Good morning. Welcome to the Willis Towers Watson fourth quarter 2019 earnings conference call. Please refer to our website for the press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next three months on our website. Some of the comments on today's call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks 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 recent Form 10-K and other Willis Towers Watson SEC filings.
During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the 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 will now turn the call over to John Haley, Willis Towers Watson's Chief Executive Officer. Please go ahead.
Thank you very much. Good morning, everyone, and thank you for joining us on our fourth quarter earnings call. With me here today is Mike Burwell, our Chief Financial Officer, and Rich Keefe, our Head of Investor Relations. Today, we'll review our results for the fourth quarter and for the full-year ended December 31, 2019. We'll provide a brief commentary on the outlook for 2020. As I look back on the last year, I think that our results were largely positive. We increased revenue, we improved margins, and we generated an impressive return for our shareholders. That said, we have more work to do to improve free cash flow, and we remain focused on executing against our strategy. Before diving into the fourth quarter results, I'd like to take a moment to update you on some exciting activity that's already occurred this year.
Two weeks ago, Willis Towers Watson returned to Davos to participate in the World Economic Forum. Now in our second year as a strategic partner of the World Economic Forum, our delegates convened to address areas of strategic importance to our business, including climate risk, the future of work, inclusion and diversity, and cybersecurity. Quite a few members of our delegation led sessions during the week at Davos. I took part in sessions that continue the work of the Coalition for Climate Resilient Investment, a cooperative initiative which we introduced last quarter. We also launched a new offering, Climate Quantified, which helps organizations to quantify how they will be affected by the climate change trajectory and the effects of mitigation with climate adequate and resilient solutions. We also co-sponsored Bloomberg Live's The Year Ahead Davos event, where Julie Gebauer, Head of Human Capital and Benefits, spoke on organizational sustainability.
Adam Garrard, our Head of Corporate Risk and Broking in our international geography, participated in a session on advancing cyber resilience for critical infrastructure. Carl Hess, the Head of Investment, Risk and Reinsurance, joined the Friends of Ocean Action community session on increasing the role of the ocean to address some of the United Nations Sustainable Development Goals. All told, the company had a great lineup of events and speakers across Davos, in addition to numerous client meetings. We were encouraged by the experience and are excited to play a proactive role within the global community that is working to build a more cohesive and sustainable future. Now, let's turn to our fourth quarter 2019 results. For the fourth quarter of 2019, we continued to deliver solid financial performance, with 14% overall constant currency growth, 6% organic revenue growth, and 270 basis points of adjusted operating margin expansion.
Likewise, we had revenue and operating margin growth at each of our business segments again this quarter. This marks the sixth consecutive quarter in which we've generated organic revenue growth of 5% or greater, along with improved margins. Our fourth quarter results reflect our efforts to constantly challenge ourselves and to deliver more. Reported revenue for the fourth quarter was $2.7 billion, up 13% as compared to the prior year fourth quarter, up 14% on a constant currency basis, and up 6% on an organic basis. Reported revenue included $22 million of negative currency movement. Net income was $551 million, up 44% for the fourth quarter as compared to $383 million of net income in the prior year fourth quarter. Adjusted EBITDA was $930 million as compared to the prior year fourth quarter adjusted EBITDA of $774 million, representing a 20% increase.
For the quarter, diluted earnings per share were $4.18, an increase of 45% compared to the prior year. Adjusted diluted earnings per share were $4.90. Reported revenue for the full-year of 2019 increased 6% as compared to the same period in the prior year, increased 9% on a constant currency basis, and was up 5% on an organic basis. 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 on an organic basis unless specifically stated otherwise. Segment margins are calculated using segment revenues, and they exclude unallocated corporate costs, such as amortization of intangibles, 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. Revenue for Human Capital and Benefits, or HCB, was up 4% on an organic and constant currency basis compared to the fourth quarter of the prior year. For the full-year of 2019, HCB revenues grew 4% organically. The health and benefits business grew 10% this quarter. New business and product revenue continued to drive revenue expansion in North America, while our increasing market share in global benefit management appointments and new local and regional wins contributed to the growth in other geographies. Health and benefits revenue growth was also aided by the lower revenue comparable in the prior year fourth quarter. The prior year results reflect the impact of adopting the new standard, ASC 606, which resulted in certain revenue not being recognized.
Retirement revenue increased 1% this quarter, primarily driven by continued momentum and a steady flow of bulk lump sum activity as the market for pension risk transfer remained attractive to plan sponsors in North America. Increased demand for consulting and advisory work in North America and international contributed to revenue growth in both talent and rewards and technology and administration solutions. HCB's operating margin improved by 20 basis points compared to the prior year fourth quarter and improved by 130 basis points for the full-year. As a trusted partner to our clients, HCB combines data analytics, strategic insight, and brokerage and technology solutions to address our clients' most complex workforce and benefits challenges. Our takeaways from Davos reinforced areas we had already prioritized. Reskilling in response to technology advances, enhancing diversity and inclusion as part of sustainability, and leveraging AI to enhance the employee experience and improve well-being.
