Good day, ladies and gentlemen, and welcome to the first quarter 2018 Willis Towers Watson earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press the star then the zero key on your touchtone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Aida Sukys, Director of Investor Relations. You may begin.
Thanks, Catherine. Good morning, everyone. Welcome to the Willis Towers Watson earnings call. On the call with me today are John Haley, Willis Towers Watson's Chief Executive Officer, and Mike Burwell, our Chief Financial Officer. Please refer to our website for the press release issued earlier today, as well as our supplemental slides. The supplemental slides provide additional information on the impact of the new accounting standard, ASC 606, on our first quarter 2018 financial statements. Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing 404-537-3406, conference ID 6847517. The replay will also be available for the next three months on our website. This call may include forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which may involve risks and uncertainties.
For a discussion of forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking statements, investors should review the forward-looking statements section of the earnings press release issued this morning, a copy of which is available on our website at willistowerswatson.com, as well as other disclosures under the header of Risk Factors and Forward-Looking Statements in our most annual report on Form 10-K and in other Willis Towers Watson filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we may discuss non-GAAP financial measures.
For a discussion of the non-GAAP financial measures as well as reconciliation of the non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures, investors should review the press release we posted on our website. After our prepared remarks, we'll open the conference call for your questions. Now I'll turn the call over to John Haley.
Thanks, Aida. Good morning, everyone. Today, we'll review the first quarter 2018 results and the 2018 outlook. Before getting to the results, I'd like to discuss Brexit and the new accounting standards. Now that Brexit is less than a year away, many of our clients, as well as Willis Towers Watson itself, are working hard to put in place the appropriate models and structures to ensure our business continuity. Most important, we're committed to do what it takes to continue providing our clients with seamless service to the extent possible, regardless of what Brexit regulations. We have a large footprint across Europe, and in the case of our broking business, we're leveraging this existing footprint and capability by engaging with regulators as we seek to establish the appropriate model for our clients and business. We're adopting similar approaches in our investment business and our other segments.
We serve many multinational companies, and we've always assembled the best global resources to service our clients. We aim to continue this as we move through the Brexit process. As of January 1st, 2018, we adopted the new accounting standard, ASC 606. A detailed description of the impact of ASC 606 will be provided in the Form 10-Q filing. We also provided the detailed explanations of how the new standard impacted the presentation of our financial statements in our earnings release this morning. The impact of the new standard is a one-time adoption year issue for 2018. We anticipate that approximately $45 million of revenues, which would have been fully recognized in 2018 using the prior accounting standard, will now be recognized in 2019. Once we get past this calendar year, the full-year 2019 results should look more comparable to the 2017 results.
More important, the accounting change doesn't impact the underlying business momentum and should have no material impact on free cash flow. Mike will discuss this in more detail later in the call. 2018 is a critical year as our merger initiatives wind down. We understand the importance of reporting our merger objectives and results in a clear, consistent manner. To that end, we'll continue to provide our 2018 guidance and merger objectives based on the prior accounting standards as you saw in this morning's earnings release. We'll also discuss our results on today's call in terms of both the old and the new accounting standards. I'm pleased to turn to our results. I will first report the results using the prior accounting standard.
Based on the prior accounting standard, without the impact of ASC 606, reported revenues for the first quarter were $2.6 billion, up 10% as compared to the prior year first quarter, and up 4% on a constant currency basis and up 6% on an organic basis. Reported revenues included $123 million of positive currency movement. We observed growth in all of our segments and regions for the quarter. Net income was $447 million, or up 27% for the first quarter as compared to the prior year first quarter net income of $352 million. Adjusted EBITDA was $841 million, or 33% of total revenues. This is an increase of 19% as compared to the prior year of $708 million, or 30.5% of total revenues. This was an increase of 250 basis points in the adjusted EBITDA margin.
For the quarter, diluted earnings per share were $3.31, and adjusted diluted earnings per share were $4.41. Currency fluctuations for ASC 605 revenues had a $0.24 positive impact on our first quarter adjusted diluted EPS. The majority of this currency impact related to our French operations, as most of their annual renewals are booked in the first quarter of the calendar year. This currency impact was already incorporated into our original 2018 guidance of $9.88 to $10.12. Turning the results based on ASC 606, the new accounting standard. Reported revenues for the first quarter were $2.3 billion. Net income for the first quarter was $221 million. Adjusted EBITDA for the first quarter was $557 million or 24.3% of total revenues. For the quarter, diluted earnings per share were $1.61 and adjusted diluted earnings per share were $2.71. Let's look at each of the segments in more detail.
As part of our portfolio review and integration process, we realigned teams, which resulted in some movement of revenues and costs between segments. We also implemented a refined segment allocation process. The restructuring and allocation charges were applied to our 2017 results. All of the revenue results discussed in the segment detail and guidance reflect revenues on a constant currency basis unless specifically stated otherwise. Please note in previous years, we reported on commissions and fees. We feel revenues are more reflective of overall company performance, as revenue is a more comprehensive measure. Segment margins are calculated using segment revenues and exclude unallocated corporate costs, such as amortization of intangibles, restructuring costs, and certain transaction and integration expenses resulting from mergers and acquisitions, as well as other items which we consider non-core to our operating results. The segment results include discretionary compensation.
