Willis Towers Watson PLC (WTW) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Willis Towers Watson Q4 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Aida Sukys, Director of Investor Relations.

You may begin.

Thank you, Andrew.

Good morning, everyone.

Welcome to the Willis Towers Watson Earnings Call.

On the call today with me 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.

Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing (404) 537-3406, conference ID 5494338.

The replay will also be available for the next 3 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 heading of Risk Factors and Forward-looking Statements in our most recent 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 certain non-GAAP financial measures.

For a discussion of these non-GAAP financial measures, as well as reconciliations 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, and good morning, everyone.

Today, we'll review the fourth quarter and the full year 2017 results, as well as provide outlook for 2018.

Closing out the fourth quarter of 2017 signified the end of the second year of our 3-year integration plan.

2017 was an eventful year.

We completed a number of organizational changes and corporate initiatives during the year, and we made great headway in advancing our innovation efforts.

From an organizational perspective, a key priority was finalizing the restructuring of the Corporate Risk and Broking business with a specific objective of achieving revenue growth in North America by the third quarter of 2017.

This was accomplished as planned.

The Operational Improvement Program concluded as of December 31, with $95 million of gross savings, and we achieved our multiyear goal of $325 million of annual gross savings.

As a result of an extensive review of our portfolio of operations, we divested approximately 10 businesses, including a portfolio of programs and executed a couple of small bolt-on acquisitions.

Last, we added some key talents, such as Mike Burwell, who came onboard as our new Chief Financial Officer in October.

Mike has certainly hit the ground running, and I couldn't be more pleased with the transition.

From an innovation perspective, we introduced our first CEO Circle award, a program meant to encourage innovation among our colleagues and to provide a path to bring the best ideas to market.

We introduced a number of new solutions and analytics during the year, and I'd like to highlight just 2 of the new client solutions we're very excited about, the asset management exchange or AMX and our proprietary benefits accounts platform.

AMX is a new marketplace, designed to transform institutional investment for the benefit of the end savor.

It aims to create a smarter, easier and cheaper way to connect asset owners to those who manage their money.

We're very pleased with the reception we've received from the U.K. and Ireland markets in a relatively short time frame.

As of the end of December 2017, AMX had over $3 billion in assets under management, and we're planning on expanding into several other markets during 2018.

The second initiative is our benefit accounts or our accounts business, which is the administration tool for accounts such as health savings and health retirement accounts.

We received our nonbank custodial status last year and enhanced our accounts proprietary platform to integrate with our marketplace and Health and Welfare administration systems for a seamless transition for our clients.

Ultimately, we anticipate that Willis Towers Watson's account platform will eliminate the need for us to use third-party providers in the future.

We limited the release to a small number of clients this past enrollment season.

We're very pleased with the preliminary results, thus far, and we plan to continue to expand the program in 2018.

So moving on to our merger synergy objectives.

The original merger objectives included decreasing the tax rate from approximately 34% to 25% by the end of 2017, and realizing $100 million to $125 million in cost-savings as we exited 2018.

We surpassed our tax goal in the first year of the merger, with the 21% adjusted tax rate, and we continue to be under our goal with the 22% adjusted tax rate for 2017.

Turning to the cost-savings goal.

On a merger-to-date basis, we saved almost $130 million, and we're raising our savings goal to $175 million as a run rate as we exit 2018.

Mike will talk about these efforts a bit later in the call.

Our merger objectives also identified 3 specific areas of revenue synergies: global health solutions, the U.S. mid-market exchange and large market P&C.

We've already achieved more than 70% of our 3-year global health solutions synergy sales goals.

Our sales pipeline continues to be strong, and we expect to achieve our revenue goal in 2018.

As we mentioned on our last call, the mid-market health care marketplace sales were muted in 2017, as compared to 2016.

We added several large former Willis clients last year, and we believe that the ACA debate may have delayed decision-making for the fall 2017 enrollment period.

We continue to believe there's a significant potential for the mid-market exchange business, and we're focused on its growth.

Through the end of 2017, we had approximately $50 million in synergy sales.

Given our cumulative sales through 2017 and the new business pipeline, we believe that we'll be at the lower end of the $100 million to $250 million goal as we exit 2018.

Turning to the P&C synergies, we had about 70 new client wins in the large marketplace, with merger to date sales of more than $100 million.

We anticipate those revenues being recognized over a 3-year period in most cases.

We're happy with the overall traction in acquiring new clients in the large marketplace, but our average sale size has been less than our original estimates.

We continue to build our pipeline and add to our talent base.

We anticipate we'll end 2018 with about $150 million of revenue synergy sales rather than the $200 million original merger goal.

While this would be a bit short of our original goal, it's clear that the U.S. large market space provides a significant long-term growth opportunity for Willis Towers Watson.

Finally, we see revenue synergies develop between reinsurance and insurance consulting and technology or ICT teams.

Now this was a revenue synergy we discussed publicly at the time of the merger, but we recognized that these 2 groups had relationships and solutions that complemented one another.

We've sold more than $25 million of reinsurance broking and consulting work, as these groups have been teaming up and utilizing one another's tools and analytics.

So now let's turn to our results.

Reported revenues for the fourth quarter were $2.1 billion, up 8% as compared to the prior year fourth quarter, and up 5% on a constant currency and up 6% on an organic basis.

