Thank you very much. My name is Shlomo Rosenbaum, business services analyst for Stifel. I've covered Willis going back about 11 years now. I want to thank Mike Burwell, Chief Financial Officer, for being here. I'm going to try and make this as interactive as possible. I have a list of questions for myself I want to ask him, but I definitely encourage investor participation. One of the things, I think I'm just going to throw it out and then start that when Willis merged with Towers Watson, there was a little bit of a rocky start on the growth profile on the insurance brokerage side.
I want to ask you, how do you feel in terms of enabling investors to have confidence that all the growth issues have kind of been ironed out, what happened initially, and that you'll be able to grow, I read the company said, to grow at least in line with the peers in the market. How can you back that up? What can you point to? How can you give people this confidence?
Thanks, Shlomo. We feel good about it. We're in year four from when Towers Watson and Willis merged. As you rightly said, in 2016, when the merger happened, people were trying to figure out who they reported to and to make sure we're focused on growth rates, and the growth rate in that year was 2%. If we look subsequently in 2017 and 2018, '17 we were at 4%, and '18 we were at 5%. We look at our peers, that's right in line with where we are at or equal to where our peers were. Then we look at the first quarter of '19, we're sitting here at 5% growth rate on a 6% comp. We felt pretty good about where that revenue growth rate is overall.
Back to your question is, where do we see confidence and why are we confident? We're confident that when we see that those results are indeed happening overall. I would share with you, Shlomo, just that what has happened at Willis Towers Watson today, I think, is really about our culture. I think the culture in the company has really come together. Are there people who talk about legacy once in a while? Sure. I would say, if I were to describe the culture quickly to you, I would say that it is one that's collaborative and team-oriented. It's one that's about mutual accountability. It's one that is about pay for performance, and it starts with John, our CEO, and I cascade that, and we all do through the organization and our leadership teams.
I think it goes to an environment and a professional services organization that needs to be open for diversity and inclusion, and we get high marks on it, that everyone can be successful. What we've seen in the transaction that we closed at the end of last year, Alston & Galer came to us on a sole source basis. The TRANZACT deal that we announced earlier this year came to us sole sourced. Why? Because they believe it's the right place for those assets to be and the culture that has created Willis Towers Watson. Back to why you should have confidence, I think that culture manifests itself in those results and equally in just in terms of how it feels at the company these days.
Okay, great. Maybe you could talk a little bit, just in terms of, because you're the CFO, I'm going to throw some accounting type stuff in there. There are reporting differences in, say, the reinsurance brokerage sector, the way that Willis Towers Watson reports versus, say, Aon and Mercer. Can you talk a little bit about that? I know you run the numbers internally. If you were to report your reinsurance in the same way that they did, would you be comparable, below, or have a faster growth rate than those peers?
The differences are facultative in reinsurance. We report in our Corporate Risk and Broking segment. Just a reminder back for the audience, when you think about Willis Towers Watson, it's 4-3-2-1. 40% is our HCB business, 30% is our Corporate Risk and Broking, 30% Investment, Risk and Reinsurance, and 10% Benefits Delivery and Administration. When you think about our reinsurance business that sits in our IRR or 20% business that's there, our facultative reinsurance sits in our CRB segment, which is different than the way Aon and MMC report that. When we compare it and we do our internal comparisons to it, we're at least operating at where that growth rates are versus those companies.
Okay. Just to throw one more out before I go and poll the audience. The company is exposed to the U.K. with about 22% of revenue. Clearly in the news, all the discussions about what's going on with Brexit. Can you talk about where it might be impacting the business in any of the business lines and where maybe it's not surprisingly so or just can discuss the impact as you're seeing?
As we think about Brexit overall, it's been something obviously that's been on the radar screen for a couple of years now in terms of the planning that we have thought about. First and foremost is to make sure we're delivering the consistent and high-quality services to our clients. That's been on top of mind. We have gotten various alternatives out there in terms of how we operate and make sure we can indeed serve clients going forward. What has actually happened is we have seen movement of certain of our clients to move certain businesses outside of the U.K. What you're seeing for us is one of our clients in the banking industry moves almost 300 people to France. We still need to provide them with HCB type services. That revenue then is not counted in the U.K.