All commentary regarding the segments will be based on the prior accounting standard unless stated otherwise. For the first quarter, total revenue grew 4% on a constant currency basis and 5% on an organic basis. This is against a very strong first quarter in the prior year. We experienced growth in all regions and segments this quarter. Most of our regions have experienced revenue growth for five consecutive quarters. For the first quarter of 2018, the international region led growth with 6% growth. North America and Great Britain both had growth of 4%, and Western Europe has growth of 3%. Without the impact of ASC 606, Human Capital and Benefits or HCB had a strong quarter with revenue growth of 3% and organic growth of 4% as compared to the prior year first quarter.
As a reminder, in the prior year first quarter, HCB had 5% constant currency and organic growth. HCB has now had growth for the last five consecutive quarters. Talent & Reward first quarter revenues grew 5% as compared to the prior year first quarter, primarily due to an increase in advisory software sales and product revenue, with very strong growth in Western Europe and International. This growth was slightly offset by lower demand in the advisory businesses in North America. Our Technology and Administration Solutions or TAS revenue increased by 5% as compared to the prior year first quarter. Growth was a result of new clients and project work related to change orders. Health and benefits revenues increased by 5% as compared to the prior year first quarter, primarily as a result of strong sales of our global benefit offering in Great Britain, International, and Western Europe.
North America's revenue growth was muted due to the timing of sales and contracting, as well as an internal reorganization. Retirement revenue growth was 2% as compared to the prior year first quarter. North America's growth was as a result of increased pension administration support, partially offset by reduced actuarial work in Canada due to their triennial valuation cycle. Great Britain led the revenue growth for the segment as a result of consulting demand for actuarial and risk solutions. International also had strong growth, notably in Asia, driven by strong results in China and Hong Kong. Western Europe's revenues declined in large part due to timing issues in Germany related to our pension brokerage business and the expected contraction in the Netherlands. The HCB first quarter revenue was $1.02 billion, with an operating margin of 38%, up 120 basis points from the prior year first quarter.
Turning to the HCB results, including the impact of the new revenue standard. The HCB segment had revenues of $832 million and an operating margin of 23%. The primary difference between the accounting standards is that the new standard prorates healthcare policies over a 12-month period, rather than recognizing the revenue at the time of the sale. Approximately 40% of our healthcare policies in the middle market are sold with effective dates other than January 1st. Overall, we continue to have a positive outlook for the HCB business in 2018. Turning to Corporate Risk and Broking, or CRB, which also had a strong quarter. Revenues increased 5.5% on a constant currency basis and 6% on an organic basis as compared to the prior year first quarter. As a reminder, in the prior year first quarter, CRB had constant currency and organic growth of 3%.
CRB has now had five consecutive quarters of revenue growth. Post the 2016 and 2017 restructuring, we have had three strong consecutive quarters of growth in North America. Revenue growth was experienced in every region. International led revenue growth with 9%, primarily due to growth in CEEMEA and Asia, with a slight offset due to softness in Latin America and Australia. Central and Eastern Europe, Middle East, and Africa's overall revenue growth included positive timing of a renewal and securing a large construction project. Great Britain and North America both had strong growth at 7%. Great Britain's revenue was impacted by the growth noted in CEEMEA and strong new business in facultative and financial lines.
North America's revenue growth was a result of better than expected new business and a retention rate of 95%, up three percentage points as compared to last year, and an increase in fees related to the forensic accounting team. Western Europe's growth was led by France's strong renewal season and strengthened specialty, offset by slight declines in Germany. The CRB revenues were $758 million, with an operating margin of 19%, up 180 basis points to the prior year first quarter. This margin improvement transpired despite a higher corporate allocation for Gras Savoye. Turning to the CRB, including the impact of the new revenue standard for the quarter, CRB had revenues of $740 million and an operating margin of 17%. The primary difference between the accounting standards is that affinity products are prorated under the new standard.
This will have no impact on the total 2018 annual revenues, as all policies were effective as of January 1st. The primary difference in expense is that under the new standard, expenses are recognized when the sale becomes effective. Under the prior standard, they were recognized as incurred. We're pleased with the momentum in our CRB business globally. Now on to the strong performance by Investment, Risk and Reinsurance, or IRR. Revenue for the first quarter increased 3% on a constant currency basis and 5% on an organic basis as compared to the prior year first quarter. Both constant currency and organic revenue growth was 5% in the first quarter of 2017. As a reminder, the reinsurance line of business represents treaty-based reinsurance with some facultative business produced in wholesale. The bulk of facultative reinsurance results are captured in the CRB segment.