Reported revenues included $54 million of positive currency movement.

We observed growth in all our segments and regions for the quarter.

Reported revenues for the year were $8.2 billion, up 4% as compared to the prior year, and up 4% on a constant-currency basis and up 5% on an organic basis.

Reported revenues included $27 million of negative currency movement.

Adjusted revenues for the year were up 3% as compared to the prior year and up 4% on both the constant currency and organic basis.

Net income for the fourth quarter was $253 million, as compared to the prior year fourth quarter net income of $148 million.

Adjusted EBITDA for the fourth quarter was $484 million or 23.3% of total revenues, as compared to the prior year fourth quarter adjusted EBITDA of $419 million or 21.7% of total revenues.

This was an increase of 160 basis points in adjusted EBITDA margin.

For the quarter, diluted earnings per share were $1.84 and adjusted diluted earnings per share were $2.21.

Currency fluctuations net of hedging had a $0.04 positive impact from the fourth quarter adjusted diluted EPS.

Net income for the year was $592 million, as compared to the prior year net income of $438 million.

Adjusted EBITDA for the year was $1.9 billion or 23.2% of total revenues, as compared to the prior year adjusted EBITDA of $1.77 billion or 22.3% of adjusted revenues.

This was an increase of 90 basis points in adjusted EBITDA margin.

For calendar 2017, diluted earnings per share were $4.18, and adjusted diluted earnings per share were $8.51.

Currency fluctuations net of hedging had a negative impact of $0.12 on the 2017 adjusted diluted EPS.

Now let's look at each of the segments in some more detail.

As a reminder, beginning in 2017, we made certain changes that affected our segment results.

These changes were detailed in the Form 8-K that we filed with the SEC on April 7, 2017.

All of the revenue results discussed in the segment detail and guidance reflect commissions and fees or C&F on a constant-currency basis, unless specifically stated otherwise.

Our segment margins are calculated using total segment revenues and are before consideration of 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.

For the fourth quarter, total segment commissions and fees were 5% on a constant-currency basis and 6% on an organic basis.

Human Capital & Benefits or HCB commissions and fees fourth quarter growth was 2%, and organic growth was 4% as compared to the prior year fourth quarter.

Our Technology and Administration Solutions or TAS commissions and fees increased by 15%.

All regions had strong commissions and fees growth due to new client implementations.

In addition to implementing new clients, we've been providing additional support for existing clients in Great Britain with respect to the legislative changes that we've discussed in previous calls.

Health and benefits commissions and fees declined in the fourth quarter by 4%, primarily as a result of the sale of our Global Wealth Solutions business in the international region.

Organic HCB growth was 4%.

North America's large market continued to see strong growth in both project work and product sales, which was offset slightly by a decline in the middle market C&F.

Great Britain C&F grew as a result of global health solution implementations.

Talent and Rewards fourth quarter commissions and fees grew 4%, primarily due to an increase in corporate transaction projects, software sales and in compensation survey revenues.

This growth was slightly offset by lower demand in the advisory businesses in North America.

Retirement commissions and fees growth was 3%.

Great Britain lead this C&F growth for the segment as a result of additional work generated by pension legislation and derisking projects.

North America C&F grew as a result of increased consulting and administration work despite the lower demand for Bulk Lump Sum work.

International also had strong growth in large part due to our acquisition of Russell's actuarial business on Australia earlier this year, as well as an increase in consulting demand in Greater China.

The fourth quarter operating margin for the HCB segment was 22%, flat from the prior year fourth quarter.

The margin reflects some planned segment investments and restructuring charges.

For the full year, HCB C&F revenues grew 2%, with 2% growth on a constant-currency basis and 3% growth on an organic basis, and had an operating margin of 24%.

Overall, we continue to have a very positive outlook for the HCB business in 2018.

Now turning to Corporate Risk and Broking or CRB.

Fourth quarter constant currency and organic commissions and fees were up 7% as compared to the prior year fourth quarter.

North America CRB had solid growth of 4%, driven by increased new business, strong retention and forensic accounting claim work related to increased natural disasters.

International had 20% C&F growth as a result of strong growth in Latin America, especially in Brazil and energy-related business in CEEMEA.

Asia had solid growth as a result of new business and soft comparables in the fourth quarter of 2016.

Western Europe C&F grew by 7%, led by performance in Large Accounts in Iberia, France and Italy.

Great Britain commissions and fees increased by about 1% due to growth in the natural resources and energy lines, which was partially offset by a decline in retail and the delay of a large renewal to 2018.

Client retention was approximately 93% this quarter.

The CRB segment had a 28% operating margin as compared to 29% in the prior year fourth quarter.

The margin decrease is due in part to a planned increase in corporate allocation related to the Gras Savoye acquisition and a onetime credit in the fourth quarter last year.

For the full year of 2017, CRB C&F revenues grew 4% on a reported constant currency and organic basis and had an operating margin of 18%.

We're pleased with the momentum in our CRB business globally.

Now to Investment, Risk & Reinsurance or IRR.

Constant currency commissions and fees for the fourth quarter increased 2% and organic increased 4% as compared to the prior year fourth quarter.

As a reminder, the reinsurance line of business represents treaty-based reinsurance, with some facultative business produced in wholesale.

