Willis Towers Watson PLC (WTW) 2019 Q1 法說會逐字稿

Good morning.

Welcome to the Willis Towers Watson First Quarter 2019 Earnings Conference Call.

Please refer to our website for the press release and supplemental information that was issued earlier today.

Today's call is being recorded and will be available for the next 3 months on our website.

Some of the comments in today's call may consist of forward-looking statements within the meaning of the Private Securities Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties.

Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law.

For a more detailed discussion of these and other risk factors, investors should review the forward-looking statement section of the earnings press release issued this morning as well as other disclosures of our most recent Form 10-K and in other Willis Towers Watson SEC filings.

The company will refer to certain non-GAAP financial measures.

For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website.

I'll now turn the call over to Mr. John Haley.

Willis Towers Watson, Chief Executive Officer.

Please go ahead.

Okay.

Thank you.

Good morning, everyone, and thank you for joining us on our first quarter earnings call.

Joining me here today are Mike Burwell, our Chief Financial Officer; and Rich Keefe, Head of Investor Relations.

Today, we'll review our results for the first quarter of 2019 and the outlook for the remainder of the year.

We're pleased with the results this quarter.

We were able to generate strong organic top line growth of 5%, and this marks the third consecutive quarter in which we've generated 5% or more of organic revenue growth.

Moreover, this quarter, we faced a challenging comparable 6% organic revenue growth in the first quarter of 2018.

Despite that challenge, we still managed to generate strong organic revenue growth, and more important, we delivered profitable growth with meaningful margin expansion of 200 basis points and double-digit adjusted EPS growth.

As we discussed at our recent Analyst Day, we have a disciplined strategy focused on generating profitable growth, and we feel positive about the strong progress that we've made in this area.

I believe this progress is a testament to the immense talent and effort that our colleagues around the world bring to the table on a daily basis.

I'd like to take a moment now to recognize their hard work and dedication.

Their commitment to client service and living our values are making deep and lasting impacts on our business.

I'm very proud of what they've achieved for the company, for our clients and for our shareholders and for bringing our story to life.

I thank them for their efforts and for another solid performance this quarter.

We remain committed to our strategy, and we're pleased with the progress that has been made.

But we're not standing still.

This is demonstrated by our recent announcement to acquire TRANZACT.

We're extremely excited to bring TRANZACT into our Willis Towers Watson family.

They bring exceptional talent and capabilities to bear, including a leading technology-driven direct-to-consumer solution platform, and we think they'll be a great fit within our company.

This pending acquisition is an excellent example of our focus on investing in areas that deliver a sustainable competitive advantage.

We continually look to identify investment opportunities that are high margin or have a prospect of getting to relatively high margin.

Similarly, we like them to be adjacent to our core business and have the potential to disrupt or transform some existing value change.

We believe TRANZACT checks the boxes across the board and represents a tremendous growth opportunity in the Medicare space.

By leveraging Willis Towers Watson technological infrastructure and scale with TRANZACT telesales and digital marketing expertise, we will have exceptional distribution and enrollment capabilities as well as a broadening position in the rapidly growing Medicare space.

Further, we look forward to unlocking the synergies between the 2 companies and as we execute on our plans.

Overall, we're excited about this step and what it means for Willis Towers Watson, for our colleagues and for our shareholders as the next step of significant value creation.

At this time, we're still in the regulatory approval process, and we expect to -- we continue to expect closing will occur in the third quarter of 2019.

Now let's move on to our quarter 1 2019 results.

Reported revenue for the first quarter was $2.3 billion, up 1% as compared to the prior year first quarter and up 5% on a constant currency and organic basis.

Reported revenue included $84 million of negative currency movement.

Once again, this quarter, we experienced growth on an organic basis across all of our segments.

Net income was $293 million, up 33% for the first quarter as compared to the $221 million of net income in the prior year first quarter.

Adjusted EBITDA was $601 million or 26% of revenues as compared to the prior year adjusted EBITDA for the first quarter of $557 million or 24.3% of revenues, representing an 8% increase on an adjusted EBITDA dollar basis and 170 basis points of margin improvement.

For the quarter, diluted earnings per share were [$2.20] (corrected by company after the call), an increase of 34% compared to prior year.

