Morning, everybody. My name is Mark Marcon. I follow human capital technology and solutions for Baird. Our next presenting company is Willis Towers Watson, a company that I've followed over its various iterations for the last 20 years. With us today from Willis Towers Watson is Mike Burwell, the CFO. Mike joined the company in 2017. Prior to joining Willis Towers Watson, he was over at PricewaterhouseCoopers for 31 years, where he was a partner and held a number of leadership roles, including Vice Chairman of Global and U.S. Transformation Services and COO and CFO of the entire U.S. business. Mike, we're really pleased to have you here with us. Thanks for joining. What we're going to do is basically a 5-minute overview presented by Mike, then we're going to go into some of the big investor questions as it relates to Willis Towers Watson.
Great. Thanks, Mark. I'm glad to be here, and thanks for the invitation to be with you again. It's been a year and a half now that I've been at Willis Towers Watson. It's been very exciting in terms of the integration process and completion of it after 3 years, feel very good about where the company sits today and what our growth rates have been and continued margin expansion that we've seen in the business. When we look at our growth rates, we see us consistent or above our competitors, which always is a good litmus test in terms of what we've seen. I guess the one thing that I think is really differentiating us today is our culture. When I think about our culture, Mark, I think about how do you describe that?
What has John created, John Haley, our CEO, in terms of driving a culture in the company? I've said this in a few of our investor sessions that we've had even this morning, that is he's created a collaborative team environment that people want to be a part of. We still have pay for performance and mutual accountability that exists across the organization, but it's one that everybody can be successful in. We're very focused on diversity and inclusion. It's a very key ingredient to our success. Frankly, what we've seen over the last year or so is acquisitions wanting to join and be part of Willis Towers Watson, willing to accept even less price in order to make sure that that organization is part of it.
In particular, we did a deal at the end of last year, Alston Gayler & Co, that we added on to our Miller wholesale business, that wasn't an auction process. That was individuals that thought that it was a right fit to be part of Willis Towers Watson. We've seen that, ultimately, what does that mean? In the first quarter this year, we had 5% overall organic revenue growth on a difficult comp at 6% in the prior year. When we think about it, overall, I think to me, that kind of summarizes probably one of the key ingredients of Willis Towers Watson and where it sits as we move, I guess, beyond, in my mind, the integration in year 4 of its history.
Great. For those who are less familiar with Willis Towers Watson, just in terms of if we could just do a quick run through with regards to the various divisions before we get into some of the key business initiatives. If we think about HCB and just the scope of services and who you compete with, just for those who aren't familiar.
The way I tend to think about it is in using the acronym 4321. 40% of the business is human capital and benefits, 30% of the business is corporate risk and brokering, as we refer to it as CRB, 20% is investment risk and reinsurance, and 10% is BDA or benefits delivery and administration. That's my 4321, just to make it simple and how you can remember it. If you think about our human capital and benefits, we are the largest actuarial firm, in our mind and our assessment, in the world, and continue to do a lot of work there. We also do a lot of health and benefits brokering in the HCB segment. We do talent rewards and talent advisory services or our TAS business as well. Those are the principal components.
I think our traditional competitors are Marsh & Aon that we see there, but there's also some very boutique competitors. For example, in our TAS business, or excuse me, in our talent rewards business, where we've seen a lot of technology insurtech type stuff evolve. From our perspective, we look at making sure that we think there's profitability to it, not just chasing what I would call small technology plays that aren't scalable or as profitable as we'd like to define for the company that we not see there. In our corporate risk and brokering segment, which was really thinking about us as the third largest brokerage organization in the world, at least as we measure it, and really in all geographies and really delivering that insurance and risk management process and portfolio for clients.
We're seeing, again, I would say traditional competitors of the Aons, Marshes, Gallaghers, Brown & Browns, really kind of playing in that particular space. If you go to our investment risk and reinsurance segment, you have reinsurance and our reinsurance business that sits in there, as well as our investment business. In the investment business, we have about almost $130 billion of assets under management as we serve as a delegated investment advisor in that space. We also have a business, Max Matthiessen, in Sweden and a wholesale brokerage business that's included in there called Miller. Again, your traditional competitors, but equally a variety of different regional competitors that are in that space as well.
