Willis Towers Watson Public Limited Company (WTW) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Q2 2018 Willis Towers Watson Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Rich Keefe, Director of IR.

Good morning. Welcome to the Willis Towers Watson Earnings Call. This is Rich Keefe, Director of Investor Relations at Willis Towers Watson. On the call with me 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 as well as our supplemental slides. Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing 404-537-3406, conference ID 5366408. 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 forward-looking statements, investors should review the forward-looking statements section of the earnings press release issued this morning as well as other disclosures under the heading of Risk Factors and Forward-Looking Statements in our most recent Form 10-K and other Willis Towers Watson SEC filings. 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 reconciliation of the non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures, investors should review today's press release. After our prepared remarks, we'll open the conference call for your questions. Now I'll turn the call over to John Haley.

Thanks, Rich, and good morning, everybody. Before I begin, I just want to thank Aida Sukys for her years of service as our Investor Relations Director. Aida has recently moved into another finance position as our company's new Head of Global Finance Business Operations. And I want to thank Aida for her many contributions, her counsel and her partnership over the last 6 years and for being a great ambassador for Willis Towers Watson. We wish her continued success in her new role. Now we'll review our results for the second quarter of 2018 and the first half of 2018. Just as a reminder, as of January 1, 2018, we adopted the new accounting standard, ASC 606. A detailed description of the impact of ASC 606 will be provided in the Form 10-Q filing, and detailed explanation of how the new standard impacted our performance and the presentation of our financial statements has been provided in our earnings release this morning. I'll report the results first using the prior accounting standard, excluding the impact of the new accounting standard. So based on the prior accounting standard, without the impact of ASC 606, reported revenue for the second quarter was $2 billion, up 4% as compared to the prior year second quarter and up 2% on a constant currency basis and up 3% on an organic basis. Reported revenue included $38 million of positive currency movement. We experienced growth on an organic basis across all of our segments for the quarter. Net income was $89 million or up 117% for the second quarter as compared to the prior year second quarter net income of $41 million. Adjusted EBITDA was $427 million or 21.1% of revenue as compared to the prior year adjusted EBITDA of $387 million or 19.8% of revenue, representing a 10% increase on an adjusted EBITDA basis and 130 basis points in margin improvement. For the quarter, diluted earnings per share were $0.62, and adjusted diluted earnings per share were $1.88. Overall, it was a solid quarter. We grew revenue, earnings per share and had enhanced adjusted EBITDA margin performance. First half of 2018, we're very pleased with our financial results. Based on the prior accounting standard without the impact of ASC 606, reported revenue growth for the first half of 2018 was up 7% as compared to the same period in the prior year and up 3% on a constant currency basis and up 4% on an organic basis. Adjusted EBITDA for the first half of 2018 was $1.3 billion or 27.7% of revenue, an increase from adjusted EBITDA of $1.1 billion or 25.6% of revenue for the same period in the prior year, representing an increase of 210 basis points in adjusted EBITDA margin over the same period in the prior year. Now turning to the results on ASC 606 or the new accounting standard. Reported revenues for the second quarter were $2 billion. Net income for the second quarter was $65 million. Adjusted EBITDA for the second quarter was $392 million or 19.7% of revenue. For the quarter, diluted earnings per share were $0.44, and adjusted diluted earnings per share were $1.70. Before moving on to the segment results, I'd like to provide an update on our three areas of integration, revenue synergies, cost synergies and tax savings. The original merger objectives included decreasing the tax rate from approximately 34% to 25% by the end of 2017 and also realizing $100 million to $125 million in cost savings as we exit 2018. So to start with the tax savings. We surpassed our tax goal in 2016 and 2017, and we continue to be under our goal with an expected 22% to 23% adjusted tax rate for 2018. Turning to the cost savings goal. Since the merger, we've saved almost $152 million on a run rate basis and are targeting $175 million of savings on a run rate basis as we exit 2018, which will exceed our original goal of at least $100 million to $125 million run rate savings. Finally, on revenue synergies in the areas of global health solutions, U.S. mid-market exchange and large market P&C. We've already achieved more than 105% of our three year global health solutions synergy sales goals. Our sales pipeline continues to be strong, and we're glad to say we'll be surpassing our revenue goal. Regarding the mid-market health care marketplace, as we previously mentioned, it's been more difficult to sell versus our original plan, we think due to debates around the Affordable Care Act, which may have delayed our clients' overall decision-making in this area. It's still a bit early to make any conclusion on the mid-market exchange progress this year as the sales season continues into November. But overall, given our cumulative sales through 2017 and the new business pipeline, we believe that we'll be at the lower end of the $100 million to $250 million goal as we exit 2018. Now turning to the P&C synergies. We had merger to date sales of more than $128 million. We anticipate these revenues being recognized over a three year period in most cases. We're happy with the overall traction in acquiring new clients in the large market, but our average sale size has been less than our original projections. We continue to build our pipeline and add to our talent base. We anticipate we'll end 2018 with about $150 million of revenue synergy sales rather than the $200 million original merger goal. While this would be short of