Adjusted diluted earnings per share were $2.98, reflecting an increase of 10% compared to prior year.

Overall, it was a solid quarter.

We grew revenue and earnings per share and had enhanced adjusted EBITDA margin performance.

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

To provide clear comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis unless specifically stated otherwise.

Segment margins are calculated using segment revenues and exclude unallocated corporate costs such as amortization of intangibles, certain transaction and integration expenses resulting from mergers and acquisitions as well as other items, which we consider noncore to our operating results.

The segment results do include discretionary compensation.

The Human Capital & Benefits segment revenue was up 3% on an organic and constant currency basis compared to the first quarter of prior year.

The Health and Benefits business delivered strong performance again this quarter with revenue growth of 11%, with new business and product revenue continuing to drive revenue expansion in North America while global benefit management appointments contributed to the growth outside of North America, primarily in Western Europe and Latin America.

Health and Benefits revenue growth was also bolstered by the nonrecurence of downward revenue adjustments, which were made in the prior year in connection with the initial adoption of the new revenue standard.

Talent and Rewards revenue increased 3% as a result of increased advisory and survey work in North America and Western Europe.

As expected, retirement revenue declined 2%, mainly as a result of headwinds from having 1 less billing day this quarter and the impact of a tough comparable from the prior year, which benefited from the triennial valuation cycle work in both Canada and Great Britain.

Technology and Administration Solutions revenue decreased 2%, as new business activity was eclipsed by reduced demand for project work in Great Britain.

HCB's operating margin improved by 150 basis points to 25% compared to the prior year first quarter.

This improvement reflects top line growth alongside disciplined expense management efforts.

HCB is our largest segment.

We're confident about the future prospects of all the businesses within it on both the short term and long-term basis.

From Employee Benefits to Executive Compensation, HCB sits in a position of strength in the markets it serves, attracting top talent, retaining over 90% of its client base and consistently generating industry-leading margins.

Now let's look at Corporate Risk & Broking or CRB, which had a revenue increase of 3% on a constant currency basis and 4% on an organic basis as compared to the prior year first quarter.

North America's revenues grew by 4% in the first quarter, primarily as a result of new business.

The International regions revenue was up 6% compared to prior year as a result of new business wins in China, Argentina, Venezuela and Central America.

Western Europe contributed 5% revenue growth.

Their growth was led by France's new business wins in large and mid-market accounts.

Great Britain had a nominal decline in revenue.

CRB revenues were $728 million with an operating margin of 17.4% as compared to a 16.8% operating margin in the prior year first quarter.

The margin expanded due to the top line performance coupled with continued cost management efforts.

As a side note, I'd like to say how pleased I am with the progress the management team and, indeed, all of our colleagues in CRB have made over the last few quarters.

To see this steady top line growth and the continued margin expansion is excellent, and our outlook on our CRB business remains positive going forward.

Turning to Investment, Risk & Reinsurance or IRR.

Revenue for the first quarter increased 6% to $589 billion on a constant currency basis and increased 5% on an organic basis as compared to the prior year first quarter.

Reinsurance with growth of 6% continued to lead the segment's growth through a combination of net new business and favorable renewals.

Insurance Consulting and Technology grew by 6%, mainly from technology sales.

Investment revenue declined because of one-offs in the comparable period and timing of performance fee bookings in the current year.

Our wholesale business was up 5% on a constant currency basis.

On an organic basis, wholesale revenues decreased by 6%, excluding the Alston Gayler acquisition.

The organic decline in wholesale was primarily attributable to reduced marine placements in the Miller unit.

IRR had revenues of $589 million and an operating margin of 43% as compared to 45% for the prior year first quarter.

The margin decline was attributable to software trading in the Miller unit and one-off timing-related items within the investment business.

Overall, we continue to feel positive about the momentum of our IRR business for 2019.

Revenues for the BDA segment increased by 10% from the prior year first quarter, primarily as a result of adding -- added about 300,000 lives during the 2019 enrollment period in the mid-market and large market space.

Project work and out-of-scope services further enhanced this segment's revenue growth.