The bulk of our Facultative Reinsurance results are captured in the CRB segment.

Wholesale C&F grew by 8% due to new marine business and favorable timing.

Insurance, Consulting and Technology or ICT had 8% C&F growth, driven by strong software sales.

Reinsurance commissions and fees declined by 1% in the fourth quarter.

Growth in International was offset by softness in North America and adverse timing in specialty.

However, as a result of improved investment returns, total reinsurance revenues remained flat for the quarter.

Investment commissions were down slightly, but overall, revenues increased by about 1% as a result of increased performance fees and delegated client wins.

Max Matthiessen grew by 7% through strong new business and increased assets under management.

Segment commissions and fees included a decline in the portfolio and underwriting business as a result of the divestiture of many of our small programs.

For the fourth quarter, the IRR segment had a 2% operating margin, down from 8% from the prior year fourth quarter.

The fourth quarter 2017 margin was impacted by planned investments for new technology and analytics and the divestment of various U.S. programs.

For the year, IRR C&F revenues grew 2%, with 3% growth on a constant-currency basis and a 4% growth on an organic basis, and had an operating margin of 24%.

We continue to feel positive about the momentum of the IRR business for 2018.

Commissions and fees for the BDA segment increased by 11% from the prior year fourth quarter, driven by increased enrollments.

Our individual marketplace commissions and fees increased by 11% and the rest of the segment increased by 10%.

Increased membership and new clients drove the revenue increase in our Group Marketplace.

The Health and Welfare in North America pension outsourcing business has continued to grow, primarily due to new clients and customized active exchange projects.

Let me turn to the 2018 enrollments.

We had a very strong Group Marketplace enrollment season, as we added approximately 200,000 lives.

As anticipated, we enrolled approximately 35,000 retirees in the Individual Marketplace.

As we mentioned in our previous call, the Individual Marketplace exchange enrollment process is changing as the businesses mature.

Enrollments will be spread more evenly throughout the year, so we continue to expect another 45,000 to 55,000 retirees to enroll during 2018.

The BDA segment had a 22% operating margin as compared to 11% in the prior year fourth quarter.

The increase in margin was a result of the Individual Marketplace enrollment cycle being scheduled more evenly throughout the year, which allowed us to align staffing and costs more appropriately.

For the full year of 2017, BDA C&F revenues grew 12% on a reported constant currency and organic basis, and had an operating margin of 21%, which represents a 260 basis point increase over the prior year.

The BDA segment is in a period of transition, as the market and our market approach continue to evolve.

We continue to be optimistic about the long-term growth of this business.

So as I mentioned earlier, 2017 was an eventful year.

We can't forget that so many of our colleagues and clients suffered losses during the many catastrophic events that occurred around the globe during the year.

Our colleagues never lost sight of the important work we do in times of crisis, and our client focus was unwavering.

I'd like to thank our colleagues for their efforts in supporting our clients in what was a difficult year.

And of course, I'd like to thank our clients for the great support you've given over the last 2 years.

Before turning the call over to Mike, I'd like to congratulate Alice Underwood and Mary O'Connor, for having been named Women to Watch by the Business Insurance CLM Women to Watch recognition program.

The award honors professionals doing outstanding work in risk management and commercial insurance.

Recipients are recognized for their leadership, accomplishments and commitment to the advancement of women and diversity in the insurance industry.

Alice is the global leader of the company's insurance consulting and technology business, and Mary is the Head of Client Industry and Business Development in Great Britain and also serves as a global leader of the company's financial institutions industry.

They couldn't be more deserving of this honor.

Now I'll turn the call over to Mike.

Thanks, John, and I'd like to add my thanks and congratulations to our colleagues for all of their efforts this year, and especially ending the year with such strong momentum.

I've been impressed by the talent, the drive for excellence and the client commitment that I've witnessed through our organization, and in particular, over the last 4 months.

I came to Willis Towers Watson in a time when our colleagues were in full crisis response mode as they work with their clients to assess the impacts of the recent catastrophes.

C&F client commitment and action during my first few weeks here was a great introduction into Willis Towers Watson's and made me very proud to be part of this organization.

But now for some additional insight into our financial results.

Income from operations for the fourth quarter was $110 million or 5.3% of total revenues.

The prior year fourth quarter operating income was $88 million or 4.6% of total revenues.

Adjusted operating income for the fourth quarter was $436 million or 21% of total revenues, an increase of 17% over the prior year.

Prior year fourth quarter adjusted operating income was $374 million or 19.4% of total revenues.

The key drivers of this increase were both strong revenue growth and prudent expense management.

Income from operations for the year was $738 million or 9% of total revenues.

The prior year operating income was $551 million or 7% of total revenues.

Adjusted operating income for the year was $1.77 billion or 21.5% of total revenues, an increase of 9% over the prior year.

Adjusted operating income for the prior year was $1.62 billion or 20.4% of adjusted revenues.

Again, the key drivers of this increase were both strong revenue growth and prudent expense management.

Let's move on to taxes.

I'd like to provide you with some additional insight into our U.S. GAAP and adjusted tax rates.

U.S. GAAP tax rate for the fourth quarter was negative 221.4% and the adjusted tax rate was 21%.

In connection with our initial analysis of the impact of U.S. tax reform, we recorded a onetime discrete net tax benefit of $204 million in the fourth quarter.

