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…

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…

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.