our original goal, it's clear that the U.S. large market space provides a significant long-term growth opportunity for Willis Towers Watson. And finally, we see revenue synergies develop between the reinsurance and insurance consulting and technology, or ICT teams. It wasn't the revenue synergy we discussed publicly at the time of the merger, but we recognize these 2 groups have relationships and solutions that complemented one another. We've sold more than $25 million of joint reinsurance broking and consulting projects as these groups have been teaming up and utilizing one another's tools and analytics. Now let's look at each of the segments in more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be based on the prior accounting standard and reflect revenues on a constant currency basis unless specifically stated otherwise. Segment margins are calculated using segment revenues and exclude unallocated corporate costs such as amortization of intangibles, restructuring costs and certain transaction and integration expenses resulting from mergers and acquisitions as well as other items, which we consider noncore to our operating results. The segment results do include discretionary compensation. For the second quarter, revenues grew 2% on a constant currency basis and 3% on an organic basis. We experienced growth in all of our segments this quarter and most of our regions. For the second quarter of 2018, the international region led with 7% organic growth. North America had organic growth of 4%. Western Europe had organic growth of 3%, and Great Britain organic revenues were flat. Without the impact of ASC 606, Human Capital & Benefits, or HCB, had a solid quarter with 1% constant currency revenue growth and 3% organic revenue growth as compared to the prior year's second quarter. HCB has now had growth for the last 6 consecutive quarters. For the first half of the year, on an organic basis, HCB revenue growth was 3%. Across our HCB segment, we had continued momentum in our retirement business with 3% organic growth compared to the prior year second quarter and growth across all regions. North America growth was 3% with increased consulting services around mortality funding assumptions, data services projects and stronger bulk lump-sum work. Great Britain had 6% revenue growth as a result of increased consulting demand for actuarial and risk solutions. International was flat for the quarter. Western Europe's revenues improved, primarily due to the positive impact of the timing of revenue in Germany's pension brokerage businesses and a growing client portfolio across Belgium, Denmark and Switzerland. Health and Benefits revenue increased by 4% as compared to the prior year's second quarter, primarily as a result of strong momentum in the global benefit solutions business as well as increased project work and product sales within the brokerage and advisory business in North America. Our Technology and Administration Solutions, or TAS, revenue increased by 4% as compared to the prior year second quarter due to increased project and call center demand. Talent and Rewards second quarter revenue declined by 4% as compared to the prior year second quarter, primarily due to an increase in -- excuse me, to a decrease in advisory services in North America and Great Britain and lower product revenues. The decline in the product revenues in the quarter was primarily due to timing, and we expect to recover that later in the year. The HCB second quarter revenue was $750 million with an operating margin of 16%, down 90 basis points from the prior year second quarter. Margin in the second quarter was adversely impacted by softness in the Talent and Rewards business and by client investments. For the first half of 2018, operating margin was 28%, an increase of 50 basis points from the prior year. Now turning to the HCB results, including the impact of the new revenue standard. The HCB segment had revenues of $780 million and an operating margin of 19%. Overall, we continue to have a positive outlook for the HCB business in 2018. Now let's look at the Corporate Risk & Broking, or CRB, which had a revenue increase of 2% on both the constant currency and organic basis as compared to the prior year second quarter. CRB has now had 6 consecutive quarters of revenue growth. For the first half of the year, CRB grew 4% organically. North America's revenue grew by 3% in the second quarter with strong construction M&A and cyber activity. And post the 2016 and 2017 restructuring, we've had 4 strong consecutive quarters of growth in North America. For the first half of the year, North America's revenue has grown by 5%. International continued its strong momentum with 6% constant currency growth and 8% organic growth in the quarter, driven primarily by CEEMEA, Asia and Latin America, which had a number of new business wins. Western Europe also had solid growth, primarily led by positive results in France with Affinity program wins and strong new business in risk management and specialties. Likewise, there was growth in Sweden and Iberia. Great Britain had a revenue decline of 3%, driven by weakness in transportation due to less aviation and marine contingent revenue. Partially offsetting this decline was an increase in our financial lines business, which had good new business generation. CRB revenues were $669 million with an operating margin of 13% as compared to a 16% operating margin in the prior year second quarter. The second quarter was generally a seasonally weaker quarter from a margin standpoint due to the low level of renewals for some lines of business. Revenue pressure from Great Britain adversely impacted the margin as did continued investments in technology, cyber and infrastructure. Finally, foreign exchange translation had a 70 basis point unfavorable impact on the segment's margin compared to the prior year second quarter. For the first half of 2018, operating margin was 16%, a decrease of 60 basis points from the prior year. Now turning to the CRB results, including the impact of the new revenue standard. For the quarter, CRB had revenues of $674 million and an operating margin of 14%. We continue to be optimistic about the momentum in our CRB business going forward as we expect revenues to continue to build in the second half of the year. Turning to Investment, Risk & Reinsurance, or IRR. Revenue for the second quarter decreased 1% on a constant currency basis and increased 1% on an organic basis as compared to the