Individual Marketplace revenue was down nominally as seasonality for this business is shifting, while the remaining businesses in the segment generated 14% growth, primarily led by Benefits Outsourcing.

The BDA segment had revenues of $135 million with a minus 15% operating margin.

Now that's up 11% from a minus 26% in the prior year first quarter.

Top line growth and greater operating leverage both contributed to the segment's margin expansion.

Our BDA offerings remained fundamental to our business growth engines of our enterprise strategy.

We're optimistic about the long-term growth of this business.

So in summary, I'm very pleased with our progress.

We've produced strong earnings growth in the first quarter, we had strong revenue growth, we had meaningful margin expansion and significant adjusted EPS growth, all were continuing to invest in our future and return capital to shareholders through dividends.

As we look to the remainder of 2019 and beyond, our future is bright.

Our business is continue to shift towards faster-growing areas.

We expect to reap benefits from our investments in areas focused on innovation such as digital and technology, and we're confident in our ability to complete and successfully integrate TRANZACT.

Now I'll turn the call over to Mike.

Thanks, John.

And I'd like to add my congratulations of our colleagues for another good quarter and then thanks to our clients for their continued support and trust in us.

First quarter represented a good start to the year with strong organic revenue growth, robust margin expansion and underlying adjusted EPS growth.

Now turn to the overall detailed financial results.

Let me first discuss income from operations.

Income from operations for the first quarter was $359 million or 15.5% of revenue, up 420 basis points from the prior year first quarter income from operations of $259 million or 11.3% of revenue.

Adjusted operating income for the first quarter was $492 million or 21.3% of revenue, up 200 basis points from the prior year first quarter adjusted operating income of $443 million or 19.3% of revenue.

Let me turn to earnings per share or EPS.

For the first quarter of 2019 and 2018, our diluted EPS was $2.20 and $1.61, respectively.

For the first quarter of 2019, our adjusted EPS was up 10% to $2.98 per share as compared to $2.71 per share in the prior year first quarter.

FX was modestly worse than previously anticipated due to a stronger U.S. dollar, resulting in a significant net unfavorable impact of approximately $0.12 in the quarter.

Likewise, as previously guided, we're adversely impacted by a decrease in noncash pension income compared to the prior year, which resulted in a year-over-year decline of $0.12 in the quarter.

Excluding the combined headwinds from currency of $0.12, the reduced pension returns of $0.12 and a little bit higher tax rate of $0.02 versus the prior year adjusted EPS growth was approximately 20%.

From effective tax rate perspective, our U.S. GAAP tax rate for the first quarter was 18.8% versus 16.3% in the prior year.

Our adjusted tax rate for the first quarter was 20.1%, up slightly from the 19.7% rate in the prior year first quarter.

This increase in effective tax rate for the quarter compared to the prior year was primarily due to additional taxes on global intangible low-taxed income or GILTI, and we continue to evaluate the impact of global tax reform on our effective tax rate, including the effect of new taxes associated with compensations for changes resulting from updated interpretations and assumptions issued by the taxing authorities.

As a result, the effective tax rate is subject to movements and will continue to be updated as more analysis and information becomes available.

The adjusted tax rate for the first quarter is lower than our full year guidance due to onetime or discrete tax benefits related to excess tax benefits of share-based compensation and valuation allowance releases in certain non-U.

S. jurisdictions.

I'm turning to the balance sheet.

We continue to have a strong financial position.

In the first quarter, we implemented the new lease accounting standard.

This result had no material impact to our operating income, but did result in increase in liabilities on our balance sheet, which is largely offset by a corresponding increase in assets.

The gross step total was approximately $1.5 billion.

For the first quarter of 2019, our free cash flow was negative a $134 million versus $47 million in the prior year.

Q1 is our seasonally lowest quarter from a cash flow standpoint due to the impact of incentive compensation payments.

The year-over-year decline in free cash flow is due to higher compensation payments as well as some timing-related income taxes and pension contributions.

As we think about cash flow generation for remainder of the year, we expect free cash flow to build as a result of operating income growth, improved working capital and disciplined capital spending.

In terms of capital allocation, we have paid approximately $77 million of dividends and did not repurchase any shares in the first quarter of 2019.

