Good morning. Welcome to the Willis Towers Watson Earnings Call. This is Rich Keefe, Head of Investor Relations at Willis Towers Watson. On the call today with me are John Haley, Willis Towers Watson's Chief Executive Officer; and Mike Burwell, our Chief Financial Officer..

Please refer to our website for the press release issued earlier today. Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing (404) 537-3406, conference ID 3295569. 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, 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 in 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 reconciliations 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, everyone. Thank you for joining us on today's call. Today, we'll review our results for the third quarter of 2018 and discuss the outlook for the remainder 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 explanations 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 first report the results using the prior accounting standard, excluding the impact of the new accounting standard.

So based on the prior accounting standard, that is, without the impact of ASC 606, reported revenue for the third quarter was $1.9 billion, up 3% as compared to the prior year third quarter and up 4% on a constant currency basis and up 5% on an organic basis. .

Reported revenue included $23 million of negative currency movement. We experienced growth on an organic basis across all of our segments for this quarter. Net income was $85 million or up 257% for the third quarter as compared to the prior year third quarter net loss of $54 million.

Adjusted EBITDA was $368 million or 19.4% of revenue as compared to the prior year adjusted EBITDA of $322 million or 17.4% of revenue, representing a 14% increase on an adjusted EBIT dollar basis and 200 basis points of margin improvement. For the quarter, diluted earnings per share were $0.63 and adjusted diluted earnings per share were $1.62..

Overall, it was an excellent quarter. We grew revenue, earnings per share and had enhanced adjusted EBITDA margin performance..

Now turning to the results based on ASC 606 or the new accounting standard. Reported revenues for the third quarter were $1.9 billion. Net income for the third quarter was $46 million. Adjusted EBITDA for the third quarter was $313 million or 16.8% of revenue.

For the quarter, diluted earnings per share were $0.33 and adjusted diluted earnings per share were $1.32. .

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 they exclude unallocated corporate costs such as amortization of intangibles, restructuring costs, certain transaction and integration expenses resulting from mergers and acquisitions, as well as other items which we consider non-core to our operating results.

The segment results do include discretionary compensation..

For the third quarter, total segment revenues grew 4% on a constant currency basis and 5% on an organic basis. Human Capital & Benefits, or HCB, had a solid quarter, with 2% constant currency and organic growth as compared to the prior year third quarter. But the solid performance extended across all our businesses in the segment.

We had the strongest growth in our Health and Benefits business, with revenue increasing by 6% as compared to the prior year third quarter. The growth is primarily a result of our continued momentum outside of North America related to global benefit management appointments as well as increases in local and regional market share..

In addition, we experienced solid growth in North America, driven by increased advisory work and growth in our specialty products.

Talent and Rewards third quarter revenue increased by 1% as compared to the prior year third quarter, even as we narrowed the focus of our T&R software portfolio to those products with the greatest growth and profit potential.

The net growth was primarily due to strong market demand for project work in Western Europe and International, coupled with growth in our compensation survey business..

As expected, the retirement business experienced nominal growth compared to the prior year third quarter. A lower level of derisking, like bulk lump sums in North America, was more than offset by growth in Great Britain related to peak volume in the triennial actuarial valuation cycle and growth in Western Europe due to pension brokerage activity. .

Our Technology and Administrative Solutions, or TAS revenue, was flat compared to the prior year third quarter, with increased revenues in Germany from new client implementations, offset by a decline in the international region. .

The operating margin for the HCB segment was 21%, an increase of 1% from the prior year third quarter. Revenue growth and disciplined expense management contributed to the margin growth. .

Now turning to the HCB results including the impact of the new revenue standard. The HCB segment had revenues of $778 million and an operating margin of 25%. Overall, we continue to have a positive outlook for the HCB business for the remainder of 2018..

Now let's look at Corporate Risk & Broking, or CRB, which had a revenue increase of 4% on both a constant currency and organic basis as compared to the prior year third quarter. .

North America's revenue grew by 6% in the third quarter, with strong results across all lines of businesses, while International also continued its strong momentum, with 9% constant currency growth and 10% organic growth in the quarter, driven primarily by new business wins in Asia and Latin America.

In Western Europe, there was solid growth of 3%, attributable to positive results in Iberia with several new business wins in construction, energy and claims management. And similarly, there was growth in Switzerland and France as well. Great Britain had a revenue decline of 2% and we continue to see some London market challenges..

CRB revenues were $616 million with an operating margin of 10% as compared to an 8% operating margin in the third quarter last year. The margin expanded due to the top line performance, coupled with continued cost management efforts. .

