurting the year-ago quarter?

No. I think there’s two aspects to that. And we have always said that when -- in the times when growth slows, then we would see an increase in margins, and so what happens is, we had more folks that we were enrolling January 1 of 2017, than we’re expecting to enroll January 1 of 2018. So that means, we needed more benefits -- benefit colleagues to be taking the phone calls in the last quarter of 2016 than we do the last quarter of 2017. So the expenses are a bit more favorable. In addition, as you may recall, we really beefed up the thing last year to make sure we were addressing some performance issues we had there in terms of handling the rights volume of calls. So we probably had a little bit of an extra spend there, but those two things are doing it. But it’s a natural consequence to that. One of the other things I mentioned in the script was that in 2018, we expect to see a more even distribution. So we’re not seeing as many of the enrollments occurring exactly on January 1, 2018. As we get that distributed throughout the year, it gives us better expense management.

Your next question comes from Adam Klauber with William Blair.

HCB had a good quarter. I think you said Global Wealth -- the sale of Global Wealth and also retirement solutions were drag on that business. What would’ve been organic or underlying growth, excluding those drags for HCB?

Oh boy, I -- do we have that write-off in? Just 1 second.

Sure.

About 3%.

Okay, okay. And I think you mentioned, in that division, the technology delivery did very, very well. Could you go in more detail, what was driving that?

Well, we’ve been our -- our TAS is basically -- its benefits, administration, operation and I think we’ve been talking about this for a number of quarters now. We’ve just had a fantastic record of winning there, and the team does a terrific job in servicing their clients and we’ve been -- we’ve just continued to add lots of new clients.

So those -- as we think those revenues if you’re adding new clients today, we should see those clients continue to add to revenues next quarter, next quarter, if I am correct, is that right?

Yes, that’s correct.

I would now like to turn the conference back to John Haley.

Okay. Thanks very much for joining us today, everyone, and I look forward to talking to you at our fourth quarter earnings call in February.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day. You may all disconnect.