Good morning. Welcome to the Willis Towers Watson Second Quarter 2019 Earnings Conference Call. Please refer to our website for a press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next 3 months on our website..

Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risk and uncertainties.

Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law.

For a more detailed discussion of these and other risk factors, investors should review the Forward-looking Statements section of the earnings press release issued this morning as well as other disclosures in our most recent Form 10-K and other Willis Towers Watson SEC filings..

During the call, we may discuss certain non-GAAP financial measures. For a reconciliation of non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website..

I'll now turn the call over to Mr. John Haley, Willis Towers Watson's Chief Executive Officer. Please go ahead. .

Okay. Thanks very much, and good morning, everyone, and thank you for joining us on our second quarter earnings call. Joining me here today is Mike Burwell, our Chief Financial Officer; and Rich Keefe, Head of Investor Relations.

Today, we'll review our results for the second quarter and the first half of 2019 as well as update the outlook for the remainder of the year..

I'm pleased with our second quarter financial results and the continued momentum in our business. We generated strong organic top line growth of 6% for the second quarter of 2019 and 160 basis points of adjusted operating margin expansion.

This marks the fourth consecutive quarter in which we've generated organic revenue growth of 5% or greater and improved margins. Likewise, we had revenue and operating margin growth in each of our business segments this quarter, reflecting solid demand for our solutions and services throughout our portfolio of businesses..

This has been an exciting and productive quarter for Willis Towers Watson. And as I reflect on our second quarter and the year-to-date results, I'm extremely pleased with the significant steps we've made to improve the company's growth profile and position the company for continued long-term growth.

In our core businesses, we've had great success driven by new business generation, strong retention rates and increased operating leverage across our core businesses..

On the acquisition front, I'm delighted to announce that we completed the TRANZACT acquisition yesterday. And today, we welcome over 1,300 talented colleagues from TRANZACT to the Willis Towers Watson community. There's tremendous energy and optimism around the benefits of this powerful combination.

The TRANZACT acquisition rapidly accelerates Willis Towers Watson's direct-to-consumer U.S. health care strategy and significantly strengthens Willis Towers Watson's growth profile in the health care space.

TRANZACT provides Willis Towers Watson with a true end-to-end consumer acquisition and engagement platform for health care by adding scale retail capabilities to our portfolio of expertise, and it significantly enhances our reach and agility in penetrating the expanse of the Medicare market..

Also, this strategic acquisition positions us for success in the unsubsidized individual consumer portion of the Medicare market space that we currently do not widely serve, and it opens up new service offering opportunities.

Similarly, it allows us to efficiently and effectively capitalize on the secular trends that are currently driving growth in the Medicare space. Together, we'll have tremendous capacity with a licensed agent workforce of over 2,000.

Moreover, TRANZACT's leading-edge digital technology capabilities and sales and marketing expertise combined with Willis Towers Watson's scale and operational excellence further strengthens our position as the leader in the growing private Medicare marketplace..

Most important, we believe that this acquisition creates value for all stakeholders. For our clients and consumers, it broadens our client base so that we can help individuals in underserved markets navigate their health care options.

For our business partners, it will allow us to develop deeper collaborative relationships, especially with our carrier partners, as well as deliver greater volume. And for our shareholders, it creates both immediate accretion as well as significant long-term revenue and profitable growth opportunities..

In addition to TRANZACT, we'll continue to execute our broader growth strategies around innovation. We believe our investments in innovation have helped further enhance our business portfolio and improve the integrated value proposition we deliver to clients as well as help us continue our leading position in the areas in which we operate.

Innovation at Willis Towers Watson is an important element of what it is that we bring to life. To that end, we're continuing to invest in new innovative solutions. As in recent years, we've introduced several specialty solutions, such as LifeSight, AMX, Innovisk and connected risk intelligence. .

Building on this progress, we recently announced 2 initiatives that we've implemented that are targeted to create further organic and inorganic growth.

The first is our launch of WTW Strategic Ventures, an initiative aimed at creating strategic growth opportunities by investing in emerging digital and technology-enabled businesses across insurance risk and human capital.

The second initiative includes the formation of a new growth Board, which will increase the company's organic innovation efforts by supporting early-stage ideas that have the potential to create new markets, new customer channels and new business models.

Working together with our existing new venture investment committee, the growth Board will help to expand Willis Towers Watson's innovation pipeline..

