Good day, ladies and gentlemen, and welcome to the Third Quarter 2016 Willis Tower Watson Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded..

I would like to introduce your host for today's conference, Ms. Aida Sukys, Director of Investor Relations. Ma'am, please go ahead. .

Thanks very much, and good morning, everyone. Welcome to the Willis Towers Watson earnings call. On the call today are John Haley, Willis Towers Watson's Chief Executive Officer; and Roger Millay, our Chief Financial Officer. Please refer to our website for the press release issued earlier today..

Today's call is being recorded and will be available for replay via telephone through Monday by dialing (404) 537-3406, conference ID 4925029. The replay will also be available for the next 3 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, involving risks and uncertainties.

For a discussion of forward-looking statements and a list of other factors that may cause actual results or even -- or events to differ materially from those contemplated by forward-looking statements, investors should review the Forward-Looking Statements section of the earnings press release issued this morning, a copy of which is available on our website at willistowerswatson.com as well as other disclosures under the heading of Risk Factors and Forward-Looking Statements in our most recent annual report on Form 10-K and quarterly report on Form 10-Q 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 of the non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures, investors should review the press release and supplemental slides 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. Good morning, everyone. Today, we'll review our results for the third quarter of 2016 and provide updated guidance for the full year of 2016. We'll also provide consolidated 2016 and certain pro forma 2015 financial results..

Our segment results for this quarter are presented based on the new Willis Towers Watson structure. We've provided historical Willis Towers Watson segment information in an 8-K filed on July 14, 2016..

I'd like to take a few minutes to address the management changes we announced last week. First, I'd like to thank Dominic Casserley for his contributions to Willis and all of his efforts in assisting in the creation of Willis Towers Watson. Dominic has been a terrific partner throughout the entire transaction and integration process.

Second, I'm extremely pleased with the appointments we've made to the Investment, Risk & Reinsurance and the Corporate Risk & Broking businesses and to the Americas region.

Not only have we enhanced the Operating Committee by increasing the strength of the brokerage perspective, but I'm very excited about bringing the vision and passion Carl Hess, Todd Jones and Joe Gunn bring to their new roles.

I'm confident that based on their previous success and the depth of their knowledge of our business, they'll continue to be strong and effective leaders..

Now let's turn to our results for the quarter. Reported revenues for the quarter were $1.78 billion, a 2% increase on a pro forma basis compared to the prior year. This includes $51 million of negative currency movement on a pro forma basis. Commissions and fees for the reportable segments were up 2% on an organic basis..

The net loss attributable to Willis Towers Watson for the quarter was $32 million as compared to the prior year pro forma net income of $209 million. Adjusted EBITDA for the quarter was $275 million or 15.5% of revenues as compared to the prior year pro forma adjusted EBITDA of $307 million or 17.6% of revenues.

The year-over-year decline is due to revenue pressure from CRB and IRR and the seasonality of the Gras Savoye business. Adjusted EBITDA for the first 9 months of 2016 was $1.35 billion or 22.5% of adjusted revenues as compared to pro forma adjusted EBITDA for the first 9 months of 2015 of $1.27 billion or 22.8% of adjusted revenues..

For the quarter, loss per diluted share was $0.23, and adjusted diluted earnings per share were $1.04. Currency fluctuations, net of hedging, had a negative impact of $0.02 on adjusted EPS..

revenue synergies, cost synergies and tax savings. First, let's discuss the revenue synergies. In the first year, we expected to achieve sales of approximately 5% to 10% of our stated 2018 revenue synergies.

We are where we want to be, but we also realize that achieving our first year goals is a small portion of our overall objective and we still have a lot of work ahead of us. As we've discussed on previous calls, the global health solutions and mid-market revenues will primarily be recognized in 2017.

The majority of the P&C wins will also impact 2017 and beyond..

global health care solutions, the mid-market health care exchange and the U.S. large market P&C sector..

We've won another 6 global health care solution clients this quarter, and the pipeline continues to look very strong. We also won 30 single-country multinational assignments..

Turning to the mid-market exchange. As previously discussed, we sold approximately 70,000 eligible lives for the 2017 enrollment. We may see a pause in sales activity while the enrollment season is underway but continue to be pleased with our 2018 sales pipeline. Lastly, in the U.S.

P&C large company space, we've been awarded 16 new projects so far this year..

Now moving on to the tax and cost synergies. We continue to be on track to achieve our original goal of a 25% adjusted tax rate, a full year ahead of schedule, in fact. We continue to expect to exceed this goal longer term..

We originally estimated merger cost synergies of $100 million to $125 million by the end of 2018 and believe we're on track to achieve this goal. We continue to estimate savings of approximately $20 million in calendar 2016 with an exit run rate of at least $30 million..

Next, I'd like to move to the Operational Improvement Program or OIP. Incremental savings from OIP were approximately $14 million from the third quarter of 2015. We incurred an incremental $11 million of restructuring costs in the same time period. We plan to spend approximately $165 million in 2016 for restructuring charges..

Now let's look at the performance as well as our revenue and margin expectations of each of our segments. On an overall constant currency basis, commissions and fees for Human Capital & Benefits increased 5%, Corporate Risk & Broking increased 8%, Investment, Risk & Reinsurance decreased 5% and Exchange Solutions increased 25%.

All of the revenue results discussed in the segment detail and guidance reflect commissions and fees constant currency, unless specifically stated otherwise..