Now turning to the CRB results including the impact of the new revenue standard. For the third quarter, CRB had revenues of $622 million and an operating margin of 11%. We continue to be optimistic about the momentum in our CRB business going forward as we close out the year. .

Turning to Investment, Risk & Reinsurance or IRR. Revenue for the third quarter increased 7% on a constant currency basis and increased 9% on an organic basis as compared to the prior year third quarter.

Reinsurance had a very strong quarter, with 10% revenue growth, driven by North America and Specialty as a result of new business generation, strong renewals and higher investment income. .

Insurance Consulting and Technology grew by 8% as a result of increased consulting projects and software sales. Wholesale increased by 9% with new business growth and increased demand across our programs business. Investment grew 5% as a result of new client implementations and continued growth in the delegated investment services space.

Max Matthiessen grew 15% as a result of an increase in assets under management and new business. .

The IRR segment had revenues of $337 million compared to $321 million for the prior year third quarter and a 15% operating margin, up 547 basis points from the prior year third quarter. The third quarter 2018 margin expanded due to the robust revenue growth for the quarter. .

Turning now to IRR results including the impact of the new revenue standard. IRR had revenues of $317 million and an operating margin of 9%. We continue to feel very positive about the momentum of the IRR business for the remainder of 2018. .

Revenues for the BDA segment increased by 10% from the prior year third quarter. Driven by increased enrollments, our Individual Marketplace revenues increased by 9% and the rest of the segment increased by 12%.

Increased membership and new clients drove the revenue increase in Benefits Outsourcing while the Group Marketplace business continued to grow, primarily due to new clients and customized active exchange projects..

So let me turn to the 2019 enrollments. As we mentioned in our previous earnings call, enrollment continued to look strong in both the mid-market and the large market space. We currently have over 30 clients with about 300,000 total lives that have committed for the 2019 enrollment period.

The mid-market sales season is winding down and won't be finalized until later this month, so we won't be able to present final enrollment counts until our year-end earnings call. The Individual Marketplace exchange enrollment seasonality has been shifting somewhat over the recent years.

We're seeing enrollment spread more evenly throughout the year due to off-cycle enrollments in age-ins and a more modest increase in enrollments during the fall enrollment season..

The BDA segment had revenues of $200 million with a 21% operating margin, up 59 basis points as compared to the prior year third quarter. The expansion in margin was a result of the strong revenue growth as well as our ability to continue to scale these businesses.

The BDA segment reflecting the new revenue standard had revenues of $127 million and an operating margin of negative 26%. The primary driver of this 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 pro rata basis throughout the year. In contrast, under the new revenue standard, the revenues generated by annual enrollment activity in the fall are now recognized immediately.

So this will change the seasonality of the revenue recognition to be higher in the second half of the calendar year..

In summary, I'm very pleased with our progress. We produced strong earnings growth in the third quarter and are on track to deliver excellent financial performance in 2018.

For the full year, we continue to expect strong revenue growth, meaningful margin expansion and significant EPS growth, all this while continuing to invest in our future and return capital to shareholders through dividends and share repurchases. .

I'd like to thank all of our colleagues for their continued client focus, collaboration and engagement and congratulate everyone on a very good quarter..

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

Thanks, John, and good morning to everyone. Thanks to all of you for joining us. My comments will reflect our earnings without the impact of ASC 606, unless otherwise stated, in order to assist with comparability over prior year periods. Now let's turn to the financial overview..

Let me first discuss income from operations. Income from operations for the third quarter was $66 million or 3.5% of revenue, up 354% from the prior year third quarter loss from operations of $26 million or negative 1.4% of revenue.

Adjusted operating income for the third quarter was $243 million or 12.8% of revenue, up 10% from the prior year third quarter adjusted operating income of $220 million or 11.9% of revenue.

Income from operations for the 9 months of 2018 was $697 million or 10.8% of revenue, up 60% from the same period in the prior year of $436 million or 7.1% of revenue.

Adjusted operating income for the 9 months of 2018 was $1.3 billion or 19.4% of revenue and up 10% as compared to the same period in the prior year in which adjusted operating income was $1.1 billion or 18.6% of revenue..

Now let me turn to adjusted diluted earnings per share or adjusted EPS. For the third quarter of 2018 and 2017, our diluted EPS was $0.63 and negative $0.40, respectively. For the third quarter of 2018, our adjusted EPS was up 45% to $1.62 per share as compared to $1.12 per share in the prior year third quarter.