As HCB's results indicate, we believe the segment is well-positioned to address these issues and provide solutions that keep pace with our clients' evolving needs, and therefore, continue growing profitability. Let's look at Corporate Risk and Broking, or CRB, which had a revenue increase of 9% on an organic and constant currency basis as compared to the prior year fourth quarter. For the full-year of 2019, CRB revenues grew 6% organically. North America's revenues grew by 11% in the fourth quarter, primarily as a result of new business and improved retention. The international region's revenues climbed 13% as compared to the prior year. There was notably strong performance in construction and natural resources in Central and Eastern Europe, Middle East, and Africa. These results reflect the benefit of some one-time non-recurring placements.
Western Europe contributed 5% growth, with the growth driven by strong new business in Iberia and France. Great Britain had 6% revenue growth driven by new business in aerospace and fintech. CRB revenue was $877 million, with an operating margin of 30%, as compared to a 29% operating margin in the prior year fourth quarter. The margin expanded due to top-line performance, coupled with continued cost management efforts. We're pleased with the CRB top-line growth for the year, as well as the margin expansion for the quarter and the overall year. CRB continues to make solid progress toward profitable growth, and we feel good about the long-term prospects of this business. The World Economic Forum Global Risks Report 2019 ranks cyberattacks among the top five global risks. Developing cybersecurity and resilience is critical to support socioeconomic growth.
We believe our CRB business has established itself as one of the world's trusted experts in helping leaders adapt the right strategies to cover their cyber exposure. As cyberattacks continue to rise, we stand ready to help clients defend their innovations and build a more secure digital world. Turning to Investment, Risk and Reinsurance, or IRR. Revenue for the quarter was $314 million, an increase of 12% on an organic basis and 14% on a constant currency basis as compared to the prior year fourth quarter, with meaningful growth across our core businesses. For the full-year of 2019, IRR revenues grew 7% organically. Reinsurance, with growth of 19%, continued to lead the segment through a combination of net new business along with a strong retention ratio across most lines and regions. Insurance consulting and technology grew by 10% from technology product sales and growth in project revenue.
Investment revenue increased 9% with continued expansion of the delegated investment services portfolio. On an organic basis, wholesale revenue increased by 15%, driven by growth across the book. Overall, the wholesale business was up 24%, including the results from Miller's acquisition of Alston Gayler. Our Max Matthiessen business grew 3%, primarily from increased commission revenue. IRR's operating margin grew 700 basis points to 9% in the fourth quarter, compared to 2% in the prior year fourth quarter. Topline growth and greater operating leverage both contributed to the segment's margin improvement. Overall, we are pleased with the financial results of our IRR businesses. Revenues for the Benefits Delivery and Administration segment, or BDA, increased by 53% from the prior year fourth quarter on a constant currency basis. On an organic basis, revenue grew 3% compared to the prior year fourth quarter.
BDA's expanded mid and large market client base and increased project work resulted in the segment's growth. We continue to see strong demand for Benefits Outsourcing's core service offerings, resulting in several new client wins. For the full-year of 2019, BDA revenue grew 4% organically. BDA's operating margin was 52% compared to 61% in the prior year fourth quarter, due to the inclusion of TRANZACT in the current year. BDA's operating margin improved from 19% to 24% for the full-year. TRANZACT's revenue growth exceeded our expectations. We're encouraged by TRANZACT's performance, and we continue to be excited about our joint trajectory as this business continues to gain momentum. In closing, we delivered another solid financial performance for the fourth quarter and for the full-year.
I also want to take a moment to recognize the hard work of our colleagues around the world, and extend our appreciation for the work they've done this past year and for their steadfast dedication to providing top-notch client service. Now, I'll turn the call over to Mike.
Thanks, John, and good morning to everyone. Thanks to all of you for joining us. I'd also like to thank our colleagues for all their efforts and our clients for their continued support and trust in us. Now let's turn to our financial overview. Let me first discuss income from operations. Income from operations for the fourth quarter was $687 million, or 25.5% of revenue, up 570 basis points from the prior year fourth quarter of $470 million, or 19.8% of revenue. Adjusted operating income for the fourth quarter was $809 million, or 30.1% of revenue, up 270 basis points from the prior year of $650 million, or 27.4% of revenue. Income from operations for the full-year for 2019 was $1.3 billion, or 14.7% of revenue, up 520 basis points over the prior year of $809 million, or 9.5% of revenue.
Adjusted operating income for the full-year of 2019 was $1.8 billion or 20.3% of revenue and up 220 basis points from the prior year of $1.5 billion or 18.1% of revenue. It should be noted that 30 basis points of our margin improvement in fiscal year 2019 was driven by TRANZACT related to the timing of the purchase. Now let me turn to EPS, or earnings per share. For the fourth quarters of 2019 and 2018, our diluted EPS was $4.18 and $2.89, respectively. For the fourth quarter of 2019, our adjusted EPS was up 23% to $4.90 per share as compared to $4 per share in the prior year fourth quarter. For the full-years 2019 and 2018, diluted EPS was $8.02 and $5.27, respectively. For the full-year 2019, adjusted EPS was up 13% to $10.96 per share versus $9.73 per share in the prior year.