WTW Strategic Ventures is core to the company's growth strategy by enhancing our capabilities to identify and develop strategic opportunities and alliances aimed at delivering tangible value to our clients.

These new initiatives will source investments and utilize relationships within the venture capital community, clients and industry connections to support innovation inorganically and organically with the growth Board to create new offerings in areas of strategic interest to the company..

Now let's move on to our second quarter 2019 results. Reported revenue for the second quarter was $2.0 billion, up 3% as compared to the prior year second quarter and up 6% on a constant currency and organic basis. Reported revenue included $51 million of negative currency movement.

Once again this quarter, we experienced growth on both an organic basis across all of our segments. .

Net income was $149 million, up 129% for the second quarter as compared to the $65 million of net income in the prior year second quarter..

Adjusted EBITDA was $425 million or 21% of revenue as compared to the prior year adjusted EBITDA for the second quarter of $392 million or 20% of revenue, representing an 8% increase on an adjusted EBITDA dollar basis..

For the quarter, diluted earnings per share were $1.06, an increase of 141% compared to the prior year. Adjusted diluted earnings per share were $1.78, reflecting an increase of 5% compared to prior year. Overall, it was a solid quarter. We grew revenue and earnings per share and had enhanced adjusted EBITDA margin performance..

For the first half of the year, we're very pleased with our financial results. Reported revenue growth for the first half of 2019 was up 2% as compared to the same period in the prior year and up 5% on both a constant currency and organic basis.

Adjusted EBITDA for the first half of 2019 was $1.0 billion or 23.5% of revenue, an increase from adjusted EBITDA of $949 million or 22.2% of revenue for the same period in the prior year, representing an increase of 130 basis points in adjusted EBITDA margin over the same period in the prior year..

Let's look at each of the segments in some more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis unless specifically stated otherwise..

Segment margins are calculated using segment revenues and they exclude unallocated corporate cost, such as amortization of intangibles, certain transaction and integration expenses resulting from M&A as well as other items which we consider noncore to our operating results. The segment results do include discretionary compensation..

Revenue for our largest segment, Human Capital & Benefits, HCB, was up 5% on an organic and constant currency basis compared to the second quarter of the prior year. For the first half of the year, HCB revenues grew 4% organically..

The Health and Benefits business delivered another strong performance this quarter with revenue growth of 12%. New business and product revenue continue to drive revenue expansion in North America, while our accelerating market share in global benefit management appointments contributed to the growth in other geographies.

Health and Benefits revenue growth was also aided by the lower revenue comparable in the prior year second quarter. The prior year results reflect the impact of adopting the new revenue standard, ASC 606, which resulted in certain revenue not being recognized..

Talent and Rewards revenue increased 5% as a result of increased advisory and survey work in North America and Great Britain. .

Technology and Administration Solutions revenue increased 6% this quarter. The growth was built on new business activity, primarily in Western Europe and Great Britain. .

While most of HCB's businesses grew, we did experience a decline in retirement revenue of 1%. This is mainly as a result of the impact of a tough comparable from the prior year, which benefited from nonrecurring project work. HCB's operating margin improved by 200 basis points to 21% compared to the prior year second quarter.

HCB has the services, products and intellectual capital that match the many issues our clients are facing. HCB is anchored by its strength in core service offerings, and we remain confident in the segment's ability to deliver growth well into the future..

Now let's look at Corporate Risk & Broking, or CRB, which had a revenue increase of 5% on a constant currency and organic basis as compared to the prior year second quarter. For the first half of the year, CRB revenues grew 5% organically. .

North America's revenue grew by 6% in the second quarter primarily as a result of new business. The International regions revenue climbed 8% compared to prior year. This growth was largely driven by new business wins and higher renewals in Central America and the Caribbean as well as new business wins in Asia and Australasia..

Western Europe contributed 5% revenue growth, with the growth led by strong renewals in Sweden in addition to new business wins in large- and mid-market accounts in Iberia and France. Great Britain had 4% revenue growth, predominantly from aerospace business driven by satellite launches and transit activity..

CRB revenue was $690 million with an operating margin of 15% as compared to a 14% operating margin in the prior year second quarter. The margin expanded due to the top line performance coupled with continued cost management efforts..

As a side note, I'd like to say how pleased I am with the progress the management team and all of our colleagues in CRB have made over the last year. To see this steady top line growth and continued margin expansion is excellent, and our outlook on our CRB business remains positive going forward..