For the 9 months of 2018 and 2017, diluted EPS was $4.58 and $2.36, respectively. For the 9 months of 2018, adjusted EPS was up 26% to $7.92 per share versus $6.30 per share in the same period in the prior year. Under the new revenue recognition standard, our diluted EPS was $0.33 for the quarter and $2.39 for the 9 months of 2018.

And our adjusted EPS was $1.32 per share for the quarter and $5.74 for the 9 months of 2018..

Let's move 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 third quarter was 0 as compared to negative 53% for the prior year third quarter.

Our adjusted tax rate for the third quarter was 17%, a decrease from 32% for the prior year third quarter. Our adjusted tax rate for third quarter is lower than the prior year due to onetime discrete tax benefits. .

Let's move to the balance sheet. We continue to have a strong financial position. During the quarter, we successfully issued $1 billion in senior notes comprised of $600 million of 10-year notes and $400 million of 30-year notes.

We feel that this transaction helps with the efficiency of our capital structure and provides additional financial flexibility. The bond proceeds were used to pay off $128 million term loan balance due in 2019 and to repay approximately $862 million under our revolving credit facility..

Year-to-date, including the impact of the new revenue standard, our free cash flow was $507 million, an increase of $190 million or 60% compared to the same period in the prior year.

Without the impact of the new revenue standard, our year-to-date free cash flow was $544 million, an increase of $227 million or 72% compared to the same period in the prior year. We expect the fourth quarter to be our highest cash-generating quarter. .

During the third quarter, we repurchased approximately $132 million in shares. We expect buyback to have a total of $600 million to $700 million in shares in 2018, subject to market conditions. Since the merger, we have repurchased or retired approximately 11.1 million shares and paid $706 million in dividends.

As we think about our full year guidance, we reported quarterly and year-to-date 2000 -- financial results in this morning's release based on both 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 finish the last year of our 3-year integration period. As such, we're continuing to provide guidance on the 2017 U.S. GAAP standard, or ASC 605, prior to the ASC 606 standard. .

So 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 low-single digits for HCB, CRB and IRR and mid-to-high single-digit growth for BDA.

We continue to expect adjusted EBITDA to be around 25% for the full year. Transaction integration costs are expected to be in the range of $180 million versus our previous guidance of approximately $140 million to $150 million.

The expected increase in integration spend relates primarily to additional cost-saving actions that have been identified in our business segments, which are expected to yield meaningful savings in 2019..

Taking these additional actions into account, we believe we can improve our adjusted EBITDA margin outlook by at least 50 basis points for the overall company in fiscal year 2019. As a result of discrete tax benefits recognized in Q3 and our current interpretation of U.S.

tax reform, we are reducing the adjusted tax rate from a range of 22% to 23% to a range of 20% to 21%. This tax guidance is consistent for both the old and new accounting standards, but may change as we complete our U.S. tax reform analysis and receive additional clarification and implementation guidance from the U.S. Treasury..

Changes in interpretation assumptions, applicability of retroactive regulations as well as actions we may take as a result of U.S. tax reform, may also impact this guidance. .

Accordingly, we are raising our adjusted diluted earnings per share guidance to a range of $10.12 to $10.32 from our previous guidance of $9.88 to $10.12. We expect free cash flow of approximately $900 million to $1.1 billion versus our previous guidance of $1.1 billion to $1.3 billion in 2018.

There is a small 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 or our capital allocation strategy. .

We will continue to use the former ASC 605 accounting standard for the remainder of 2018 to assess bonus calculations, capital for dividends, share buybacks, internal investments and M&A. Annual guidance assumes average currency exchange rates to $1.34 to the pound and $1.19 to the euro..

So in summary, we have seen good acceleration in revenue growth, greater operating leverage and continued cash flow improvement this quarter. We should continue position -- which should continue to position us well to execute on our plans this year and help us drive significant shareholder value creation on a long-term basis. .

With that, I'm happy to turn the call back to you, John. .

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

[Operator Instructions] Your first question comes from the line of Kai Pan from Morgan Stanley. .

The first question on the organic growth. You had a nice rebound from the second quarter. If you look at your results across the segments, it's roughly in line with your global peers.

I just wonder, could you give probably more detail about what's the improvement from second quarter to the third quarter? Do you see across your line, are you sort of be able to maintain your shares, your competitive position or you'll be able to gain shares going forward?.

Yes, so let me say, I think when we had the second quarter call, I think we advised people that it was probably better to look at the first half as a comparison as to how we were doing against our peers versus the second quarter only. If you look at the first half, we were at or above our peers generally.

And one of the things -- I think we're delighted with the revenue growth we have here. And we're especially delighted because if you look at it in the third quarter of last year, our revenue growth was generally higher than our peers in the third quarter of last year, so we had tougher comparables.