It's counted in our results we call Western Europe, which would include France. You saw the revenue move between the two business units, but still obviously included in Willis Towers Watson. When we think about Willis Towers Watson overall, we frankly have not seen that big of impact to it. I think we're well planned to be able to serve clients. If I knew the answer in terms of, is it a hard Brexit, no deal or whatever, I guess I wouldn't be sitting up here. Nonetheless, we've just thought about what are all the alternatives and are we well positioned to be able to take care of that, and we don't really see significant risk on our part in terms of operations, at least to date, or nor are we forecasting that.
What about, just along the lines of that, what about a slowdown in business activity just in general in the U.K.? Do you see any of that just, hey, there's less work being done because there's less hiring right now, or parts of the industry that we might be working with are just not growing the same way that we would expect? Is that not a fair question because it's hard to figure out what would do absent a Brexit? I mean, how would you think to answer that?
Look, I think there is some impact. I think it's naive to say there isn't. We don't see it in the local marketplace just totally being a disaster. Is it down a little bit? Yes, it is, but not significantly.
There are questions from investors. Anybody has a question they want to throw at Mike? Throw it hard. No. Okay. I'm just going to follow up. If you look at kind of the guidance for this year in terms of margin expansion, it's pretty strong margins in expansion. You're looking for what looks to be about 200 basis points year-over-year, and this is coming off of pretty good margin expansion in prior years as well. Can you talk about the sources of where all this is coming from and maybe some of the operational aspects of what's driving it?
Sure. At the end, just maybe just for people's reference. If you look back at the end of last year, which is the completion of three years since the merger date, we had targeted 25% EBITDA margins to be delivered, and we delivered 25.1%. For the current year, one of the things that happens for us is we have significant pension income, and we measure that on December 31st. What we looked going forward was to really focus on operating income. The reason that that was to really kind of take that pension ups and downs out of it so that our investors could really focus on actually really what's happening in that operating performance. We think about that operating performance, and we've targeted 20% for the current year, coming off the prior year at 18.1%.
In the first quarter, we were actually up 200 basis points at the end of the first quarter for 2019. We obviously feel good about that, but there's several components that are driving that. One is the revenue growth rate. Our revenue growth rate was 5%. We're targeting 4%, at least for the whole year in terms of delivering. That revenue growth rate's doing it. Second is we have the rollover effect for us. We adopted ASC 606. From an accounting standpoint, we did have part of the rollover of that revenue and the related income actually happen in the current year. The third piece of it is obviously continued margin improvement.
We had done a lot of integration activities over the last three years, you're seeing that continued improvement actually happen in the margins overall, that's how we feel confident about the 200 basis points target or the improvement that we've targeted for the current year.
Can you talk about where some of the efficiencies from an operational standpoint?
Yeah. The efficiencies themselves are technology. We continue to invest pretty significantly. If you look at our cost base, it's salaries and benefits, it's technology, and it's real estate. Technology is something that every piece of our business continues to impact, so it's more with less and how it is that we bring that to life. Every individual, we're looking to make them more productive in terms of how they can deliver that service. We still need people, but we don't need as many. That's an important element that's driving that productivity.
Okay. Any questions coming from the [audio distortion]? It's okay. One of the things that I find very interesting is the focus on free cash flow at this point in time and the expectation that free cash flow is supposed to grow compound annual growth rate of 15% over the next three years. That also includes a certain payout for a certain lawsuit debt that went out. Even with that, the cash flow is supposed to have this kind of growth rate. Can you talk about, number one, what's driving the cash flow up so much? Number two, is the growth rate of cash flow just sustainable? What are the levers that you're pulling that for multiple years you're going to be able to do that? Number three, as people are looking at their own models, is there any timing of that Stanford litigation at this point?
It seems to be going on for a really long time.
Yeah. We delivered at the end of last year was around 90% improvement in free cash flow. We entered the year in round numbers of $1.1 billion in terms of cash flow last year. We've targeted 15% improvement for the current year, and we had targeted 10% earnings growth. We were looking to have our cash flow grow greater than our earnings growth. The reason we targeted the 15% and put that in place again was to really take the pension income out of the effects of it to really focus on that improvement in free cash flow, which will be earnings driven. It will be working capital management. We still believe we got work to do in terms of managing our working capital. Just for example, in our DSO, again, every one-day reduction for us is $22 million in terms of improvement.