Turning to Investment, Risk & Reinsurance, or IRR. Revenue for the second quarter increased 9% to $409 million on a constant currency basis and increased 8% on an organic basis as compared to the prior year second quarter, with clear acceleration in all lines of business. For the first half of the year, IRR revenues grew 6% organically.

Reinsurance with growth of 10% continued to lead the segment's growth through a combination of net new business and favorable renewals. Insurance Consulting and Technology grew by 7%, mainly from technology product sales. Investment revenue increased 4% with continued expansion of the delegated investment services portfolio.

Assets under delegated management reached $135 billion at quarter end. On an organic basis, wholesale revenues increased by 11% driven by growth in specialty. And overall wholesale business was up 20%, including results from Miller's acquisition of Alston Gayler. .

Our Max Matthiessen business grew 6%, primarily from increased commission income. IRR had revenue of $409 million and an operating margin of 27% compared to 23% for the prior year second quarter. This improvement reflects top line growth alongside scaling of successful businesses.

Overall, we continue to feel positive about the momentum of our IRR business for 2019..

Revenues for the BDA segment increased by 6% from the prior year second quarter, primarily due to increasing membership counts and client base. Project work and out-of-scope services further enhanced the segment's revenue growth..

Individual Marketplace revenue returned to growth this quarter as seasonality for this business continues to shift. Benefits Outsourcing revenues grew 13% as a result of new client wins in special projects. For the first half of the year, BDA revenue grew 8% organically.

The BDA segment had revenue of $126 million with a negative 20% operating margin, up approximately 600 basis points from a negative 26% in the prior year second quarter. Top line growth and greater operating leverage both contributed to the segment's margin improvement.

Our BDA offerings remain fundamental to our business growth engines of our enterprise strategy. The addition of TRANZACT will further boost their growth. We're excited about the long-term growth potential of this business..

So in summary, I'm very pleased with our continued progress in the second quarter. We produced strong revenue growth, meaningful margin expansion and adjusted EPS growth, all while continuing to invest in our future and return capital to shareholders through dividends..

I'd like to thank our 43,000-plus colleagues for their contributions. Our talented colleagues and the way they serve clients are core to our long-term success, and they delivered another quarter of strong results.

I continue to be inspired by their energy and passion for serving our clients and their unwavering dedication to creating a truly winning client experience. As we look forward to the remainder of 2019 and beyond, our future remains bright..

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

Thanks, John. And I'd like to add my congratulations to our colleagues for another good quarter, as well as thank our clients for their continued support and trust in us..

As John mentioned, we are very excited about the completion of the TRANZACT acquisition, as this transaction shows Willis Towers Watson's renewed focus on strategic M&A opportunities. Our second quarter represented another positive result with strong organic revenue growth, robust margin expansion and underlying adjusted EPS growth..

Now turning to the overall detailed financial results. Let me first discuss income from operations. Income from operations for the second quarter was $176 million or 8.6% of revenue, up 540 basis points from the prior year second quarter.

Adjusted operating income for the second quarter was $299 million or 14.6% of revenue, up 160 basis points from the prior year second quarter. .

Let me turn to earnings per share, or EPS. For the second quarter of 2019 and '18, our diluted EPS was $1.06 and $0.44, respectively. The prior year quarter was impacted by $0.55 of transaction and integration expenses.

For the second quarter of 2019, our adjusted EPS was up 5% to $1.78 per share as compared to $1.70 per share in the prior year second quarter. .

Foreign currency caused a decrease in our consolidated revenue of $51 million for the quarter compared to the prior year second quarter, but had no impact to adjusted diluted earnings per share this quarter..

As previously guided, we were adversely impacted by a decrease in noncash pension income compared to the prior year, which resulted in a year-over-year decline of $0.14 this quarter.

Excluding the combined headwinds from reduced pension returns of $0.14 and higher taxes of $0.04 versus the prior year second quarter, adjusted EPS growth was approximately 15%..

Talking about our effective tax rate. Our U.S. GAAP tax rate for the second quarter was 19.7% versus 12.7% in the prior year second quarter. Our adjusted income tax rate for the second quarter was 21.4%, up from the 19.7% rate in the prior year second quarter.

The increase in effective tax rate for the quarter compared to the prior year was primarily due to additional taxes on Global Intangible Low Tax Income, or GILTI.