So having tougher comparables and getting the growth we had here, we couldn't be happier with the result and we think that reflects our competitive positioning. If we look at the third quarter -- the whole 3 quarters of this year, we think that's a fair look at our competitive positioning. .

Okay, that's great. My second question is on the margin, the 200 basis point year-over-year improvement, but you also mentioned in your Q&A session on the press release that there's a large improvement, $32 million in the other income line. So that probably contributed to most of the margin improvement year-over-year.

And so I just wonder, what's your view on the underlying, basically revenue versus expense growth? And also want to clarify that you said at least 50 basis point improvement versus in 2019.

Was that implied on the old accounting or new accounting? Basically, what I'm trying to get at is your margin next year, will it be like at least 25.5% or 24.5%?.

So let me -- I'm going to let Mike talk about the specifics of the $32 million, et cetera, and how that factors in there, but let me just make a couple of quick comments.

Now first of all, one of the things we said coming out of the third quarter -- at the second quarter call, was that we -- our expenses were running ahead of where we thought they should be then and we thought that we could control that. And if you look at the margin improvement we have here, what we've done is we got our expense growth down to 2%.

So we've had a 4% to 5% growth rate and we've had a 2% expense growth rate. That's exactly what we told folks we felt we could do and that's what's contributing in the margin improvement. We think that's something that we can continue to exercise that kind of discipline going forward.

I think the 50 basis points, that should translate to either revenue standard, where as we look at that. That's not impacted as much by the revenues. It's actually an expense control item, again. But Mike, let me add... .

Yes, John, I would add on the $32 million, Kai, other income. So just picking it up back up on John's comments. So when we look at across the segments, we had 220 basis points improvement in margins across all 4 segments.

And as John said, due to the 2% management of expenses, in addition to that 5% organic revenue growth, the other income was $32 million in terms of the change that was included in there. And so that was -- what we see is pension, what we see in terms of managing our foreign currency impacts overall. So that's how we think about it. .

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

I just want to piggyback off the last question and just ask you, first, just to break out that $32 million year-over-year increase.

How much was pension? How much was FX? And how much was that loss from disposal of business? Because people look at that pension expense -- gain as kind of a onetime-ish thing and we're trying to get kind of year-over-year growth in margin excluding that. .

So I can add a little bit here. On -- if you look at the -- so that's on a GAAP basis, that change on the other income line. We did have adjustments for pension settlement items. So there is a variety of things in there, if you look at the press release and what we adjusted out.

If you look at it on an adjusted basis, the other income net line, I think it's roughly about $12 million difference year-over-year. It's off the income, and it's mainly less FX hedging losses. That's kind of the composition of that. .

So if we were to take it year-over-year, it's really an increase of $12 million and most of it is FX, is what you're saying?.

Correct. Less FX hedge losses. .

Got it.

And then, Mike, is the entire guidance raise just the difference in tax rate?.

Yes, it is, Shlomo. .

Okay, great. And then can you also go into what's going on with the free cash flow? It sounded like you're saying there was an account -- it's differences where you put stuff, kind of real estate on the cash flow statement.

Is that something that just came to your attention in this quarter or just [indiscernible]?.

No, no, I would say, no. I would say timing is always a challenge in terms of when you communicate things. But what we looked at was we are completing some additional CapEx spends, specifically around our facilities consolidations, as we've continued in our merger and consolidating office space that we have, just as an example.

Additionally, you're seeing the additional spend that we're going to do on integration and that additional drives that incremental cost. And we see that benefit, obviously, in that 50 basis points improvement and moving, as John referenced, into fiscal year 2019.

So those are just a couple of the bigger pieces of that in terms of our adjustment back to it. But we still look at it and say, look, we're 60% up in terms of our free cash flow. We're not going away from our long-term guidance in terms of where we're going to get to from thinking about free cash flow.

But we thought it was appropriate to make sure we give you, and ultimately, investors, a view as to what that would be, based on what we know. .

So the $200 million difference is -- how much of it is CapEx and facilities? Is that all of it?.

No, no. .

No, it's a number of things, Shlomo.

We have the additional -- the CapEx was how much, Mike?.

CapEx was around $40 million. .

CapEx was around $40 million. We had the additional restructuring of, that was like $30 million... .

$30 million to $35 million. .

$30 million to $35 million. We had -- and this was something we knew earlier, but it wasn't big enough to necessarily adjust, but we had to make an extra $40 million pension contribution to the U.K.

And so there's -- it's a number of little things like that, that most of these are items that we expect to be -- I mean, the $40 million is a one-off for this year for the U.K. pension. The $30 million to $35 million is one-off. The CapEx increase is a one-off.