Max Matthiessen led the segment with 9% revenue growth as a result of an increase of assets under management and new business. Reinsurance revenue grew by 6% as a result of solid renewals and strong new business, especially in North America. While there were pockets of rate increases on catastrophe-impacted business, pricing was essentially flat across our multi-line global portfolio. Wholesale grew by 5% as a result of new business momentum and some pull forward of business booked in the second quarter last year. Insurance Consulting and Technology grew by 2% on a constant currency basis and 3% on an organic basis. ICT revenue growth was a result of increased consulting project and software sales. As a reminder, we sold the UBI business in 2017. Investment grew 2% as a result of new client implementations, slightly offset as a result of market factors impacting performance fees.
Underwriting and Capital Management, or UCM, experienced a decline of 10% in constant currency revenue as a result of the divestiture of the U.S. programs business in 2017 and the Loan Protector businesses in the first quarter of 2018. UCM organic growth was 5%. The IRR segment had revenues of $539 million compared to $491 million for the prior year first quarter, and a 45% operating margin, up 110 basis points from the prior year first quarter. IRR experiences a seasonally high operating margin in the first quarter, primarily driven by the timing of revenues in reinsurance. Now turning to the IRR results, including the impact of the new revenue standard. IRR had revenues of $574 million, operating margin of 45%. The primary difference in the accounting standards is related to the revenue recognition for the proportional treaty reinsurance broking arrangements.
Under the prior accounting standard, the revenue was pro rata. Under the new standard, the revenue is recognized upon the effective date of the policy. We recently announced the integration of our Insurance-Linked Securities, or ILS, portfolio and team have moved from our securities line of business to Willis Re. This move reflects our ongoing efforts to evolve our IRR segment and better align our portfolio of businesses to position us for long-term sustainable growth. ILS is an important part of the capital advice and solutions that we provide to clients, and we're excited to integrate that ILS business within Willis Re. Overall, we continue to feel positive about the momentum of the IRR business for 2018. Now revenues for the BDA segment increased by 8% from the prior year first quarter. BDA has now had nine consecutive quarters of revenue growth.
Individual marketplace revenues increased by 14% as a result of increased membership from the 2017 fall enrollment season. Group marketplace and benefits outsourcing revenues grew 2% as a result of new client wins and special projects. The BDA segment had revenues of $195 million, with a 22% operating margin, up 50 basis points as compared to the prior year first quarter. The BDA segment, reflecting the new revenue standard, had revenues of $122 million and an operating margin of negative 26%. The primary driver of the difference due to the accounting standards is related to the individual marketplace. These revenues must now be recognized at the date of placement rather than prorating the revenues starting at their effective date.
This means that the revenue typically generated by placements in the 2017 fall enrollment period was recorded as an adjustment to the opening balance of retained earnings as of January 1, 2018. This revenue under the prior standard would have started to be recognized in January 2018 on a pro rata basis throughout the year. However, the overall revenue profile should not change in 2018, as under the new standard, the revenues generated by the policies placed in the fall 2018 enrollment season will be recognized immediately. This will change the seasonality of the revenue recognition to be higher in the second half of the calendar year. We continue to like this business, and we're optimistic about the long-term growth in this business. Before concluding my remarks, I'd like to provide you with an update regarding the U.K. Financial Conduct Authority, or FCA, investigation.
During this last quarter, we received an update from the FCA regarding the previously disclosed investigation of the aviation insurance brokerage sector. We had previously disclosed that the European Commission had taken over the competition law aspects of the investigation, but the FCA retained jurisdiction over the brokerage regulatory matters that do not relate to competition law. The FCA has now informed us that they will not be taking enforcement action against us for the brokerage regulatory matters. The European Commission's civil competition investigation is ongoing, and we have no further update to provide at this point. For additional detail, please refer to our SEC filings on this matter. Again, I'm very pleased with the first quarter results. I certainly hope that despite the confusion of adding the additional element of the new accounting standards, we've been able to communicate the strength of our underlying business.
I feel very good about the momentum in the overall business, the general state of the global economy, and our integrated market approach. Of course, I'd like to thank our colleagues who continue to service our clients without fail. Now I'll turn the call over to Mike.
Thanks, John. I'd like to add my congratulations to our colleagues for another great quarter. I'd also like to thank our clients for their continued support and trust in us. Now let me turn to our overall financial results. Let me first discuss income from operations. Without the adoption of ASC 606, income from operations for the first quarter was $538 million, or up 34% from $401 million in the prior year. This was 21.1% of total revenues. Adjusted operating income for the first quarter was $722 million, or up 17% from $619 million in the prior year. This was 28.3% of total revenues. The key drivers of this increase were strong revenue growth and prudent expense management. Now let me turn to adjusted diluted earnings per share, or adjusted EPS, excluding the new revenue standard.
For the first quarter of 2018, our adjusted EPS was up 19% to $4.41 per share versus $3.71 per share in the prior year. As a reminder, we had a strong revenue growth in the prior year first quarter in terms of a comparable. Our adjusted EPS was $2.71 per share under the new revenue recognition standard for the quarter. We adopted the new revenue standard using the modified retrospective approach. This approach was noted in our earnings release this morning and will be in our footnote disclosures to the financial statements in our 10-Q, as required by the new standard. As John mentioned previously, we believe this is the best way to assess our performance for 2018. As a reminder, we anticipate that approximately $45 million of our revenues, which would have been fully recognized in 2018 using the prior accounting standard, will now be recognized in 2019.
