Good morning, everybody. Thanks for joining us here. I'm delighted to have with us Mike Burwell, CFO of Willis Towers Watson. Mike, I think you joined about just over a year ago.
Little over a year ago. Yep.
After 30 years at PricewaterhouseCoopers.
Yep.
Right. Definitely an interesting time in you're heading into year three post merger of Willis and Towers Watson. Sounds like you're in the midst of building really a global franchise here. I think it's an interesting time in, as we head into year three, to hear more about what's going on with the company. Maybe before I jump into the questions, I want to give you the opportunity to maybe start with some opening comments, and then we'll go into Q&A.
Yeah, I appreciate that. Well, it's a very exciting time. We're excited about the business in terms of what's going on. I guess I'd refer you to our investor website, which includes our management presentation and our Reg FD information overall. We are coming to the end of the third year of the creation of Willis Towers Watson. Willis and Towers Watson both coming together in the first part of 2016 and creating really a global player to the marketplace and a franchise that what we're seeing today of a lot of people knocking on our door wanting to join our organization. Which wasn't the case in year one. We had people exiting and going in different directions. Today, we've got people that are really lining up.
Uniquely, I would say that on the acquisition front, we're seeing people saying, "Hey, we'd like to be part of your organization, and we recognize where market multiples are, and we're willing to forego that to be part of an organization that makes sense for us, and culturally to be part of our organization." What John Haley, our CEO, and myself, as well as the entire management team, are very excited to say we're Willis Towers Watson today, not Willis, not Towers Watson, Willis Towers Watson.
Thank you. Why don't we start off with talking a little bit about organic growth into 2019, maybe even beyond that. This year, 2018, you had some macro headwinds, tailwinds, sorry. You had economic growth. You had the P&C rates probably not being as much of a headwind as they had been in years past. Do you expect those macro factors to dissipate going into 2019? Beyond that, what other maybe company-specific drivers for growth are you seeing?
That's a good question. When we think about overall macro trends, we think about exposure growth. Exposure growth is continuing to pace for us. When we see that in one instance where people are looking for a third option, Willis Towers Watson has been absolutely a third option that people have been looking for, we've seen frankly almost a 20% growth in new clients. Not that we're taking over total relationships, but that we are taking very rifle shotted positions overall. The world is a risky place, and as a risky place, what that means is that there's a greater need for thinking about insurance. In particular, we're seeing that in cyber, we're seeing that in catastrophic insurance. With our technologies around data analytics, risk management, we're able to give greater insight to our clients to help them think about it.
From a macro trend standpoint, you think about healthcare. We're well-positioned in our ACV business to help with helping manage lower costs and greater healthcare and healthcare providers. We have various solutions there. If you look in our BDA segment, we're seeing how do you deal with an aging population? From a macro trend standpoint, we're well-positioned in terms of where the business is. You think about workforce of the future, that we have individuals that are consulting in Gen X, Gen Y, Gen Z today in terms of thinking about it. We think about those as all organic growth opportunities for the company.
Okay. Along that line, I think for a long time we heard many of your peers, Willis Towers Watson as well, talk about 3%-5% organic growth. This year seems like one of your competitors has kind of upped that and started talking about mid-single digit organic growth or greater over the long term. Is that a reasonable number to think about when it comes to Willis Towers Watson as well in the long term? If so, what would be the drivers to get that acceleration?
Yeah, look, we'll disclose what we think is going to happen in 2019 in the first part of February when we do our earnings call. At this point, I'm not prepared to really talk about 2019. What we have said is that we will be at or above where our competitors' growth rates are. We had forecasted 3%-4% for the current year. Through the third quarter, we're at 4% organic growth rate. We feel pretty good about where the company's positioned and what those growth rates are.
Okay. Beyond 2019, if you did think longer term, do you think there are drivers that would result in accelerating organic growth?