Now let's look at each of the segments in more detail. Turning to Human Capital & Benefits or HCB. HCB generated growth of 5%, driven primarily by the Gras Savoye acquisition. On an organic basis, commissions and fees increased 2%. Retirement commissions and fees were up slightly due to increased bulk lump sum project work in the U.S.

and new pension administration client implementations, which were offset by softness in the Netherlands. Talent and Rewards commissions and fees were up as a result of strong demand for executive compensation work and the delivery of data surveys.

But we continue to experience softness in the Rewards, Talent and Communication business in North America and EMEA..

Moving to health and benefits. We continue to see strong demand in the large company space globally, with strong product and planned management activity in North America. Technology and Administration Solutions, or TAS, continued to produce solid results due to new clients and higher call center demand..

We continue to have a positive outlook for HCB business for the rest of 2016. We should continue to see both lump sum projects in the fourth quarter. Talent and Rewards is seasonally stronger in the second half of the calendar year, and we continue to expect growth in the health and benefits and TAS businesses..

Turning to Corporate Risk & Broking or CRB. Commissions and fees grew 8% from the prior year as a result of the Gras Savoye acquisition. On an organic basis, commissions and fees were flat. Revenue declines in North America and in the international business offset the growth in Great Britain and Western Europe.

In North America, a onetime project in 2015 created a strong comparable, and our new business was lower than expected. China and Brazil accounted for most of the revenue declines in our international business as a result of the economic and political climate in those countries.

Great Britain had very strong results across all lines of business, and Iberia led the growth for Western Europe, with some weakness in Denmark and with the affinity business..

We expect Great Britain and Western Europe to continue providing revenue growth, and we don't see any significant near-term changes in the Asian and Latin American markets. We're seeing a small pricing headwind in the North American market and continue to focus on building our new business pipeline.

Overall, we expect similar results in the fourth quarter..

Now to Investment, Risk & Reinsurance. Commissions and fees were down by 5% for the quarter. Organic commissions and fees declined 5%, primarily due to a decline in the Reinsurance and Capital Markets business. The decline in North American reinsurance revenues offset the revenue growth in the other regions.

The Capital Markets business, which is generally volatile and is dependent on transactions, generated its highest revenue ever in the third quarter of calendar year '15 and had nominal revenue this quarter. So while the business is rather small to our portfolio, the volatility had a material impact on the growth of the segment..

On a positive note, we continue to see wholesale delivering solid results from Miller. Risk Consulting had modest revenue growth, led by software sales, and Investment had a very strong quarter as a result of increased performance fees and a soft comparable in the third quarter of '15.

We anticipate that IRR will continue to see headwinds in the Reinsurance and Capital Markets businesses as we don't expect the overall environment to change by the end of the calendar year..

Lastly, Exchange Solutions followed up the strong first half with another outstanding quarter with commissions and fees of $161 million, an increase of 25%. Driven by record enrollments, our retiree and access exchanges revenue increased 35%, and the other Exchange Solutions businesses increased 14%.

Increased membership and new clients drove the revenue increases. Our Health and Welfare administration business continues to grow, primarily as a result of the new business we've won over the last 2 years..

We continue to receive high satisfaction scores from retirees, where 95% feel they selected the right plans to best meet their needs, and we have an overall 93% retiree satisfaction rate. We've also experienced 100% renewal as our first round of active exchange client contracts were ending this year..

We expect the fourth quarter revenue growth to be more moderate as the retiree and health and welfare businesses start to overlap the strong enrollment numbers and new clients, which were added in the fourth quarter of calendar year '15, which created a strong comparable..

I'm pleased with the progress on a number of initiatives associated with the merger, especially the focus on revenue synergies. We're even seeing crossover in marketing efforts we did not contemplate as we created Willis Towers Watson and remain committed to continue to support and encourage these activities.

In order to provide the investments needed to attain our growth goals, we're taking steps to help ensure we achieve our merger commitments of enhanced margins and shareholder return. We're extremely focused on balancing our growth initiative while maintaining financial discipline.

I feel we have the right team in place to deliver the 2017 objectives and beyond..

And last, I'd like to thank all of our colleagues for their enthusiasm in supporting our efforts and their continued steadfast commitments to our clients..

Now I'll turn the call over to Roger. .

Great. Thanks, John, and good morning to everyone. I'd like to add my congratulations to Todd Jones, Carl Hess and Joe Gunn. I'm excited about how the experience Todd, Carl and Joe bring to the table aligns with our long-term opportunities and goals. And based on their proven track records, I'm confident in their future success..

Now for our financial results. As a reminder, our segment margins are before consideration of unallocated corporate costs such as amortization of intangibles, restructuring costs and certain integration expenses resulting from mergers and acquisitions. The segment results include discretionary compensation..

Income from operations for the quarter was $1 million or 0.1% of revenues. The prior year third quarter pro forma operating income was $104 million or 5.9% of revenues. Adjusted operating income for the quarter was $243 million or 13.7% of revenues, and the prior year quarter pro forma adjusted operating income was $267 million or 15.3% of revenues.

As we highlighted earlier, revenue pressure and seasonality related to Gras Savoye impacted the third quarter margin..

Income from operations for the first 9 months of 2016 was $463 million or 7.8% of revenues. The prior year first 9 months pro forma operating income was $632 million or 11.3% of revenues.

Adjusted operating income for the first 9 months of 2016 was $1.25 billion or 20.7% of adjusted revenues, and the prior year first 9 months pro forma adjusted operating income was $1.13 billion or 20.3% of revenues. The GAAP tax rate for the quarter was 46%, and the adjusted tax rate was 22%..