So there are things that we don't think will affect it going forward, but they did affect it for this year. .

Got it. If I could just sneak in a last one.

John, given the decline in the stock price and your confidence in hitting all these margins, how come you are just not getting way more aggressive on the stock repurchases?.

Well, I think what we try to do, Shlomo, is we try not -- we actually have some metrics where we use as the stock price is lower, we'll ramp up our purchases a little bit more than we did. But we also are trying to be real careful about not borrowing to buy back the stock.

And if you look this year -- this quarter, I mean, given that we had our dividend payments and our stock repurchases, we returned over 80% of our cash flow to shareholders already. .

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

It's nice to see the progress over the 3-year period. Just wondering, you gave the guidance for the full year by the -- in terms of the segments. I'm just wondering, how should we think about the growth in the segments next year and the following year? And specifically, IRR was -- seemed to be quite strong. The commentary also sounded strong.

Is it possible that we could end up seeing a little bit stronger growth on an out-year basis? Or how should we think about that?.

So I think, Mark, we'll be giving our detailed guidance for 2019 at the next call. But just to deal with IRR for the moment. They have had a -- they've had a fantastic year. I think it's been -- it's really all the different parts of it, as I was going through, have contributed. But especially, reinsurance has had a very strong year.

As I said in the -- in my prepared remarks, we expect to see this continued growth through the remainder of 2018. The only comment I could give at this time is we've set ourselves up for a tough comparable for 2018 -- for 2019, of course, with the good growth we've had here.

But this is also a business that we like the performance and we like the prospects a lot. .

Yes, so tough comp, but overall fundamentals continue to be good. And then, they'll potentially... .

Exactly. .

Yes. And then with regards to the -- on HCB, can you talk a little bit about what you think we might end up seeing with lump sums for next year, given the change in rate environment? How should we think about that? And then you've made some changes there, optimizing things to a greater extent.

How should we think about HCB, particularly given the current economic environment with unemployment rates coming down?.

Yes, so I think, first of all, the bulk lump sums are down this year, as we had expected they would be. We -- and so I think we have a -- there's a case where we have an easy comparable compared to the bulk lump sums going forward for next year. Again, we haven't gotten to any kind of detailed estimate on that.

But I would say, overall, the decision to do bulk lump sums is as much an arbitrage rate between what the rate you can cash them out at and the accounting rate that you're using, as it is at the absolute level of the rates.

So there's reason to do bulk lump sums even when the rates are low and there's reasons not to do it sometimes when rates are higher. But overall, we do think the increase in rates will probably pick up bulk lump sum activity. But again, we don't have any real thoughts as to how significant that will be or even if it will be significant.

But I think it's certainly not going to be a lower level of activity than we've had this year. So we feel pretty good about that. .

And Talent and Rewards?.

Was there another part to your question, Mark? I'm sorry. .

Yes, just the Talent and Rewards within that, within HCB?.

Yes, so I think Talent and Rewards is one of the areas that we saw did not perform very well in the first half of the year, particularly in the second quarter. And we said then that we would be taking some actions to try to, a, control expenses there and to get the growth up.

As I mentioned in the prepared remarks, that's an area that grew about 1% or so. We're actually happy with that because one of the things we've done is make sure that we're trying to focus on the areas that have the growth and the profit potential. And I stress actually growth and profit potential.

There are areas in Talent and Rewards that we see that seem to be relatively high growth and seem to have very little or negative profit. Those are not particularly attractive to us. We want to be in the high profit and the growth areas.

And so doing some of that movement to those areas and getting the 1% growth, we like the margins we had and we think we're placed to grow from there. .

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

My first question is just about your longer-term guidance for a low double-digit EPS growth.

So when we're thinking about 2019, should we essentially be using the EPS guidance for '18 that you gave us today and then assume double-digit EPS growth from there, since essentially the delta between new and old accounting should come back next year?.

Yes, so I think, Elyse, as I've mentioned in response to a couple of the other questions, we're really going to give the detailed 2019 guidance at the next earnings call after we're finished with the first -- after we're finished with the full year. A couple of comments.

One, the idea of low double-digit EPS growth is, in fact, an aspiration we have over the next medium-term outlook coming up here. But how that factors into any specific year, I think we'll adjust that as appropriate. That's not to suggest we won't come out with low double-digit growth, just that we haven't come out with the actual 2019 numbers yet.

Your point is well taken, though, that some of the 2016 difficulties that we've had with 606 will -- those will disappear when we move into 2019. And so we actually expect the kind of growth we would see should be more robust. .