Well, you look at it, what we see is 3%-4% organic growth rate is kind of really where the trend is. We see the 2%-3% inorganic growth rate, what we see is roughly 3% productivity. Really driving a double-digit bottom line is really what we're targeting. Some years we may be higher than that, some years we may be lower than that, but that's what we're really trying to drive, then converting that to cash flow. When we look at the company today, we're at 40%-50% free cash flow conversion. As we look to the future, we're looking to continue to improve that, as I say, be equal to or above our competitors.
Maybe specifically talking about the Corporate Risk and Broking segment, do you feel like there are future opportunities to enhance the segment's operating performance?
I do. I think across all four of our segments, we see opportunities for improvement. It's always the case. I call it the yes, but. Yes, we did well, but we can always do better. In CRB's case, Todd Jones took over running that business in December 2016. When Todd came into place, it took him six months to really think about actions that he was going to take. He changed out half of our North American leaders in the markets. He really focused on making them Willis Towers Watson clients, so to the extent a broker left that the business didn't necessarily leave us. He focused on taking out a layer of middle management to make sure that people were close to clients and in an even greater fashion than we have seen today. He's still focused. That's phase one.
The next focus is continuing to think about how it is that we can deliver the services in a more efficient and effective manner. We have a multiplicity of broking systems in certain parts of the world that we think we can rationalize. We continue to see opportunities. I don't see it's big jumps, but I definitely see improvement across all our businesses, but CRB definitely has an opportunity in front of it.
Would that be more of a short-term opportunity or really your earlier point, not necessarily big jumps, but a gradual improvement?
I think you'll see continued incremental improvement in CRB.
Okay.
Yeah.
Maybe moving a little bit away from organic growth, talk a little bit about the M&A front. I think you're back in the market, you alluded to that in your opening comments as well. One of the questions that always comes up would be use of capital, prioritization of capital, buying third-party businesses as opposed to investing in the company or buying its own shares. Maybe you can talk about that a little bit.
Yeah, it's a great question. Look, we're looking to deploy capital where we think we can get the greatest returns. As I say, we're going to be thoughtful about how we look at M&A and to make sure it's accretive within a fairly short period of time. Long term, we got to look at revenue growth and profitability of thinking about those acquisitions to be in place. We're not going to overpay. Having said that, to the extent we don't see those opportunities in place, we're obviously returning capital to shareholders. In fact, we've returned $1.4 billion to shareholders of shares that we've repurchased since the merger date. Any acquisition that we look at, we're comparing it against share buybacks is the lens that we're looking against. With where our stock's trading today, I still believe it's undervalued versus our competitors and versus the market.
That's the lens that we're looking at.
Okay. Is there white space that you're looking to fill for the acquisition?
Yeah. What we're looking at is really adjacencies. We feel pretty good about the footprint that we have in the company. We're not missing something in some particular country, or we really don't have particular service offering that we don't see that today. What we do see is there's parts of the world that we'd like to be a little bigger. For example, in South America, we'd like to be a little bit bigger than where we sit today. That helps and bolsters us. It's not like we're devoid of that. What we're really focused on is innovative opportunities that we think could be there for us. In fact, we have a relationship with Plug and Play that we use to think about innovative opportunities that we can bring to the table.
That's what we continue to think about overall or adjacencies to our current businesses.
It sounds like you're looking at tuck-ins, adjacencies, financial opportunities, not necessarily a large strategic deal that would require a debt offering, equity offering, or any transformational deal.
Yeah, never say never. John has had a track record of growing the business, but right now, I think that's a fair statement.
Okay.
Yeah.
If we move more to the margin side, you have a target of 25% EBITDA this year under old accounting standards. You have a bit of a catch-up from old to new accounting standards into 2019. I think you've also highlighted about 50 basis points improvement coming through restructuring. As I take all that together, is 25.5% the floor for 2019?
Yes, that's a very good summary. As we look at it, we've had the accounting between ASC 605, the old accounting, ASC 606, the new accounting, as of the first quarter of 2019. That will be behind us. We look at that we had targeted for the year, and we had said this on our third quarter earnings call that we would still be at 25% for the entire year on adjusted EBITDA basis. As we look to 2019, we said, based on the incremental restructuring actions that we had taken in the fourth quarter, that it was appropriate for that at a minimum or a floor to be at 25.5% for 2019. We will, in our February earnings call, give any additional guidance beyond that.