We equally are looking at CapEx. In the first three years, we needed to catch up in certain investments, particularly in our real estate, as we reconfigured many of our locations around the world. We think that from a CapEx standpoint, we should be able to continue to move that down. All three of those should drive that 15% or greater growth that we've said, and it's greater than our earnings growth going forward. Contemplated in that is the settlement of Stanford. Like you, I'd like to see that behind us. We have a settlement in principle. We're just waiting for the courts to give us final approval. Everything we know that we believe that it will happen this year. We're anticipating that, and we anticipated that overall. The other piece that was rolling off was the integration cost from last year.
You have the integration pickup, and you have the offset associated with Stanford, and that was all contemplated in the 15%.
Since you are the CFO and you have been here before, and I am asking you questions designed to elicit a response from you, I'm going to ask you about the DSOs because I seem to remember being in front of you about a year ago talking about DSOs as well. I think in your office, it's like the buck stops there. We kind of thought that the DSOs would be coming down a little bit faster than they have. What's been the story over the last year, and why should that change then?
Yeah, it's a tough challenge, and I appreciate you asking it, Shlomo. Look, human beings like routine, and unless we can help them continue to find a better way and a better routine, they want to go back to the old ways they were doing things. You call it squeeze the balloon, you can call it different things. We were able to push that pretty hard over the last year, and we're looking at what's the next thing that we put in place. We're talking about how do we put more incentives in place to maybe advance people's bonuses or things that would continue to drive that incentive across the company, not to the detriment of any one segment or any one geography, but how do we continue that sustained drive overall in improving in net working capital?
Look, we've made great strides, but we want to take it to the next level and continue that improvement and equally change people's behavior, and that's never easy. We all like to sit in the same chair or ride in the same bus or comb our hair, brush our teeth in the same way every day. Trying to change that routine is never easy.
You think you've found the hot buttons for the people in your organization to move this down?
Well, yeah. I think money can be very helpful. I don't think it's the only answer. I think we're putting a bit of gamification to it as well, and get people engaged. There's a variety of different things that we're bringing to life. It's going to take the next wave overall to continue to not just get to me too. We're not trying to just get to me too to our competitors. We're looking to be more at the lead position. We know that's going to take time. It's not going to just happen any one quarter. It's consistently. We'd like to believe that the down payment last year, and 90% improvement was a good start. Then we're going to continue to drive that going forward.
With our operating committee and with John Haley, he's not letting off the gas in terms of what we're trying to do in the company.
Where does all this cash flow go then? You're talking about a pretty big step up. You're starting from 1.1. You look at this over the next three years. We're talking looking out like $1.5, $1.6 billion in a few years. That's a lot of money. Where's it going to go?
I think right now with where we're trading versus our principal competitors, obviously share buybacks is an important alternative to us, and we measure everything against that. Share buybacks don't generate cash. We have multiple stakeholders too, including our bondholders. We're looking at M&A. We announced the acquisition of TRANZACT here in the first quarter. We're very excited about that business and really in the healthcare space, which is obviously a very growing space and feel very good about it. Where's that cash going? Part of it's going to pay our dividends. Part of it's going to continue to look at M&A. We're clearly going to do buybacks to make sure we don't have dilution as it relates to our employee benefit programs.
We have a pipeline of M&A that's continued to come at us, but we're still going to always measure it against our buybacks, and that'll be a continued thought process for us. As I said, culturally, or maybe I should just share, culturally, we're having these companies come to us. We have a pipeline of companies that have come to us to say, "Hey, we believe it's the right home for you." We just want to be selective and not taking everything in terms of the stuff that's coming our way.
Once you're mentioning buybacks, I'm going to just kind of push you on that a little bit because I've covered this company-
Not the first time.
I've covered this company for 11 years, I have never seen the company being aggressive on buybacks. Do you really think that there's like $3.5 billion coming into this company over the next three years? Why can't you lever up in the short term and buy back some stock and put your money where your mouth is?
Well, at least you're consistent, Shlomo. You've been asking us on the analyst call. It has been pretty consistent about that. I think in all seriousness, I think it really comes back to we do have multiple stakeholders. We issued $1 billion worth of bonds in the last 12 months. Most likely we'll go to the market later on in the year, we need to make sure we think about where we sit from a deleveraging standpoint, and that's what we've committed to in terms of our ratings. We're looking to move our ratings up one more notch so we can access the commercial paper market overall, which we haven't been able to access at our current rating. Look, buybacks are an important element to us. It's definitely a measure that we will continue to look at.