This net benefit includes a $208 million tax benefit as a result of the corporate rate reduction impact on the remeasurement of U.S. net deferred tax liabilities primarily related to merger-related acquisition intangibles.

For the year, U.S. GAAP tax rate was negative 20.5% and the adjusted tax rate was 22%, which surpassed our guidance adjusted tax rate of 23% to 24%.

U.S. tax reform is relatively new, and as such, we anticipate that the U.S. Treasury may issue further clarifications, interpretations or guidance so there's a possibility that our guidance could be updated during the year.

Moving to the balance sheet.

We continue to have a very strong financial position.

In terms of capital allocation, we purchased approximately $70 million of Willis Towers Watson's stock in the fourth quarter, bringing the total for the year to approximately $710 million, including the cancellation of shares related to the settlement of shareholder litigation.

And as you may recall, our expectation was that the buyback was about $0.5 billion of shares for 2017.

Over the last 2 years, we have repurchased or canceled almost 8.4 million shares as we believe this was in the best interest of our shareholders.

We also increased the dividend by 10% in 2017.

Free cash flow for the year was $562 million, a decrease from $715 million for the prior year.

The year-over-year variance was related to an increase in payments for discretionary compensation, as we had a full year of discretionary bonus payments in 2017 whereas we had a partial payment on our partial year in 2016.

We had higher capital cost this year due to our increase and integration efforts, the interest charges and the costs related to shareholder appraisal settlement and a prepayment of our corporate taxes on the fourth quarter.

Before moving on to the 2018 guidance, I'd like to remind everyone that a new revenue and pension accounting standards were implemented as of January 1, 2018.

On January 10, 2018, we filed an 8-K report, and hosted a conference call to discuss the potential impact to the company and the segment results.

As we discussed on the call, we don't anticipate any material change on the annual basis, but the seasonality will change for some segments as a result of the new revenue standard.

A more detailed discussion and examples can be found in our 8-K filing.

The 2018 financial results, we published using the ASC 606 standard, but our disclosures will include results as if the 2017 U.S. GAAP standard was implemented.

As such, the guidance, which we will provide you today will continue to be on the 2017 U.S. GAAP standard.

We want to ensure the divestitures have a clear line of sight between our merger goals and our 2018 results.

So now let's review our full year 2018 guidance for Willis Towers Watson.

For the company, we expect constant currency revenue growth to be around 3%.

As John mentioned in his introduction earlier on the call, we have been reviewing our portfolio, and during 2017 and in January 2018, we sold businesses with revenues totaling $65 million, so the 3% revenue growth equates to 4% organic growth.

For the segments, we expect commissions and fees constant currency revenue growth to be in the low single-digits for HCB, CRB and IRR, and to be in the mid-single digits for BBA.

Transaction integration expenses expect to be approximately $140 million.

As John mentioned earlier, we have already exceeded our original savings estimates of $100 million to $125 million.

Depreciation expense is expected to be approximately $210 million.

The adjusted EBITDA margin is expected to be around 25%.

The adjusted effective tax rate is expected to be around 24%.

As alluded to earlier, new Treasury rules could materially impact this expectation.

We expect free cash flow of approximately $1.1 billion to $1.3 billion in 2018.

We had previously committed to delivering a minimum of $1.3 billion of free cash flow.

The reason for the range is we settled the Stanford claim for $120 million in 2016, and expected to pay the funds in 2017 once approved by the court.

Although the settlement was granted, we're still in the process of litigating an appeal.

We hope the settlement will be approved by late 2018, but is dependent on the court.

We've increased our integration budget by about $60 million in order to save an additional $50 million in merger synergies for a total savings of $175 million.

There are 2 areas where we see opportunity for additional savings.

The first is expanding the scope of implementation of our ERP system.

We shifted our focus to creating a global system rather than focusing on our major centers of operations.

This will enhance data collection and greater financial efficiency.

The second area of investment is in the real estate and data centers.

We've been successful in consolidating and optimizing office and data centers, and surpassing our initial savings goals.

We expect to aggressively continue these efforts, and I'd also like to address the steps we have identified during 2018 budgeting process that makes us comfortable in guiding to the $1.1 billion to the $1.3 billion of free cash flow.

We see specific opportunities in the following areas: enhanced operational performance, reduction of program cost and capital expenditures; increased working capital; refining our hedging programs and a onetime nonrecurring cash events, which took place in 2017, such as the shareholder settlement and prepayment of core income taxes.

We plan to repurchase $600 million to $800 million of Willis Towers Watson's stock during 2018, and expect to end the year with approximately 131 million shares outstanding.

This will be a net reduction of 7 million shares since the merger, and at the top of the estimated range we discussed at the Analyst Day in 2016.

Adjusted diluted earnings per share is expected to be in the range of $9.88 to $10.12.

Annual guidance assumes average currency exchange rates of $1.33 to the pound and $1.18 to the euro.

So before I turn the call back to John, I want to remind everyone that we'll be hosting an Analyst Day in Washington, D.C., on March 16, 2018, and a Meet the Leader session in London on March 22, 2018.

We look forward to seeing you all at one of these events.

Thanks very much, Mike.

And now we'll take your questions.

(Operator Instructions) Our first question comes from Kai Pan with Morgan Stanley.