We continue to evaluate the impact of global tax reform on our effective tax rate, including the effect of new taxes associated with computations for changes resulting from updated interpretations and assumptions issued by the various taxing authorities.

As a result, the effective tax rate is subject to movements and will continue to be updated as more analysis and information becomes available..

Moving to the balance sheet. We continue to have a strong financial position. As a reminder, in the first quarter, we implemented a new lease accounting standard. This result had no material impact to our operating income, but did result in an increase in liabilities on our balance sheet, which are largely offset by a corresponding increase in assets.

The gross-up totaled approximately $1.5 billion..

During the quarter, we generated $287 million of free cash flow, bringing our year-to-date free cash flow to $183 million, a decrease from free cash flow of $254 million for the first half of the prior year. The year-over-year decline in free cash flow is due to higher compensation payments as well as some timing related to cash tax payments.

We're expecting free cash flow to build over the remainder of 2019..

In May, our Board of Directors approved our quarterly cash dividend of $0.65 per share. In terms of capital allocation, we paid approximately $84 million in dividends and repurchased $51 million of Willis Towers Watson stock in the second quarter of 2019..

Related to the TRANZACT acquisition, we have principally financed the purchase through debt. As part of the acquisition of TRANZACT, we have secured financing up to $1.1 billion in the form of a 1-year unsecured term loan. We're committed to deleveraging in the near-term and returning our leverage ratio to historic levels..

As we move ahead into the third quarter, I'd like to review our revised outlook. Willis Towers Watson is raising its 2019 guidance, primarily to reflect the acquisition of TRANZACT. For the company, we now expect constant currency revenue growth for 2019 to be in the range of 7% to 8% and organic revenue growth in the range from 4% to 5%.

Full year adjusted operating income margin is expected to be around 20%. The adjusted effective tax rate is still expected to be around 22%, excluding any potential discrete items, and we expect free cash flow growth of 15% or better..

Now moving on to transaction and integration expenses. We expect to incur between $20 million to $25 million of cost as a result as the TRANZACT acquisition, primarily related to the transaction costs associated with the deal.

Foreign exchange was immaterial to adjusted EPS in the second quarter of 2019, but was a $0.12 headwind to adjusted EPS in the first quarter of 2019..

We expect FX to be around $0.03 headwind adjusted -- to adjusted EPS for the remainder of the year, resulting in an overall headwind of about $0.15 for the full year 2019. We are raising our adjusted diluted earnings per share guidance to a range of $10.75 to $11.10 for the full year for 2019 versus our previous guidance of $10.60 to $10.85..

Overall, we delivered solid financial performance in the second quarter. While I am pleased with the results and the continued momentum of our businesses, there's still a lot of opportunity ahead, and we remain focused on driving and making sure we execute..

I'll now turn the call back to you, John. .

Thanks, Mike. And with that, I'd like to open the call to your questions. .

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

Hey John, seems like you've had a pretty good run here for the last 4 quarters with really good organic growth that has accelerated. And I don't usually ask this kind of question, but 4% to 5% organic growth does imply like you're expecting something else to decelerate from the first half of the year in the second half of the year.

But it seems like the momentum is pretty good.

Is there just tougher comps? Or is it just you want to make sure you're at 100% of ability to deliver? Can you just give us a little bit more of your outlook for the second half of the year in that context?.

Yes. Sure. Thanks, Shlomo. I think we're not suggesting really that we think anything is going to decelerate here. I guess when we came out with the -- we initially had the 4% growth that we said we'd be at for the year. So the first is -- the first half came in at 5%, and so we said, well, we think we'll be 4% to 5%.

When we first came out with the 4% growth, I know there were -- some of our competitors had some higher growth projections. And we said the fact that we're at 4% shouldn't be interpreted as we think we're going to grow slower than the market.

And I would say the same thing here, we've just sort of taken the 4% and raised it up to reflect what happened in the first half. You shouldn't think we think we're going to grow slower than the market. .

Okay. Great. And then, do you mind just discussing a little bit about the operating environment in the U.K.? Given the political situation and the Brexit items, it seems like there was some slowdown just in general in the U.K. in the first quarter, but it seems like things are -- seem a lot better right now. If you could just comment on that. .

Yes. I mean, our growth -- we had some good growth in the U.K. It was 4% this quarter. And we feel pretty good about that. And in fact, actually, particularly in CRB, we were seeing some declines last year. So we feel much better about that. I think Brexit is still a bit of an uncertainty. We have done a lot of planning around Brexit ourselves though.