prior year second quarter. For the first half of the year, IRR grew 1% on a constant currency basis and 4% organically. As a reminder, the reinsurance line of business represents treaty-based reinsurance with some facultative business produced in wholesale. Bulk of Facultative Reinsurance results are captured in the CRB segment. Reinsurance revenue led the segment with 5% revenue growth, driven by international and specialty as a result of solid renewals and favorable timing. Max Matthiessen grew 3% as a result of an increase in assets under management and new business. Insurance Consulting and Technology grew by 3% as a result of increased consulting projects and software sales. Investment grew 4% as a result of new client implementations, alongside higher performance fees. Wholesale declined by 11%, mainly driven by the timing of revenue that was accelerated into the first quarter of 2018 and less demand in the specialty and program businesses. Underwriting and Capital Management, or UCM, experienced a decline of 6% in constant currency revenue. That's just a result of the divestiture of the U.S programs business in 2017 and the Loan Protector businesses in the first quarter of 2018. UCM organic growth was 3%. The IRR segment had revenues of $379 million compared to $374 million for the prior year second quarter and a 23% operating margin, down 110 basis points from the prior year second quarter. The second quarter 2018 margin was impacted by planned investments in new technology and analytics such as our Innovisk investment; as well as by our foreign exchange translation, which had a 50 basis point unfavorable impact on the segment's margin compared to the prior year second quarter. For the first half of 2018, the operating margin was 36%, an increase of 60 basis points from the prior year. Now turning to the IRR results, including the impact of the new revenue standard. IRR had revenues of $385 million and an operating margin of 23%. Overall, we continue to feel positive about the momentum of the IRR business for 2018. Revenues for the BDA segment increased by 9% from the prior year second quarter. BDA has now had 10 consecutive quarters of revenue growth. For the first half of the year, BDA revenues grew by 9%. Driven by increased enrollments, Individual Marketplace revenue increased by 3%. Group Marketplace and Benefits Outsourcing revenues grew 17% as a result of new client wins and special projects. The BDA segment had revenues of $195 million with a 25% operating margin, up 560 basis points as compared to the prior year second quarter. The expansion in margin was a result of the very strong revenue growth as well as our ability to continue to scale these businesses. For the first half of 2018, operating margin was 23%, an increase of 300 basis points from the prior year. The BDA segment, reflecting the new revenue standard, had revenue of $119 million and an operating margin of negative 26%. The primary driver of the difference is due to the effect of the new revenue accounting standard on the Individual Marketplace. These revenues must now be recognized at the date of placement rather than prorating them starting at their effective date. This means that the revenue typically generated by placements in the 2017 fall enrollment period was recorded as an adjustment to the opening balance of retained earnings as of January 1, 2018. This revenue under the prior standard would have started to be recognized in January 2018 on a prorata basis throughout the year. However, the overall revenue profile should not change materially in 2018 as under the new standard, the revenues generated by the policies placed during the fall of 2018 enrollment season will now be recognized immediately. So this will change the seasonality of the revenue recognition to be higher in the second half of the calendar year. Regarding enrollment. The 2019 sales pipeline continues to look strong in both the mid-market and large market space. We currently have over 20 clients with about 270,000 total lives that have committed for the 2019 enrollment period. The mid-market sales season will not be finalized until early November. The Individual Marketplace exchange enrollment process has been changing somewhat over the recent years. We're seeing enrollment spread more evenly throughout the year due to off-cycle enrollments and agents and a more modest increase in enrollments during the fall enrollment season. We're also currently seeing a number of larger companies that are contemplating off-cycle enrollments in 2019. Our Benefits Delivery & Administration offerings remain fundamental to our business and growth engines of our enterprise strategy. We're optimistic about the long-term growth of this business. So before concluding my remarks, I'd like to provide you with an update regarding the review conducted by the U.K. Competition and Markets Authorities of the investment consulting market. 2 weeks ago, the CMA published its provisional decision report, which did not recommend any structural changes to businesses. The report describes the market as not highly concentrated and states there is no evidence of conflicts of interest that give rise to a competition problem. The CMA did recommend certain industry-wide remedies involving mandatory tendering, enhanced fee disclosure and common standards for reporting performance. We welcome the recommendations set out in the CMA report. We've advocated for stronger regulatory oversight of the investment consulting and fiduciary management market for a number of years, and we look forward to working with the regulatory authorities and the wider industry to ensure that best practice becomes normal practice. We also look forward to continuing to work with the CMA, which will issue its final report by March 2019 at the latest. So to wrap up my comments, I'm very pleased with the first half 2018 results and the overall performance of our underlying business. The results for the first half of 2018 were in line with our expectations, and we believe that we remain well positioned to continue our success in the second half of 2018 and beyond. Likewise, I'm excited to see the progress we've made in building Willis Towers Watson. And I'm proud of the more than 43,000 Willis Towers Watson colleagues around the world, who are focused on their clients' success. I'd like to thank our colleagues for their hard work and for their enthusiasm and support and efforts. And now I'll turn the call over to Mike.

