The exchange business continued to grow, although the Cadillac tax that was proposed in ACA kind of paused people in terms of that being repealed, that they weren't going to move forward with it. We have continued to see very strong activity in the exchange business. Although we had targeted $100 million-$250 million, we'll be a little below that, but that's because we cut this off over a three-year timeframe-
as opposed to a longer period of time. One of the things in the health brokerage side of the business, we've been doing a lot of health and benefits work, and Willis had had the licenses to be able to execute and deliver that service offering through that network. Before, it wasn't that efficient, and as Towers Watson wasn't able to do that, we had targeted $75 million, and we're very comfortable we're going to exceed that number. The last one we saw has been a real convergence between our ICT business, which is, for us, is a business that I would equate to be similar to our Insurtech kind of a business that coupled with the reinsurance and our data analytics capabilities, that we're continuing to see revenue synergies there that we originally didn't anticipate. The same thing on the cost side.
We continue to drive the cost synergies between the two businesses overall, we had targeted originally, $125 million. We're more like $175 million in terms of cost synergies that we're forecasting for the year. All in all, a very good story, and we said our EBITDA margins would be 25%, and we're up 210 basis points through the first half of the year. Feeling pretty good about being able to deliver against those objectives that we put in place. The last thing I would share with you is culture. In year one, we had some people leave us, as any company does, I guess, these days. What we've seen is more and more resumes coming to us. People feel comfortable and confident about what's happening specifically at Willis Towers Watson from a cultural perspective, particularly in the actuarial business, where we think that skill set's very important.
We see that we can use that in multiple pieces of our business. If I were to just measure the amount of talent resumes that we're getting, and the other piece that we're seeing is people wanting to sell their businesses to us. Although we really kind of had the M&A sign not out-
for obvious reasons. We've had people come to us, say, "Sole source, I'd like my business to be with you." We really believe that's because of the culture that we've created called Willis Towers Watson.
Based on what you're saying and based on comments, I guess, that John made to the Financial Times, it sounds like that the M&A business is now open and good to go. Am I characterizing that correctly?
Yeah, I think John was really setting it up to say, in the future. What we've said is a target operating model for the company of 3%-4% organic growth, and we see that in good times and bad times.
What we do see is inorganic growth in 2% or 3%. I really see that starting over the second half of 2019.
Okay.
If you looked at dollar size, our revenue's $8.5 billion, 2% to 3% is roughly $200 million to $250 million, just round numbers. Second half, we'd say $100 million to $125 million starting in 2019. When you look at transformational deals, I don't see them on the table, but generally, it's not like you plan them per se. They tend to happen a bit more episodic.
Sure
overall. As I say, we've had many people approach us here in the last 12 months that we've just said, "Look, we want to make sure we got our back office in order." Ultimately, we're looking at is saying to drive that 3% to 4% organic growth, 2% to 3% inorganic growth, at 3% productivity, is that we'll build, and we've been working on building the back office and platform that we're able to bring those businesses onto our overall infrastructure. One plus one will have to equal one as we look to the future in terms of profitability of that business, that our income and our revenue stream that we bring on board.
Right. Are there margin implications of call it 2% to 3% inorganic growth?
Yes, there is. We said 3% productivity, if you said 3% to 4% plus 2% to 3% plus 3% productivity really gets you back to double digit or a 10% return. Some years we may be 8%, some years we may be 12%, but that's what we're really targeting is 8%. Then 75% to 80% of adjusted EBITDA is in terms of a cash flow number.
Right
is where we ought to be getting to. We think that's probably four or five years out in terms of ultimately getting to that. That's really the target of the model as we think about it overall.
Okay. I infer, and correct me again if I'm wrong, that there's activity going on now, if we're talking about something that's less than 12 months in the future.
Yes
Okay. That's good to hear.
Yep.
I won't ask for names.
Yep. I wouldn't give them to you, but that's fine.
Well. Okay, on the second quarter call, John had talked about, again, large market space being an opportunity. I'm trying to think of the best way of introducing this question. If you go back a decade and a half, the largest broker in the world at the time was dominant in large corporate space. A couple people in the organization had done some pretty bad things, and they lost very little business. What drives the ability to further penetrate the large account space now?