Right now, that's what we've said in our third quarter earnings call, and as you rightly summarized, that's where we are.
Okay. Without getting into 2019 numbers specifically, can you help us think about drivers that would help maybe expand EBITDA beyond 25.5%?
Well, look, we always want to continue to think about the business and what we can do. We're going in the midst of the planning process. We've been in it for the last several months. Each of our businesses are challenged with doing more with less. I think technology. In each of our service offerings, technology has become more and more a critical component of everything that we do. We continue to hire people, we continue to grow people, but we don't need as many as we have had in the past. I think you got to look at many of the technology investments that we're making are going to continue to drive productivity in our organization, whether they make our employees more productive in terms of our colleagues more productive in terms of how they're operating, et cetera.
Again, in our fourth quarter earnings call, we'll be prepared to give any further guidance on that.
If we talk about technology, we hear a lot about Insurtech these days, and it sounds like most of it is aimed at the distribution side. Do you see that as an opportunity, as a disruptive area in this space? Maybe you can also talk about where you are investing in Insurtech or in technology in general. I don't know if you'd be willing to talk about how much you spend in technology.
Yeah, I'm not sure I want to give away how much we spend, but let's just say it's significant.
Is it increasing?
It is increasing. Yeah. Just as all our companies, as you think about technology and what that means. Insurtech, when I think about Insurtech, I think about our ICT business, which resides within our IRR business segment. It really looks at the entire value chain, whether we can create additional value or reduce it, particularly as it relates to insurance. We've been working with insurance companies for many years, in the legacy Towers Watson days, and as Willis Towers Watson today, and helping them think about how they enhance that value chain or how they disrupt that value chain. I think we've got some tremendously talented individuals that reside in that particular business.
As I mentioned earlier, we equally have a relationship with Plug and Play, where it gives us insight to think about innovation that we're able to bring to the table to help solve our clients' and/or colleague issues that we have internally. L astly, I think about what we do internally. We have what we call a Horizons program that really is run ultimately by John Haley, our CEO, that we all support as a leadership team, where we think about innovative ideas that we bring to the table. What we basically do is bring a theme out there, for example, exchanges, and we'd had some history with exchanges because our BDA segment is an exchange, and said, "What ideas might you think about with an exchange idea?" We had over 100 submissions to it.
We narrowed it down to two or three, and that's how AMX came about. We then funded that opportunity, and today we've therefore commercialized it, brought it to life, and today it has $7 billion of assets under management under that platform. We have a very strong, innovative culture within Willis Towers Watson, and we only look to continue to drive that. When I think about Insurtech, I think about those broad spectrums. How is it that we look at that entire value chain that we can create additional value or disrupt it? We've got great talent in our ICT segment. Equally, what are we doing to ourselves in terms of what's happening? Yeah.
If we take a broader view of this, is it just a measure to just add value to client and make yourself relevant or more relevant over time? Is it a way to improve your own internal efficiencies? I guess it's probably both.
It's probably both, yeah.
Okay.
Yeah.
Going back a second to margins and maybe the relationship between organic growth and margins, is there a number that, in terms of organic growth, that you need in order to show margin improvement?
Yeah. Look, we've said that right now, what we did in our Investor Day back in March is 3%-4%, I'd say really that's kind of really what we've targeted that way. Yeah.
Anything above 3%, 4% could also lead to accretive.
Y es. We do have people, a big piece of our business is not just brokerage business, is people in our HCB consulting business. When you think about, again, when I think about our company, I think about four-three-two-one to make it simple. 40% of our business is HCB, 30% of our business is CRB, 20% is IRR, and 10% is BDA. When you think about HCB being the 40% of the business, there's a lot of people elements to it, although, as I mentioned, we're investing in technology, and therefore we're needing less of those resources, but we're still growing and still adding people back to it. You don't just get it one for one because we are adding people still as part of the business model.