We reflected the required change in presentation of the pension expense on our income statement and have restated 2017 to be consistent with the new presentation. This change involved moving non-service cost component from salaries and benefits to other income net. The year-on-year increase in other income net is primarily due to increased pension income. The increase in unallocated net on a restated basis is primarily due to higher Brexit costs and payroll taxes on vested options. Lastly, we've also started reporting revenues this quarter versus commission and fees, given the immaterial difference between the two amounts. I'll now move into taxes. I'd like to provide you with some additional insight into our U.S. GAAP and adjusted tax rates. Our adjusted tax rate was 19.6%, an increase of 4% over last year's first quarter. The U.S. GAAP tax rate for the first quarter was 19.7%.
Beginning in 2018, the adjusted and U.S. GAAP tax rate will be more closely aligned due to the U.S. corporate rate reduction from 35% to 21%. Deferred tax benefits in the U.S. related to the merger that previously had significant impact on our U.S. GAAP tax rate have now been reduced. There's a possibility there will be further guidance from the U.S. Treasury and others on interpretation or application of new rules. This may result in adjustment to our estimates as we move through the year, and we will continue to monitor this and communicate appropriately. Let's move on to the balance sheet. We continue to have a strong financial position. As expected, free cash outflow for the first quarter was $47 million, a decrease from free cash flow of $33 million for the prior year first quarter.
The year-over-year variance was related to an increase in payments for discretionary compensation, as our 2017 company performance was significantly improved from 2016. We did not repurchase shares in the first quarter as a result of the 2017 annual bonus payouts. We have already reinstituted our share buyback program and expect to buy back $600 million-$800 million of shares in 2018. As a reminder, we have repurchased or retired approximately 8.4 million shares since the merger and paid $546 million in dividends. The dividend was increased by 13%, effective as of April 2018. Thinking about our full-year guidance for 2018, we reported 2018 financial results in this morning's release based on both the ASC 606 standard and the old accounting standard, ASC 605.
We want to ensure that investors have a clear line of sight to our progress as we move into the last year of our three-year integration period. As such, we are continuing to provide guidance based on the 2017 U.S. GAAP standard. Now let's review our full-year 2018 guidance for Willis Towers Watson. For the company, we continue to expect organic revenue growth to be approximately 4%. For the segments, we expect revenues to be in the low single digits for HCB, CRB, and IRR, and to be in the mid-single digits for BDA. We continue to expect adjusted EBITDA to be around 25% for the full year. We are moving the adjusted effective tax rate from 24% to a range of 23%-24%. This tax guidance is consistent for both the old and new accounting standards.
We expect free cash flow of approximately $1.1 billion-$1.3 billion in 2018. There is a non-material difference in free cash flow between the prior and new accounting standards. The difference is a result of moving a portion of capitalized software related to client system implementations from investing activities to operating activities in the cash flow statement. This accounting change does not impact our overall guidance nor our capital allocation strategy. We will continue to use the former ASC 605 accounting standard for this year to assess bonus calculations, capital for dividends, share buybacks, internal investments, and M&A. Our annual guidance assumes an average currency exchange rates of GBP 1.40 to the pound and EUR 1.23 to the euro. I'd like to say again how pleased I am with the results and the continuing momentum of our business. Now I'll turn the call back to John.
Thanks, Mike. Now we'll take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the one key on your touch telephone. Please limit your questions to one and one follow-up. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Our first question comes from David Styblo with Jefferies. Your line is open.
Hi there. Good morning, guys.
Good morning.
You obviously put up some solid organic growth again this quarter despite some really tough comps a year ago, I think back then you had called out that the first quarter of 2017 benefited from one to two points of growth. I guess I'm just wondering, was there anything in terms of timing or change orders that you'd spike out for this quarter that helped the first quarter of 2018's results? If not, the 4%-6% organic growth that you've had in the last few quarters, last three quarters, I guess specifically, it's obviously a nice uptick. How much of that you think is your company-specific initiatives that you've been pushing through with management structures and implementations versus perhaps an uptick in end market demand?
First of all, look, there's always little movements between quarters that occur, and we've had our usual share of those. There's the HCB, there's the carry-forward for 2017, et cetera. I would say that in general, the first quarter of 2018 is sort of a normal first quarter, and it's 2017 that was the one that was exceptional. Just to state the obvious, we are delighted. That was such a tough comparable and great revenue growth that we've had. I think Mike and I both refer to our colleagues throughout our company working very hard and satisfying client needs, and that seems to be paying off.