Thanks, John, and good morning to everyone. Thanks to all of you for joining us. Now let's turn to the financial overview. Let me first discuss income from operations. Without the adoption of ASC 606, income from operations for the second quarter was $93 million or 4.6% of revenue, up 52% from the prior year second quarter of $61 million or 3.1% of revenue. Adjusted operating income for the second quarter was $288 million or 14.2% of revenue, and the prior year quarter adjusted operating income was $300 million or 15.4% of revenue. As we highlighted earlier, investments in certain businesses impacted the second quarter margin, as did foreign exchange translation, which had a 30 basis point unfavorable impact. Without the adoption of ASC 606, income from operations for the first half of 2018 was $631 million or 13.8% of revenue, up 37% from the same period in the prior year of $462 million or 10.8% of revenue. Adjusted operating income for the first half of 2018 was $1 billion or 22.1% of revenue compared to the same period in the prior year in which adjusted operating income was $919 million or 21.5% of revenue. Now let me turn to adjusted diluted earnings per share or adjusted EPS, excluding the new revenue standard. For the second quarter of 2018, our adjusted EPS was up 30% to $1.88 per share versus $1.45 per share in the prior year second quarter. For the first half of 2018, adjusted EPS was up 21% to $6.29 per share versus $5.18 per share in the same period in the prior year. Our adjusted EPS was $1.70 per share under the new revenue recognition standard for the quarter and $4.41 for the first half of 2018. Moving to taxes. I'd like to provide you with some additional insight into our U.S. GAAP and adjusted tax rates. Without the impact of ASC 606, the U.S. GAAP tax rate for the second quarter was 14%, a decrease from 17% from the prior year second quarter. Our adjusted tax rate for the second quarter was 20%, a decrease from 29% for the prior year second quarter. As we mentioned earlier this year, beginning in 2018, the adjusted and U.S. GAAP tax rates will be more closely aligned due to the U.S. corporate tax rate reduction from 35% to 21%. We're expecting further guidance from the U.S. treasury and others on the interpretation or application of their rules before the end of 2018. This may result in adjustments to our estimates as we move through the year, and we continue to monitor this very closely. Moving to the balance sheet. We continue to have a strong financial position. During the quarter, including the impact of the new revenue standard, we generated $301 million of free cash flow, bringing our year-to-date free cash flow to $254 million, increased from free cash flow of $200 million for the first half of the prior year. There's nonmaterial difference in free cash flow between the prior and new accounting standards. Operating income growth was a primary driver of cash flow improvement. We expect to continue to see free cash flow build as we complete 2018. During the second quarter, we purchased approximately $269 million in shares. We continue to expect buyback of a total of $600 million to $800 million of shares in 2018, subject to market conditions. [Indiscernible] we repurchased or retired 10.2 million shares and paid $627 million in dividends. We reported quarterly and year-to-date 2018 financial results in this morning's release based on both the ASC 606 standard and the old accounting standard, ASC 605. However, we want to ensure that investors have a clear line of sight to our progress as we move into the second half of last year and of our three year integration period. As such, we'll continue to provide guidance based on the 2017 U.S. GAAP standard. Now let's review our full year 2018 guidance for Willis Towers Watson. For the company, we continue to expect organic revenue growth to be approximately 4%. For the segments, we expect revenue growth to be in the low single digits for HCB, CRB and IRR and are raising our BDA revenue guidance to mid- to high single-digit growth. We continue to expect adjusted EBITDA to be around 25% for the full year. And as a reminder, the first quarter margin was seasonally high, and we expect seasonally lower margins as the year progresses. Transaction integration costs are expected to be in the range of $140 million to $150 million versus our previous guidance of approximately $140 million. The expected increase relates primarily to property consolidation costs as we look to streamline our integrated real estate portfolio. We are reducing the adjusted tax rate by 1% from the range of 23% to 24% -- or from 23% to 24% to a range of 22% to 23%. This tax guidance is consistent for both the old and new accounting standards. We continue to expect free cash flow of approximately $1.1 billion to $1.3 billion in 2018. There is a nonmaterial difference in free cash flow between the prior and new accounting standards. The difference is a result of moving a portion of capitalized software related to client system implementations from investing activities to operating activities in the cash flow statement. This accounting change does not impact our overall guidance nor our capital allocation strategy. We continue to use the former ASC 605 accounting standard for this year to assess bonus calculations, capital for dividends, share buybacks, internal investments and M&A. Annual guidance assumes average currency rates of $1.35 to the pound and $1.19 to the euro. I'd like to conclude in saying that I'm pleased where we are at the midyear mark. We've been able to make good progress in our margin expansion efforts with adjusted EBITDA margin improvement year-to-date at 210 basis points. Similarly, we've been also -- made great strides in developing our foundation for long-term growth. We continue to make investments in innovation, integrated solutions tailored to our clients' needs and underpinned by cutting-edge data and analytics to unlock potential for our clients. Examples include our cyber risk management solutions, which help clients assess cyber vulnerabilities, protect them through best-in-class solutions and improve their ability to successfully recover from future attacks. Our Asset Management Exchange, or AMX, is an innovative institutional asset management marketplace that fundamentally transforms institutional investment for the benefit of the end saver. We recognize that the trend and the power of the global marketplaces, AMX was the first exchange of its kind in bringing the digital revolution to institutional asset management and will be a catalyst for change in the institutional investment. And blockchain. We recently announced the first blockchain transaction for marine insurance along with our partners, EY, Møller-Maersk, XL Catlin, MS Amlin, ACORD and Microsoft. This is the first time that blockchain technology is being used in insurance transactions for marine insurance, and this technology is expected to be rolled out in other sectors in due course. Finally, our Innovisk investment, which is designed to augment underwriting by developing technology that utilizes data and analytics in a more sophisticated manner, should support our underwriting product innovation development and pricing as well as improve distribution efficiencies. Investment in these innovations -- innovative solutions for our clients certainly speaks to our continued thought leadership in the market and our focus on growth. Some of these activities and investments may dampen our results from time to time but are necessary to keep our business dynamic. I feel very confident in the soundness of our underlying business, and I'm encouraged with our progress towards our long-term goals. I'll turn it back to John.