Okay. As you look at M&A opportunities and assuming they will flow in, do those create a margin headwind? If so, is it quickly abated?
Yes. Well, if we're going to take it lower than our targeted margin rates, we got to believe that it's going to be accretive within a very short period of time. I say that within a two to three-year kind of timeframe to it. Generally, I'm more focused on two. It's in that kind of range in terms of accretiveness. Otherwise, it's got to have some strong components that we're going to see a value creation for the company. Otherwise, we can, again, got to continue to look back at share buybacks, as I mentioned earlier. That's a pretty high bar for us in terms of what that means for our shareholders.
Okay. Maybe final question on margins. With the merger behind us now, I'd say integration costs are done. Restructuring costs are nearing an end as well.
Done.
Done.
December 31st, done.
All right. Right. December 31st. In terms of what happens in 2019 and beyond, should one expect additional restructurings or is that eaten up or taken as part of the normal, quote-unquote, operating profit?
No, that's a good question. I think the recurring non-recurring charge is not what we're looking for going forward. It's never say never. Something changes, but right now that is not anticipation that the integration plan will be completed at December 31st, 2018, and we don't see further restructuring charges. Any actions that were to be taken would be run through our business segments.
Okay. I thought maybe we'd shift gears a little bit just free cash flows.
Okay.
One area I know that you've focused on, and I think you also have a strong background in, is managing of the DSOs. You've set a target of improving DSOs by, what, five days, I think, this year and more beyond that. Can you maybe help us understand, beyond just the phrase improving DSOs, how that's actually achieved, o r what are you looking to do, and how long it takes to do that?
Well, it's a good question. When we look at DSO, days sales outstanding, ultimately, it's about improving cash flow. When we look at our free cash flow today, our conversion rate's roughly in the 40%-50% range, where we look at our competitors are higher ends of that range or higher amounts. We see no reason fundamentally why we shouldn't be at a similar spot to our competitors. Y ou get behind that, and first is creating awareness. We've created awareness of what that means in terms of education inside the company. As we look through the third quarter on a 606 basis, we're sitting there at roughly three days improvement. The fourth quarter isn't done yet, but we had targeted five days for the year.
We continue to think about how it is that the terms that we have with our clients, we think about that, and some people would say, "Well, it may reduce your revenue." Obviously, we're smart about that in terms of negotiations, so we have changed some of our terms, and we have gotten very little pushback, so it hasn't really impacted revenue in terms of thinking about it. We've driven in terms of cash collections and the prioritization that's happened within the organization. We moved up our billing timing up about 10 days. That's given people additional follow-up time within our organization to make calls and make sure we're collecting that cash. I think this is the beginning of step one in terms of our being able to improve working capital and free cash flow.
There's no one inside Willis Towers Watson that's not familiar with the term DSO. I can assure you of that. It's also included in their measurements, starting from the senior leadership on down. I think we started a down payment. We started a process. I think it will be a multi-year journey. I don't see any reason why we can't be similar to our peers in really driving cash flow for the company.
Okay. If I take a broader view of free cash flow, I think your target's 75%-80% of adjusted EBITDA, right?
Long term. Yep.
Long term.
It's a very difficult target, just to be clear.
That's kind of my question. How do you bridge the gap from where you are today to 75%-80%? I think it's more than just the DSO component.
It is. If you look at our CapEx spending over the last two years, which a lot of it's been merger related, has been higher than our competitors. We look to realign what that spend level is, which to be at a more consistent to our competitors. Equally, the $180 million integration cost that we're going to spend in the current year goes away. That's a big benefit going into 2019 in terms of amounts. As we just touched on in your earlier question and comment around cash flow or DSO improvement or working capital improvement overall, I guess I would put it in that category, is an area that we think we can continue to drive that.