And we feel like we're prepared for that. And so we'll have to see what happens. But we feel we're about as prepared as we could be. .

And our next question comes from Mark Marcon of R.W. Baird. .

Congrats on the strong progress that we continue to see. I was wondering if you could talk a little bit about 3 different questions. One, free cash flow growth of 15%. How confident are you still in the ability to generate that for this year and then for the next few years? That's the first question. .

Okay. I think Mike will take care of that. .

So thank you for the question, Mark. Like prior years, we expect the second half of the year to be seasonally stronger from a free cash flow standpoint. Now during the first half of the year, we had higher compensation payments as well as timing related to cash payments for income taxes, which had an adverse effect on our free cash flow.

But similar to last year, we knew coming into 2019 that we had a continued challenge around improving working capital, and we're taking actions to improve free cash flow during the remainder of the year and specifically focus on working capital. .

Great. And then can you talk a little bit about TRANZACT and how we should think about that, particularly as it relates to the fourth quarter? Obviously, that's the time when we get the enrollments and the benefit from that. .

Go ahead, John. .

Yes. I'd just say, look, we did raise our guidance, as Mike said, and that was mostly the result of TRANZACT, not 100%. But -- and TRANZACT -- well, most of the impact of TRANZACT, the overwhelming impact will be in the fourth quarter. .

Can you just talk a little bit about the margins? I mean, obviously that's seasonally high.

So just from a modeling perspective, how we should think about it?.

Yes. I mean, TRANZACT from a margin standpoint, we see it consistent with what we've targeted for the overall company from a margin standpoint, Mark. So we don't see it different. .

Okay. Great. And then the last thing, Mercer with JLT, yesterday there was some discussion about how their book was looking. I was wondering what you're seeing in terms of opportunities in terms of share gains as a result of that transaction, both in terms of people and business. .

Yes. I think you know we've seen our reinsurance business being very strong, as John commented in his comments -- prepared comments, at 10% overall. And so part of that's coming from continued wins and strong market conditions that we've seen out there. So I think it's encapsulated in those numbers, Mark. .

Our next question comes from Elyse Greenspan of Wells Fargo. .

My first question goes back to the TRANZACT acquisition as well. When you guys announced this deal earlier this year, I know you had said that it would be accretive relative to earnings, but that was assuming no buyback.

And so you guys returned to the market and did buybacks, some stock in the Q2, which seemed thinner, I think, than you guys and The Street had expected. Can you just give us a thought around buybacks? Because you're now buying back shares sooner, it does seem like the deal might be more accretive relative to your initial expectations. .

No. Elyse, I mean we've always said -- maybe just to make sure that was understood previously, that we would buy back shares to make sure we managed dilution in regards to our benefit programs to be in place. And that's what we've continued to do. So there's no different assumptions. That's been there.

Obviously, we're very excited about TRANZACT and what we see it is going to do for us in the future. And that's what we reflected in taking the earnings guidance up. So we're very excited about what TRANZACT brings to the company. And as John said, we welcome those colleagues to the company, and we're very excited about it. .

But just to be clear, going forward here, while we're basically paying down the debt for TRANZACT, the only stock buybacks we'll do will be anti-dilution ones. .

Okay. That's helpful. And then also on TRANZACT, could you give us a sense of what their organic revenue growth has been through the first half of the year? I know when you guys announced the deal, you said you were expecting 25% to 30% revenue growth.

How does that compare to those expectations?.

Yes. It's right in that range. We're very excited about it. Obviously, it's right spot into that range and maybe pushing the top end of it, to be fair. I mean the market is very strong. We've seen that reflected overall in demand. Obviously, the big piece comes in the fourth quarter. But that's what we're seeing overall in terms of individuals.

So we've kind of put that 25% to 30% that we touched on over the next 5 years was what we're thinking about. .

And we see no reason to change that. That's still our expectation going forward. .

Okay. And then lastly on TRANZACT. The margins within your BDA segment are seasonally highest in the fourth quarter, obviously negative earnings in the first 3 quarters. So I just want to get a sense that we're all setting our models correctly.

I'm assuming your updated guidance, assuming TRANZACT follows that same seasonality, so it would report a loss, it will be margin-dilutive for 2 months in the third quarter since it just closed and then be accretive to your margins in the fourth quarter.