Foreign currency caused a decrease in our consolidated revenue of $22 million for the quarter compared to the prior year fourth quarter, with a $0.05 headwind to adjusted diluted earnings per share this quarter. Foreign currency caused a decrease in our consolidated revenue of $192 million for the full-year 2019 as compared to the prior year, with a $0.16 headwind to adjusted diluted earnings per share overall for the year. Moving to taxes. I'd like to provide you with some additional insight into our U.S. GAAP and adjusted tax rates. Our U.S. GAAP tax rate for the fourth quarter was 18.3% as compared to 19.7% for the prior year fourth quarter. Our adjusted tax rate for the fourth quarter was 19.4%, a decrease from 20.4% rate in the prior year fourth quarter.
Our adjusted tax rate for the fourth quarter is lower than the prior year due to one-time discrete tax benefits. Full-year, the U.S. GAAP tax rate was 18.8% for 2019 as compared to 16% for the prior year, while the adjusted tax rate was 20.3% compared to 19.5% for the prior year. Excluding discrete items, our adjusted tax rate for the full-year was approximately 21%. We'll give forward guidance around our tax rate. We do not project discrete items, which can be positive and/or negative. Moving to the balance sheet. We continue to have a strong financial position. As a reminder, in the first quarter, we implemented the new lease accounting standard. This result had no material impact to our operating income, but did result in 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. Our balance sheet position continues to strengthen. During the year, we successfully issued a $1 billion in senior notes, offering to help with the efficiency of our capital structure and provide additional financial flexibility. Total debt at the end of 2019 was $5.6 billion, compared with $5.9 billion at the end of the third quarter. Our term loan commitment resulting from TRANZACT acquisition had a $295 million balance as of the end of the year, down from $463 million as of the third quarter, and we had no borrowings at year-end under our revolving credit facility. Our next debt maturity due date is July 2020. Lastly, full-year free cash flow was $835 million, a decrease of $185 million compared to the prior year of $1.02 billion.
The year-over-year decline in free cash flow is primarily due to higher cash tax payments of $130 million, resulting from the U.S. and global tax reform, unfavorable working capital changes, particularly in accounts receivable, and negative cash flows of TRANZACT. In terms of capital allocation for the full-year of 2019, we repurchased approximately $150 million in Willis Towers Watson stock and paid approximately $329 million in dividends. We remain committed to de-leveraging in the near term, returning our leverage ratio to historic levels, improving our free cash flow position. Now that we've summarized last year's performance, let's look ahead to our guidance for fiscal year 2020. Turning to revenue. For the company, we expect organic revenue growth of around 4%-5% and 6%-7% on an overall constant currency basis for 2020.
Our non-cash pension income, which is classified within other income net line, is expected to improve by approximately $50 million due primarily to improved returns on planned assets. Pertaining to tax, we expect our adjusted effective tax rate to be around 20% for fiscal year 2020, excluding any potential discrete items. Annual guidance assumes average currency rates of $1.31 to pound and $1.11 to euro. Assuming exchange rates remain at current levels, we expect FX to be a headwind to adjusted EPS by 2020 by approximately $0.10 per share, and we expect most of this impact in the first quarter. Adjusted diluted earnings per share is projected to be in line with the range of $11.80-$12.10. This guidance includes the impact from the expected headwind items to adjusted diluted earnings per share, such as the currency of $0.10.
Finally, we expect free cash flow to be around $1 billion, which assumes the Stanford settlement will no longer be subject to further appeal, and we will make approximately $120 million payment in 2020. In summary, we've seen good acceleration of revenue growth and positive operating leverage this quarter. I'm pleased with the results and the continued momentum of our businesses. There is still a lot of opportunity ahead of us, and we remain focused on executing on our strategy. Before I turn the call back to John, I do want to mention this year, we'll be hosting an Investor Day in Washington, D.C., on March 20th, and we look forward to seeing you there. Now I'll turn the call back over to you, John.
Okay. Thanks, Mike. With that, I'd like to open the call for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Shlomo Rosenbaum from Stifel. Your line is now open.
Hi. Good morning. Thank you very much for taking my questions. Hey, Mike, you guys are doing such a good job in improving the organic growth rate of the various businesses. The free cash flow is just really a sore point. Could you just comment on what is exactly the issue and how should we be thinking about that? Where are you falling so far behind, and how should we think about that for 2020? What changes are happening that are going to kind of impact the company a lot more than what we've seen over the last year?
Sure. Thanks for the question, Shlomo. I guess first is, obviously, to your point, we're working very hard on it. We're not pleased with the outcome in terms of where we landed for the current year. Here's what we're doing about it. One is that we have tied variable compensation to the top 500 people in the company, to the established goals that we have. That has been implemented. Equally, that's true for the operating committee of the organization. Additionally, we are in the process of implementing a contract management and cash management system to manage contract terms more directly and consistently. We have established a contract-to-cash task force with individuals that are 100% dedicated to focus on improved and sustainable performance in the area. We're very focused on it, I guess, is the bottom line.