Now thinking about our guidance.

For the full year, we're reaffirming our original guidance.

We continue to expect organic revenue growth of around 4% and full year adjusted operating income margin to be around 20%.

One point of clarification around our guidance.

We'll remind you that our fourth quarter is our seasonally highest quarter, primarily as a result of our enrollment activity within our Benefits, Administration and Delivery business.

Also concerning the HCB brokering recapture from the adoption of ASC 606, we recaptured approximately $11 million in Q1 2019 within the HCB segment and expect to recapture remainder by the end of Q3 2019.

The adjusted effective tax rate is still expect to be around 22%, excluding any potential discrete items, and we still expect free cash flow growth of 15% or better.

Foreign exchange credited to a $0.12 headwind to adjusted EPS in the first quarter of '19.

This will mean exchange rates remain at current levels.

We expect an FX headwind of around $0.15 for the full year of 2019.

Despite the additional potential FX headwinds, our adjusted diluted earnings per share guidance will remain unchanged and is projected to be in the range of $10.60 to $10.85.

On the next quarter earnings call, we expect to update our guidance to reflect the TRANZACT acquisition, which is expected to close in Q3 2019.

Overall, we delivered solid financial performance in the first quarter.

While I'm pleased with results and the continued momentum of our business, there is still a lot of opportunity ahead to remain focused on driving execution.

And now I'll turn the call back to you, John.

Thanks very much, Mike, and now we'll take your questions.

(Operator Instructions) And our first question coming from the line of Greg Peters of Raymond James.

I'll ask a couple of questions.

First, on organic growth.

The first quarter result running ahead of your full year guidance.

If I reflect back on the last couple of years, it seems like the second quarter has always been a struggle, but nevertheless, with you running ahead of your guidance is suggesting that maybe some of the quarters maybe lower going forward than where you were in the first quarter.

Can you comment?

Yes.

I mean, I think Greg, we don't reflect our guidance for what we think are relatively smaller changes, we don't.

So Mike just got for his sake, even though we have the negative currency effect is bigger than we anticipated, we're not changing our guidance.

We have a range there.

And similarly, with the revenue.

Even though we're a little bit ahead in the first quarter, we're not changing our guidance right now.

So we don't adjust for every small, little thing.

I got it.

I thought we were done with ASC 606, but it popped up in Mike's comments.

And if I'm not mistaken, the benefit to 2019 was going to be in total around $40 million, and you've only booked $11 million of that.

So that leaves $29 million to fall through in the second and third quarter, is that correct?

Yes.

I'll let Mike comment on that.

But let me just say, I had -- we were talking about this the other day about 606.

I thought we were done with it, too, and I was telling folks that have reminded me from the scene in Carrie where the hand comes up out of the grave to strangle you.

We just can't seem to get rid of this -- the effects of this standard.

So up, Mike?

So Greg, the number actually is $59 million in total.

And the remainder above the $11 million that I commented on in my prepared remarks will happen by the end of the third quarter.

I loved the analogy.

And so should I -- should we look at the $59 million as recurring in nature going forward when I think about 2020, et cetera?

Or is this onetime or it gets pulled out of 2020 in comparison to 2019?

It'll be recurring going forward is how we think about it.

All right.

I guess the final question would be around the adjusted operating margin.

20% is your target for the year.

And then I look at the segment results.

And I've have always felt like CRB had the most opportunity and yet it looked like it was a drag on the consolidated adjusted operating margin, at least in terms of improvement in the first quarter.

Can you give us some updated perspective on how that might progress through the year?

Yes.

Greg, so when you look at it, I mean there is no doubt we continue to see opportunity in that business.

Todd Jones and the management team there are very focused on it, and we saw improvement in the first quarter in terms of overall margin improvement.

We continue to think of opportunity that we'll see and continue to see that happening.

So as we look at the quarter, we're pleased with the progress we are making.

We still see more.

It's about 50 basis points improvement is what we saw in the first quarter for CRB.

And it's hard to compare that to other -- it's hard to compare that to the improvement in other segments because HCB have some of the 606 changes and other things.

So we feel pretty good about the CRB.

They are making -- as I said in my remarks, they are making good steady progress with the margin improvement, exactly what we're looking for.