Am I thinking about that correctly? Or am I missing anything there in thinking about the guide and how to update for the next couple of quarters?.

No. You got it. That's right. .

Our next question comes from Greg Peters with Raymond James. .

This is Marcos, calling in for Greg. Had a couple of questions. First on HCB, you guys singled out the revenue that wasn't there last year.

And I'm just curious if we were to back that revenue in last quarter, what would operating margin expansion look like this quarter?.

It would be roughly about 2%. Yes, go ahead, Rich. .

Yes, it's Rich. Are you referring just to HCB, what would be the margin? I think that's your question. .

Yes. You guys picked up 200 basis points or so this quarter.

So I'm just curious if that revenue were to be there last year, what would the pickup be this year?.

Yes, it's roughly flat. .

Okay. My second question is on free cash flow and it's related to TRANZACT. If we understand it correctly, the MA and MS business is free cash flow negative the first 2 or 3 years, and you guys reiterated your free cash flow guidance.

So if we -- say, if we were to back TRANZACT, would that imply that free cash flow could be growing in the high-teens over the next couple of years?.

The overall TRANZACT business is about -- it's not -- it's pretty much neutral, it's pretty close to 0. It's not a negative. .

Okay.

And then, Mike, can you just revisit your comments around pension?.

Yes. So on pension, if you remember, we talked about what the pension got valued at December 31, 2018, which obviously the market was way down at that point in time, let's just deal with that portion of it, that obviously gave a headwind offsetting our pension income that we would have in the current year.

And that's what we reflected in the -- in our results. Had we not had that amount included in there, it would have been roughly $23 million that would have impacted those numbers had you taken that out.

So when you adjust for that pension amount of that $0.14 and equally you added back the headwind that we had on taxes, I said our growth rate for the quarter would have been greater than -- or approximately 15%. So that's what I was trying to comment on. .

Our next question comes from Mark Hughes of SunTrust. .

The quarterly revenue spread for TRANZACT, is it similar to the underlying BDA business?.

Yes. .

Yes. .

And then would -- did you consider maybe stepping up your investment in TRANZACT, in the call centers to accelerate growth? Seems like the market opportunity is quite strong.

Do you maybe try to grab some share here early on?.

When we think about it today, we have over 2,000 agents that are in place. And obviously, the individuals may come through online, they may come through call centers, they're coming through various aspects of it. Clearly, we're seeing the market is strong in preparing for the annual enrollment period in the fourth quarter.

And so our combined team under Gene Wickes' leadership is really looking at and making sure we're well prepared given the market dynamics that are in place and working with all the leaders associated with it. So we definitely see opportunity, and we think we're well prepared for it.

And we feel good about the size of our organization to support that growth. .

Yes. I mean I think that's the key. We think we're prepared to handle the growth that's out there. And so we feel good. .

Understood. And a final question.

Is there any concentration among the carrier partners you work with, with TRANZACT? Do you -- is there any goal of increasing the breadth of the carrier partners?.

We'll continue to evaluate it. I mean, we'll do that with that leadership team. I mean you want to be smart about doing anything. We're coming up to the annual enrollment period. I mean, obviously, we just closed the transaction yesterday. So we'll continue.

I know Gene and the team will evaluate that and all opportunities that are out there and will consider what makes sense. .

Having said that, we like the way things are set now. So I wouldn't expect to necessarily see any changes. I mean, we'll always continue to evaluate it. .

And our next question comes from Meyer Shields of KBW. .

John, I was hoping you could talk about the thought process underlying the changing exposure to incentive payments for the TRANZACT deal. .

Yes. So look, I think from our standpoint, we had a -- we got some certainty in the payments that we were making there. And we feel pretty good about getting that because frankly, we're pretty bullish on TRANZACT. And so we felt that -- we felt this serves us better doing that.

And I think, as in all the different cases, it has to be something that works for both sides. But I think the other side liked the idea of getting some certainty in what they had, too. And so we were able to come to an agreement on that. And we're delighted. .

Okay. Understood. That makes sense. Also -- and maybe this is a question for Mike.

Can we get an update on the margin expansion initiatives specific to CRB?.

Yes. I mean I think if we go back to the last quarter call, we had touched on that we would consistently see improvement in CRB margins. And that's what we continue to see. So we're up 1 point in the current quarter. Todd and the team are working that. And as I said, it isn't going to see some giant ramp-up.