My first question is on margin.

So if you look at organic growth have been very strong and the margin improvements had been a bit slower than expected.

So I just wonder why you don't have sort of like higher leverage on the margin and what give comfort for like 25% margin in 2018?

That seems like a big jump like 200 basis points from the 2017 levels.

Yes, Kai.

Well, thank you for the question.

We think we're still confident and comfortable with the 25% EBITDA margin for 2018.

In order to -- we've seen a couple investments that we've made in the current year, one that we referenced in the HCB segment, which is both restructuring, as well as further technology investments that we've made there.

And second, in the IRR segment, our AMX investment is what we referenced, and John alluded to that in his opening comments, are investments that we've made.

So we feel good about the margin that we have delivered, a little over 3% for the current year.

And we're -- we see a bridge and a path forward, and we think that's reflective in terms of what's happening in the current year.

But we see an absolute path to the 25% margin, and that's what we've touched on.

Okay.

Then my follow-up question is on the organic growth front.

If you look at across the segments, been pretty strong.

The one weak spot is in reinsurance.

Could you talk a little bit more?

Because some of your competitor peers, they seem to have very strong organic growth in reinsurance.

And also, how do you contract your strong organic growth overall versus your, seems like, lower guidance, the sort of merger synergy?

Well, I guess, the first is, again, remember on reinsurance we take facultative.

That is included in our CRB segment overall.

So when we look at the reinsurance segment, we feel very good about where it sits and what it's delivered overall when we see it.

So I guess we're not uncomfortable with where we are in our operations associated with reinsurance.

Looking out to future in terms of overall organic revenue growth, we're comfortable really being in that 3% to 4% range that we've historically touched on, and we think that makes sense for the business, given where market conditions are.

And so I really have no more to say that that's kind of where we are.

I don't know, John, anything you'd add to that?

Yes, I mean, I think, Mike, I agree with what you said.

I guess the only thing I'd add is that when you look at the revenue synergies, we said we expect to be ahead on Global Health.

We expect to be at the low end on the mid-market exchange business.

And we expect to be about maybe $50 million below our target on the large company P&C, but we have about $25 million of revenue synergies that we hadn't counted in terms of the reinsurance at ICT.

When you add those all up, it gets to a point which is pretty damn close to about where our revenue synergies were.

And frankly, what we're focused on is making sure that we have a company that's growing.

And if we grow a little bit slower in one area and faster in another to account for it.

That will be just fine.

But we like the fact that we're getting growth from all areas, and we have a great deal of confidence going into 2018.

Our next question comes from Greg Peters with Raymond James.

I just wanted to go back a couple of comments that you made.

You raised the integration expense savings to $175 million, and you also referenced refining the hedging program.

On the $175 million, is that expected to all fall to the bottom line?

Or is there going to be a reinvestment in part of that $175 million?

And then can you run through the costs or the savings that you expect to get out of the refining of the hedging program?

Yes, so let me -- I'll take the first part of that, and I'll let Mike explain the hedging because I just get frustrated talking about it.

But the $175 million, that's part of our merger cost synergies.

And in the merger cost synergies, we expect every penny to drop to the bottom line.

And John, that's just -- that comes by the end of the fourth quarter '18, correct?

It's not something that we'll miss...

That's a fourth quarter, yes, that's a fourth quarter run rate exiting 2018, Greg.

Perfect, yes.

And Greg, on the hedging program, it's something John and I had been looking at.

I specifically have been looking at it, and really reevaluating how we do it, what instruments we use, what's the length of time that we put in place, and so we've reevaluated that activity.

I think we've streamlined it.

We've given it greater focus, attention, et cetera, and we're optimistic as we look forward that we'll see enhanced management of that going forward.

Yes, I think we do feel -- we've done -- we've spent a large part of 2017, understanding the hedging and as Mike says, evaluating it and trying to set up the best program, going forward, into 2018.

And I think both Mike and I have a lot of confidence that the system we have now is better than what we had before.

Does this mean that there's going to be a little bit more volatility in the reported results around currency?

Or I'm just trying to read through the tea leaves there.

No, no, the hope, honestly, Greg, is the opposite actually, is there's less volatility than what we've had historically.

Yes.

Okay, perfect.

The last -- the second question is around free cash flow.

I understand your guidance for 2018.

Can you just talk to us about some of the drivers in 2017 because it was down relative to 2016?

Yes.

I mean, I think, as I mentioned in the comments, Greg, what we had seen is first is bonus payment.

So in '17, we had a full year of bonus payments.

They were recorded in '16.

We only had a partial year that was included in there.

We did spend some additional CapEx, both in real estate, in which we're seeing benefits, and we'll see benefits from, going forward, as well as technology.

And I had mentioned, we had paid some taxes in the fourth quarter, which we believe were an appropriate tax strategy for us, and so we've made some additional tax payments in the fourth quarter.

So those things were the principal changes between fiscal year '16 and fiscal year '17 from a free cash flow standpoint.

Our next question comes from Shlomo Rosenbaum with Stifel.

Mike, I want to focus more on the free cash flow, like the last question, and just asking to bridge some of the 2017 to 2018 guidance.

Just want some specifics, so there's some high-level numbers that are not going to reoccur, like, how large was that tax payment that you made in '17 that will, obviously, reduce the tax payment in '18?