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

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

My first question will be around organic revenue. And if you look at your result in the second quarter and compare it with some of your other publicly traded peers, it looks to be at the lower end of the range. And I recognize, in the first quarter, it was probably at the higher end of the range. But I just have a question for you around momentum. Do you think momentum on the -- in the sales pipeline may be stalling? Or maybe you can add some perspective around that.

Yes. Thanks, Greg. And I think you're absolutely right the way you've characterized the quarters over time. And one of the reasons that we spent some time talking about the first half today is we don't think the momentum is slowing in the second quarter, but we do think we have to look at the whole first half together. I think, last year, we, I think, did a good job of alerting analysts generally to the fact that we saw the first half as being -- the first quarter as being stronger than the second quarter and maybe absorbing some of the revenue. We didn't necessarily see that this year, but we think that that's certainly what happened. There was a -- there's a component to that. But when we look at it, we think that the first -- the revenue growth for the first half is a better indicator of what the second half will look like rather than the revenue growth for the second quarter.

If I recall correctly, you had strong organic in the back half of last year. Is that -- is it just the nature of your business model where organic growth accelerates in the back half of the year versus the first half?

I think that's right. And some of these businesses are a little more subject to just timing differences than others. So retirement doesn't really see much of a timing issue at all, and that sort of marches steadily along. But if I look at Talent and Rewards or if I look at the broking business or the reinsurance business, they're subjected timing changes for income [indiscernible].

Okay, great. Now my second question was around just the segment operating results and guidance. And I guess we're looking at the segment operating income excluding revenue -- the revenue standard for the second quarter '18. And then that corresponds, I suppose, with your full year guidance on an adjusted EPS basis. But for the second quarter, I have to say that the risk -- the results in Corporate Risk & Broking, Investment, Risk & Reinsurance were down year-over-year, excluding the revenue standard. And I suppose -- I don't want to get too hung up on 1 quarter's results, but that was a surprise to some. And then -- but yet you're still holding out the expectation that the overall result is going to get you to your EPS number. So I was hoping maybe you could provide some different -- some additional color behind that to help us understand what's going on.

Sure. I know Mike will want to weigh in with some color commentary on this. But let me just say that I think that those 2 segments are actually different, in our minds. IRR, even though the results may look like they're not as robust as we might like, they're actually right on target for what we had projected. And so we have had -- we disposed of some businesses there. We have bumped up -- our biggest investments that we're making in our business are really 2. One is in the Innovisk and the other is in AMX. And both of those are in IRR. So the margins that we have there are exactly on our forecast that we had here internally. But the CRB is different. That was -- that is truly where we had expected to be. And I think it's largely a revenue thing in the second quarter, but it's partly expenses being a little bit higher. Mike, do you want to give a little more color on that?

Yes, John. I mean, when we look and think about the CRB point drive that you raised, we look at it and say, we have been making some further investments in resources around cyber, M&A resources that we have deployed into the CRB segment. FX impacted by 70 basis points just in terms of margin for the quarter. And we also -- as we mentioned in the press release, contingent revenue was down a bit for us, specifically in the U.K. that we had seen. So again, we focus on the annual margins overall. As you say, 1 quarter doesn't make a year either one way or another, and so we are focused in terms of where they are. But as John said, it's a little bit below where we'd like it to be, but we're optimistic about what the recovery will be over the second half of the year.

And your next question comes from the line of Shlomo Rosenbaum with Stifel.

A lot of the commentary on the margins, 3 of the 4 segments comes down to investments. And I wanted to ask a couple of things around that. First, are -- what are some of the returns you're expecting? And should we see these enhancing the revenue growth in subsequent years? And also, whether some of these investments were stepped up in the course of [indiscernible] or accelerated during the course of the year?

Yes. So thanks, Shlomo. The investments are pretty much tracking the way we thought they would be. So there's no step-up in there. I think the -- we see these adding to our margins, I would say, beginning in 2020.

So it's going to be a margin improvement or also a revenue growth improvement?

Both. It should be both. I'm sorry, I thought your question was related to margins. But yes, it should be both.