And our next question coming from the line of Elyse Greenspan with Wells Fargo.

My first question, I'm just trying to get a little sense of the organic revenue outlook for HCB for the balance of the year.

So in the previous question, you addressed the fact that we have some rev rec benefit coming back into numbers.

But then that was offset this quarter by some timing issues and retirement.

And then also by the triennial valuation cycle.

So do either of those -- do the impact of either of those 2 items benefit you in the past 3 quarters?

Or are these things that we should be thinking about as being a headwind to organic within HCB for the balance of the year?

Yes, Elyse, we really purposely stopped giving segment guidance on and really looking at the totality around the 4% overall.

But we feel really good about the HC business -- HCB business and their ability to continue to drive revenue growth.

We're not overly concerned from the triennial impacts coming forward, they're very small.

But we feel very confident in the management team and what that business is going to continue to drive and really contribute, as we said, on an overall basis around that 4%.

I would say that the impact of the triennial evaluations tends to be more pronounced in the first half of the year than in the second half.

Okay.

And then in terms of IRR, you guys called out that wholesale organic was down around 6%, I believe, due to reduced Marine business within Miller.

Can you just provide a little bit more color there and if that's something we expect to continue?

And was that the driver of the margin deterioration within IRR in the quarter?

Yes, Elyse.

I mean we were just calling out our particular businesses that we had seen.

We just not had seen as much continued growth in that particular business.

But -- so yes, that's what we were -- that's what we're highlighting.

And the margin story is a little bit complicated with some of the expenses and everything.

Yes.

I mean you do have -- we also have some expenses that we've included in there as we run off -- continue to run off and close out of our securities business.

And equally, when you look at where the market has been in terms of some of our performance fees.

But we view those all as timing and still feel confident back in terms of our overall guidance from an EPS standpoint at the $10.60 to $10.85 range.

Okay.

And then in terms of the TRANZACT deal, it's -- and I know you said you guys will update EPS guidance for that next quarter.

Is the right way to think about it in that you are getting that business right?

If the deal closes in the third quarter, the fourth quarter would be their strongest earnings quarter.

That relative to that type of seasonality there that would technically be accretive relative to your initial guidance or am I missing something and thinking about it that way?

Well, there is something you need to be careful about because we were planning to buy back shares.

And if we don't buy back shares and we do TRANZACT instead, those 2 were offsetting, whether they're offset exactly or not, that's something we'll address later on.

And our next question coming from the line of Mark Marcon with R.W. Baird.

I'm wondering if you can talk a little bit more about TRANZACT just in terms of what you've seen post the announcement just in terms of their continued momentum that's been growing their policies at a rapid rate of 25% to 30%?

I'm wondering if that's continuing, if that -- from what you're seeing from an update perspective?

And then what are you hearing with regards to -- obviously, it's early in the political season, but if Medicare ends up being expanded and includes, say, 50-plusers, how's that going to end up impacting their business?

Yes.

So I think, first of all, we continue to be pleased with the performance of TRANZACT, and they're doing very well.

And in fact, we expect to -- we had some sort of performance-related elements to the deal, and we expect to be paying off on them.

Ideally, we'd like to pay off on all of them to really grow.

But TRANZACT continues to do very well, and we're looking forward to getting together with them.

From the viewpoint of Medicare expansion, whether it's even to 62 or down into the 50s.

So I think one of the things we found particularly attractive about the TRANZACT deal is that if the Medicare space does expand at all, that just opens up an enormous market.

As I said, even an expansion down to 62 would -- what's that, Mike?

10 million new lives or something like that?

Yes.

So all of that would be good for our business we think.

That's great.

And then can you talk a little bit about what you are seeing in Great Britain?

You talked about HCB and CRB.

Just wondering how should we think about it because this has been dragging -- Brexit has been dragging on, and I'm just wondering what you're hearing from your people over there and how they are dealing with the uncertainty?

Yes.

So I would say -- I think it's actually been surprising lease to some of us that how -- that there is relatively little disruption on our day-to-day work.

I mean when we talked about some of the impacts in GB, when we talked about HCB, you noticed what we were talking about was the triennial valuation cycle, not Brexit itself.