I guess the follow-up would be with the strong growth in the quarter and the lower taxes, at least relative to what the Street was expecting, the beat was more narrow, and that seems to be because margins weren't as strong as expected. I'm curious, did you guys accelerate any sort of spending? How did the margin side compare to what you were thinking? When you step back and look at the results, you would think you would have had a little bit better earnings upside and margin upside from having such a strong organic growth quarter. Just trying to reconcile why we didn't see that benefit flow all the way through the bottom line for this quarter.
Maybe I'll let Mike talk a little bit about that, but just a quick comment from me. I think we had a 250 basis point improvement in our adjusted EBITDA margin. I got to tell you, that is not something that is below our expectations. We'd be delighted with a 250-basis point increase for the year.
Yeah, John, I just add to your comments. At the end of last year, we ended at 23.2% on an adjusted EBITDA margin basis. Obviously, the first quarter is a strong quarter for us overall and is one of our larger quarters. We look at that, to John's point, we're 250 basis points up as it relates to our margin on a 605 basis, and we feel very good about that, which is all what we had focused on in terms of cost reduction. You see it across all four of our segments in terms of margin improvement.
Okay, thanks. I'll step back for others.
Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Hi. Good morning. My first question is on currency. I just want to tie together a couple comments. You guys left your guidance even though you had $0.24 of currency in the quarter. You told us last quarter there would be a $0.04 benefit on the year. If I heard you correctly, John, you said the $0.24 was in line with your outlook. Two questions. Do you expect $0.20 of that to come back in out three quarters? Or is something offsetting this favorable currency when compared to your initial guidance a few months ago?
No, it's the former. We expect the $0.20 to come back. The currency impact of $0.04 for the year is still what we think is the right outlook for the year, and we always had recognized that there was a seasonality to it.
Okay. Currency didn't have an impact on margin in the quarter, correct?
No.
Okay. I just want to go back to the larger margin conversation. You posted a pretty strong 6% organic for the second quarter in a row. It doesn't seem like there's a lot of operating leverage here if your margins coming in a bit short, I think what was expected, obviously, under old and new standards. Can you talk through maybe some of the cost saves that fell to the bottom line in the quarter? How did the overall margin jive with what you would expect you would have hit this quarter to hit the full year 25%? Is there anything one-off that maybe negatively impacted margins in the quarter?
Maybe, again, I'll let Mike go into some of the details of this, but let me just give you a couple of thoughts overall on that, Elyse. I was actually surprised at the prior question, this one on the margins, because again, I thought a 250 basis point was an incredible improvement in them. I guess maybe what's happening is you're looking at some of the ASC 606 numbers. I got to tell you, from the viewpoint of somebody trying to run a business, the ASC 606 numbers are worse than useless as far as I'm concerned. It's a standard that recognizes some revenue not at all and some expenses twice. This first year of transition, I don't find that to provide any useful thing.
When I'm focusing on the margin improvement, I'm trying to look at it on the ASC 605 basis, and I thought those results were spectacular. Mike, I don't know.
Yeah, no, I would just add to John's comments. I did mention we did have a couple of expense items in there which were around Brexit and our payroll taxes on vested options. Those were not big numbers, Elyse, when we look at it. I just reiterate to what John said. We feel very good about where our margins are. We continue to focus on driving and continued improvement on those, and we look at them on a 605 basis, and we continue to push them very hard.
Can you quantify what level of expense saves there might have been in the quarter?
We have a variety of different ones without going into those in a lot of detail. I guess if you think about what we've done in real estate, we've continued to drive our real estate footprint across the organization as we continue to consolidate offices between the two legacy organizations which are driving costs. We've continued to manage our headcount appropriately and make sure that we do drive that operating leverage. As we're driving that revenue growth, we're not looking at just adding headcount. Particularly in our back-office functions, we're looking to manage that and look to drive that appropriately with the footprint that we have today. I would say those are probably two of the bigger drivers, Elyse.
Okay. Thank you very much.
No problem.
Thank you. Our next question comes from Kai Pan with Morgan Stanley. Your line is open.
Thank you, and good morning. First question on your guidance. You maintain your guidance for the full year. If you look underneath the organic growth guidance a little bit better, tax rate a little bit lower, and you maintain your 25% adjusted EBITDA margin. Why the guidance would not be higher?
Well, the guidance was in a range. We still think we'll be in the range.
Okay. All right. Then on the organic front, I just wonder because the first quarter comparison was tough, and that you achieved 6%, actually more than last year's 5%. The second quarter last year actually was weaker at 2%. Do you think the second quarter actually the comp will become easier for this year? Or there's one-off timing issues?
We think the second quarter comp is easier.
All right. That's clear. Thank you so much.
Thank you. Our next question comes from Greg Peters with Raymond James. Your line is open.
Good morning, John, Mike, and Ida. Thanks for the call. I guess my first question would be around in your press release, you provided a section where you gave select questions and answers, and I appreciate that. Question 2 that you provided an answer was around EPS for 2019. I'm trying not to get out in front or over my ski tips here, but I'm wondering if you could sort of establish some basic guideposts for the investment community and what they should expect around annual revenue growth, margin improvement, free cash flow, et cetera, as we think about 2019 and beyond.