Okay. So that's something that -- it's tracking, but it's something will impact in a couple of years. And then just a little bit of a different question. In terms of the demand for the advisory work in Talent and Rewards, I think you mentioned something about timing over there. That was kind of surprising to me because usually, that's -- when unemployment is doing -- it's really low, that's usually the strongest time for the Talent and Rewards business. Can you comment a little bit about what's going on over there in the context of the strength we should be seeing?

Yes. So the part that we were talking about with timing was related to some of the products in T&R. And so that revenue gets recognized when we deliver the products. And sometimes, things that we might expect would be -- get delivered in June get delivered in July instead, so they move over. So that's the timing issue. I think, generally, we would expect T&R to be up when unemployment is low and when there's more competition for folks. I think some of the uncertainty in various parts of the world, though, may have limited people's appetite for some of those projects. But T&R is clearly an area where it was lower than we had expected. In fact, we had a revenue decline in Talent and Rewards, and that's something we need to address going forward.

Is there something that you see line of sight to in improvement over there? Or in other words, is it kind of look like a pause? Or is there something that you think you need to be rightsized? Or any other color you might have on that strategically?

Well, I would say that it's not necessarily we see that there needs to be a rightsizing. And I think -- again, we think the better estimate for what the second half will look like is the first half as a whole as opposed to the second quarter results. But I do think in Talent and Rewards, our expenses will probably -- we had a good end to last year and then a good first quarter there. And I think we were building up our expenses on the assumption that, that would continue and we need to be -- we need to do a better job of expense management there.

Your next question comes from the line of Mark Hughes with SunTrust.

You described the bulk lump-sum business as being a little bit stronger. Is there a discernible pipeline there? Can you talk about how you think that will go on in the second half?

No, it was -- overall, retirement had about a 3% growth, and bulk lump-sums was one of several contributing factors. But it wasn't an enormous difference.

And then you may have touched on this on an earlier answer, but you talked about the -- in the CRB business, momentum building up in the second half. What gives you visibility for that?

Yes. I mean, we obviously look at the pipeline of growth. We look historically in terms of what that growth has been. If you look overall, third quarter generally is lowest and first quarter being the strongest and fourth quarter being the second strongest. When we look at starting the year every year, we have 93% retention rate in our clients. So we have a pretty good visibility in terms of what those clients are doing and what we've seen over the first half of the year and what the expectations are over the second half of the year. So in addition to our pipeline management as well as our historical view, that's what's giving us that perspective. And equally, as we look at the marketplace, continues to be very strong as evidenced by, as you say, our -- looking at our competitors and the strength in the marketplace.

Your next question comes from the line of Mark Marcon with R.W. Baird.

Appreciate all the color both in the 605 and 606 standards as well as the discussion of the first half relative to just focusing on individual quarters. I'm just wondering, with regards to some of the segments, like for example, in HCB, we talked about Talent and Rewards being the one weak area. On CRB, it sounded like, geographically, Britain was the area where it was weak, particularly in the transportation business. Wondering if you can talk a little bit about the outlook there and what you would anticipate in terms of it potentially improving. And then I've got a follow-up with regards to IRR and BDA.

Sure. As it relates to GB, we did see weakness there, particularly around contingent revenue that we look to have. When you look and think about some of the market assessments and views that were going on, it's created and dampened a bit of the marketplace in terms of that outlook, not only today but looking into the future. So -- and equally, you got Brexit still going on there and has not been completed. And so that's paused people a bit just in terms of how we're going to operate into the future, though we're very confident in terms of how we're going to operate. Nonetheless, we've seen that dampening overall in terms of GB and, indeed, saw GB down for the second quarter. Although international was very strong for us outside of GB, and we've seen international grow at 8% and North America grown at 3%. And so we feel pretty good when we look at the overall view of it. So as I said before, we have a pretty good sense of renewals and our client base in terms of our 93% retention of our clients. And so we feel -- that's what gives us that optimism in terms of looking out over the rest of the year as well as the strong market conditions. So Mark, I mean, that's -- I guess that's what I would respond to your question, make sure I hit your -- responded appropriately to what you were looking for.

Is there an opportunity to manage expenses to a greater extent in GB as we think about the full year?

Looking at expenses, it's a tale of two challenges. One, anytime you're obviously managing people, it's -- when -- you have to go through a process in terms of to the extent you were to rightsize talent. We don't believe that's the great answer for us overall in terms of thinking about that right now, but nonetheless, you need -- there's a bit of a notice period, it just doesn't happen immediately, particularly in GB. But equally, there's a lot of, discretionary expenses that we can turn off immediately if, indeed, we need to do that. And our track record, collectively between John and myself as well as our local leadership, has been able to -- be able to be very agile and be able to make those types of decisions if, indeed, we need to. And -- but nonetheless -- so that's kind of, as we look at the expense situation in terms of managing it, how we think about both of those avenues.

Great. And then just with regards to IRR and BDA. On IRR, can you just remind us of the size of divested units? And then on BDA, there was improvement. It sounds like things are being targeted for stronger growth. What was the specific area that's growing at a faster rate on the BDA side?