Yeah, I think first it starts with when you look at our direct competitors at the higher end of the marketplace, they're well-run companies with good management teams. One's $15 billion and the other one's, subsequent to the divestiture, more in the $9 billion range, but they're well-run businesses. I think the market was looking for a third option. Willis previously at $4 billion and an erratic earnings history just wasn't able to play in that game that had started principally in Europe.
Really moved to a middle market acquisition that had happened in the United States. They wanted an opportunity, they've given us an opportunity. In that opportunity, what they've seen is we've brought real data analytics to the table. Our ICT segment, which was historically a Towers Watson business, combined with what we've been doing in the overall CRB business, has given us that opportunity. In fact, in the first quarter of this year, we had 20% new business. Now, we're not taking the entire relationships, to be fair. We're getting a piece of business here, a piece of business there, that's how relationships start. Not only are we seeing those opportunities continue to come our way, it's really moving us more in that space, really kind of leveraging the history of ICT and its capabilities.
Equally, we're very strong in the top end of the market in Europe and really starting to leverage that more in the U.S. market.
Okay, thanks. Fantastic. Again, if there are questions here, don't hesitate to let me know. I want to talk about another side of it, sort of the opportunity for growth on the smaller side of the market. I was hoping you could describe the strategies for increasing penetration there, utilization of data analytics, how you solicit, et cetera.
Yeah. We see, again, that space has been relationship based historically. It has continued to evolve from a pure relationship base to more technology and understanding the risk profiles. What we have been doing is investing in a business that we have internally been developing called Innovis. We announced it a few months ago.
It's an MGA, and it's really going direct from the client to the carriers. It started out small today in terms of what we've positioned it with, but we believe that that will continue to grow and continue to be an opportunity for us.
Can we call that an exchange?
You could call it an exchange.
Okay.
Yeah.
I hate asking yes or no questions. Is there more bang for the buck in buying smaller brokers? Sorry, in servicing smaller clients?
Honestly, we segregated and looked at the margins. Both are very profitable for us. We see them as both different segmentations and different sizes of the market. Your hope is ultimately some of those smaller companies become bigger companies over time.
Right.
If you look to the Fortune 1000, how many have changed over a period of time, or Fortune 500, you're really kind of investing in that, but both are profitable segments for us. It's clear, you see the private equity firms have been rolling up brokerage businesses. One of our major competitors has been rolling up businesses, and why? Right now, the multiples we think are pretty high, we've sold off 10 businesses, which we think were not the right strategic fit for us in terms of investment and what we needed to do. We want to be thoughtful and not overpay as it relates to those businesses. With interest rates low, you can borrow them, you generate a lot of free cash flow, and you pay down the debt. You got to operate it at the end of the day.
Right.
We're operators, so it's not just about buying them, it's about buying them, executing them, running them, and ultimately creating value for shareholders.
No, that makes sense. One of the theoretical arguments, I guess, for focusing on smaller accounts is that you're competing against smaller brokers that don't have anywhere near the same level of resources and capabilities. Even if they're not looking for the most sophisticated whiz-bang technology, there are things you can answer questions they may not even know they have as a competitive force. I was hoping you could talk about your strategy. This is more of an organic growth strategy than anything else in the small space.
Yeah. One of the things that we have is scale. Based on that scale, we're able to invest in technology, right. We're able to bring that technology to bear to the marketplace, to both larger clients and smaller clients. We're able to do that across the board with the scale of our overall business. Almost there's not something that doesn't happen in the company today that doesn't have some component of technology associated with it. We continue to think about what that's going to mean for those small clients and larger clients, and thinking about that segmentation.
Okay.
I know you'd like a little bit more, but I'm not going into all our detailed strategies there.
No, that's fine. Just knowing that you have one will allow us to anticipate more success there. Another option available to you because of the spectrum of businesses you have is the cooperation between reinsurance brokerage, primary insurance brokerage, and consulting, where sometimes the lines can be, and should be, blurred. Again, I don't know how specific you want to get-
Yeah
If you could talk about that as a conceptual strategy.