Okay, great.

And then is it possible -- can we get the tax rate, how that's running year-to-date on adjusted earnings, excluding discrete items?.

Well, yes, let me -- we'll pull some data here, Elyse. .

We're going to try and do this in real time, Elyse, but we -- so we'll try and mention that in a few more minutes, if we -- we'll work it into another answer. .

Okay, yes. Because I was just trying to get a sense of like go-forward tax rate for '19.

And then the unallocated net, that was $65 million in the quarter, is that the right level to think about for that line on a go-forward basis?.

Mike, do you want to...?.

It moves around a little bit, Elyse. I mean, I think your estimate, we kind of said that that's in a range of where it is, but it does move around a little bit. .

Okay. And then one more just follow-up on Kai's question, your 50 basis points at least of margin expansion for next year. So there is a margin delta between new and old accounting.

So essentially, that means that we'll see 50 basis points plus the margin accretion from getting back the earnings that we lost, meaning, it could be greater under new accounting than the 50 basis points?.

That's correct. .

Your next question comes from the line of Greg Peters from Raymond James. .

I was -- I wanted to focus in on the integration expense. And you called it out, there's going to be more integration expense in 2018 than originally envisioned. And I'm just curious about how I should be thinking about this line beyond the fourth quarter, because it seems like you're finding additional opportunities for savings.

And is it reasonable to assume that there's going to be some ongoing continuing integration or restructuring that's going to sort of part of your longer-term operational improvement concept?.

Yes, so Greg, the answer to that is, no, it's going to be 0. Now if there are restructurings that come up in the future, we're going to -- we're actually making a distinct effort. We're going to try not to do that at all. To the extent that we do, do it, we'll just take it as part of the normal earnings. [ And that part, it's less than half. ].

Got it. Yes, makes sense. I guess, the second question I would have is perhaps you can spend a minute and talk about some of the moving parts in organic in CRB North America versus Europe, U.K. And I know one of the issues you called out before was the market-derived income. Maybe you can update us on what's going on with that. .

Yes, so I think our market-derived income is down year-over-year. We see pressure around premium flow into the London market. That's hampering our performance in this space. And another important thing is in the prior year period, we had several onetime projects that we just don't have this year. And so that's contributing to the overall shortfall.

But I would have to say that the London market stands out as a quite a distinction from all the other areas around the globe, where we're seeing strong growth. .

And just a follow-up on that. Your view on Brexit and how it might affect that business, that's my last question. .

Yes, I mean, look, I think Brexit is something that, as with all businesses across all different areas, we need to be worried about making sure that we can provide continuity of service and a seamless transition for our clients and for -- and indeed, for our reinsurance partners post-Brexit. And that's really regardless of how things happen.

We have plans that we've been working hard on. We are -- we've been working diligently to make sure that we're prepared for any different outcome in Brexit. We're very close to finalizing our post-Brexit platform, including the necessary regulatory approvals, and that's something that we'll be announcing in the near future.

We're not able to say anything today, but we'll come out with something soon on that. But we're confident we have a good plan. .

Your next question comes from the line of Dave Styblo from Jefferies. .

I'm going to maybe try to give you an opportunity to circle back to Elyse's question a little bit as part of this question.

But can you help us understand, realizing you don't want to get into specific EPS guidance for next year, what some of the key headwinds and tailwinds would be to that? Obviously, you talked about the increased integration spending yielding another 50 basis points of margin expansion.

I think you guys also are not quite realizing the full benefits in this year of the cost synergies that run up to $175 million. I think the exit run rate goal was $175 million. So I think that provides some incremental benefit next year.

Could you maybe quantify how much that would be? And then on the flip side, it seems like, again, coming -- going back to Elyse's question, at least the taxes reverting back to perhaps a more normalized level for next year would be a headwind.

But anything you'd add on to that, just to help us get a sense of moving parts, considering that The Street's 10.74% for next year seems to imply pretty low growth, especially off the new guidance range now. .

Mike, do you want to...?.

Yes, I mean, when we look at -- we feel good about our businesses in terms of their growth prospects going forward. And as I referenced in terms of what we thought we'd be in terms of the rates of overall revenue growth and those low- to mid-single digits for all business except BDA and really kind of being in that double-digit area.

But we feel good about those prospects. And obviously, as we've continued to perform, it gives more difficult comps for us, no different than we had in this quarter. But we feel that that's the kind of right growth. And as John said, we will update that here in the fourth quarter.

As it relates to tax, I would just -- and we're continuing to work the real-time numbers here, but we -- as I mentioned in my prepared comments as well, that we had discrete items that drove our tax rate down here in the third quarter.