Sure. Why don't I start with the second question first. On BDA, I mean, we continue to see strong demand for individuals. And in particular, when we think about our outsourcing activities that we're doing overall in North America has been very strong demand. So when you think about our overall health and wealth kind of positions have been places that we feel we're doing very well and outperforming the marketplace, and obviously, BDA being one of those. As we reflect on it, I mean, we believe we have a very strong market position. We've got a very strong platform that we continue to invest in, and we've got a very strong management team in terms of leading that business in terms of how it is they're driving it and winning in the marketplace. So we're very optimistic about it. And the other piece is, again, we are one of the only noncustodial banks that are out there that can play in this particular space in BDA. And we continue to make sure we've got the quality right around our via benefits solution and what that means for us. And we're dogfooding that on ourselves as it relates to Willis Towers Watson. And we continue to work really hard to make sure that quality is right as we continue to think about how it is that we bring that to the marketplace. So we're very excited about the BDA business, what it's been doing, how it's been performing and all those things lining up. As it relates to the revenue base, I'll give you the exact number, but my recollection is roughly around $15 million to $20 million in terms of the divested businesses in the current year, the impact.

Your next question comes from the line of Kai Pan with Morgan Stanley.

My first question, on the -- so you said there's a timing issue, so it's wholesale. IRR was down 11% for the second quarter. I just wonder if you can provide the first half organic growth in wholesale. And also, there are some press release about some of the brokers that are leaving there. I just wonder, would that have an impact going forward in that particular business?

Yes. No, Kai, I mean, I would tell you, I think we're very -- still very bullish and excited about the Miller business. What we had seen was one of timing. I'm not aware of any -- or John are aware of any resources that create us any real concerns. I mean, obviously, in any business, you have people that come in and go out, and obviously, you don't want to lose any key individuals. But we've got a really strong leadership team that's leading our Miller business overall. We're very supportive of them. And the conversations that we've had with them have been about really continue to grow that business and are very excited about the prospects for it. The timing issue, we'll get you the exact number. I'll follow back up with you, Kai, just to get you that exact wholesale number overall.

Okay. Great. And then my second question, you're stepping back on your full year guidance. Looks like everything else remained...

Hello, Kai? We're not getting anything.

Your next question comes from the line of Adam Klauber with William Blair.

The last few years, you've spent a lot of time in integration, and we haven't seen a lot of deals, which makes sense. As we look at 2019, '20 -- 2019, 2020, should we expect deals to pick up?

Yes. I think that -- and we said really from the beginning that the first, certainly, 2.5 years or so, we didn't expect we would be doing any sizable deals at all unless they were really quite unusual, just really rare and unique opportunities. But I think we feel pretty good about where we are in integration, and we feel that 2019, we'll certainly be in a position to consider deals.

Okay. Okay, that's helpful. And also, you've restated your free cash outlook, I think 1 point -- or cash flow, $1.1 billion to $1.3 billion. As we think about that next year, should it be more on -- with the growth of operating earnings? What are the factors should be impacting free cash as we think about 2019?

Yes. I mean, directionally, that seems to make sense, Adam, but honestly, I think we'll come back to you and give you more direct guidance as we go through the rest of the year. As we come into the fourth quarter, we'll give you a forecast as it relates to what we believe that will be for next year. So at this stage, I think it'd be -- I think directional guidance what you're saying makes sense to us, but I wouldn't give any more guidance than that.

Okay. Okay. And just one quick other question. CRB in the U.S., if I remember, it seemed like retention had been improving in the last couple of quarters. Are you still seeing improving retention this quarter?

We don't actually -- we will get -- we will have information on that right yet. But I don't think there's anything that would cause us to think it's off some.

Your next question comes from the line of Meyer Shields with KBW.

I just wanted to follow up a little bit on the, I guess, improving capabilities for dealmaking going forward. Are there geographic regions or services that are of particular interest?

I think as we would -- as we look up, there's some of the -- we're in about, what, 120-plus countries around the world. And so we're pretty much in most geographies. Some of them we may like to be a little bit bigger in them, so we might be looking at some particular geographies here or there. But there'd be -- there aren't any that we would be newly entering as to where we go. When we look at the segments that we have, we're in a pretty strong position in most of the businesses we're already in, which makes us think that we're more likely to be looking for some close adjacencies rather than businesses that we're already in. That would be slightly more likely that we'd see acquisitions like that.

Okay. Can I incur for that, that you're not looking for, I don't know, we call it transformational, but it's probably too difficult, but anything major?

No. I think that's fair enough. I think transformational acquisitions come up relatively well, I'd say. It's not clear you can -- I mean, we're certainly open to those things if they present themselves, but they're not something we would be banking on.

Your next question comes from the line of Elyse Greenspan with Wells Fargo.

My first question is on your earnings guidance. I'm hoping you could help me tie together a couple of things. So you guys blocked your guidance for EPS unchanged. It sounds like maybe revenue a little bit short in the second quarter, but your full year outlook is unchanged for revenue and for margins, yet your tax rate is going down, so that benefits you better than you thought. And currency was $0.24 positive in the first quarter, and now it seems like it's -- you're not going to see much of an impact on earnings, offset that for the rest of the year. So currency is about $0.20 better than the $0.04 in the initial guidance. So what's the offset, I guess, to the better currency and the lower tax rate that you're leaving your guidance for the year as opposed to raising the guidance?