It's just slow and steady and continue to see that progress. And I think that's what you're seeing in the 1% growth this quarter. .

And our next question comes Yaron Kinar of Goldman Sachs. .

First question, just going back to the ASC 606 catch-up.

Can you quantify what the dollar impact was?.

It was roughly $23 million. .

Okay. And then going back to... .

But it roughly offsets the pension. .

Yes. .

Right. Right. Okay. And in line with prior guidance, I guess, for the quarter. Then on free cash flow, I guess, on a previous question around the 15% growth this year, I think I heard kind of the moving elements in the second half of the year and I fully recognize that second half tends to be much larger.

But can you confirm that you're still expecting 15% or greater growth this year?.

We -- that's what we are working towards. We know it's a challenge just like it was for us last year in terms of moving in that direction. We have the entire team very focused on it like we did similar to last year. But yes, it is a challenge for us.

And we recognize that, and that's what -- we're going to work our tails off as a collective team, just do everything we can to achieve that. .

Okay.

And then finally, the TRANZACT revenues, they will not be going through organic this coming year, right? They're going to come in through acquired?.

That's correct. .

And our next question comes from Brian Meredith of UBS. .

One quick numbers question and one more broader question. First, just quickly numbers.

Mike, does the Stanford litigation payment still factor in the free cash flow kind of guidance for this year?.

Yes, as of right now it is. We're continuing to work on that. If that changes, we will update you. .

Yes. By the way, the Stanford payment may occur this year, but it may not also. .

Well, I guess, the question would be, would free cash flow growth be greater than the 15% without Stanford?.

Yes. I mean, right now, we'd always looked at -- you had the integration cost rolling in, you had Stanford coming in there, you got a mix of things in there. We've always said 15% was kind of where we were. And if we're lucky, we'd be better. .

Got you. Terrific. And then just quickly, I'm just curious, you've briefly talked a little bit about pricing, what you're seeing, pricing in commercial insurance, great growth obviously in the wholesale, Miller's.

What impact are you seeing from a revenue perspective from pricing? And perhaps, maybe do we see that potentially having a better impact going forward, particularly from Miller's as you start to see maybe capital freed up at Lloyds?.

Well, I think, look, we're -- this is a better environment than we've had for a while. We've had these years of the rates going down. And now we're seeing most lines -- workers' comp is probably one of the key examples. Workers' comp and international liability are the ones that where we're seeing rates going down continuing.

But the rest of them, we're seeing some pricing uplift and that's probably good news for the insurance industry. For a long time, insurers were really competing for market share by driving down prices and they probably got to something that wasn't really that sustainable. And so that's why we're seeing some of these rate increases.

For us, it's -- one of the things we have to do in the face of some rate increases is see what we can do to get as good a bargain for our clients as possible. And sometimes that suggests moving in some business or looking for other alternatives or maybe buying a little less insurance. So it's not clear we always get the effect of all the rates.

And then sometimes, only a portion of our business is commission based, a lot of it's in fees also. So it doesn't automatically flow through. But a -- when there's rate increases, generally it does tend to improve our results. .

And our next question comes from Mike Zaremski of Crédit Suisse. .

This is actually Charlie on for Mike. Just one quick question.

Can you guys talk about the mix of the cyber business as far as the proportion of consulting versus broking? And how the performance or trends in those businesses have been differing? Or what trends you're seeing, if they're similar?.

Yes. I mean, obviously, cyber has been very strong. It's not huge in terms of its aggregate size. Most of it has been brokering, [ incident ] brokering business. So it's not to say we aren't doing some consulting, but a majority of it is in the brokering business. And it continues to grow at double-digit type of numbers but off a small base.

But we continue to see that opportunity as the marketplace is looking for that solution. And we continue to see that growing in the foreseeable future. .

I guess the only thing I'd add to that is that -- and as Mike said, this is -- we're at the beginning stages of this market really growing. But in addition to North America and Great Britain, we're now seeing some good growth in the emerging cyber insurance markets, like Western Europe, Latin America and Southeast Asia. .

And I have a follow-up with Shlomo Rosenbaum of Stifel. .

First one, I just want to ask Mike if you could just help us out a little bit more on the TRANZACT acquisition just in terms of modeling, just because it seems like there was an outsized contribution in 2019 because you're going to have a really big fourth quarter and not really get the losses that you would get for most of the rest of the year.