We believe that those discrete items will -- some of those will reverse in the fourth quarter, and again, doing nothing more than the math. And when you look at it at a 20% to 21% effective rate, it gets you to about a 23% to 27% rate in the fourth quarter in terms of looking at it.

As you look at and think about that rate going forward, we have no reason to believe it will be different, frankly, at this time, but we'll continue to evaluate all Treasury guidance as it's issued and its applicability to us. We do believe we will see some additional rules come in the fourth quarter. We will evaluate those.

And honestly, we will update on our year-end call in terms of what that looks like for us going forward. But at this stage, we don't know anything further and that's kind of our best guess and best view -- not guess, but our best perspective of it going forward. .

Yes, and let me just make sure we're clear about this. I think to answer Elyse's question, the discrete item we had in this quarter was about $12 million or something like that. That's going to reverse in the fourth quarter.

So when we're giving you the projection of 20% to 21% for the year, that's something that's not affected by this discrete item because we've already assumed that's going to reverse in the fourth quarter.

And I guess, that's really what probably, I think, Elyse was asking for, is what's a -- how can I get to a more normal tax rate, and I think what we're telling you is 20% to 21% is what we see as the normal tax rate. .

Okay, that's really helpful on that part. What -- can you come back maybe to the margins a little bit? Because I think that's an area, just specifically the cost synergies, that we still have to generate exit run rate of $175 million.

Is there extra that will annualize next year to that -- to the -- to 2019 numbers?.

Yes, again, we're not in a position to go into any details, really, on those things. But I would just say, look, we said when we were targeting our margin of around 25% this year, that we thought that we would get increases in the years beyond that.

And we expect to see, when we come out to update on our expected 2019 earnings in February, we'll be coming out with some expected increases in our margins. .

Okay. And then on just the exchanges, it sounds like you guys have about 300,000 members that will be rolling on it at some point throughout the year in 2019.

Can you help us understand what that base is or what you're expecting the base to be at the end of this year, so we have a sense of growth for that business? And is there any comments -- I don't think I heard any comments about the retiree exchange.

How is the -- how do the prospects look for that growth next year?.

I mean, so the growth in the BDA segment is largely a function of the growth in the Individual Marketplace. The Group Marketplace is the much smaller portion of that. I don't have the numbers right in front of me in terms of the enrollment.

Can I ask you to follow up with Rich on that? But I mean, I think here's what we would say is that, overall, we expect the Group Marketplace to grow up into the double digits. It'll be a good bit above the double digits, probably, and a good way into there anyway.

And the Individual Marketplace is probably going to grow in the mid- to high single digits. And so that's how the combination comes out at right around 10%, something like that. .

Your next question comes from the line of Tobey Sommer from SunTrust. .

Price; your internal headcount growth, whether it's consultants or brokers; and their productivity.

How would you kind of prioritize those in terms of ascending or descending order of drivers of growth in the quarter? And maybe as you look out, which ones do you think will be the biggest contributors?.

Yes, so I think -- look, consulting traditionally has been a business that you tend to get -- it's by adding consultants that you tend to increase the revenues there. I think in the last decade or so, we've seen a little bit more of revenues from increased technology, which can give a bit of scale.

But I think it's still largely a business which is driven by bodies. And so I think we'll continue to see that as the most important driver, although we will see some tools and software and products that are -- that will help.

I think in the brokerage business, it's -- I think it's a similar thing, although I -- and I think what happens, though, is that to the extent technology comes in and we get some efficiencies and make our brokers more productive, then it may be that we can get that without increased headcount. .

Yes, maybe, John, I would just add to your comments. Just in terms of the pricing, pricing has really kind of been in that 0% to 1%, depending whether you've had losses or not. And so that's really kind of been the overall numbers from a pricing standpoint. .

And are you going to be able to generate the kind of organic growth that you're targeting in -- add the heads and still kind of maintain that 2% expense growth that you mentioned previously?.

Yes, so look, we -- the business, Willis Towers Watson as a whole, we went out after the second quarter results and said we need to be more disciplined about how we're managing it and these are the kinds of things we want it to do. We didn't go out looking to cut out people.

We looked to reduce unnecessary meetings, be more efficient the way we held meetings, to focus on a lot of our internal expenses and not on expenses that are related to client work. And by doing that, we pulled it down to the 2%.

We recognized that -- and we think that if we continue to do that, we can -- that's something that we should be able to continue to do into the fourth quarter and indeed, beyond. .