Before we discuss the segment operating margins, I'd like to remind you that we provided recast segment operating income for the prior periods in the 8-K we filed on July 14, 2016. Additionally, our segment margins are calculated using total segment revenues..

For the third quarter, the operating margin for the Human Capital & Benefits segment, or HCB, was 16% as compared to pro forma 17% last year. As expected, the 2016 margin trended lower due to the Gras Savoye margin being lower than the company average..

For the first 9 months of 2016, the HCB segment operating margin was 22% as compared to pro forma 23% in 2015. We continue to anticipate the HCB segment operating margin will be in the low 20% range for the year..

For the third quarter, the Corporate Risk & Broking segment, or CRB, had an 11% operating margin as compared to a pro forma 14% operating margin in the prior year third quarter. Revenue pressure from North America and the international business impacted margin.

The heavy weighting of Gras Savoye in the first quarter has also changed the seasonality of the quarterly margin. For the first 9 months, the operating margins for 2016 and pro forma for 2015 were 16%. We continue to anticipate CRB's operating margin to be around 20% for the year.

The change in leadership has not impacted the focus to drive margin enhancement..

For the quarter, the Investment, Risk & Reinsurance segment, or IRR, had an 8% operating margin as compared to pro forma 10% operating margin in the prior year third quarter. The revenue pressure from Capital Markets and Reinsurance was generally offset by growth in Wholesale, Risk Consulting and Investment.

For the first 9 months of 2016, the IRR segment operating margin was 26% as compared to pro forma 25% in 2015. Inclusive of the JLT legal settlement, we continue to expect the IRR segment margin to be around 20% for the calendar year..

Exchange Solutions operating margin for the quarter and the prior year pro forma was 12%. For the first 9 months of the calendar year, the Exchange Solutions segment operating margin was 18% as compared to 11% pro forma in the prior year.

For the quarter, retiree and access exchanges led the segment with a 27% operating margin as we continue to invest in the active exchange..

For 2016, we expect the Exchange Solutions segment margin to be in the mid-teens. As a reminder, margins are seasonally higher in the first half of the calendar year as compared to the second half of the calendar year due to cost buildup for the enrollment season.

Commissions and fees are recognized over the year once the policies become effective, which is typically the 1st of January..

Moving to the balance sheet. We continue to have a strong financial position. As of September 30, we had repurchased $233 million of Willis Towers Watson stock. We continue to anticipate a total repurchase of $300 million for 2016..

Free cash flow was $122 million this quarter and $457 million for the first 9 months of the year. Free cash flow is generally expected to build through the year. We still expect to deliver approximately $650 million in free cash flow for 2016..

Now let's review our guidance for fiscal year 2016. We expect to incur approximately $150 million to $175 million for both integration and transaction-related items and restructuring items. Integration and transaction-related expenses and restructuring costs will continue to be adjusted from our GAAP measures.

In fiscal '16, we're adjusting the expected reported revenue growth to be around 6% and constant currency revenue growth to be in the 9% to 10% range, with the primary growth drivers being the Gras Savoye acquisition and the Exchange Solutions segment. Last quarter, we estimated that organic revenue growth would be in the 2% to 3% range.

Based on the third quarter results, we now expect organic revenue growth to be around 2%. .

We expect GAAP operating income margin to be around 7% and adjusted operating income margin to be around 20%. In calendar 2015, pro forma GAAP operating income margin was 10.5%, and pro forma adjusted operating income margin was 19.3%..

We're progressing with various cost-reduction programs, which will allow us to keep this margin in line with previous expectations. And we believe that we're beginning to realize the results of this cost control work.

While costs can ebb and flow and it can be difficult to fully lock down sequential organic momentum, we believe we saw a modest net sequential enterprise expense reduction in Q2 and that we enhanced the level of sequential reduction in the third quarter versus the second.

Assuming continued organic revenue growth, this is the path to margin expansion momentum in 2017..

On a segment basis, we're holding margin estimates to previously reported estimates for all segments. For revenue guidance, we'll be referring to organic commissions and fees.

Based on the third quarter results, we're maintaining low single-digit revenue growth for HCB, lowering CRB revenue estimates from low single-digit growth to flat, lowering IRR revenue estimates from a low single-digit decline to a mid-single-digit decline and, finally, increasing Exchange Solutions revenue growth from high 20s to around 30%..

The GAAP tax rate for the year is expected to be in the range of 5% to 7%, and the adjusted tax rate is expected to be around 23%. We expected GAAP diluted EPS to be in the range of $2.30 to $2.50. Adjusted diluted EPS is expected to be in the range of $7.60 to $7.80, which is in line with our previous guidance.

While our financial results this year haven't been as strong as we hoped, this adjusted EPS range represents upper-teens percentage growth over the merger pro forma for 2015. Guidance assumes average currency exchange rates of $1.35 to the pound and $1.12 to the euro..

I continue to be pleased with the integration efforts. While we're seeing early signs of success in areas like reducing the tax rate, winning projects aligned to our revenue synergies and a greater focus on margin management, many of these initiatives are building the foundation for 2017 and beyond.

I remain confident in achieving our long-term success..

Now I'll turn it back to John. .

Thanks very much, Roger, and now we'll take your questions. .

[Operator Instructions] Our first question comes from the line of Shlomo Rosenbaum with Stifel. .

John, can you just talk a little bit about the progress to date versus the long-term goals? It's slower out of the box on the revenue side, and clearly, you need the CRB segment to pick up in revenue growth on an organic basis to get to where you want to be in a couple of years.