Our benefits delivery and administration business is a business that is continuing to grow, whether it's the individual marketplace and where we're supporting employer-sponsored retiree activities or plans that are out there. It's our exchanges. We have over 2 million people on exchanges. We believe we're the market leader in this particular space. We've been doing that for a number of years. Frankly, we think we have a very strong market position in that particular space. We announced and are looking forward to closing TRANZACT acquisition that we have pending that will add to that individual space. We also have benefits outsourcing and a benefits administration where we do pension administration or health and benefits administration for a variety of different clients. That's the company overall. It's a variety of different businesses, but a portfolio that we're very excited about.
You're spread out across the world. You've got 43,000 employees, 140 different countries. You're in every continent. One thing that's kind of interesting is the last major acquisition, which was more than 3 years ago, is basically bringing Willis along with Towers Watson and merging them together. I was struck by the last Analyst Day, just getting a sense that, hey, this integration is truly complete, and that means we can basically play offense now. Can you just give a sense for, is that a correct interpretation? It sounds like the culture is all set, but it's also like from attack the market perspective, we're also set.
Yeah, I think that's right, Mark. I think you summarized it well. I think us, starting at the leadership team level, just how people work together. People aren't worried about who do I report to or what's the cultural implications in terms of how we drive it. As I was referencing, I think that's a key ingredient is really set for continued growth. I think we started on that path with the announcement we made in the first quarter. We've got a lot of things that we're continuing to look at in the marketplace. We're really playing, as you say, offense in terms of looking to the future as opposed to integration and inwardly focused. I would say we were doing that, but I just feel an acceleration is really where we stand.
Great. With regards to some of the big goals that we had previously, we talked about getting the margins up nicely. We accomplished that. Now we're setting new goals because we've accomplished our 3-year goals. A big one is basically at least 15% free cash flow growth. Just in terms of setting the expectations, if we take a look at where we are currently, that set rate is roughly $1.07 billion in terms of what we're starting off as a base, which is roughly $8 a share, roughly speaking. We're going to get 15% growth after this period of margin expansion. When we think about that, which in our minds means we're basically going to get free cash flow up to roughly $13-ish per share as we go out over the next 3 years.
Can you talk a little bit about some of the levers that we have in order to do that?
Yeah, sure.
I guess we could start with just that cash outflow that we've had from a merger and integration perspective that's no longer there, and so that we can just take people through the math in terms of how we get there.
Sure, Mark. When we looked at it, historically we had spoke a little bit about conversion rates from adjusted EBITDA to conversion rates. With us, we measure our pension at December 31st, and we tend to be in that business. What we saw was a lot of pension income coming into our forecast and a lot of volatility in terms of looking at that and said, "Is that really the right measure that we should put out there?" Our mind was no, we really thought it was really defining that 15% or greater, and I emphasize or greater amounts going forward. We've targeted 10% earnings growth and looking at 15% to say that our cash flow needs to be greater than our earnings growth is really what we're targeting in terms of thinking about it.
How we're going to drive that is continued margin expansion as it relates to EBITDA. It's going to be driven by management of our CapEx. Our CapEx has been a little higher than we'd like, looking to manage that down a bit. Working capital management. We made a good down payment on it last year and look to continue to drive that working capital. We had a 90% improvement in cash flow from the prior year at the end of fiscal year 2018. We're really looking to drive that. We feel pretty good about what that means from a free cash flow standpoint. I thought that was a better measure for investors in terms of really understanding that's how we're looking at it into the future.
Just to contextualize it in terms of if we take a look at how much you've spent last year, for example, just in terms of merger and integration charges, that was well north of $200 million that you were spending there every day of DSO improvement where you've got some room that basically ends up yielding more than $20 million in free cash flow per day, correct?
That's correct. Every day is a little over $21 million for a DSO reduction for us. When you look at it, we spent about $200 million integration cost, about $160 million was cash. We also had contemplated that number into our 15% growth rate, because right now we're contemplating we have a legal settlement with Stanford that we will pay out this year. Those would be around $120 million. We looked at that in that context of 15%. Again, I would emphasize the word 15% or greater is really how we've thought about it. We thought it was helpful to at least have a minimum floor in terms of how we're driving that.