Greg, I think right now, our focus is so much on 2018 and delivering those results. As we think about 2019 there, we're focused on making sure that we have the right kind of capabilities and investments to do well then, we're not necessarily focused on being able to provide guidance at this point.
Okay. I guess, just a tangent to that is, we're almost halfway through 2018, still haven't heard word on whether we're going to see a contract extension for you, who's going to be the CEO in 2019.
Yeah. We don't have anything to say about that either at the moment.
Okay. I'm striking out. Last area. I know in the past you've commented on legacy revenue synergies, the targets for 2018. Perhaps you wanted to circle back and give us an update on how you're performing as we're moving through 2018 on those legacy targets.
Yeah. Thanks. We didn't go through and talk about that this time, partly because we already had a long script with these double accounting results and everything there to begin with. Broadly, things are going well. I would say that they're in line with what we had last quarter. If they hadn't been, we would've called it out.
Yeah. Thank you for the answers.
Thank you. Our next question comes from Paul Newsome with Sandler O'Neill. Your line is open.
Sorry. I had questions on the margin and I couldn't get out of queue. Apologies.
Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open.
Hi. Thank you for taking my questions. Hey, John, the quarter looked really good. Organic growth, margin expansion, the EPS, it looks like the business momentum is accelerating. One thing I want to pick at is, if things are going this well, why do you have to wait for cash flow to buy back stock? You know it's coming. Why wouldn't you just make the decision the first quarter, let's get ahead of this?
Yeah, that's a fair. Do you want to take.
Yeah.
That's a fair question.
Yeah. We're watching it pretty closely and managing and focusing on cash flow and our DSO efforts, our continued focus. We're just being prudent, I guess, and conservative. We could've, but we didn't.
Yeah.
That's reality.
I think that's right, though, Shlomo. The real answer is we were probably just being a little conservative, maybe a little overly conservative in terms of doing that. The first quarter is, as we've said, it is a quarter where we have the big outflow of bonuses, and we had a very good year in 2017, so we had larger bonuses than we did the year before. We could've done that. Maybe we should have.
Given where you see the business going and the momentum, is it fair to assume that you gave a range and you should be tracking towards the higher end of the range, if not above that, just based on where the stock has been tracking recently?
Yeah. Look, we feel very good about hitting the guidance that we have. I think you've worked with us for a while and you know we're not into just adjusting the guidance on every little up or down that occurs in the course of a year. We feel pretty good about being able to come out in the range we had there or maybe even better.
Right. That's fair. I was just pointing out at the cash flow in terms of the targeted share repurchases were $6 million-$800 million, given where you're coming out and the strength of the business, should we assume, and where the stock has tracked, you should assume that you should be able to get to the upper end of that?
I think after the good first quarter, it's more likely that we'll get to the upper end than it was going into it. Yeah. That's for sure.
All right. Thank you very much.
Thank you. Our next question comes from Arash Soleimani with KBW. Your line is open.
Thanks. I just wanted to ask one more question on the margin. I agree, on a year-over-year basis, it looked like very strong performance, it seems like for some reason, The Street expected something higher. Do you have any thoughts on where maybe the disconnect was? Was there anything in unallocated expenses, perhaps, that maybe we weren't expecting to be in there that was in there? Again, just saying one more time that it was definitely a strong performance, seems like there was some kind of disconnect between The Street and
Yeah. You have some accounting
Application that's been going on. Obviously, the 606 and how are people, were they getting that comfortable with that and thinking about what 606 was going to present, what the margin then associated with that, what was that going to be? Then you had the pension change that happened as well, which moved amounts from unallocated net down to income from operations. So that pension income is included in other income net in that line item, if you compare it on a year-over-year basis. We've obviously restated them appropriately to reflect that in the accounting standards. Overall, I guess I would reiterate back to your opening comments. We feel very good about the margins and what's gone on overall. We've tried to be as transparent as we can be to highlight the changes that have been going on.
I think it's not easy to model all those activities that are happening and changes that are there, and we've tried to give as much guidance as we can, both in our comments and our disclosures and what we've included in the supplemental schedules that we've posted on our website to try to enhance everyone's understanding of what that means.
Thanks. I don't know if you provided this, if you put the margin, obviously, that we're looking at is on a new accounting basis, what would the expansion have been if we were looking at a new accounting versus new accounting margin number?
Yeah. When you adopted the accounting standard, it's a prospective basis. Included in that was equally open contracts method, which a certain amount of revenue, which we had talked about here in the $45 million, $50 million range, that literally did not get booked to retained earnings, is gone. As we have articulated, we think we'll come back in fiscal year 2019 in some form, in terms of thinking about it. We did not restate back as contrasted with what others have done in terms of looking at that margin. We've really been managing the business on a 605 basis. That's really been our focal point. I'm not sure how relevant that would really be.
Yeah. Our margin for last year was, what? 23.2%.
For the year.
For the year. We were looking if we got to the 25%, which some people were skeptical of, to get to 25 is 180 basis points.