What are you seeing internally in the business that makes you feel comfortable that you're going to see that progress over the next, say, year or so?.

Yes. Thanks, Shlomo. I think as we came into this year, we could see there were some headwinds in some of the businesses that we were facing a little bit.

I think we've seen North America has been a place where we've probably seen it, particularly in CRB more than in some areas, although international has also been a place where we've experienced a good bit of a decline there. We see those things as being -- turning around somewhat next year.

I think we had tough comparables on the international; for example, last year, we had some reversals of some income that we had booked in 2015 that occurred this year, that we have going on.

I think we -- when we said what we were going to try to do this year, it was, first, we were going to try to make sure we got the right kind of margins, and then we were going to use that to a platform to build with profitable revenue growth. I think that's still been our focus.

We feel pretty good about coming in at exactly what we had said last quarter with the EPS. We might be 1% or so lower on the -- or at the bottom end of the revenue guidance that we gave last quarter. But we still feel we'll come in right around there.

I think with the new team we have in place, too, I think one of the things I like about that, with some strong brokerage representation for North America leading both CRB and the Americas geography, I think we're well poised to turn around North America there.

So I do feel like we have the right people there, we have the right offerings, and I think we just need to build on that. .

So is there anything market-wise that you feel has increased headwinds in North America broking? Or you really think it's a people item or a combination?.

I think it's a -- I think you always have a little bit of loss whenever you go through some big changes like this in the merger that we did. So I think we probably lost a little bit of that. I think as we put the organization together, we probably made it a little too complex, too.

And I know one of the things that both Todd and Joe Gunn are focused on is making sure that we streamline some of the organization and are spending more time with clients and less time internally. .

Okay. And then in the IRR business, it seems that the guidance supplies a pretty big step-down next quarter.

And is there -- can you just give us a little bit of a thought as to what's in play over there? And is that something that we should continue to see those kinds of declines? Or is that specific to the quarter but don't think about it that way for, say, next year or so?.

Yes. I think IRR is a -- it's a mixture of a number of businesses. As we said in the script, the Capital Markets business is a relatively smaller part of that overall portfolio. But in this particular quarter, best quarter ever in the third quarter of 2015. And nominal revenue is really -- I mean, it was pretty close to 0.

So it was really quite nominal revenue for this year. And it reflects the fact that there's just been a dearth of deals in the insurance business generally.

And so we're not expecting to see, for example, that to pick back up in the fourth quarter, although we do see some signs that 2017 -- I mean, we have had a couple of wins recently that could very well deliver some nice revenue in 2017. So we'll have to see about that. Reinsurance. We have a -- we are facing some headwinds in reinsurance.

We -- our facultative reinsurance, of course, is off in CRB. So we don't report that with our -- in IRR. And that's the part of the business that's been growing more than the 3. But -- so we see that business is still facing some headwinds.

I think some of restructurings that our clients have done and some of the just withdrawal of reinsurance from the market, as you've seen some big mergers, have also contributed to headwinds for us there. So again, we're not projecting that the fourth quarter is going to be a big improvement there either.

I think some of the other businesses, Investment, which has been down for a number of quarters here, we saw some real improvement in the third quarter, and I think we feel better about the fourth quarter now than we would have a quarter or so ago. And I think we're beginning to see some signs in the Risk Consulting and Software of a bit of a pickup.

So it's a mixed bag, but I think the -- I think we continue to see pressure on Reinsurance, and we continue to see Capital Markets as being down. And I think, overall, that's what contributes to a lower forecast for the fourth quarter for that segment. .

So if I could sneak in one, just a P&L -- or balance sheet question for Roger.

Did the DSO spike up a lot this quarter? And if so, can you just give us a little detail on that?.

Yes. Not based on our numbers, Shlomo. So I think, in total, on our numbers, we're a little over 100 days this time. I think that's maybe a couple days higher than in the June quarter but not a big spike-up. .

And our next question comes from the line of Greg Peters with Raymond James. .

I guess I just wanted to circle back. You gave some excellent color on organic.

Can you speak to customer retention, specifically in Corporate Risk & Broking and IRR, especially in light of some organic challenges that you're having there?.

Yes. Our retention rate is in the low 90s, which is, I think, about what -- that's about the traditional rate. I think it's standard for that. I think the -- where we've been seeing the pressure on the CRB is actually some new business wins haven't been as high as we might have hoped.

And so that's been more the issue than the renewal rate, Greg -- retention rate. .

Okay. So I mean, I'm just trying to marry that. Roger, you said on your path to margin expansion for 2017 assumes organic growth. Just trying to parse out exactly what you mean by that.

And then the follow-on to that, John, would be just -- it doesn't seem like there's a lot of changes in the numbers with the third quarter result that would represent new headwinds towards your 25% EBITDA margin target in 2018.

But perhaps you could talk a little bit about anything that's changed from Analyst Day to now that might have adjusted your thinking. .

Yes. Actually -- thanks, Greg, for that. And I'll let Roger maybe address that. But let me just address the sort of the macro point you raised there. We don't actually see anything in these results that have -- really changes our thinking from what we presented at Analyst Day.

I mean, when you look, as I said, at where we project where our earnings will be this year, we -- we're still right where we thought they would be at Analyst Day. And actually, we're even more confident that we'll be in the range we guided to. So we feel very good about that.

The kinds of things -- when we talked in Analyst Day, we talked about what we needed to do to deliver in 2017 and then 2018. We knew that this 2016 had been a tough year and that it was going to continue to be a bit of a tougher year. But I think we feel like we have everything in place to get to where we need to in 2018. Roger, you want to... .