So we're not necessarily seeing a big impact from there.

Even CRB, which I mentioned, it had a nominal decline in Great Britain.

Actually the performance of CRB was really pretty good, and it was ahead of what we had in our internal projections.

And the reason is we had several one-off natural resource projects last year that we knew were not going to be recurring.

So then coming in where they did was actually ahead of where we are.

Brexit is something that's been weighing on the British people and British business for a couple of years now.

But we're not seeing any necessary acceleration of that, I don't think.

And so like everybody else, we're just waiting to see how this plays out.

Yes.

And maybe, John, I would just add comment and that is to mark, I mean, obviously, clients come first for us and, obviously, clients and colleagues.

And we've been thinking about various scenarios and various alternatives, obviously giving our presence and worth sits in that marketplace for some period of time.

And it's continued to been working at the detail level, at least in terms of working at the various alternatives.

So just to add to John's comments.

Our next question coming from the line of Mark Hughes with SunTrust.

Hello?

Don't hear anything, operator.

We may have lost the operator.

Olivia, can you hear something?

John, can you hear me?

Yes, we can hear you now.

Okay.

Very good.

In looking at the BDA business, last year, the margin was relatively stable through the first 3 quarters it looks like, both in absolute dollars and percentage.

Would we think that should be the same this year kind of relatively steady in terms of that loss?

Yes, but lots of a loss.

I mean, obviously, our team there, led by Gene Wickes, has been very focused on cost management and continue to -- continuous improvement like all of our segments continue their -- continued focused on it.

And so I think that's a fair assumption.

But I would say that they're focused on continuous improvement.

And then on the reinsurance part of IRR, I think you talked about the momentum in the renewal.

Any comment on how much of that is market conditions?

Are you just seeing more activity, renewal rates or possibly improved or market share gains?

I think it's a combination of all of those.

So -- and we don't -- we can't actually break that down.

But I think I wouldn't underestimate the impact of just a change in reinsurance buying behavior among clients, too.

So that definitely is an element of it.

And when you say change in behavior?

So in other words, buying more reinsurance.

Now our next question coming from the line of Paul Newsome with Sandler O'Neill.

Is there any offset to the FX in your thinking about guidance for the year that sort of offsets to get us back to the overall sort of guidance in there that you would highlight?

I make sure -- I'll make sure I follow your question, I guess, what I've heard you asking is saying, look, with FX at your $0.12 overall for the first quarter.

We had updated our guidance to $0.15 headwind for the year, and we did not change our guidance.

We kept it at $10.60 to $10.85.

So then, therefore, that's what we're assuming.

We're going to be able to absorb that within that range that we said would be there.

And there's really no change to margins.

So that's how we're thinking about it.

Or help me if that isn't -- I'm not responding to your question.

No, that's exactly what I was saying.

If there was some sort of -- if you think, essentially, the strong organic growth offset or anything that you thought or you want to point out to.

No, we just thought we would still be in that range.

Okay.

I was hoping you could talk about a little bit of the market environment, particularly for the brokerage operations.

And 2 things I would like you to touch on.

One obviously, there seems to be something going on with insurance pricing.

And the other is there are comments about dislocation of lots of folks from the JLT merger and whether or not that's having any impact on your business?

Yes.

So I mean, I think, look, pricing is generally -- each particular area has its own pricing changes.

So auto is different from cyber or whatever.

But in general, across most of them, we're seeing modest price increases, I'd say.

That's where they -- there's a range everywhere, but they tend to be centered around modest price increases for most of them.

I mean cyber is one particular example, workers comp or both probably centered around 0 change, no change in rates.

But most of them have some slight one.

So that's a headwind for us.

The other piece...

(inaudible)

The other part of the question was JLT.

And look, we have seen a -- there have been a lot of resumes on the market, and I think that's no surprise.

This could be an opportunity for us to add some key people, but I think we also want to be careful about just who we bring on and when.

So we're approaching this very carefully.

And our next question coming from the line of Adam Klauber with William Blair.

The TRANZACT deal that gives you, obviously, great exposure to the growing senior market.

You mentioned part of the business is telesales, part of the business is digital.