Just for people who weren't clear, it's like we're growing the 15% despite these things going on.
Yes.
Thank you, Mark. Is that going to happen in the third quarter or the fourth quarter, or?
It's a good question. I just got updated last week. Right now, in our mind, everything's been agreed to from a settlement standpoint, but the courts have not approved it. Until they do, that payment will not happen. There's always a risk that it doesn't happen, but all signs and all things from our standpoint believe that it will. Look, we've got agreement in principle. This has been going on for a while. We'll continue to update in our normal reporting process to the extent there's something that changes, but that's what we're anticipating.
Great. With regards to just the merger and integration, generally speaking, one of the things last year, you were here, and you had only been part of the company for less than a year at that point. It struck me in our discussion about just you came from PwC, where basically when the financial results actually came in, it was just basically a confirmation of what the projections were, and you stated a goal of getting Willis Towers Watson to that standard. How would you say how far along are we in that?
Yeah, I think we've improved from where we were a year ago, but we still got work to do. Still opportunity in front of us to continue to think about how it is that we forecast inside the company. The reason being is, ultimately, it's about allocation of capital, whether it be human capital or financial capital, and can we do that in a way that exceeds our competition? That's how we're thinking about it. If we're looking out from our windshield and understanding what signals we're seeing happening in the marketplace, and we're looking at our dashboard real time and seeing as revenue per day that's transpiring, we're looking at win rates that are happening, then can we make real decisions real time? We're doing that today, but we want to continue to improve upon our decision-making overall.
Look, we're continuing to drive client satisfaction rates. It's ultimately about delivering for our clients and our colleagues. That's how we think about it.
You've had a unique view into some of your competitors. How far along are we in terms of being best in class from that perspective?
I think we still have opportunities in front of us, we're doing some things that I would tell you I think are best in class, Mark. The reason I would say that, I would say around innovation. I come from a company that was private partnership that did a lot around innovation. I would tell you, I believe we're some of the best in terms of incubating ideas and bringing them to market at the company. Why do I say that? I sit on an overall board with John Haley and a couple of our Operating Committee members and really incubate these types of ideas in terms of how we're going to fund them, how we're going to shut them down, fail quickly, et cetera.
The process that we have inside the company and the culture together allow those things to incubate, or we wouldn't have the AMN product that we have in the marketplace today that has over $8 billion of assets under it. That came from a concept that one of our colleagues had, that we incubated, brought it to market, and to bring it alive. I'm excited about some of the things that we have in the pipeline around innovation. I think people don't necessarily realize that about Willis Towers Watson, I think the culture and the way that we bring things to market and innovate is something that is very different than I've observed. I was inside a lot of companies in my history and my previous life.
Yeah. Okay. That's the reason why I bring it up, because you've seen a number of different companies, including your competitors, and-
Yes
so it's-
It's very unique. It's like something I have not seen at other places.
Great. Talk about one of the more innovative things that we're talking about doing is basically closing the deal and bringing in TRANZACT. Can you talk a little bit about that opportunity for people who aren't familiar with it? Because that's going to fit within BDA. Can you talk about the growth that you're seeing there? What attracted you to it? Because it is a fairly big bet. You're basically spending $1.2 billion upfront, then you've got $200 million in an earn-out for a company that's generating $260 million in revenue with it's growing 25%-30%, has 20% EBIT margins, but you're still paying a fairly full price. I have the experience with regards to when we got into the exchange business and how well that worked.
Everybody doubted it then, Mark.
Yeah.
Yeah. Well, thank you for asking the question. Look, we're very excited about the TRANZACT business. If John Haley, our CEO, were here, he would tell you that he really looked at the direct-to-consumer market as the place that he was looking at his first entrée into it. It wasn't the employer-sponsored space around thinking about it as it relates to Medicare and how we would play, as you probably know. TRANZACT fits right into our right strategy. When we look at TRANZACT, it is a direct-to-consumer business. It's been very successful in that particular space. We were looking to build.
For those who don't know, it's Medicare Advantage.