Yes. Just a comment, Greg, on my words there. And they weren't intended to be profound words. It was actually more -- and I don't say mathematics in front of John. It was arithmetic.

But what really we challenged ourselves to do this quarter was step back and say, "Do we start to see the seeds of momentum shift towards our margin expansion goal?" And while we're still in this period of, one, having comparison to big acquisition periods, so that makes it a little difficult on a comparison side.

And so the comparisons aren't really apples and apples year-over-year. But we took a look sequentially at what we saw in the numbers. And given the actions we know we've taken this year, the path to margin expansion is continuing the kind of growth as we've had this year, albeit at a low level.

And then if sequentially costs are going down, the way margin enhancement pops is you get to a quarter where you're comparing to a year where you began the cost reductions and revenues have been growing through that period, and the margin enhancement pops.

And so the only point I was trying to make is -- and again, with a lot of kind of noise in the system and you have to adjust for things that are seasonal in nature, but we believe that we see a sequential cost reduction momentum, which means that when we start comparing next year to 2016, that we would expect to see margin enhancement.

So I didn't mean anything particular by citing organic growth, just saying that's the calculation. .

Perfect. And just a cleanup question on the tax rate. It's been running ahead pretty much all year of where you thought it would be.

When do we start factoring in a lower tax rate for 2017 or '18? Or do we still keep it at the mid-20s?.

Yes. I mean, I think my view on taxes is, one, there's enough complexity there as I don't like to declare victory on a year until you close the year out. So we're hopeful of -- and as you can tell, we dropped our guidance a bit this quarter.

Hopeful that we conclude that this kind of range is where we'd like to see going forward and then maybe set a new goal. But I'd really like to close this year out before we talk about what '17 and '18 might look like. .

And our next question comes from the line of Ryan Tunis with Crédit Suisse. .

My first question, I guess, is just on how to think about variable compensation. And I was wondering if -- and your [ph] organic is slower.

Does that change the relationship of, like, variable comp to revenues? In other words, is there margin expansion coming through this year in some shape or form because organic growth hasn't been quite where you guys thought it would be at the start?.

Well, yes, maybe I'll start with just a more kind of numerical discussion, and John might have some philosophical comments. But -- so certainly, we have incentive compensation programs across our businesses that are sensitized to performance.

And you can see in our numbers that the segments -- there's pretty broad diversity of performance in the segments. So there is a reduction at this point in incentive compensation, total dollars versus what the target amounts might be. And so those -- we have had some adjustments over the last couple of quarters.

In terms of getting -- where we are right now and getting to the end of the year and having a material impact on margins, I don't think those adjustments are at that level.

And I guess the other thing, just in terms of the way the accounting works that I'd observed is that the -- what we called in Towers Watson discretionary compensation, which was a quite material item financially relative to a total year, it's not as material for Willis Towers Watson because there are more separate sales compensation programs in Willis Towers Watson.

So anyway, long and the short is just pure kind of bonus, not as impactful as Towers Watson was. But there have been some downward adjustments, and that's a part of -- that's supported margin somewhat. .

I guess the only thing I would add about that is to say that our -- we do have a pay-for-performance philosophy, and we expect to pay our people better when results are good and not as well when results are not good. And so we tend to maintain our variable compensation plans of all different stripes.

When we add them all together, we come somewhere in, in the low 30s as a percent of our pretax, prevariable comp margins. And so they do adjust. But they actually don't tend to -- they don't tend to affect the margins themselves that much because they tend to be a constant percentage of that. .

Okay. That's really helpful. And I guess my follow-up is just thinking about organic on the Reinsurance side. I think listening to John talk about these headwinds, it comes across as sounding environmental, a softness in North America Treaty Capital Markets.

And I guess I'm just -- if you could just elaborate on why you think it's environmental as opposed to, more broadly, maybe some loss of market share because when we look at competitors that are quite a bit bigger than Willis, I guess in those -- in Reinsurance, we're still seeing organic hold off reasonably well.

So I mean, yes, if you could just elaborate, I guess, on why you -- what gives you confidence that it's environmental at this point?.

Yes. So I think Reinsurance is a -- it's an interesting one. If we look at North America, which is where we have experienced, I think, some of the biggest headwinds, we actually have exceeded our new business targets so far this year. So the new business part of it has gone relatively well.

What has hurt us is, a, there has been a -- some of the existing clients are buying less reinsurance. And so we've seen that occur partly because people are buying less reinsurance, partly because mergers have actually just taken -- just cut the market in total.

And then we've also seen -- we've had a couple of clients that have restructured things, some of the reinsurance programs, which have led to revenues being shifted to different years. And we've seen that on a couple of big ones that have had a material impact on our results.

When we look at it overall, the Reinsurance is -- it does tend to be a little lumpy from year-to-year when we compare our results to -- I'd look at -- we were looking at one of our big competitors the other day, and they were minus 4% last year and they're plus 1% this year. And so we were -- we had a better 2015 and a little bit lower 2016.

I think we tend to look maybe at a little bit longer trends than just a year or so. But when we look at it, we fundamentally are encouraged by the fact that the new business efforts have been strong even in North America, and in fact, it exceeded targets. And that's what makes us think that we -- going into 2017, we're well placed. .

Okay. And I guess one thought I had is the legacy Towers risk business, I guess, that you guys kept when you sold the auto reinsurance business to JLT.

Is -- have there been any revenue dissynergies in that business from, I guess, now bringing Willis Re back into the fold? I mean, has there been softness, do you think, there that's at all related to the merger? And how big is that revenue base for the legacy Towers risk business?.