Can you give us any sense just as far as that in that senior market, how much of the market is digital today?

In other words, how much of the market actually initiates or does the sales online versus more of the traditional channel?

We -- I don't want to wing it here.

So we don't have a number on that right now.

That's something we'll think about putting in when we do our update on TRANZACT for next quarter.

Okay.

But as part of the thesis that, that digital online piece is going to grow pretty rapidly?

That's correct.

We do expect that to grow, yes.

And it's one of the things, as we said, we liked a lot about TRANZACT.

And then thinking forward and as you look at other potential deals over the longer term, is it -- are you thinking about more like TRANZACT that have that digital online exposure?

Are those in the pipeline?

I guess what are your thoughts on expanding your digital footprint?

So I think something that has that kind of digital capability and that kind of exposure, that's a feature that makes a deal more attractive.

It doesn't mean that every deal has to have that there.

So we'll be looking at that.

But in general, what I laid out was we're looking for businesses that are going to be high-margin businesses, either we're already there or have the capability to get there relatively quickly.

We're looking for businesses that fit in and are relatively near adjacencies to our existing business.

And we're looking for that, simply put, because we want to understand the businesses ourselves.

We don't want to be acquiring things that we don't understand inside and out.

So that's why we're looking for things that are relatively near adjacencies.

But within that, if a deal is accretive, it's more attractive than if it's dilutive, if it has more digital capabilities, it's more attractive than if it doesn't.

So we'd be looking about that.

I mean having said that, we're really focused on organic growth, too.

Great.

And then as far your -- the benefits business for large and jumbo clients, some of the other competitors or there's been some dislocation, as you know, some have been splitting their tacking consulting, some are trying to figure out what to do with their technology.

Has that been a benefit in -- when you're picking up clients in that large and jumbo market?

I don't know that we see that is having a particularly large impact, no.

Our next question coming from the line of Yaron Kinar with Goldman Sachs.

And I apologize in advance, I missed the first part of the call.

Did you talk about the FX impact on margins?

And if not, can you maybe talk about that now?

Yes.

Yaron, there was really no real, meaningful impact on margins from FX.

Not material.

Okay.

And then my other question, I guess I was called out offguard the [odds]here in terms of the triennial valuation cycle.

Should there be any impact from that for the rest of the year?

And are there other maybe one-offs that we should be thinking about for the rest of the year?

Yes.

I mean I think the answer to that is, no.

I mean the triennial valuations have an impact the whole year.

I mean it's this year compared to last year.

The effect is more pronounced in the first half of the year than it is in the second half of the year.

There's nothing else comparable to that.

We called out that in the last year, the triennial valuations were a reason that we had good growth last year.

So it was something we tried to signal then.

Okay.

I must have missed that.

And then finally, so the remaining $48 million of ASC 606 catch-up in the second and third quarters, should those be roughly evenly spread?

Or do you expect that to be more weighed to 1 of the 2 quarters?

I would think they'd be pretty even.

I guess it's the best way I would look at it.

And our next question coming from the line of (inaudible) with KBW.

It seems like -- going back to wholesale, it seems like pricing in many wholesale lines is a generally positive and modestly accelerating but revenues declined, which you guys called out to the Marine.

Are you concerned about the net new business going forward and whether you'd expect, kind of, to see some positive movement from -- on renewals due to rate that'll be probably impacted going forward?

Yes.

I mean, as John said, we see the rate is dependent on the line and in terms of modest increase in pricing.

Obviously that's winning and continue to win more net new business.

So it's both volume and rate.

So we've had -- as we articulated a little bit of volume change here that's got a little soft for us.

But let me tell you the management team is very focused on it, and we manage it for entirety of the year.

So we're giving an update here at the quarter, but our expectation is to meet what we have said in terms of objectives for the year.

And our next question coming from the line of Michael Zaremski with Crédit Suisse.

We're not hearing anything.

I think I'm showing he's just removed himself from the queue.

At this time, I'm showing no further question.

I would like to turn the conference over to Mr. Haley.

Okay.

Well, thanks, everyone, for joining us today, and we look forward to updating you in our second quarter call in August.

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

This concludes the program, and you may now disconnect.

Good day.