Yes.
Direct to consumer.
Yeah. Medicare Advantage or Medicare Supplement, direct-to-consumer business, and a direct-to-consumer business that they've done extremely well, and it was a space that we were looking to build and get into ourselves, as we had stated previously. What we see with TRANZACT is some really great performance, great management team, and we look at demographics. We look at those demographics overall for Medicare, what we see is baby boomers hitting that market and looking for that type of product of Medicare Advantage at 10,000 per day, every single day. We look at 65 or older population going to grow by over 3%. For us, it gives us capabilities that we didn't have before, particularly their marketing skills and conversion skills, where we had really been doing servicing in the employer-sponsored market. We have over 2 million people gone through and been on our exchanges.
Although in this population, necessarily aren't always there long-term, but nonetheless, we've had over 2 million people going through our particular exchanges. We look at the demographics are very strong in terms of the retirees happening. We look at the capabilities that we're bringing on at a much earlier pace than we would've built ourselves, in terms of capabilities. We look at the secular trends that are continuing to be very strong around Medicare and Medicare Advantage, and we look at it from the lens of the individual. The individual looks at it as very comfortable playing in the PPO space or that space and looking for that particular coverage. They get a defined payment that they're paying. They know their deductible, and it's covering them for catastrophic type events overall. We see this space continuing to grow very rapidly.
We're very excited about the business in terms of what it's going to do for us. We're looking at growth rates of 25%-30% and those are pretty exciting growth rates for us.
It also sounds like, relative to the [audio distortion], that we're really at an early stage. If I recall correctly, and it sounds like last year we basically ended up selling 360,000 combined policies out of 35 million that were sold. Is that-
Yes. That's correct. A team was reminding me the other day that we had well over 100,000 opportunities we weren't able to convert in the legacy Towers Watson scenario that we're looking to be able to take advantage of in the future. Revenue synergies and market share growth, we see plenty of opportunity for this marketplace to expand. The other thing I would mention is that we're buying this business from Clayton, Dubilier & Rice, two individuals from that are going to continue to work with us, over the earn-out period, and make sure we do integrate it and take advantage of all the great things that they had done to the business over that timeframe, and we're excited to work with them.
How does it fit in with the rest of the BDA units from a synergy perspective? Are there any cost, technology or sales synergies, or is it completely separate?
No. If you think about our BDA segment, as I mentioned, 10% of the business prior to TRANZACT being part of it. When we think about the individual marketplace, this is really will work together. What we see is not much cost synergies. What we really see is revenue opportunities overall. TRANZACT brings real marketing skills and conversion skills to the table. As I said, we've had 100,000 opportunities that we think we potentially can convert into the future.
We look at the systems and connections to carriers where TRANZACT has their own systems, we're going to be able to leverage this very enhanced system that we had built from the employer world, from a technology standpoint, to be able to get underwriting done quicker, and placements done faster, which we think is ultimately going to be a benefit to the consumer and a benefit ultimately for our shareholders and for the company. We see real revenue opportunities that are here. Yeah, there'll be some small cost synergies, the revenue opportunities are really the exciting proposition that we see and the enhancements overall. Now, also in BDA, we have a benefits outsourcing business that's doing very well as people have continued to outsource health and benefits and/or pension administration.
Our benefits accounts business is in there, which is really what we're doing as it relates to HSA accounts. When we look at this totality, that Medicare space, we think we're very well positioned, if not market leading in terms of where we're sitting. We don't take that for granted, but we're very excited about the opportunity here.
You've got a great tailwind there if legislation changes.
I'd like to think that, Mark.
Okay. If we talk about some of the we'll stay away from the one and talk about the four three two. It sounds like during the Analyst Day, we talked about some margin expansion opportunities. What are the two or three margin expansion opportunities within the rest of Willis Towers Watson that you really focus on?
Yeah. Thanks for asking that. As we said at the Analyst Day, we really see our CRB business as really a cost play, and we really continue to see an ability to expand margin through cost takeout in our CRB business. If you look at it, we don't see that it will happen automatically. It's not going to happen overnight. It's going to happen each quarter, and you'll continue to see that improvement. You've continued to see that improvement happen, and Todd Jones, who's leading that business, has continued to drive that, and we continue to support him in terms of thinking about that.