Yes. So I think, no, there haven't been -- certainly, there's no net revenue dissynergies. And I don't think there've been really any revenue dissynergies to speak of. Interestingly enough, the -- I sort of referred in the script to businesses spontaneously working together.

And I think it's the Reinsurance and the Risk -- the RCS business, which have actually led the way in terms of doing that. And so our Reinsurance folks have reached out to the RCS folks, have been adopting some of their models, have been using them in joint client presentations. And we've seen the -- getting some synergies across business lines.

Probably the poster child for that right now is our Reinsurance and our RCS folks. So we don't see a big difference there. Roger, what's the number on the size... .

I think with RCS is, what, $275 million, $300 million, something like that, that neighborhood. .

And our next question comes from the line of Quentin McMillan with KBW. .

I think one of the things, and I know you gave a lot of organic color, that is confusing people is just the change from what you saw as of September 29 at the Investor Day on your organic growth and sort of the lowering of that; you're at 2% to 3%. You go to 2%.

It's not a huge change, but really just want to know sort of what changed in the last 30 days.

And is that also related to your decision to change leadership at Corporate Risk & Brokering post the Investor Day?.

So I'll let Roger talk about the numbers and how we got to that because it is a mix of a lot of different things. But let me just address the leadership changes. As we were looking out as to what we need to deliver in 2017 and 2018, I became focused on making sure I had the team that I had the most confidence in to be -- to deliver those results.

And I made the changes to put that team in place. And so it wasn't anything specific about just 1 quarter or just -- it was a matter of identifying the teams that I felt the most confidence in. .

Yes. I'd just say on the guidance question that -- even though Analyst Day was at the end of September, as you probably know, in the CRB business, there can be some big transactions that may or may not happen at the end of the quarter.

And in our forecast, our internal forecast, which advised guidance, we had anticipated some larger transactions that would generate meaningful revenue for us. And ultimately, they did not come in by the end of the quarter. So CRB was the biggest piece of the miss in driving the reduction. .

That would sort of imply that the fourth quarter should be very strong because those contracts would have just rolled into the fourth quarter.

Correct?.

There are items that we hoped for the third quarter that we now expect in the fourth quarter. .

Okay. And just shifting to the free cash flow. Your 2018 guidance of $1.3 billion to $1.4 billion. I just wanted to clarify one expectation for that. At the Analyst Day, you guys did break out the $10.10 EPS you get there from 2.5% top line growth, 25% EBITDA and 8 million decrease in shares.

Is the free cash flow $1.3 billion to $1.4 billion number based on the same level -- those same expectations? Or are there any differences in how you get to that free cash flow expectation?.

No. They're based on the same level that -- and they're based on our belief at this point that free cash flow, while balance sheet items go in there and there'll be kind of puts and takes year-to-year, but over time, that free cash flow should fall into the range of adjusted net income.

And so the adjusted net income underlying $1.3 billion to $1.4 billion is consistent with the $10.10 plus that we've talked about. And that's -- and the $1.3 billion -- so -- and it's to the exit rate of 2018 into 2019. .

Meaning you'll finish 2018 with $1.35 billion or around about in free cash flow?.

Well, no. So the difference -- so the big kind of reduction or detractor from free cash today are all the restructuring and integration costs. We don't get out from under those until the end of 2018.

So that's why -- so the $1.3 billion to $1.4 billion is saying, look, if you're running at a $10.10 kind of level for adjusted EPS, adjusted net income that underlies that, and you're out from under the restructuring and integration costs, then you're at $1.3 billion to $1.4 billion. .

Okay. So the reported number will be lower, but adjusted for the restructuring, it should be that number. Okay. .

That's right. That's right. .

And our next question comes from the line of Mark Marcon with Baird. .

Just wondering if the -- some of the headwinds in CRB and IRR don't really abate. And let's say that revenue ends up being a little bit lower than the 2.5% in terms of getting to the 2018 targets. How much room for adjustment? It seems like you have lots of different levers to pull in order to be able to still get to the $10.10.

Can you just talk about that a little bit?.

Yes. I think I'll let -- Roger will probably have some things to add to that. But I think, Mark, if you remember that slide we had from Analyst Day, one of the points of that was to show that there were a number of different levers that if you grew at 2.5%, then you're at a 25% tax rate, and you reduce to 8 million shares, you could get to $10.10.

If you grew at 4.5% and you had a 25% for tax rate and you only reduced by 2 million or 4 million shares, you could still get to $10.10. So what we were trying to illustrate is we did have a number of levers to pull.

We tended to focus in that one on that even at a relatively low growth rate, we could still get to $10.10 if we were buying back enough shares. But in addition to that, we could -- we didn't factor in what happens if our tax rate is better than we had suggested, for example. So there -- we have a couple of different levers that we could pull.

Roger, you want to... .

Yes. I'll just add maybe another element of context, which is, look, every year, one of the things we do, I would say, pretty thoughtfully is step back and say, what are our best opportunities. As you said, Mark, and I agree, and John went through it, we do have a number of levers.

And we'll continue to do that relative to shareholder value in general but then the specific targets that we've set out. That's generally how we meet our commitments as adjusting with the times, finding the levers and executing on them. .

Great. And then could you talk a little bit about some of the things that you think Todd and Carl will end up doing a little bit differently? I know it's early, obviously, but just in broad strokes, here are some of the reasons behind the changes and some of the different executional elements that might go into reaccelerating growth in those areas. .