Clearly, margin improvement, we touched on one of the businesses in CRB, but we think that across all our businesses, we'd like to continue to drive continuous improvement, and we'll look to set what those targets are, as I say, in our fourth quarter earnings call.
Okay.
I think all of those things will be contributors.
Okay. I noticed one thing that you didn't mention was taxes. Is that a component that could also be improved, o r even if I think of, let's say, the BEAT tax going into 2019, I would think that may not necessarily be your friend in terms of improving free cash flow.
Yeah. It's been very interesting. We had a holiday present in December last year with the change in the tax code, so it kept us very busy in terms of going through that analysis. We had forecast at the beginning of the year a 23%-24% overall effective rate. As Treasury continued to issue rules in the U.S., because a lot of our income had shifted more to the U.S. at the U.S. tax rates, we then benefited from that. Equally, we're evaluating each of the rules as Treasury continued to issue those interpretations throughout the year. In fact, last week, we just got 780 additional pages of interpretation, and we expect that we'll get another holiday gift coming up here in the next few weeks. I think we have to continue to evaluate it.
Right now, we've taken it down based on our best view, which is 20%-21% of our tax rate for the current year. We see no reason right now to be anything different than that. We will update in our February earnings call in terms of where we sit. I have nothing today that I can tell you that changes that. Again, until the team advises me, we go through it in detail and kind of where we sit. We have thought about various scenarios. We have thought about various planning options. We obviously want to be compliant with the law, it's a very dynamic situation right now in terms of what's happening there.
Right. Not really in your control either.
No.
Another item that's not in your control is currency, right? I think 1Q 2018 was a very significant tailwind from a currency perspective. I think if we have locked rates today, it would not necessarily be a tailwind into 1Q 2019. Can you talk about how currency plays out at Willis Towers Watson, one, and two, what mitigating actions can you take maybe to offset currency as a volatility element?
One of the things we did at the end of last year, we did re-look at our entire hedging philosophy, view, et cetera, and we've seen positive results in that in this current fiscal year, in fiscal year 2018. We really, again, spent quite a bit of time re-looking at our entire policies, thought processes, et cetera. Second is that when you look at the business overall, we have sterling denominated. We have a large operation in the U.K. In the U.K., when we look at it, we have higher costs in pounds than we do revenues. It serves to mute a bit of what impacts that we see in terms of the FX movements, given that's really between our revenue and cost base that's happening. I think, really those two things.
One, I think we've re-looked at the whole hedging program, equally, I think with that natural, where our denominated revenue sits versus where our expenses sit. We're not as much of a headwind as it may be originally thought of going into 2019.
Okay. No, that's helpful. Maybe we can touch on the U.K. a little bit. Brexit.
You got a view as to what's going to happen?
That's the thing.
I'll tell you what we're going to do.
Yeah. I read it, and I don't understand it, and clearly, I don't have to take action based on something I don't understand. You may actually have to take some actions here and position yourself. How are you preparing for it, given where we are today?
Yeah. Well, thank you. We started about, I would say, two years ago, in terms of really planning for Brexit. We've thought about from hard Brexit to the various scenarios. We've engaged with various regulatory bodies as part of that. We're prepared where it's ultimately finalized in terms of the position of the company. I'm confident in our ability to be able to operate and execute. We've spent money in 2018, which is included in the numbers that we reported to date and will be reported through the rest of the year. For 2019, I think we, again, we'll budget it accordingly, and we will see some short-term incremental costs that will go away as we have duplication, in terms of operating under Brexit, but then we'll look to rationalize that within a fairly short period of time in terms of how we operate.
I think we're well prepared. We've thought about the various scenarios. It's a bit like tax. It's a bit of a Ouija board of the various scenarios, but that's what you would expect management to do, is to be in a position to operate effectively depending on where things happen.
Okay. In terms of the revenue impact, we have seen a little bit of a slowdown in the U.K. How much of that is Brexit related, or there may be other drivers that have created the temporary.