Would you be able to just kind of help us in terms of contribution that you're expecting in earnings specifically from the acquisition? And if we were to have it for the whole year, what it would be so that we can kind of model this appropriately for 2020?.

Shlomo, I think your premise is right. Obviously, we're not having 12 months of the expenses for it since we closed on July -- the end of July here, and would have that -- only that portion of expenses. And obviously, most of the revenue, as we touched on, is coming through the AE, annual enrollment period. We had said, total growth at 7% to 8%.

We said we're at 4% to 5% in terms of organic growth. And obviously, that's not 100% the numbers but it gives a good direction to it. And most of that's coming in the fourth quarter in terms of what is to be in place. And maybe I'll have -- Rich will follow back up with you, any further questions you may have. .

I think the only other thing, Shlomo, and we're really not in a position to go through it with a lot of detail, as Mike is saying, right now. But I would say this, and I think I mentioned this in response to an earlier question. Most of the earnings guidance, the earnings increase that we did for guidance, that's almost all due to TRANZACT. .

Okay. I'm going follow up afterwards also just to see if I can pull that little bit up here. And then just one other thing... .

Yes. I mean we recognize that it's a little difficult because, as Mike said, your premise is right, it's the -- the money is made in the fourth quarter and we have some losses in the beginning. But we just don't really feel we're in a position to do that right now. That's something we'll do when we do the 2020 guidance. .

Okay. And then just one last one.

John, just following up on Meyer's question on the renegotiation of the terms, do you feel like you can kind of hold the seller's feet to the fire with the earnout being all the way down to like $17 million or so? I mean it seems like the -- kind of -- I understand they're taking a lower purchase price, but why would -- if there's the same kind of confidence on your side as there was on -- as there is on their side to execute the way that they would, it's only a 2020 target, you're only talking about 18 months later.

It just seems interesting that they're kind of reducing their -- almost their entire risk to that. .

Yes. I mean I would say 2 things though. One is, I think they did very, very well already on the TRANZACT acquisition and getting rid of that. And if they have the money right away and some certainty around it, then they can invest that and so that gives them some other opportunities.

I mean you really have to ask them exactly why they wanted to do what they wanted to do. But for us, TRANZACT is ahead of where we thought they would be, and we feel good about where they are. And so it was something that we were happy to do that. The management team at TRANZACT is still on the original deal that we had and the original incentives.

So we feel that with them -- with no change to their earnout at all, we feel very good about that. .

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

Just a few kind of number-related questions. First off, in terms of the rev rec in HCB coming back, you got $23 million this quarter.

So is the assumption still that the remaining $25 million would come in the third quarter?.

Most of it, yes. .

Almost all of it, yes. I mean, the vast majority of it. .

Okay. That's helpful. And then in terms of minority interest picked up to $11 million in the quarter.

Is there anything that caused that to just pick up from where it had been trending? And then what -- within that line item, how should we think about modeling forward?.

Yes. I mean, what drove that was Miller specifically. And yes, I think that's the right model going forward. And again, if you want, Rich can give you some more thoughts on that. But that's -- that Miller was the main driver there. .

Okay. That's helpful. And then in terms of a couple of questions on the BDA segment margin. So first off, on the legacy BDA before TRANZACT. You guys have shown -- I know obviously you -- the margins are negative in that segment for the first 3 quarters, but it's actually been trending better year-over-year, less negative.

Would you expect that to continue in the third quarter on kind of the legacy BDA business? And then do you still expect TRANZACT to run at about a 25% margin, which is what you said when the deal was announced?.

Yes. I mean, Elyse, just as it relates to the overall margins in BDA, we've really gotten away from giving any segment guidance. We've kind of said overall that we'll get our operating income around 20%. But we continue to focus on improvements in that business. And the leadership team will continue to do that.

So there's still opportunity there, but I'd put it in that particular context. And your second question as it relates to TRANZACT, what we see is that is consistent with what we see for the overall company, is in that type of range. .

And the only other thing, maybe, Elyse, I would add to that is that we -- we're looking to get margin improvement everywhere and BDA is no different than that. 600 basis points is a lot. So I wouldn't necessarily assume that we'll continue to get 600 basis points. .

And this concludes the Q&A portion of today's conference. I'd like to turn the call back to Mr. Haley for closing comments. .

Okay. Great. Thanks, everyone, for joining us this morning. And we look forward to updating you on our third quarter call in the fall. Have a good day. .

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone have a wonderful day..