Yes. Well, so first of all, when Dominic indicated his intention to leave at the end of the year, we had to find a replacement for running IRR.

And I think one of the things that we especially like about Carl, he had run the investment line of business for both Watson Wyatt and Towers Watson as part -- when he was running that, he was part of a leadership team in that segment.

And at the time, it included both Risk Consulting and Software and our -- the Reinsurance business that we had at Towers Watson. So Carl has some background in all 3 of those areas. I think the background he has in investment will serve him well in understanding the capital markets part of the business also.

Carl is one of the smartest people we have in the organization, and I think he'll be a quick study on the other parts of the business, too. So we liked his background. We like the fact that he has been involved with delivering high revenue growth in the areas he's been in, and he understands the importance of generating profitable revenue growth.

So he was, I think, a very good fit for that. In terms of CRB and North America, as I mentioned in the script, one of the things that I thought we needed more of a perspective on at the Operating Committee was the -- our brokers.

And by moving Todd, who has a brokerage background, and then putting Joe Gunn in charge of North America, we have increased some of that perspective on the Operating Committee. And I think that will be very helpful.

Both Todd and Joe, I think, are hard-charging folks who understand what we need to do to build up the brokerage business in North America, and I think that's going to be one of their key focuses in the short run.

And as I said earlier, I do think that this is a business that we probably have overcomplicated our structure a little bit, and I do think some streamlining is probably called for. .

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

On your buybacks, $300 million this year, and plus dividends, probably close to $500 million and you have free cash flow generation about $650 million this year.

I just wonder, going forward, was the free cash flow generation will be mostly used for shareholder returns?.

Yes. I think that, one, as we've said before, we love to balance those 2. We think, certainly, this year we are leaning to share repurchase. Return of cash to shareholders is very important to us and we think is appropriate at this point. And we're in the process right now of formulating our plans once we're complete with the $300 million.

And I think, in the short term, we'll be highlighting where we come out of that. .

But just as a matter of philosophy, I think shareholder returns are what we probably see as the highest priority. .

Good. And then I just have a quick number question. On your presentation at Investor Day, you mentioned that the integration costs will be about $150 million to $175 million in 2016. I'm assuming that would be mostly for -- to achieve the $100 -- $100 million to $125 million of cost synergy.

And then you have about $100 million each year in 2017 and '18.

I just wonder, are those additional restructuring costs? And what kind of savings could -- coming from that?.

Yes. So there are various activities in there. I think we might have referred to this in investment -- Investor Day. Some of the actions that you take are short term and, I don't know, low-hanging fruit or whatever, but very targeted and happened in the first year.

And then some, like things that require, let's say, combining systems, so finance and HR systems and the related technology, that's a multi-year project. So the benefits come in gradually and later in the integration period. Something like real estate as well.

While we have overlapping real estate, it's best to execute those combinations when leases are kind of closer to coterminous. And so it's those kinds of things that extend into '17 and '18, bigger kind of process in [ph] technology changes and the real estate. .

Do you expect to generate additional cost savings over time beyond the $100 million to $125 million outlined?.

No. The $100 million to $125 million anticipated all those changes that I referred to. .

Okay. So the total cost is about $375 million.

For the savings, about, like, $100 million to $125 million?.

Right. That's right. .

Okay. That sounds bigger than the normal sort of restructuring costs about 1.25x. .

Yes. I mean, some of it is -- again, because you look at a project like an ERP project, there's some big changes that we're making as part of restructuring. Some of the real estate activities are quite expensive, so it's more than headcount-driven changes. .

And our next question comes from the line of Brian Meredith with UBS. .

A couple of questions. Roger, I was hoping to focus a little more on the expense side.

Do you have an organic kind of expense growth number on a year-over-year basis if you factor out Gras Savoye? What were expenses up on a year-over-year basis?.

Yes. I think it's about -- well, actually, I don't have a year-to-date number. But I think for the full year, we're anticipating organic expense growth in the neighborhood of the level of organic revenue growth; pretty close. .

Pretty close to it. Got you.

And then on the OIP program, still on track to achieve the $230 million of cumulative savings in '16? And then on that, how much do you think is flowing to the bottom line at this point?.

Well, the second question gets a little complicated, but relative to all that's going on in the company. But we are on track for the savings, and the savings are realized. There's a very disciplined process to track both the exits as well as then how that relates to the additional folks that are added in Mumbai or elsewhere in the service centers.

So those costs are "dropping" to the bottom line.

Of course, as a result of both the shortfall in revenues versus what we expected and the plans that had been built for the year relative to that business momentum, that has certainly challenged our ability to show kind of net margin expansion as a result of the savings that are going on, which is really why I wanted to highlight that sequential cost momentum item that I talked about in my script.

So while right now you see in the adjusted operating margin a little bit of increase, it's not at all what you would expect based on the savings we're seeing in OIP plus merger. But we have been adjusting our expense levels all year as the year went by. And we're now starting to see the results of that.

In this 2017 planning period, we continue to emphasize that. So we have our eye on the prize. And we think we're starting to see the kinds of results financially that will lead to margin expansion, but we're not seeing it yet. .

Right.

In the weaker-than-expected organic revenue growth, is it changing any of your kind of thoughts as to how much needs to kind of be reinvested back in the business to get that organic revenue growth going and maybe less falling to the bottom line of the OIP and the integration?.

Yes. I'll comment on the idea of investments and John may have a comment or 2 as well. I think that -- and it's why we cite the shortfall, the revenues.