What else is sticking out over there?

And then, just to understand more clearly, are you expecting to make that settlement payment in 2018, and that's why the reduction from $1.3 billion to $1.4 billion to $1.1 billion to $1.3 billion?

Just trying to understand some of the moving parts and what are some of the highlights, so we can understand that bridge?

Sure.

Well, let me see if I can help fill on that color.

So first is, again, coming from '16 to '17, let's take '17 to '18 just in terms of our thinking.

Again, when you look back at '16 to '17, so cash tax payments was roughly in the $50 million range.

When you think about it, we had disclosed the shareholder litigation that we had paid, was is around $33 million, and CapEx that you can see, and there's roughly $82 million.

And we had the bonus payments in there were $80 million, $90 million kind of range, were the biggest pieces that really bridge you from '16 to '17.

And then as you look out to '18, what we really see is some operational improvements.

You're obviously going to have reduced spending from a T&I perspective, integration perspective and a restructuring perspective, and what we see is improvement in working capital and CapEx.

So when I look at those components, that's $500 million to $600 million that we see in aggregate of opportunities that are there.

So I guess you're up in that -- round that $1.3 billion free cash flow.

And your last question was when do we expect to pay the Stanford litigation?

Right now, the reason we did go with that range, $1.1 billion to $1.3 billion, was if indeed we pay it in '18, and obviously, we cruised that down to $1.1 billion, fix that and we don't pay it, we would obviously be at the $1.3 billion, then it might get pushed into '19.

Obviously, we're at the mercy of the judicial system in terms of how that process moves forward.

So I hope it provides a bit more color.

It does a bit.

Although it'd be nice if we get just some brackets around some of the anonymous.

Like $500 million to $600 million, is there something that accounts for $100 million to $200 million?

I understand that Stanford is $200 million, but what about some of the other items there?

Yes, I mean, I think if you look at our T&I, our reduced restructuring and T&I spending, you're in the $250 million to $300 million range, just to give you some further information and insight to it.

Okay.

And then just in terms of the margins in the quarter, there's a lot of talk about increased investment in some of the areas in some of the units.

Is there some way to quantify that just so that we get a sense as to what was planned and what was kind of accelerated in the plan?

And, John, maybe you want to kind of address what are you expecting to get out of some of those investments again.

Yes, do you want to talk about what was acceleration on...

Yes, I mean, so first, in the -- again, we have been investing, and John touched on it in terms of highlighted that -- what we believe were significant investments around AMX and the IRR segment.

We're continuing to look to expand that geographically, and so obviously, we need to adapt that appropriately into the particular territories, and which is going to operate, et cetera.

And we believe that, that was the right investment to make, so that we can continue to leverage that, given the positive response that we've seen in Ireland and the U.K. And frankly, it's moving at a very rapid pace, and so we view that as an appropriate investment in terms of be able to leverage that looking to '18 and beyond.

And the HCB segment was, frankly, we thought we needed to take some restructuring actions to better align the business and position it for longer-term profitability.

The -- Julie and the team, did that and executed within the quarter.

We did not include it in our restructuring charge because we view that as it relates to the prior years, and we want to make sure we keep this clean in terms of what was going to happen, and we see that as further productivity.

So we would have been more in the 23.5% kind of EBITDA margin just to come back from a quantification standpoint on an adjusted EBITDA margin basis, had we not made those investments just to kind of quantify and give you some perspective on it in terms of how we think about that.

Okay, and so let me just, Shlomo, give you a little bit more color too on maybe Mike's statement on the -- you mentioned the $500 million to $600 million of free cash flow improvement from 2017 to 2018.

And as we look at that and think about the numbers, we're focused on the grand total, not so much the specific buckets.

But if we look at the buckets, we're actually planning for operations to be about, say, 27% of the total DSO improvement to be about another 27% of the total, and then the CapEx reduction to be maybe 45% of the total.

But what we're really focused on is the total as opposed to the individual pieces.

But that, at least, gives you some idea of the relative sizes of what we're working with.

The main investments that we've been making and we're doing a little more restructuring to get some of the -- we're taking a little more charges there to get some of the additional benefits in the cost synergies.

We have those going on.

But this year, the major investments that we've been making in the business, one, Mike talked about some of the restructuring we've done in HCB, and as you noted, we let that flow through and affect our margins as opposed to separating that out in a restructuring charge, where we look at this as some necessary restructuring, but maybe a little closer to business as usual.

And John, we didn't adjust it out in the adjusted numbers either.

Right.

So it's not in the -- it's not adjusted at all in there, so we're treating it as business as usual, but we think that will pay off just as the work we did in HCB the year before paid off in some better margins this year too, improving the margins, so -- from what they would have been.

The -- we've invested heavily in AMX and brought that out, and we've also been investing quite heavily in new technology and new tools in the brokerage business, generally.

So these -- that's actually the most significant investment we're making right now is in some of the new technology and new approaches in brokerage.

We also have some investments in analytical tools in HCB.

So I think one of the things that we were focused on doing this year, Shlomo, is making sure that we, as a company, we're focused on the future and investing in what's going to be generating the future revenue flows and the future profits in 2019, 2020 and beyond.

And we wanted to make sure that, that was moving ahead as we did this.