My response would be, we're looking at all those alternatives, and believe me, that's top of mind. Whenever we talk about it, we think about Shlomo's comments.
Okay. I'll take a question from the back.
deal that you did, a reference to why now and.
Yeah. The question was, why TRANZACT? What do we see for it? Why now? What we saw in TRANZACT, so originally, in the marketplace, we thought the retail space or the direct-to-consumer space would have been our original entry point, as opposed to the employer-sponsored plans. When you look at it, we had a very strong position in terms of assisting in our Benefits Delivery and Administration segment, what we're doing for employer-sponsored plans. Which is roughly about, look at the marketplace overall, we see roughly 50 million people that would be eligible for our services. About 15 million of them are employer-sponsored plans, 35 million would be just in the marketplace for it. Of that 15 million, we break that down to seven and a half million to be in employer-sponsored plans, and seven and a half million be employer-sponsored plans that are really government agencies, et cetera.
We think we have a very strong market position in employer-sponsored plans. Frankly, we think we have almost all major accounts in that space. We have over 2 million people that are on our exchanges. We also played very strongly in the public sector as well, that other 7.5 million. For example, the state of Ohio in terms of one of our larger accounts that we service. That 35 million portfolio, really, we viewed that as an opportunity for us, and we think TRANZACT has been very strong in playing in that particular market space. We see that market growing from 50 million to 70 million people as baby boomers age into retirement here, and about 10,000 retirees a day as potential opportunities for us. What TRANZACT brings to us is real capabilities to assist individuals who need counseling.
It's a very important decision for them at that particular point in their life. It has huge economic ramifications to them, and it's been a business that's been growing very well in terms of Medicare Advantage market, and the Medicare Supplement market, but more the Medicare Advantage. What we see is people over 65 years old, that market really growing at greater than 3%. We also see an opportunity, although not included in our original plans, to be able to leverage that direct-to-consumer platform greater in Willis Towers Watson longer term. We also think about other services that we can provide through that channel that we haven't, that wasn't contemplated in our business case to it. You can paint your picture in terms of where single-payer systems go. We can paint an opportunity that's really exciting.
We could paint some risk to it, but we feel most likely and more probable that it's an exciting opportunity for us. We think about all those options. For us in TRANZACT, we're big in health, we think this fits right in that sweet spot. I think we understand what it takes to service that marketplace, and we think we can really drive it going forward. We're pretty excited. Actually, I'm very excited about it.
Maybe just building off that last question, could you maybe throw out one or two potentials of where you could take that TRANZACT strong capabilities, just a real-life example, maybe, "Hey, we could apply to this part of the legacy business or the regular business," really do some interesting things with that?
Yeah. Maybe first just come back to through the 2 million people that we have in employer-sponsored plans, we have pipes into almost all the major insurance carriers. Today, we'll be able to think about leveraging that back into TRANZACT in and of itself. The cost synergies aren't here. This is about revenue synergies and how we think about it. Equally, just come back to your question, Shlomo, we think about vision, we think about dental. You want to be real creative, you can even think about cell phone insurance, right? That you could run through that type of channel. Now that's really stretching it, but you can think about those things. But also, you think about direct to consumer in our CRB business, particularly in certain of the markets.
Why couldn't we deliver that kind of direct-to-consumer platform from an insurance standpoint and a variety of different insurance products that could be out there that could be delivered through that? Those are the things I think longer term, as we get it more mature and understanding. Let's not get too far ahead of ourselves. Let's get to our knitting, get it integrated, operating well, and feeling good about where it is. Those things, we never contemplated them in the valuation or how we thought about them. They're still top of mind for us in terms of what we think we can do with that platform.
Okay.
Sure.
Sorry if I missed this. Yeah, I was going to talk about insurance pricing in general and what you're seeing. I'm wondering, does the insurance-linked security market have a bearing on your business over time? Are you involved in it at all?