I think it's true. When you think about, as I say, if you look at our ICT business segment, I would characterize it really as data analytics and really bringing to life insurer-type ideas through that particular channel. One of the examples that's out there has been in the marine business for us. We have sensors that are on containers, and we've been working on this with a particular client, where before we would make guesstimates as to where those containers are. Today, we can look at those sensors, understanding from a satellite, and we know they're on a boat, they're on a ship, they're on a dock.
Based on that, we can look at that risk profile associated with that, help manage that risk, and go back, whether it's in an insurance marketplace that's happening, or if we're doing it for a particular carrier in the reinsurance market. We have greater insight and knowledge that we're able to bring to bear, and it's really across all those particular aspects that we're able to bring to bear. The other place I would share with you is when we think about cyber. One of the things that's been happening with us in the cyber world is that there's a deep correlation between cyber issues in a company and how many disgruntled employees you have.
Okay.
Okay.
I didn't know that.
That's an analysis that we've done at Willis Towers Watson. Based on that, we help companies assess what's their disgruntled level, if you will, and use that view, and how does that heighten your potential risks inside the organization. Then we ultimately then can help them think about how you manage those risks, and then how might you place the insurance down the line. You're seeing it from a human capital standpoint of assessing what's actually happening in the company. You're coming down the path to evaluate how do you want to deal with those risks. We can help advise you on that, and then we can help think about how you might want to insure those potential risks that exist in the organization, as obviously, as well as the behavioral changes you may want to make inside the organization.
We can consult with you and help you improve those.
Am I right in thinking that that particular cyber risk is because the employees are unhappy?
Yes.
That's the threat?
Yes.
Okay. This is a pedestrian question, but how does Willis Towers Watson get compensated? Who's in charge of making sure that you get paid for that cross-unit insight?
Yeah. We have plans to make sure people are compensated for bringing value across that value chain inside the organization. As I mentioned, year one, that wasn't in place. Year two, we really put those in place, and now we're seeing that starting to pay fruit here, starting in this current year.
Okay. Yeah. We're a little bit beyond, I guess it's been a month or so since the second quarter earnings call.
Yep.
One of the issues people focused on, we always focus on the bad things, not the good things.
Yeah.
We see too much of that, Talent & Rewards. Now that you have another month to look back, is there more color you can provide in terms of what the issue was in the second quarter, what that means going forward?
Sure. I would just take you back. If I looked at the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, all were at or higher than our competitors as it relates to organic revenue growth. Our second quarter was below, but if we looked at the first half of the year, we were pretty much in line at a 4% aggregate revenue growth rate. We could have done a better job of communicating some of the timing issues in that particular quarter. One of the things that we saw was in Talent & Rewards. The market for HR consulting is very strong today. When you think about Gen X, Gen Y, and the ability to be able to do that, we got ahead of ourselves in terms of hiring resources versus where the work is. The market's still very strong.
We've made those changes appropriately so to get those expenses lined up better and feel pretty good about it. Again, still a margin of 210 basis points. Improvement over the first half was up 130 basis points on an adjusted EBITDA margin in the second quarter. Again, against our goal of two overall points, moving from 23%-25% on an adjusted EBITDA basis for the year, we still feel comfortable that that's where we'll end up overall. Yes, second quarter was not one of my favorite quarters.
Right. If I understand you correctly, it's much more of an expense issue as opposed to a revenue generation capability issue?
Yeah. The only thing I would say on the revenue generation issue, we did mention this on our second quarter call, was contingent revenue. Some people would call it market-derived income, which isn't just necessarily coming from commissions. There had been an overview of the FCA of looking at the aviation business that had, I'll use the word maybe scared or made people nervous. We didn't have as much of that in the second quarter. There was nothing inappropriate, nonetheless, that's what was happening, and we've re-engaged in that, where I'm optimistic that we'll be able to see that recover going forward.