Is there any one specific thing? Is it a matter of just communication with the customers? In other words, is there a few items that you can point to that are saying, "Hey, this is just where things are not getting done"?
I would tell you, we look at the entirety of the process, Shlomo, and from top to bottom, so every area we can see that there's areas for improvement. Obviously, we've made some progress, but we really look at it as a totality of the process itself and are not leaving any stones unturned in terms of going after it.
Okay, great. Hey, John, can you talk a little bit more about what's going on with TRANZACT? You said that it had better revenue growth than expected. Can you just give us a little bit more commentary about what you expect from this company over the next year and the general trends that you're seeing in that business?
Look, Shlomo, when we bought TRANZACT, we expected this to be, at least for the short to medium term, a relatively high-growth business. We had a business case, I think, where it was going to grow in excess of 20%. That's the basis we did the deal on, we thought there was even a possibility that revenue growth could get to 30% or even 35% in the first year. We actually surpassed all those. We grew by over 50%. Our TRANZACT colleagues have just done a terrific job of gearing up and taking on all this additional revenue. Our Medicare Advantage grew by about 94%, very good growth there in what's probably the most important part of that market.
We still have this expectation that we're going to continue to see this be a high-growth business for the short to medium term, and even though we have a pretty tough comparable and a base we're building on, we're still expecting to see over 20% growth for the next several years.
Okay, great. I guess one more housekeeping. Mike, what is the currency impact in a dollar basis expected in 2020? You noted $0.10 on the EPS, if I were to look at it on revenue, is there a number you guys have embedded in the guidance?
It's very nominal, Shlomo. This is really on expenses. It's really small on revenue.
Okay, great. Thank you.
No problem.
Thank you. Our next question comes from the line of Greg Peters from Raymond James. Your line is now open.
Good morning. Thank you for taking my questions. First up on organic. For the fourth quarter, you posted some pretty impressive results, especially in CRB. I know you've provided guidance for next year around organic. Is there anything unusual to what happened in the fourth quarter? Any specific items you can call out to help us get a sense of why it was so strong?
I think our folks really worked hard with clients and delivered in the fourth quarter. I did call out, we had some one-time projects in construction and natural resources, which were a big help to that. That's actually the nature of construction and natural resources. Projects tend to be more episodic than in some of the others. We had a couple of those. Frankly, Greg, when you look at it, our growth was really pretty much across the board. It wasn't like we just had one area that was way ahead of all the others. They all performed, I think, at the top of what we might have expected.
Yeah. Can I pivot to the guidance on the operating margin? For fiscal year 2020, you're guiding to operating margin around 20.5%, and I think that's just a 20-basis-point improvement over 2019. Seems like there's better opportunities, especially with the growth you're posting. Can you walk us through why you're not anticipating better margin expansion?
Sure, Greg. As I said in my prepared remarks, when you look at TRANZACT, for fiscal year 2019, it really had about a 30 basis points improvement. We had originally targeted being around 20%. When you normalize that gets you more like 20%. If you looked at 20.5%, we've talked about 50- 70 basis points on an annual basis in terms of what that improvement would look like, that's really what we're targeting on a normalized basis in terms of thinking about it.
Got it. That makes sense. Can we pivot to BDA ex TRANZACT? Because it looks like the business slowed down, maybe the legacy exchanges business, or can you give us some color there?
Yeah, I think BDA is one we've been talking about for a while now that, with the tremendous success we've had penetrating that market over the years, there's still opportunities left, but the opportunities tend to be more a few mega opportunities that are episodic now. We're not surprised. The sales cycle on these large ones takes some time, and we're continuing to work on them. We'll see some years where we have a big jump up, but I don't think you're going to see the steady growth because you don't have the same pipeline of clients there. It's one of the reasons why we're really focused now on our technology and operations to make sure we maintain our market leadership as the go-to marketplace for the retiree medical.
Got it. Listen, I realize you're not going to make some announcement regarding management on this conference call, but it feels like when we get to the end of this year, there's going to be some retirements. Can you give us an idea of when you expect the board and the company to announce who the next lineup of executives are going to be running some of the businesses?
Sure. Look, you're right. We're not in a position to provide any real details right now. Let me tell you this, the Willis Towers Watson Board of Directors, of course, they're the ones who lead the succession process for the role of CEO, and the board, acting through the Governance Committee, is actively engaged in the whole succession planning process. This isn't something that has happened this year or last year or even just the year before. This has been a multi-year thinking about what our talent is and how we bring them along and how we develop them. The board and the Governance Committee have been regularly involved in that. They meet with me and our head of human resources on a regular basis.
We've engaged a third party to make sure we have an outside look at the experience and attributes of our candidates. Our expectation is that we will name a new CEO in the second half of this year. We're going to make sure we have enough time to allow an orderly transition. Other than that's pretty much all I can say at the moment.