Yes, and I would add, John, just I mean, just every investment that we continue to make in every one of our service offerings has a technology component to it and it continues to drive some level of productivity overall that we're seeing across the business. But as you commented before, it's not -- that's not changing overnight.

It's incremental in terms of what's happening. .

Since the integration period, we're coming to a close, how do we think about your capital deployment as we get into the next few years, assuming that the stock starts to reflect the better organic growth momentum you have there?.

Yes, so I think -- look, the -- what we've always said is if we can find acquisitions that make sense and inorganic growth, we -- that's actually what we would prefer to do. We prefer to find things that can grow the organization and grow it profitably.

When we're comparing that to a stock that we think is somewhat undervalued at the moment, it's hard to find some acquisitions that actually pass this threshold, particularly acquisitions of any size. And so we're going to continue, though, with that overall priority. Acquisitions that make sense would be #1.

And if we can't do that, we're going to return the -- our cash to the shareholders. As I mentioned in response to a previous question, if you look at the last quarter, we returned over 80% of our free cash flow to shareholders. I think that's something that we would be looking to do in the future. .

Your next question comes from the line of Paul Newsome from Sandler O'Neill. .

I was hoping you could talk a little bit about what might be or could be possible levers for margin improvements really beyond '19 and beyond as well.

And excluding sort of the obvious of just trying to get revenue faster than expenses, are there other things that you think you can do to improve profitability prospectively?.

Well, I mean, the obvious answer, I think, is that technology is making us more efficient -- making all employees more efficient in all businesses. And I think that's especially true in a professional service firm like ours.

And so we continue to look at the possibilities of using technology in all of our consulting businesses as well as in our brokerage businesses. I mean, I joined the company over 40 years ago as an actuary.

And I look at the kind of projections that used to take me a month to do on these enormous spreadsheets, actual physical paper spreadsheets that I had. And today's actuaries press a button and get 10,000 of them in 3 seconds. So we've seen technology influence everything we do.

And I think sometimes, we don't recognize some of the incremental things that occur year-to-year, but that would be the biggest part. .

And a separate big picture question would be thinking about organic growth prospectively, are we past the impacts of the integration at this point, even though we're still having, I guess, through the end of the year, integration charges? And if that's the case, then do we have some of that relief or change or differences as we get past 2018?.

I'm not sure quite what your question is. I mean, we don't expect to have -- there will be no integration expenses going into next year. But you started out asking about organic growth. I'm not quite sure what your question is. .

So I guess, I'm making the assumption that when you're making -- doing integration changes, that, that actually has a negative impact typically on organic growth. Now obviously, this year has been very strong and I'm just curious if there's still -- and in years past, you had lagged in organic growth.

It appeared to have to do with putting the 2 big companies together.

I'm asking if that's, in your opinion, over this year and that's -- we're seeing that? Or if it's -- there's still some benefits to the release, let's call it, prospectively?.

No, I think that's over. In fact, I would say that, that was almost wholly a 2016 phenomenon. We had a little bit of, in some businesses, a little bit creep into 2017. But if you look at 2017, we performed as -- we grew as fast as any of our competitors. And into 2018, we're doing the same. So no, we don't see any impact from that. .

Your next question comes from the line of Yaron Kinar from Goldman Sachs. .

Just wanted to go back to free cash flow for a second.

Is the software capitalization, is that part of the CapEx that you had called out, the $40 million of CapEx? Or is that separate?.

It's separate. .

Separate, okay. So the $120 million or so of IMs that you called out, FX, CapEx, restructuring, then you also had to have the software capitalization.

And if we take that and kind of roll forward, are you still comfortable with 75% to 80% of the adjusted EBITDA as kind of the -- as the free cash flow margin long term?.

Yes, I mean, as we say, long term, right, I mean, we're looking -- that's where our ultimate goal is into the future, yes. .

But I mean, I think the -- yes and so, a, yes, 75% to 80% is the right longer-term thing. We are -- I think our free cash flow is growing 75% -- or 72% so far this year. And we expect to see a significant growth next year, too. .

Okay. And then my second question was just going back to the brokerage space. We've seen a couple of deals in that space.

Do you see that impacting your business, whether in a positive or negative way? Have you seen any maybe revenue creepage or talent creepage from some of those deals moving your way?.

No, we -- I mean, I think any time there's a big deal, there's always some market repercussions that occur there, both in terms of the way your competitors are reconfigured and how they go to market and in terms of sometimes individuals looking to move from those organizations. And we see a little bit of that, but we haven't seen any big impacts. .

And this concludes our question-and-answer session. I would now like to turn the conference over to Mr. John Haley. .

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

And this concludes today's conference call. Thank you for your participation. You may now disconnect..