Right. Yeah. Having lived through the 2004, 2005 era, there was a lot of fear back then, the conservatism or the caution doesn't really shock me. Again, if there are people in the room that have questions, by all means, please let me know because I don't want to block any of that. How should we think about margin expansion beyond 2018? I don't expect a precise number, although we'll be happy to take one.
Yeah, sure.
Conceptually, what are the prospects?
Obviously, we are not giving any guidance as it relates to 2019. We obviously believe that we can continue to drive margin improvement. That's the opportunity in front of us and believe that to be the case. In particular, our CRB business we believe has margin expansion, and that we've got more work to do there. We did change a finance person there. The person who had been there a long time has retired. Aida Soukas, who was our investor relations person, had spent a lot of time in operations before she came into the IR role. Now today she is the finance leader in the CRB business. After spending the last six years listening to folks like yourselves, she's pretty focused on what we need to do to that business. I would tell you there's a cost opportunity that we believe exists there.
Yeah. I also say there's headwinds. Look, as we continue to be successful, our people continue to be attractive targets. Anybody can pay at any one time a lot to get somebody maybe to dislodge from us. Ultimately, they got to get a return. Those are short-term strategies in my mind.
Right.
Yeah.
Okay. I have a question on industry trends, specifically whether it's insurance or reinsurance. We're seeing a lot of consolidation. The two potential areas of impact, and I'm sure I'm overlooking something, one, fewer potential clients. Although you should have some integration-related demands for, like this year, you had a lot of increased reinsurance demand for companies that were being acquired that wanted to make sure the deal went through. On the other hand, it should make more talent available in terms of people with some familiarity with the insurance enterprise being made available. I was hoping you could talk us through both of those and anything else that I'm not thinking of as ramifications of industry-wide consolidation, because based on yesterday's news, I don't think we're done.
Yeah, I don't think we're done either. Any of those types of changes that happen create risks and opportunities. Obviously the risks you talked about in terms of further consolidation of where you're going to place business, therefore, what does that ultimately do to pricing in the marketplace? What's the right answer for our clients? The flip side in putting great talent out there is something that makes sense for us as we look at these MGAs and questioning how do we really service that direct as opposed to needing a lot of talent, the same level of talent that we've had to be in place. Again, we're not going to go people to zero.
As we continue to invest in technology, we won't need as many, but we're going to need different skills and different insight that we're bringing to the table. Any of those changes, we really evaluate and say, "What are the risks and opportunities to them, and how is it that we can take advantage of minimizing the risks and looking at the opportunities?
Yeah. It seems like you at least share the expectation that there will be more industry consolidation.
We think there will be, yes.
Okay. I would agree that there has to be. We always put it in the framework of the ratio of underwriting talent to underwriters. It's still too low.
Yeah.
That's sort of encouraging. I'm trying to think of the right way to frame this. Can you give us any guidance for free cash flow growth as we go into 2019? I would assume that some of the one-time expenses are falling off.
Yeah. Obviously we want to make the free cash flow number in 2018 first.
Fair enough
That's pretty much the focus, I got to be candid with you. The history predates me, but the company has been, like, we see the earnings, but show me the cash.
Right.
We want to start really with 2018, and we haven't given any further guidance other than, as I say, we think out over the next four or five years, we should be 75%-80% as a percentage of adjusted EBITDA into the future. Clearly, we see opportunities in working capital. We think about taxes can go positive or negative depending on where GILTI BEAT and capitalized costs and ultimately treasury issuing regs that we can interpret, and they can go back potentially 18 months. As that starts to settle down, I can give you some sense of what component of taxes really fit into that bucket as it relates to cash flow.
Those are some of the principal drivers and the last one being that will stop this integration or recurring, non-recurring charges that have been part of the company going forward that will be the first one that kind of falls off as you think about 2019.
Right. Did that fall off day one in 2019?
Yeah, pretty much.
Okay. If there are questions in the room again, I want to make sure that I'm not heading them off. I'm happy to charge ahead if there aren't. John's on for another two years.
Yep.