We're still very focused on delivering the results for 2018, but we don't want that to be at the expense of future growth.

Our next question comes from Mark Marcon with Baird.

First of all, I want to congratulate you on all of the progress which occurred over the last 2 years.

You did a lot of things that a lot of people were skeptical of.

So congrats on that, and it seems like things are well within range for 2018.

I'd actually like to look beyond 2018 first, and just think about, incrementally, what are some of the things that you could continue to improve upon as we look out beyond 2018?

Because it looks like the 10 10 is within range.

What areas are you most optimistic about?

Where are the areas where the free cash flow could improve even further?

How should we think about that?

Yes, so I would say this, I think if you look at our margins and compare them to our competitors, where you would see the biggest difference is probably in CRB.

And so we think that, that is probably an area where -- I mean, I love the progress that we have made in CRB from the fourth quarter of 2016 to today.

If we keep on that (inaudible), I think there's further improvement that we can make in 2019 and beyond.

And also, the investments that I just talked about that we're making, as I said, we're putting more money in investments and making sure that we are at the forefront, technologically, in CRB than anywhere else, and so I see that as also something that we contribute there.

I think we -- I think there's some things we can do just as a matter of housekeeping and better management that will improve things.

Both Mike and I think our DSOs are far too high, and we think that there's some significant improvement.

We expect to make some improvement in 2018, but frankly, we expect to make improvement for several years, year on and year out in DSOs, and so we see that as an area that we can improve on.

And then finally, we've been spending a lot of time on making sure that we're encouraging and fostering innovation.

And I mentioned, the CEO Circle awards, we have a number of other programs.

It's my belief that most of the best innovation comes from the people on the front lines, so we're dealing with clients every day, and trying to -- they see what the problems are, and they come up with solutions for them.

And what we want to make sure is that we have the right kind of environment in this company where people can bring those solutions forward and we can institutionalize them and get them out to market quickly.

And we think we've done a number of nice things the last couple of years to bring that forward.

We think that will pay off.

That's great.

With regards to the innovation, I mean, that's part of the culture, and I'm wondering if you could talk a little bit about some of the metrics that you're looking at with regards to engagement and retention, particularly, in CRB, where you have made a ton of progress.

Yes.

So we did our first annual or our first all associates engagement survey in the early part of 2017.

And we did that, actually, before we started to see some of the real upturns that we had.

It was in the very early part of 2017.

So it's not necessarily with all the good results we've had here factored in.

But it was a -- over all, we were very pleased with the results.

We got over 86% of our people responding to it.

I think the most important thing was that in terms of feeling about the company sharing their values and improving of the values of the company of what we were trying to do, we had extraordinarily high alignment.

We had some things the people indicated that we needed to work on in terms of improving some of the efficiencies and the way we make it easier for people to do their work.

We look at engagement surveys as not report cards, but really as areas for us to identify that we can work on to improve the company, and so we're taking that feedback.

We have a whole program to roll that out.

We'll probably do another survey in another year or so, and I expect we'll see some improvement in the areas that our colleagues have identified for us.

On innovation, generally, though, we have a new venture investment committee.

That is a committee that reviews ideas that people have.

We have invested a lot in infrastructure to make it easy for people to identify some new ideas to get the appropriate support, to develop business plans for them and to bring them forward.

We have a pretty rigorous approach to which ideas we'll pilot test.

And then of the ones we pilot test, which ones we'll put into development.

And I think the idea behind that is to say, going forward, we want to have maybe a little bit -- any ideas that we're supporting, we want to make sure we give them sufficient support that they get a fair chance to do it, but we also want to have a culture of fast failure.

So we want to get out of things that aren't working.

But we're pleased with the whole development across the range there, Mark.

And then just 2 number questions real fast, the $175 million in run rate savings that we were going to get to by the end of 2018, can you just give us a pacing for what's incremental in terms of coming through as the quarters fall through?

And then from a DSO perspective, what would be a realistically ambitious goal and what would be, like, an audacious target in terms of where you can get the DSOs to?

I'm going to let Mike take both of those.

Sure.

On the -- when you look at the incremental $50 million, a big piece of that is the continued program around real estate, in particular.

As we see that optimization continuing to happen, we have certain leases coming due and we have refined the program that we've learned over the last couple of years and we believe we can see incremental benefits from what we've done to date, and that's the biggest piece of what you're going to see in that $50 million happening in fiscal year '18.

You're coming back on your -- remind me of you second...

Just the DSOs, what...

What's a realistic and what's an audacious goal.

So I think a realistic goal is clearly getting it down by 5 days I think is a realistic immediate goal.

Every day is worth $0.01 of share, it's $21 million a day for us.

So we see that, I mean, 20% reduction would be more of an audacious goal in what we have out there in terms of what we would look to do.

And so we're really, as John mentioned, the both of us are very focused on it as well as, frankly, the entire leadership team in terms of managing it and driving it in a very focused way.

So we understand what it means to free cash flow.

We know what it means in terms of creating opportunities for us to be able to redeploy that free cash flow and return it to potential investors is an important element to that, so hopefully that helps.

Our next question comes from Mark Hughes with SunTrust.

In the CRB segment, very strong international organic growth, was there some timing benefit to that, your guidance for low-single-digits is consistent with what you've had historically, but it seems like Q4 was quite strong.