I think there are areas in the company, I would say, specifically, the legacy Willis International business where there had been tremendous success, I guess, over the last few years, at least in growing revenues organically.

Certainly, as they targeted that and anticipated that it would continue, they did have plans of continuing to add resources and invest relative to that momentum. It certainly has halted here this year.

So we have been in the process of both pulling back what had been identified, let's say, as targeted investment initiatives but also pulling back the momentum of cost growth relative to prior organic growth momentum. So it's been a major discussion item. Again, it's a major planning item.

And we're pushing that hard to make sure that where we are investing, it's in places where there's good visibility of getting a payback. If there isn't, then we're not going to do it. .

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

First off, has the currency impact that you guys are now -- last quarter, I think, it changed to a $0.14 tailwind for the full year in terms of the EPS impact. What are you now expecting in terms of currency? I see the exchange rates you're providing in guidance moved a little bit.

And then also, what was the currency impact on earnings in the third quarter versus what you are expecting for the fourth quarter?.

Yes. I think, overall -- so year-to-date, the FX impact on EPS is now $0.11. I'll say that relative to the $0.14, I don't think we had all of the hedging impacts in that $0.14. So the $0.11 is a refined number, and there was only a couple cents in the third quarter. .

Okay. So we'll see most of the currency benefiting the fourth... .

Yes. Headwinds, yes. .

There was a couple cent headwind in the third quarter -- I meant headwind in the third quarter, just to be clear. .

Okay. So the -- and the tailwind will be in the fourth quarter. .

No. I mean, I don't know that we have the guidance -- in the guidance, what the FX impact would be. We can follow up with you on that. .

Okay. That would be great. And then just in terms of, I guess, you guys, there was an earlier question in terms of some compensation changes that were variable comps this year given probably the weaker organic.

I mean, how are you guys thinking about that in terms of just retention overall? I mean, there's been some high-level departures from the legacy Willis organization that you guys have seen over the past year.

So how are you balancing, I guess, maybe lower comp this year versus your desire to want to retain most of the employees, I guess, that you have in the platform now versus potentially seeing additional departures of people you might potentially not want to lose?.

Yes. I mean, look, I think we do have a pay-for-performance culture. And we do pay people for results, and I think we want to continue to do that. I think the people who are performing well will get compensated well. So we're not really too worried about that.

And I think -- we think we have the right kind of programs in place to incent the right kind of performance. .

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

I think you had mentioned last quarter that the adoption rate for exchanges was accelerating in the middle market, larger companies a little slow to adopt. Your language, at least in terms of the growth, you expect 4Q to be a little more moderate.

How are you seeing the development of that market now?.

Yes. So I don't think we seen the market developing really any differently. I think what -- the point about the quarter 4 is just that for all of us in the exchange business, quarter 4 is the quarter where we're all implementing. January 1 is when all the activity occurs.

And so we're all focused on implementing, and there's not as much effort on the sales then. We will have all of -- the open enrollment season for Medicare is from October to December. The folks who have a -- or with employers that have a calendar year plan, which is most of them, all of that enrollment occurs during this fourth quarter.

So it wasn't anything -- it wasn't reflecting anything different about the market, just saying that most of our attention is on enrollment now. .

And our next question comes from the line of Josh Shanker with Deutsche Bank. .

Just want to follow up a little bit on the -- again, on the management. When we watched the Analyst Day on 9/30, I sort of assumed that Tim Wright and Dominic Casserley were the authors of the plan that was articulated for the traditional insurance brokers type segment. Maybe that's an incorrect assumption to have.

And given we've seen 2% to 4% growth among your peers and probably about negative 2% at Willis, maybe the management change makes sense.

But I'm trying to figure out who's the author of the new strategy? And why should we think that's going to work?.

Yes. I think the strategy that we presented at Analyst Day was one that reflected, really, input from the whole Operating Committee and where we felt we were going. And I don't think -- no strategy is ever just one person doing that. So I think there is a group that were focused on that.

And frankly, the -- as I said, Dominic indicated his intent to leave, and so we did have to find somebody to replace him. The other changes that I made were really more about putting in place what I felt was the team that was best able to execute in 2017 and beyond, given the strategy that we'd already developed. .

Did you already know these changes would be made at the Investor Day but was too early to let us know that?.

No. If I'd known the changes were going to be made, I would have made them. .

Okay. And the 2% organic growth for 2016 implies about 6% in the fourth quarter. Without the JLT, it sounds like you're at flat growth through 9 months. It seems like a big haul to get 6% in the back half of the year.

How confident are you on the 2% number?.

Well, the 2 -- you're saying 6% in the fourth quarter to get that? That's not correct. Remember, the fourth -- the 2%, this is total revenue growth, so it does include the JLT settlement. .

Yes. I can go through the math. Excluding -- I can give me [ph] about 8%. I get flat without JLT; maybe 60 bps of growth with the JLT settlement.

Maybe my math is wrong, but I think it's going to be -- is your comp around the 2%, I guess?.

Yes. I mean, this is organic constant currency, remember. But yes, I mean, we -- the 2% based on the forecast, and of course, you have the segment guidance as well. So you don't find anything in there that's 6% kind of growth. So... .

We're talking about growth for the company as a whole. .

Yes. .

Yes, yes. I guess I'll run the numbers again. I'm not quite there, but that might be my bad math. I apologize. .

I think we have that right, Josh, but we can follow up with you..

Okay. I think we're probably going to have to end this now. So thanks very much, everyone, for joining us this morning. And I look forward to talking with you at our fourth quarter earnings call in February. .

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..