Basis points.
That's why I was measuring against the 250 and thinking, "Boy, that's pretty good.
Yeah.
Yeah. No, agreed. This might seem like a silly question, on the 5% organic growth for the segments, I know you don't break out the investment income anymore, the 5% organic versus the 6%, is the only difference there just the reimbursable expenses?
No, the difference. That's divestitures.
Yes.
Divestitures. Okay.
We divested about 1% of our businesses in 2017 and I guess January of 2018, counting that in there. These were generally lower performing businesses that we divested. I think it cost us $0.03-$0.04 of earnings. Yeah, that's that difference there.
Okay, thanks. Just the last question, is there any change in capital management or buyback philosophy?
No. Full steam ahead.
All right. Perfect. Thanks for the answers.
Thank you. Our next question comes from Adam Klauber with William Blair. Your line is open.
Good morning. I think you mentioned free cash of $1.1 billion-$1.2 billion, but you mentioned something about a change in capitalization. Did I get that right, and how much does that impact free cash flow?
You did get it right. It's $1.1 billion-$1.3 billion is the number. Roughly, it's about $10 million for the quarter. That's the impact.
Okay, pretty small.
Yes.
This year, looks like buybacks and dividend will be the majority of free cash. As we think about next year, the merger-related activities have.
Hello? I'm sorry, you're breaking up.
Sorry. Do deals and mergers become more likely in 2019 and 2020?
Yes. I think that when you first do a large, complicated merger like we did, ours was complicated not just on a couple of fronts, but also it was really three companies coming together. The first few years after that, mergers are relatively unlikely. Each year you go further out, they become more likely. Other M&A activity.
Great. Thanks a lot.
Thank you. Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open.
Good morning, everybody. Just one follow-up on Elyse's question on FX. If we're still targeting $0.04 of a boost from FX, I'm looking at the guidance page on, I think, slide 21. I do think that the average exchange rates there assumed have gone up a little bit. I just want to confirm that's all driven by the first quarter, or is there still maybe a little more momentum coming from FX the rest of the year?
No, it's all coming from the first quarter.
Okay. That's helpful. My second question is around organic growth, or actually, I guess currency-adjusted growth. You had 5% growth in the first quarter, still targeting 3%-4% for the full year. Is that just because you're running into tougher prior comps in the second half of the year? Or are there other drivers that may result in slower growth for the remaining nine months?
We're looking at what's happening in the marketplace. We obviously think we have a little better comps actually going to the second and third quarter overall, fourth quarter, obviously, we had to have very good growth, it'll be a very tough comparable overall. It's reflecting what we saw happen, obviously, in terms of actuals on the first quarter. We're looking, second and third quarter, feeling like we have reasonable comps. In the fourth quarter, we got another tough comp. That's how we really manage ourselves in terms of what we think the number will be.
Right. I think we actually think the market growth will be somewhere in the 3% to 4% range for the year, and we expect to be at at least that, as fast as the market's growing. That's more or less how we got there.
Okay, thank you very much.
Thank you. Our next question comes from Jay Cohen with Bank of America. Your line is open.
Yes, thank you. It looks like in addition to the accounting changes, you made some changes to your own reporting, moving things around. Will you be providing us with that basis of accounting for the final three quarters of 2017 so we can model it effectively for 2018?
Yes. We absolutely are, Jay, and it's recast in the slides that are posted on our website, so you'll have them.
Great.
You have them. Yep.
Great. Other questions are answered. Thank you.
No problem.
Thank you. Our next question comes from Mark Hughes with SunTrust. Your line is open.
Yeah, thank you. Good morning. Any thoughts on bulk lump sum work or just broader pension accounting dynamics? We've got the interest rates going up here. What impact are you seeing in the backlog at all?
Yeah. Bulk lump sum work has bobbed up and down over the last, say, half a dozen years or so. It's at a relatively low level right now. We don't have any projections for a pickup this year. It's a little too early to say about next year. In some ways, higher interest rates can lower the cost of doing some bulk lump sums. Of course, they also lower the target liability that you were measuring it against also. There's a lot of factors that play into bulk lump sums. Right now, we're not projecting a big pickup on that, I think we're just sort of looking at this space and ready to act if we do see something.
Thank you very much.
Thank you. Our next question comes from Michael Zaremski with Credit Suisse. Your line is open.
Hey, good morning. Thanks. Mike, in the prepared remarks, you mentioned IRS guidance, potentially. A number of companies have mentioned this as well. I'm trying to get more color. Are you guys being conservative and there could be guidance in the coming months or years where the tax rate could materially change? Maybe just some more color on that.
Yeah, treasury continues to issue more clarification and guidance. We continue to incorporate that in all our calculations and analysis. Most recently, they had done that and provided us additional guidance as it relates to the GILTI tax. We continue to believe as fast as they got that bill passed, that there's continual interpretative guidance that comes out. We're trying to be thoughtful and making sure we understand exactly what could impact us going forward. Just to be clear, we continue to appropriately plan tax planning strategies to, over time, get us more and more aligned with the statutory rates or below. That's what we continue to try to do. I don't know if I'd use conservative or aggressive. I think we're thinking about it properly.