Great. Thanks for your answers, John.
Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is now open.
Elyse?
Pardon me, Elyse Greenspan from Wells Fargo. Your line is now open. Please check your mute button.
We're not hearing anything. Could we maybe move on and come back to Elyse in a little bit?
Thank you. Our next question comes from the line of Mark Marcon from Baird. Your line is now open.
Good morning, and thanks for taking my questions. First of all, on CRB within North America, really good performance. How sustainable is that? What are the specific areas of strength? To what extent, how big could the cyber opportunity be?
Yeah. Let me just, and Mike may want to weigh in on this. Look, the CRB in North America grew, I think it was 11% in the fourth quarter. 11% is a real big number.
Yeah.
They had very good growth even throughout the year, not as high as 11%, but still very good growth throughout the year. I think when you talk to folks in the industry, generally, the middle market in particular in North America is one that people are focused on, and it's one of our relative strengths. We feel pretty good about that. I know when we talked about our projections for this year, there was some question of were our revenue growth projections more modest? What we said was we preferred a budget on a more modest basis, but we thought we would make sure we grew as fast as the market or faster. I think we've delivered on that. That's pretty much the expectation I think we have going forward. I think cyber is something where there is fantastic opportunity long run.
I think that's going to require the market developing the right kind of policies and the right kind of solutions for clients. I don't think the market is there yet. I think we're moving towards that, and as we do, it'll be a tremendous opportunity.
Great. When we take a look at the overall guidance for 2020 in terms of the 4%-5% organic growth, you mentioned TRANZACT should continue to grow at least 20% + year-over-year. That'll drive that segment. For the other segments, are we taking the same sort of general stance in terms of generally assuming 4%-5% growth for each of those, and then we'll walk it up as the year goes on? How should we think about that?
Yeah. Look, obviously we don't get into all the details of how we do it. Mark, when we build our overall growth for the company, we do it segment by segment, almost line of business by line of business. We go through, and we do think, for example, and just as one clear thing, CRB is going to grow faster than retirement. We just pretty much know that.
Sure.
We build the models that way. Then we just give a revenue growth for the company.
Terrific. Then a question for Mike, just on the free cash flow. Can you disaggregate the impact of TRANZACT relative to the DSOs and what the major source of improvement for next year is going to be in terms of whether it's TRANZACT normalizing or the goal for DSOs?
Yeah. Mark, as it relates to TRANZACT, when we looked at TRANZACT and we originally did the diligence and understood TRANZACT, with the revenue growth rates it was having, we knew there would be some level of cash implications to it or a drag, if you will, but we viewed minor. Given the growth rates that we had, it turned a bit more significant because of the build of what we had to do across the board in licensed agents, investments, et cetera, to make sure that we could satisfy what we saw as the market demand. Our team there, I think, did a wonderful job in making sure that they were well-positioned to be able to take advantage of that growth. I think that's the one issue as it relates to TRANZACT.
I think as it relates to our receivables, we just saw it build a bit more. As I said earlier, I was really looking at from contracting and how we set up the contracts to ultimately how we collect that cash. Contract to cash from a process standpoint, we're very focused on it. We did see that receivables build. We're very focused on improving that going forward. Hopefully that gives you some further insight.
Yeah. Maybe I could just mention that, Mark, when we think about this, we had TRANZACT, and as Mike said, when we first did it, we had the deal cost for TRANZACT, and we knew we would have some sort of impact just from financing the growth there. We thought, "Well, we're not going to bother updating our forecast for that." It turned out the growth was bigger than we expected, and it became a more sizable number as a result of that. I think the tax payments were a surprise to us, the cash tax payments being higher than what we had projected. That's one of the things that I think Mike has done a good job of putting in a much better forecasting system for this coming year so that we won't have those kind of surprises.
A better forecasting system, which we needed, because clearly we missed some things. We were focused on improving our cash collection, but we were focused on improving it without having the right kind of incentives built into our whole compensation system. The fact that we're now building these right kind of incentives, and I think some very significant incentives into improving our cash collection gives us a lot more confidence going into this year.
Thank you very much. I appreciate the long-term efficacy of your incentive planning. It's always worked. Thanks.
Thanks.
Thank you. Our next question comes from the line of Suneet Kamath from Citi. Your line is now open.
Thanks. I just want to go back to the free cash flow for a second. Just, I think last quarter you guys were pretty optimistic about the $1.1 billion-$1.2 billion, and obviously, as you said, came in below that. Maybe you just answered it, but I just want to clarify. What was the surprise? Was it the cash taxes or was it TRANZACT? Obviously, something happened just towards the end of the year, and I just want to make sure I'm clear on what that was.
Yeah. I think we actually lowered our cash forecast last year from the $1.1 billion-$1.2 billion down to what, $900 million-$1.1 billion we had said it would be. Excuse me? We stayed at $1.1 billion-$1.2 billion. Okay. Well, we were concerned about where it would come, I guess, anyway. Look, TRANZACT was bigger than we thought. We had the cash taxes, the cash taxes were about $130 million higher. We knew that was going to be weighing on us to begin with. The decline in the receivables, though, was something that we did not expect. That was something that was a surprise to us.