Yes. Your last question, are we involved in insurance ILS or insurance-linked securities? Yes, we are. We are involved in it. We do do that. It's a piece of our business that resides in our IRR segment itself. Specifically, we do that. The market's still good, and we continue to play very actively in that space. Your first question was, how do I see insurance pricing? We do see insurance pricing in the 1%-2% range. In fact, if you look out on our website on April 25th, we put out our Insurance Marketplace Realities where we describe 12 insurance products and the pricing associated with them. If you looked at those, 10 of those would have increases associated with them, and two would be flat to down overall.
That is what we're seeing, a bit of a hardening of the marketplace, and indeed that happening both in reinsurance and in the brokering space. Also to be mindful of that, as the CFO of the company, I look at what does that ultimately mean for us, right? I look at, of that price increase coming back to me, how do I manage deductibles? What do I run through my captive? No, I'm not letting all that price just come back at me in terms of how I'm managing that risk portfolio in the company. Just as you look at those numbers that are in there, you have to be mindful how much of that price actually ultimately comes through.
Are you surprised the pricing isn't even stronger after all the big cat events of the last few years?
The question is, am I surprised I haven't seen pricing bigger with the cat events such as Florida and California? No, the reason I say that is we are the chief investment officer for about $120 billion of assets under management. When we look at that portfolio, how much are really into strategic capital, that we would say that people are really deploying, and it's less than 1%. When we think about that, we think that number ought to be a little bit higher than that. We ought to think of it maybe in the 2% or 3% range in terms of the portfolio's allocation. What that's telling us is there's still capital available that's willing to go against risk and sitting on the sidelines.
I still think that opportunity's there, as much as you not see more pricing, you still have that capital that can enter that marketplace that wants to go against that risk.
One of the other things I wanted to ask about is one of the businesses that's been kind of being built up, a little more on the quiet side, but the Benefits Delivery and Administration business, Watson Wyatt was in that years ago, was not very successful, got out of that business. Hewitt was a dominant player that went to Aon, got spun out. Willis Towers Watson has quietly been building a pretty strong competitor business over there. Can you talk about the size of that business, how you play in the market, the market share you might be gaining and your positioning over there?
Yeah. Thanks, Shlomo. From us, we've been very thoughtful about that particular business with a focus on quality and not willing just to look at volume. It's really been capabilities and quality we think is really the end game in terms of being successful with it and with a margin target for that business that we would consider to be market leading. If it doesn't meet that criteria, candidly, we'll turn down the work. As that business, as you said, has been spun out, a competitor in the marketplace, we view them as a very viable competitor and do good work. We've really kind of put a niche in place on the quality high-end side and where we sit in that space. It's a very important business for us and continues to grow significantly in double-digit kind of growth numbers for us.
We're very excited about the business. We stick to our knitting. We've been very diligent on it, and not looking to just drive volume and low cost solutions has not been the game plan for us.
Has the competitiveness of that market changed over time? You used to have the old ACS business was in that. You had a few kind of smaller private players in there, then it was really Hewitt was the dominant player. That was actually their highest margin business as well. As things have gone through, has the competitive structure of the market changed a lot?
Yeah. Look, I think people have kind of jockeyed themselves into particular positions, and our position has been higher end, quality related, not willing to just chase volume and price in order to cover that market position. We've stayed to it and saying, "Hey, look, we're going to stick to that." We're willing to sacrifice losses at times to make sure we stay to that quality agenda. Frankly, business has moved itself back to us through that process, Shlomo. Look, at certain points, there's overlap and competitiveness to it, but from our standpoint, we really feel sticking to quality has been a key ingredient for us.
Okay. Just a last one. Can you talk about the margin challenges in the IRR business in 1Q 2019, just to hit on the highlights and their timing issues or their changes in trends and how investors should view that?
Yeah. In our IRR segment, there are a couple things that impact the margins in the first quarter of 2019. We believe it's timing. One was our Miller business in terms of placements between Q1 and Q4. Most of the placements happen in Q1 and Q4, a bit of timing that impacted Miller's margins. Second was we get performance fees in our investment business. If the market gets paid, they get paid in the following quarter. When you look at where the market was valued at the end of December through the last quarter of December 2018, and what performance fees we had in the first quarter, both in our Swedish business, Max Matthiessen, and our investment business overall, you saw that impact that happened in the first quarter.
Okay. No significant trend?
No.
All right. Well, thank you very much and appreciate your participation.