Yes. No, it's a good question, Elyse. I mean, ultimately, what we're looking at is a range, right? And so we think about that as we give it at $9.88 to $10.12 as a range. Obviously, based on that, we think we'll still be in that range. You could think about us in the middle or the higher or the lower end, between it, but we feel comfortable we're in that range. And I think you summarized it appropriately. And we think we're still within that range in terms of how we add everything that's included in there.

Where do you think the tax rate -- I know you guys lowered the guidance for this year. Where do you think the tax rate ends up in 2019? Does it go up? Like are you sticking with your original kind of higher end of 20s range? Or would it kind of be in line with where you see 2018 coming in?

Yes. So we'll look to give you guidance on that in the end of the year. Directionally, I mean, just -- there are certain things that we continue to work through that we need interpretations from treasury to help us understand certain implications in terms of our planning. Clearly, we continue to get more and more information. We continue to do more analysis every quarter. And obviously, that's what's reflected in our ranging it at 22% to 23% and bringing that down from 1%. When we look at potential implications, we could see it potentially going higher, but I wouldn't -- I'm not giving you that guidance at this stage. I would do that as we comment in the end of the year. So it's something that -- honestly, I wish I could just give you more view that these are the rules. The rules continue to get interpreted. We continue to use our folks as well as advisers in working through that. And at this stage, I think there's pressure on it, but I wouldn't get you specific guidance to, Elyse. And I'm trying to give you as much as I can based on what we know right now.

Okay. And then the pension charge, if you guys backed that of adjusted earnings, where did that run through the P&L on a reported basis? Did that go through the segments?

Yes, it's in other income net and is adjusted out.

Okay. So it's in other income net. And then one last question. New business, how did that trend in the quarter? I guess, within CRB, was that maybe part of what led to the slowdown in organic growth? Did you see anything in the new business front? Or would you attribute more of the slowdown kind of a way for some of the timing that you pointed out to a drop in retention? Or was it new business? Or was it maybe a combination of both?

Yes, Elyse, I mean, I guess I would view it -- again, as John said, I think a little bit more timing than we originally had thought. I mean, that actually happened in the first quarter versus the second quarter. I think retention rates, we don't see a real decline in retention rates overall. New business, yes, to your point, we had seen a little bit less new business that actually came our way in terms of those amounts because, obviously, that's what resulted in those lower revenue numbers versus the marketplace. So yes, I think it's all three of those.

You next question comes from the line of Ryan Tunis with Autonomous Research.

So I guess my question is really just around visibility in the margin expansion and I guess where your confidence comes from into the back half of the year. Because I guess, looking at this quarter, ignoring, I guess, the lower hedge expense, there wasn't really a lot of margin expansion on 3% organic growth. So kind of thinking into the back half of the year, why should we expect there would be any?

Yes. So thank you for the question, Ryan. I think as John mentioned, our T&R business was a contributor to it. We are working very directly in terms of driving revenue growth as well as expense management in terms of thinking about that business and the impacts that, that would have directionally on margin. We are -- as we mentioned in terms of investments, are consistent with what our plans are. But I think we know where the levers are in terms of being able to manage our expenses appropriately, and we will look to do that. And we kept line of sight as to what that will mean in terms of the second half of the year. So that's what's giving us and me the confidence about us and our operating committee and the way that we can deliver those results.

Yes. And I guess, Mike, I would just also add like, we did have 130 basis points improvement. I don't consider that nothing.

Okay. And obviously, not a lot of discussion around 2019. I get that, but just -- I guess, John, are you more of the view coming out of this integration, does earnings growth come more, you think, as a function of organic revenue on the top line side? Or do you think it's kind of more of an efficiency story when we're thinking about margin expansion going forward longer term?

Yes. I actually think it's a combination, Ryan. I think -- we expect, as I said earlier, to be growing as fast as the market or faster. That's our expectation of what we'll do. And although we didn't do that in the second quarter, we did it for the whole first half of the year. And so when I look to 2019 and beyond, we still expect to be doing that. And so we expect to be seeing that hope on margins. But at the same time, we think that -- we think that there's a lot of things we can do to improve the overall efficiency. And so we expect to see some margin improvement from that, too.

And then just quickly on housekeeping. The pension item stripped out, it was unclear to me. Is that expected to recur in the coming quarters or annually?

It's a good question. We're hopeful that it doesn't recur in terms of thinking about it. Obviously, depending on the marketplace, where interest rates are has an impact on it in terms of people leaving the plan and being encouraged to do that and their financial advisers advising them to do it. So we saw -- last year, we've seen it through the first half of this year, but we continue to watch it and monitor very, very closely. And we're hopeful that it's not a recurring event. But I -- right now, I can't tell you that it's not going to continue to be the case based on what we continue to see happen overall.

This concludes the Q&A portion. I would now like to turn the conference back to John Haley.

Okay. Thanks very much for joining us this morning, and I look forward to talking with you in our third quarter earnings call in November.

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