I would only add to your comments, John. When we sat there at the end of the third quarter, we knew exactly where we had stood. We knew what we had done in the prior year, fourth quarter. These couple points that John just raised influenced it. Frankly, we were worried about working capital build, and that's why we took the guidance down at the end of the third quarter. In fact, that's what we saw actually really build in receivables. That's really one of the improvements that we're looking at is really driving that improvement in working capital. Obviously, the drivers coming back to free cash flow. We've seen some reduction in CapEx.
We obviously know operating income's a big driver of it, and obviously, working capital, and that's the area that from a process standpoint, again, go back to from contracting to make sure we're looking at our terms at the beginning, to the ultimate cash collection process is really where we're going. As John referenced, I would not underestimate what this means going forward in terms of the incentives we put in place, or are putting in place throughout the organization.
Yeah. Makes sense. I guess if we look at 2020, your cash flow guidance would imply something like, I don't know, high teens growth and free cash flow. Are you still guiding to kind of longer term that growth rate to be around 15%?
Well, we're sort of laser focused on what we're going to do for next year right now. I would say if you look at us, where we're growing, our guidance of $1 billion is after we anticipate paying the Stanford settlement too. It's closer to a 30%-35% growth in free cash flow.
Got it. Then just lastly on the capital management or capital return outlook for 2020, I'm assuming you're going to continue to target double-digit growth in dividends, any color on terms of what you're expecting for share repurchases?
Yeah. As you know, given the acquisition of TRANZACT last year, we really had nominal share repurchases, which were really just to manage so that we weren't dilutive as it relates to our employee benefit programs, and we would anticipate doing that again as we think about 2020. Additionally, when you look at our dividend payments, there are $350 million-$370 million kind of range that are there. Equally, then you got to look at and say we've committed to paying our debt down, related to TRANZACT, as I referenced. If you look at our current debt to EBITDA ratios, we're more in the 2.4 range and we're looking to get closer to 2.0. That would really be where we're looking to deploy capital, at least as we look at 2020.
Okay, thanks.
Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is now open.
Thank you. Good morning. My first question, going back to the margin discussion. I understand from one of the earlier questions you pointed to kind of neutralizing for TRANZACT, right? Still being within that 50%-70% target. I guess I'm more thinking about the segments and just conceptually, maybe you don't want to guide to a certain level, but I thought the goal was to look to improve CRB. I know there's a delta between where you guys are and where some of your peers are running in their brokerage business. Does this operating margin guide assume that there's going to be underlying margin improvement in CRB and perhaps also in IR and HCB, and it's just offset by kind of the accounting impact of when that TRANZACT deal comes on?
Elyse, just like we do the revenue growth in response to Mark Marcon's question, I was saying we project our revenue growth line of business by line of business, and then build that up to the company here, and the revenue growth is not the same across all of them. We project our margin line of business by line of business. Certainly, we see more opportunities for margin improvement in CRB where we're trailing some of our peers in terms of what we have than, say, retirement, where we're ahead of our peers. Those are reflected in our projections, yes.
Okay, great. As we think about free cash flow for 2020, I just kind of want to understand the seasonality. I am not sure if you guys have a sense the timing of the Stanford litigation, and I know typically cash flow is weak in the first quarter. Also, is there any seasonality to that guide? Another part of that question would be, does the 2020 free cash flow guide imply that I am pretty sure TRANZACT is negative from a free cash flow perspective. Does it take that drag into account?
It does take the TRANZACT drag into account. Start with that. I think Stanford, it seems like it's at a place where we should be able to pay it, but we've thought for a couple of years now we would be able to pay it, and the court system drags things on longer than we had thought. We don't have a particular time when we're estimating it during the year, but we will alert you when we've made the payment. Then, clearly, there's a lot of seasonality. Our cash flow is highly skewed towards the second half of the year. We have tax payments that tend to come in the first quarter. We have our bonus payments are in the first or second quarter. So, we have a lot of cash drain in the beginning of the year.
Okay. That's helpful. My last question is on leverage. You guys have obviously been managing down your leverage since you closed the TRANZACT acquisition. I just kind of want to get a sense of the interest expense expected with the guide. Are you going to pay down more of your leverage as we move through 2020?
Yes. Elyse, the game plan is to do that. We're looking to do that as part of our capital deployment. You should continue to see And as you've seen us do from the third quarter to the fourth quarter, in terms of that reduction, you're going to continue to see that over the first half of 2020 in terms of us really addressing that outstanding balance, which will obviously have the corollary effect to interest expense.
Okay. Thank you.
Thank you. Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your line is now open.
Good morning. A couple more on free cash flow. First, the TRANZACT, considering that it is still in startup mode, still growing very rapidly, how long do you see that as being a cash drag for the business?