That's why we said it, and I'm sure that's why others are saying, because they're getting the same guidance that we're getting.
Okay. TBD there. Okay, my last question's on the investment segment. You guys in the past have mentioned about launching an asset management exchange, I believe in the U.S., and it's in the U.K., and it's had a good deal of success. I've noticed there's been at least one or two of somewhat prominent lawsuits against some of your peers regarding some proprietary products. Does launching these exchanges and some proprietary products to your clients come with added risk?
I guess, in today's world, you can't take a breath without having added risk. There's always something there. Look, we feel very good about the products we have, and we vet everything very carefully with our legal department. There's nothing that we're aware of that presents any unusual risk.
Okay, thank you.
Thank you. Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open.
Hey, just one quick follow-up on the 2019 EPS. I realize it's too early to give guidance, but I do think in the past you talked about double-digit growth in the long term. When we think of that double-digit growth, is that off of that $9.88-$10.12 guidance for the full year 2018?
Yeah, if that's where we end up.
Okay. Thank you very much.
Thank you. We have another follow-up from Kai Pan with Morgan Stanley. Your line is open.
Thank you. Since I didn't take much of your time last too, I want to give another try. On your BDA healthcare exchange business, the run rate of organic growth has slowed down for the last two years. Is that sort of like a maturing of the business? Just wondering, the margin profile of the business, will that improve given that you now probably don't need to invest a lot into the system?
Yeah. As we said, the reason the growth rate is slower is because the individual marketplace, which is where you get all of the big clients with all of the retirees that you get at once, all the big cases are pretty much out, and there's relatively few of them there, and all but one of them are with us. We have a very large installed base. The growth rate is slowing down, and I guess you could call that a maturing of the market there. We think that the margin impact, if we're not investing, or maybe I would just say if we're not incurring the expenses to enroll very large new clients or some 200,000 life case or something like that, then that tends to improve our margins a little bit.
I don't think of it so much as investment because we are still doing a lot of investment to make both the individual and the group marketplace keep at the forefront of technology and keep ahead of any of our competitors. We continue to have to do that, but we don't have to necessarily hire large people to just implement big new cases. We prefer, of course, to be getting several big new cases and hiring people and having the margins be a little bit lower, but we'll see what happens.
Great. My final one is on the pricing side. You see the pricing neutral to slide up currently, how do you see the momentum going? Is that going to slow down, especially at the mid-year reinsurance renewals?
I don't think we see mid-year being different than what we saw at the beginning of the year. I think pricing is a dynamic market, these things can change. At the moment, we don't see any difference.
Thank you so much.
Thank you. We have another follow-up from Shlomo Rosenbaum with Stifel. Your line is open.
Hi. Thank you for squeezing me back in at the end. Hey, John, can you talk a little bit about the competitive environment in some of the higher-level areas that you're in, maybe just in some of the brokerage areas, then some of the consulting areas on the human resources side? I'm just trying to flush out a little bit as the organic growth in the business was better than the peers this quarter. It seems like it has been on par or better over the last several quarters. I want to know, are you sensing, are you hearing on the ground from your people that they're doing better competitively, or is it just you're in different markets, I shouldn't compare them the same way?
Sure. Mike is chomping at the bit to answer this question.
I think we feel very good about what we've seen going on, particularly in our international operations, in terms of strength in international. That equally has translated to strength in Great Britain in terms of working together and serving clients and going through that from a risk management standpoint. We look at our defined benefits actions and activities where we continue to grow, we see others not growing there because of the strength of our people, our colleagues. John mentioned it earlier in terms of the quality of our resources and what they're delivering in the marketplace is continuing to win more than our fair share, in my view, that's because of the retaining clients and winning more and more business.
I think about, you look at us from an international standpoint, you look at what's been happening in Great Britain, you look at our defined benefits activity, you look at our brokerage business overall versus what's been happening in the marketplace, our defined benefits business is growing. We feel good about what's happening at the top line. Look, there's some areas that we continue to focus on, and we mention them. Germany is an area that we're continuing to focus on. Nothing ever hits perfect on all cylinders, so we're continuing to focus on that part of our business. Overall, we feel very good.
I think, Shlomo, maybe just to add something, too. I think one of the things we've been focused on just as we've brought this merger together, this quarter sort of indicates where we think we'd like to be. When you look at it, we have growth across all of our regions. We have growth across all of our segments. I think that what we see as the kind of company we'd like to be is one where we have no weaknesses, one where everything is growing, and everything is performing well. As Mike says, as you get down to the smaller units, you can always have pluses and minuses there. We think you make a strong company by having no weaknesses.
Okay, great. Thank you for the color.
Thanks.
Thank-
Okay. Is that it then? Thanks very much, everybody, for joining us, we'll look forward to updating you on our second quarter earnings call in August.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect, and everyone, have a great day.