Yes. What we saw in 2017 is we had some one-time transactions that happens because when we look at Europe, we really look at it as an overall view. We have a lot of activity that happens in our international operations that gets placed or run through GB, Great Britain. We tend to sometimes, I think we talk about it a bit narrowly, but in reality, that functions as an overall marketplace. We had seen in the prior year some one-time transactions that we didn't see recur in the current year. Some people would say, "Well, that's Brexit related." I don't know. I guess what we have seen is a reduced amount of placement happening within Great Britain, and I think you could attribute it to Brexit. It's hard for me to say, just in terms of what's happening there.
Definitely, there's definitely people, there's a bit of uncertainty until that's calmed down, then it'll rightsize itself out, I think.
Okay. I want to give the audience an opportunity to ask questions as well. All right, I get to continue.
All right. There's one in the back there.
Oh, thank you.
Hi, thanks. I just had a quick question, actually to follow up on the U.K. there. Although it could apply to the U.S. as well. Can you speak a little about some of the bulk annuity deals that you've been seeing in pension risk transfer, and maybe the role that Willis Towers Watson or a brokerage has to play in helping facilitate those deals, and those transactions? I don't know how much it might play into pre-Brexit or pre expectation of a downturn in the U.S. or whatever it is that sponsors want to get this off their books and engage in more risk management opportunities around that. Thanks.
Sure. Thanks for the question. What people are looking, obviously, we've, in many cases, because the long tenure of many of these programs from a Willis Towers Watson standpoint, we're very integrated in terms of being advisors, either directly because we recommend risk mitigation strategies, or the company engages us to think about those risk mitigation strategies. We're helping them think through whether that makes sense for them, whether it's in the U.S. or U.K., and what does that mean to their ultimate bottom line? What's it mean from a cash standpoint, what's it mean from an earnings standpoint, et cetera, and that various modeling. We've been doing it for a long time, as you see conditions change, through those change create opportunities and risks. We're either advising them on the opportunity and/or the risk to be in place.
In certain cases, we're coming to them proactively and helping them think through it. We obviously see some of that actually happening in our own plans, in terms of actions that are transpiring. We're helping them think through both of those. We've seen a little bit more of it happening, obviously, as you referenced, the U.K., a bit more. Candidly, it's been going on in the U.S. in bulk lump sum distributions that have been happening and advising that's been going on. I think it's both a risk or opportunity depending on where it is. Any follow-up question? Yeah, it's hard to say. It just depends on the client, the client situation. We have many long-term relationships and master services agreements, or is it a one-off situation? It's difficult to say exactly where that is from a pricing standpoint.
Okay. Maybe we can talk about pricing more broadly or P&C pricing.
Sure.
What are your thoughts going into 2019 given the year that was?
Yeah. It depends on whether you're a client that's had losses. If you've had a lot of losses, then you're probably looking at a little bit of a pricing increase. If you haven't had many losses, I think you're looking 0%-1%.
That's both property and casualty?
Property and casualty. I think the other side of it is you don't know exactly where we're going to be from a reinsurance standpoint, given the wildfires that have happened here on the West Coast. I'm literally meeting with our team next week to understand that in a bit more detail. We're in the midst of renewals right now in terms of what that means. I've heard from opportunities to risks. I don't know where we are, quite candidly. We're in the middle of the planning process right now, I think it's something to be thoughtful of in terms of what's it mean to the reinsurance market.
Okay. Any other audience questions? All right.
Sort of building off the last point about sort of climate risks and materiality of climate risk to your insurance business. More curious about with your CRB business, how has the sort of increasing materiality of risk related to climate change impacted how you think about your CRB business?
Yeah. We see it as an opportunity, candidly. Climate change is very important to us as a company. We think it's very important overall, and we see it, frankly, as an opportunity. John Haley, our CEO, is very engaged in terms of thinking about that. I would say more to come in communications from Willis Towers Watson on that front. It's something we are very passionate about and very focused on.
Well, Mike, I want to thank you for your time.
Yeah, thank you.
I think our time's nearly up.
Okay.
Thank you.
Thank you. Appreciate it.