We continue to see is with those kinds of growth rates that are there, Yaron, which we've projected out over the next four to five years. We're continuing to see that. From a cash standpoint, we only see it about a year out in terms of the growth rates we see over the five years, we'll really see the cash side of that equation really starting to go only a year or so in terms of its drag on cash.
Okay. On the DSO side, and maybe tying back to the seasonality question earlier, I would think that a lot of the contracts got renewed at the very end of the year or the very beginning of the year. I would think that a lot of the contract changes in language with regards to DSO would be in place by the first quarter of 2020. The variable comp adjustment that you've made is also probably in place already. Shouldn't there be a little bit of an offset to the regular seasonality just by a lift from DSO in the first quarter?
Yeah. We got a lot of factors in that first quarter. As you rightly said, we're attacking the contractual terms that we have to be in place. We're aligning it from a variable compensation standpoint. We also have the bonus payments, we have tax payments and those amounts that come in there. Candidly, we're looking to make sure we meet what we're saying we've put out there in terms of expectations around. That's the game plan. I understand the logic where you're going, we see the first half of the year being more of a use of cash and really see it. If you look back historically in the company, you really see it build over the second half of the year, with the fourth quarter being outsized in terms of cash coming in.
I would just point out that the changes to the variable compensation plan, which we've discussed with the board and the comp committee. They won't be formally put in place until the end of this month at our board meeting. We've discussed making these changes with them, so we'll have those in there. They weren't in last year.
Right.
We'll see the impact from them in this year. I would hesitate to ascribe any effect to them for last year.
Okay. My other question is just going to the HCB margins. I think if we adjust out the accounting catch up, the ASC 606, margins actually declined by about 30 basis points year-over-year this quarter. A, is my math roughly right? B, if it is, what caused that decline considering that organic growth was actually up?
Yeah. Your math calculation seems maybe a little high, just in terms of how you calculated it.
Okay.
We didn't have it quite that way. It may be a flat to slight decline really is kind of how we've looked at it, Yaron. That would be our thoughts in terms of the numbers, just to give you that feedback.
What would have caused that decline?
Well, there is a bit of a portfolio shift. A retirement, which is the most profitable, is growing slower than some of the others.
Okay. Thank you.
Thank you. Our next question comes from the line of Mark Hughes from SunTrust. Your line is now open.
Yeah. Thank you. Good morning. Has there been any change in your write-off of receivables? Any change in bad debt trends?
No. Actually, we've been going after that. If anything, we've been really making progress on collecting some of the older stuff that we've had in terms of dealing with it. No. No change in policy, no accounting change, nothing that way.
Is it fair to think that the faster organic growth and the cash drag, it's just really two sides of the same coin? You've got more receivables in the business because you're growing the top line faster. Does that make sense?
Yeah. You look at it on a year-over-year basis. The beginning of December 2018, and how it rolled into January of 2019, in comparison to December of 2019 and how it rolls into 2020, there's definitely some element of that. I think to your point, yes. I think that there's some portion of that.
Finally, IRR, you really had the acceleration this quarter, especially thinking relative to Q3. How much of that carries over into 2020?
Yeah. There's definitely multi-year arrangements that are included in there. There is definitely an impact that's there. The other thing, I guess I'd just point out, our reinsurance business in particular was very strong as well as our investment business, as John commented on in his opening comments there. Overall, yes, there is some impact to that.
I think if you think back to a year or two ago, when particularly insurance consulting and technology investments were slower growing, we said we thought we liked the future outlook for them. I think we're seeing that come to fruition this year. We liked where they're positioned in 2019. We feel good about them going forward. I'm not sure they're going to grow as fast as they did in the fourth quarter of 2019. We like our positioning, and we like our growth prospects there. I think we feel the same way about reinsurance. Look, the whole reinsurance market was very positive and very strong in the fourth quarter. We think we grew as fast as anybody else or faster. We feel good about that. We think we'll perform well against the market in the future.
Thank you.
Thank you. Our next question comes from the line of Meyer Shields from KBW. Your line is now open.
Great, thanks. I was hoping to start with some maybe guidance on how much margin headwind you expect in 2020 from the inclusion of TRANZACT, I guess, earlier quarters.
We think that's probably about, what, 1% or something like that?
Yeah.
Yeah, so yeah.
Yeah. 1%.
1%.
1% margin drag?
Yep.
Yeah.
Yeah. Just a reminder back, remember, we acquired TRANZACT in July of 2019, right? You go back from that acquisition, you had five months of revenue and five months of expense. Obviously, we're going to have it for a full-year as we look into 2020.
Right. No, I understand, and I'm thinking that that's actually very good news because it implies better underlying margin expansion. Can you give us a sense in terms of the non-recurring CRB items in the fourth quarter? Just magnitude.
Yeah. We really don't disclose the individual deals or those particular aspects to it.
The problem with doing that too is when there's a couple of notable ones, we note them, we say, "Oh, those are big ones." There might be a lot of other smaller ones, and we just don't have a system for aggregating them.
Yeah. Okay. No, that makes sense. All right. Thanks so much.
Thank you.