Is there some reason it should decelerate that much?

Well, I think when you look at international, you have really a tale of just 2 very different years between 2016 and 2017.

And we mentioned that we thought that there were a lot of things, just a lot of unfortunate breaks in 2016 on international, and we thought the actual performance of that business was really much better, but a lot of things brought it down.

So I think we had some easier comparables in 2016.

The performance in 2017 has just been outstanding, I think, really the whole year.

And so it's a little bit better in this fourth quarter, but it's really good performance the whole year.

And then your large case P&C, sounds like you're making some progress, but would like to make more.

Is there -- are you finding this is just something that's going to take longer?

Or it is just hard to do?

Yes.

I would say that I think -- well, 2 things about this: one, we put the $200 million goal out there, and that was really taking us from -- it was an additional 2% market share, we estimated, but it was really about a 40% increase in our market in what our total revenues were because we're going from 3.5% to 5.5%.

So a pretty big increase there.

We're not getting quite as far along as we thought.

But even when we had the $200 million out there, we expect that, that would be something that we would build on in future years and continue to grow our relative market share there.

So if it comes out the way we're planning now, we'll have gone from about 3.5% market share, up 1.5% to about 5% and 5%, 5.5%, something like that, and we'll -- we expect to continue to grow that over future years.

I think it's probably, I mean, it's fair to say it's probably been a little bit harder than we anticipated or at least it's been a little bit slower than we anticipated.

And so I think I mentioned the -- we actually are not as far off on the number of cases that we had brought in, but the average case size is a little bit smaller than we had anticipated.

And our last question comes from Elyse Greenspan with Wells Fargo.

Just trying to tie up some stuff.

If I look at the earnings guidance that you guys gave, obviously, the 10 10 that you guys have pointed to throughout the merger is included within that.

It seems like expense saves, you're more positive on.

Revenue synergies are coming in a little bit lighter than you would expected in a couple of the buckets.

Tax, more or less about in line a little bit better.

So I guess I'm trying to tie it all together and just understand how you kind of got to your guidance and maybe why it wouldn't be a little bit higher.

And then do you -- is the 25% EBITDA margin goal, is that embedded within the guidance that you set forth for 2018?

Yes.

So I'll give you some thoughts, Elyse, and then maybe Michael will want to jump in too.

But look, the 25% EBITDA goal is embedded within there also.

I think what I would say is that when we thought about the 10 10, and you will remember from that, that back in 2016, we did the Analyst Day.

We said everything doesn't have to go perfect.

We have some things that can balance as to where they are.

I think, frankly, we have a lot of things going right at the moment, and we feel pretty good about that, which we think gives us good momentum going into 2018.

We did -- we do expect we'll lose about $0.06 a share as a result of the new tax bill.

And so if you take the $0.06 a share and added that to our guidance, we have the 10 10, just about almost -- it wouldn't be quite dead centered, but it will be real close.

But that's about where we had been targeting the whole time that we thought 10 10, we always said it wasn't a slam dunk by any means, but we thought we had a plan to get there, and I think we still feel that way.

Mike, do want to add anything?

Yes, I was going to add, John, I mean, I think at lease back on the margin things, I mean, I think we've made those investments.

We believe they will pay off going forward.

We're obviously focused on a variety of different things.

As John said, we have a lot of things going right.

But obviously, we're planning for to drive it as a management team.

But we'll have some things that will come up, and we think we put the appropriate measures in place.

But we think that 25% makes sense, and therefore, rolls up to those overall goals, adjusted by taxes, as John said.

The 25% is included in the 2018 target?

It is.

Yes.

Okay.

And then as we think about the saves from the OIP and then the higher merger saves, as you guys come up with this guidance, just because it's really hard for us from the outside to see how much might actually be falling to the bottom line, is there any way you can kind of talk to how much bottom line savings you're seeing as you think about '18?

And then this might relate to the saves going up.

But I did notice the integration cost that you pull out of adjusted earnings went up in the quarter and was ahead of plan this year.

What drove the higher cost there?

Yes, so first off, Elyse, the higher costs were principally related to additional technology and real estate costs that we had been -- spent activities on.

We also had the shareholder suit that came back overall in terms of what we spent additional money on, the $33 million that we had as it relates to the shareholder litigation.

Settlement was included in there.

So those are the principal biggest pieces of that incremental amount.

On OIP, as John referenced, the $95 million, our best estimate of it right now is roughly around half that we've seen in terms of falling to the bottom line, and equally, we talked about $175 million next year in terms of what that looks like as an exit rate amount.

So I know you're trying to go back to those pieces, but those are the biggest chunks that are included in there.

Okay, great.

And then one last question.

It seems like it's taking a little bit longer for some of the larger account wins that you guys had pointed to with this merger.

Is that something that maybe -- how do you think about '19?

Is it something where you see these synergies continuing, maybe more coming in over the longer term?

Or is it something where maybe the ability to gain a higher share in that market might just -- it's either taking longer?

Or do you think you might not get to the original target?

No.

We'll get to the original target and go past it.

This does conclude our Q&A session.

I would now like to turn the call back to Mr. John Haley for any further remarks.

Okay.

Thanks very much, everyone, for joining us this morning, and we look forward to talking with you or seeing you in March.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.

Everyone, have a great day.