I think the other thing is really revenue growth, and if you think about margin expansion, that revenue growth is going to come from our health and benefits brokering business, which is resonant in that 40% HCB business that is doing very well and continue to see that happen. I would go back to BDA's revenue growth overall has been strong. You look at the end of last year, with 9% growth and 300 basis points improvement, we're looking to continue to build on that overall in terms of thinking about it.
On the CRB, is there anything structural that would stop you from achieving the same sort of margins that Aon and Marsh McLennan have in that business?
We don't see them, Mark. No, we don't. We think that that's our target. That's where we're looking to get to, there's nothing structural that we see that we can't overcome or that we need to improve upon.
Most of your business is recurring in nature. It's pretty resilient, even during downturns. You do operate in 140 different countries, and you've got lots of different things to look at. From your perspective, looking out, can you identify the areas that you would say, "Okay, these are the areas that are the most cyclically sensitive, and here's what we're seeing in those areas.
Yeah. If you look at our business and our company overall, we look at it and say 85% of the revenue we know day one, January 1st. We have 99% retention rate in our retirement business. We have 93% retention rate in our brokerage businesses. We have multi-year contracts in our investment business, and we have multi-year contracts in our BDA segment. We're really talking about 15% of the company. Now, I don't take any of that for granted. We have to service our customers and our clients and meet or exceed their expectations, or that's at risk. Nonetheless, day one, that's what we have in place. That 15% really comes from our talent rewards business. For example, that's there, or you see a bit more judgment around some of the consulting assignments that we would have in our TAS business in HCB overall.
That's kind of we see. We've already looked back and thought about if there's a downturn, what does that mean for us? Frankly, in certain cases, that creates growth. They need consulting assistance around what they're looking to do and de-risk some of their pension programs, et cetera. We're the right people to help serve that up and look in that space. We look back on the 2007 in the history of the businesses, because they were two separate businesses at that time. It weathers the storm pretty well in terms of a downturn.
Is there anything that you would have as a contingency plan that you would put in place that you think about in terms of if we go into a downturn, in terms of preserving the margins, or how do you think about that?
Yeah. We have a game plan. John always has been through many of these cycles. He's been around a while, he thinks about and challenges us along those ways so we have good, bad, and ugly scenario that are put in place that are very regimented. To the extent we saw revenue move at a certain percentage, these are the actions that we would take. They're very mechanical to be in place. Without going through all those details with you, but I would tell you there's absolute plans in place, and boom, they're ready to go and triggered. It's not just putting yourself into mode of how are we going to deal with it. I would leave you with, look, we do have a fair amount of people businesses, right?
You can deal with people in a pretty quick fashion, at least in the U.S. Gets a little more difficult outside the U.S., of course. Nonetheless, we are in the people business.
You do have roughly 47% of your business is international. U.K. is a really large component within that. What are you seeing there just in terms of just the latest discussion?
Yeah. I'd like to hear your opinion on this. Who knows with Brexit? If I could do that, I wouldn't be sitting here with you, I guess. It's.
You want to do this for fun?
I saw the protests this morning going on. We've thought about various scenarios, right? Whether it's a hard Brexit without a plan, what would happen? The bottom line is we have to be able to service our clients, and we've put in a variety of different plans to be able to service them. We feel comfortable with what that means. What we have seen, though, is definitely movements of our clients from the U.K. to France, Belgium, Germany as examples. When you look at us, and if you just looked at the U.K., that wouldn't necessarily tell you the picture. Where we've seen clients move into those other territories, that revenue has moved from the U.K. to that territory, but it's still sitting at Willis Towers Watson. It's just sitting in the international bucket overall. Look, it's a tough situation.
Nonetheless, certainty would be helpful one way or another, we plan for various alternatives and don't feel uncomfortable in terms of where we're positioned.
It doesn't sound like you're going to get derailed by it in any way, shape, or form. Unfortunately, that's all the time we have. Please join me in thanking Mike for a frank and enlightening discussion. Mike is going to be available for a breakout session in the Rockefeller room.