Can you give us any insight into CEO succession beyond that? I assume that we'll take that as two-year transition period. Maybe that's the wrong way of characterizing it.
Yeah, I think it'll be a shorter timeframe than that. John's been clear that he plans to retire in two years.
I'm glad he's staying on another couple of years. I enjoy working with him. As Willis Towers Watson, as you might imagine, we're not one of the largest human capital consulting firms or companies in the world without having good succession planning. That's been in place whether John retired now or continued to work, that's been a normal process to be in place. There's individuals that are in that process that have been evaluated, that are continuing to be evaluated. From the board's perspective, they're looking to make sure there's multiple candidates that are well-positioned to be able to succeed John. I feel very good about the process that the company has, and there's multiple individuals who I think could succeed John in that role.
Okay. Fantastic. Capital deployment, or one of the things that we always liked about both the insurance brokerage and the consulting businesses, they generate a lot of capital, don't require a lot of capital. Can you talk about the decision-making process for this year's capital deployment and maybe what insight that provides us looking forward?
Yeah. First is we've been looking to manage the balance sheet right. That's our first thought process. That's number one. Two has been looking at how it is that we think about OpEx and CapEx. Right now we're spending about $500 million in aggregate between the two.
We think over time you will continue to see more investment in technology. That investment in technology will have more cloud-based attachments to it, and under the accounting rules, much of that is not capitalizable. You'll see it more OpEx than CapEx going forward, and we think that we may have been a little high right now still on the CapEx side, but that will start to come down as we continue to build out the office spaces that we've had in particular. Three, we've looked to pay dividends back at the 20%-25% of market value of the company, or market value of the stock overall. We said share buybacks would be in the $600 million-$800 million range. I think we'll be close to six, then we will be to eight-
for the year. M&A, really the M&A that we've been doing has really been divestitures. We've seen the multiples that have been paid. We thought it was the right time to then be a seller. We've trimmed the portfolio that either strategically didn't make sense or wasn't generating those specific returns overall. We're constantly thinking about it in that context. I would tell you that we have about 1 million shares per year based on our estimates for employee benefit plans to make sure we're not dilutive at all. We'll always have some level of share buyback. That's how we'll be thinking about both from a priority standpoint and as we start to bring M&A back into it.
We will always evaluate M&A in terms of return versus share buyback, particularly as our multiple continues to still be below a couple of our competitors. That's got to be a decision criteria for us in terms of evaluating it.
Okay. I don't know if there are any questions in the room. Yeah. Brian?
I'll just take one because I only have one. I understand-
Brian, we're just going to bring you a microphone to make sure we can hear.
Oh, sorry.
No, that's okay.
I understand the deep correlation between disgruntled employees and the risk of cyber risk.
Yep.
I guess, how do you obtain that high degree of confidence in the number of disgruntled employees? I had a follow-up.
Look, we have proprietary activities and process that we have developed over a period of time to see that correlation rate. It's a study that we had done. We see that high correlation rate between those as the single highest correlation. That's our study that we had done, and that's our hypothesis. That's what we're communicating back to the marketplace and our evaluation.
Okay. I'd just like to ask along the lines of cybersecurity. I read a lot about the potential there growing substantially in the next few years.
Yep.
Could you touch on the opportunities there?
Yeah. We've continued to see it grow pretty significantly within the company, and we'll see it double again between 2018 and 2019. Just people are concerned about, obviously, the risk. We have teamed up with IBM, and the reason we had teamed up with IBM was for them to bring some hardware solutions at times that we think can have some assistance to us. We're very comfortable with looking at the HC side. We believe that we can help with that consulting. If there's remediation that's needed there, we can see the correlation in terms of what we can do overall in assessing the situation and the potential risks that they have.
We can help them think about insurance that they would place with that, certain of the hardware solutions that we think make sense and/or we need to really honestly even add to our base just because to get the right level of talent, we've been able to buy that or team with IBM overall.
Yeah. Yep. Okay, if there are no other questions in the room, please join me in thanking Mike and Rich for a helpful presentation.
Thank you. Appreciate it.
No, thank you very much