Thank you. Our next question comes from the line of Mike Zaremski from Credit Suisse. Your line is now open.
Hey, good morning. I guess starting with a question on free cash flow. Are pension cash contributions or maybe CapEx, are those slight year-over-year headwinds?
No, we don't see it that way. As we look at next year, we don't see that, Mike, no.
About the same, yeah.
Same, yeah.
Okay. If I just think about the organic growth outlook, would you categorize organic growth as kind of being more of a tailwind in recent quarters and kind of going into 2020? Also, remind us, will TRANZACT's growth eventually move into the calculation in the back half of 2020?
Starting with your last question first, yes, TRANZACT. As soon as we get to same-store sales, we will include it in there from an organic growth standpoint. In terms of your question about tailwinds on organic growth, yeah, in certain of our business, if you looked at it, we've seen some pricing. If you look back to our Marketplace Realities report that we put out, most recent one in November 2019, you definitely continue to see price in the marketplace continues to be a tailwind, but equally, obviously, we got to do the right thing for our customers and clients in thinking through that. We have seen some pricing tailwind come through that. If you look at our organic growth rates, we've been right at the market as we look at our peers in terms of what we've been growing at.
When we put out there for our organic growth rate for the current year, we had 4%-5% and we build our budgets, and we've been pretty consistent around it, looking at 4% in terms of how we're more skewed that way in terms of how we think about it, but we're being realistic and recognizing the tailwinds that we see out there. That's why we went with 4% and 5%.
Yeah. The only other thing I'd add to that is that pricing is only one part of the equation for us in the revenue because as prices go up, people buy less of it, and so it's the net that is what we're trying to solve for.
Yeah.
I guess just lastly, though, a follow-up to that then. Can you remind us what, roughly, on the insurance side of the business, the breakdown of commission versus fee? Thanks.
Yeah. Mike, we really haven't disclosed that, so appreciate the question, but we really haven't given that information.
Thank you. Our next question comes from the line of Paul Newsome from Piper Sandler. Your line is now open.
Good morning. Just one question, Mike . Does the cash flow change that we had in 2019 and I guess thoughts here in 2020, does that have an impact on the speed at which you're going to be de-leveraging over the course of this year?
Yes. In the sense that we kind of know where the patterns have been. I guess we've said a couple, responding to a couple of the earlier questions in that we obviously pay bonuses, cash bonuses. At the end of the first quarter, we have tax payments. We have some real outflows of cash, but then we start to see it build through the rest of the year, and the intent is obviously to really deal with that term loan that's out there over the first half of the year by the end of the second quarter.
Okay. The term loan should be done by the end of this, or hopefully by the end of the first year?
Yes.
Okay. Thank you very much.
It's a one-year term loan.
Yeah. Got it. Appreciate it.
Yeah.
Thank you very much.
No problem.
Thank you. Our next question comes from the line of Brian Meredith from UBS. Your line is now open.
Yeah, thanks. I just have one or two quick ones here left. One, just curious, if I look at the TRANZACT margins and just the impact on margins overall, if I kind of look at it on a pro forma basis, is TRANZACT, assuming you have a full-year 2020 and it was full-year 2019, is it accretive to the BDA margins and overall company margins, or is it kind of dilutive or in line? Understand that the pressure just from timing perspective, how it's going to hurt 2020.
When you look at a full-year, it will be accretive overall. We talked about this in terms of where the margins ended up in the fourth quarter, we're actually down for BDA overall. That being down was, although TRANZACT has very good margins and we're very pleased with their margins, that you only had five months of expenses and five months of revenue that was included in there. The margin was a bit higher, and we've normalized that as we think about fiscal year 2020. To your first question, it is absolutely accretive and very excited about what that growth and what we're going to see.
Great.
Accretive but lower percentage margins.
Margins.
The TRANZACT margins, when we bring TRANZACT in, it adds to the dollars of earnings we have, but it's a lower percentage.
Oh, it's a lower operating margin percentage. I got you.
Exactly.
Yes.
Got you. I was wondering if there's any difference, like seasonality of TRANZACT versus the rest of your BDA business?
Not that different compared to our regular exchange business. Our regular exchange business is a little less seasonal than TRANZACT.
Not that much.
Worlds apart.
Okay. That's helpful. The last one, I just want to follow up Mike's question. Just wanted to confirm here that in your guidance, you have nothing assumed for kind of improving organic revenue growth in the IRR business or the brokerage business, CRB business for pricing in the commercialized marketplace.
Well, yeah, we do.
We do have something in there.
Okay.
Yeah.
How much, roughly? Is it consistent with-
That's what we were saying. We don't do things by line of business.
Business segments. That's how we build it up.
Yeah, we build it up. That was an answer I made to an earlier question. We do build up our things differentially by segment in terms of revenue growth and in terms of margins.
That's clearly impacted.
Got you. Very helpful. Thank you. Appreciate it.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to John Haley for closing remarks.
Okay. Thanks everyone for joining us this morning, and I look forward to seeing all of you in March.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.