Willis Towers Watson Public Limited Company

Good morning, ladies and gentlemen, and welcome to the Willis Towers Watson Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Rich Keefe, Head of Investor Relations at Willis Towers Watson. Sir, you may begin.

Good morning. Welcome to the Willis Towers Watson earnings call. On the call with me today are John Haley, Willis Towers Watson's chief executive officer, and Mike Burwell, our chief financial officer. Please refer to our website for the press release and supplemental information that was issued earlier today. Today's call is being recorded. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995 These forward-looking statements are subject to risk and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements. 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 in our most recent Form 10-K, and other Willis Towers Watson SEC filings. During the call, we may discuss 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. After our prepared remarks, we'll open the conference call for your questions. Now, I'll turn the call over to John Haley.

Thanks, Rich, and good morning, everyone. Today, we'll review our results for the fourth quarter of 2018 and for the full year, and then we'll provide a brief commentary on the outlook for 2019. Before discussing the 2018 financial results, I'd like to reflect on our journey since the merger. The fourth quarter of 2018 marked the end of Willis Towers Watson integration activities. Over the course of the last three years, we faced many challenges. and I'm extremely proud of the progress we've made. Our success is evident in the financial results we executed on our synergy goals for margin expansion, for revenue growth, and for lowering the tax rate, and we nearly doubled our free cash flow in 2018. In short, we made a commitment to create long-term shareholder value, and we delivered. I believe that with our continuing focus on servicing clients and strategic investments in innovation, we're well positioned to deliver sustainable growth into the future. I'm also honored that Willis Towers Watson was recently included on Bloomberg's 2019 Gender Equality Index, as it demonstrates our commitment to equality and advancing women in the workplace. Gender equality is central to Willis Towers Watson's wider commitment to inclusion and diversity, as we strive to attract, retain, and develop the very best talent to best serve our clients. This year at the World Economics Forum at Davos, Willis Towers Watson was a co-sponsor of Bloomberg Live's The Year Ahead Davos event, where Julie Gebauer, head of human capital and benefits, spoke about the value of broadening perspectives as part of the gender equality conversation. Participating in the World Economic Forum was an exciting opportunity for us to share our perspective on critical topics like the future of work, inclusion and diversity, climate finance, and cyber risk. It's clear that we're entering an era that will revolutionize the way we work and the way we think about inclusiveness. As trusted advisors and thought leaders in our increasingly socially conscious world, we're well-positioned to help our clients and colleagues keep pace with the transition. Now let's turn to our results. Just as a reminder, as of January 1, 2018, we adopted the new accounting standard, ASC 606. A detailed description of the impact of ASC 606 will be provided in our Form 10-K filing and detailed explanations of how the new standard impacted our performance and the presentation of our financial statements has been provided in our earnings release this morning. I will first report the results using the prior accounting standard, excluding the impact of the new accounting standard. Based on the prior accounting standard, without the impact of ASC 606, reported revenue for the fourth quarter was $2.1 billion. up 3% as compared to the prior year fourth quarter, and up 5% on a constant currency basis, and up 6% on an organic basis. Reported revenue included $49 million of negative currency movement. We experienced growth on an organic basis across all of our segments for the quarter. Net income was $174 million, down 31% for the fourth quarter, as compared to the $253 million of net income in the prior year fourth quarter, which included a one-time tax benefit from tax reform. Adjusted EBITDA was $525 million, or 24.5% of revenue, as compared to the prior year adjusted EBITDA for the fourth quarter, was $184 million, or 23.3% of revenue. representing an 8% increase on an adjusted EBITDA dollar basis and 120 basis points of margin improvement. For the quarter, diluted earnings per share were $1.29, and adjusted diluted earnings per share were $2.40. Overall, it was a good quarter. We grew revenue and earnings per share and had adjusted EBITDA margin performance. Now turning to the results based on ASC 606 or the new accounting standard. Reported revenues for the fourth quarter were $2.4 billion. Net income for the fourth quarter was $383 million. Adjusted EBITDA for the fourth quarter was $774 million, or 32.6% of revenue. For the quarter, diluted earnings per share were $2.89, and adjusted diluted earnings per share were $4. 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 based on the prior accounting standard and reflect revenues on a constant currency basis unless specifically stated otherwise. Segment margins are calculated using segment revenues and exclude unallocated corporate costs, such as the 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 revenues grew 5% on both a constant currency basis and on an organic basis. Human capital and benefits, or HCV, had a solid quarter with a 4% constant currency and organic growth as compared to the prior year fourth quarter. The solid performance extended across all our businesses in the segment. We had the strongest growth in our health and benefits business with revenue increasing by 7% as compared to the prior year fourth quarter. The growth was primarily a result of solid growth in North America driven by increased advisory work and growth in our specialty products. In addition, we experienced continued momentum outside of North America related to global benefit management appointments, as well as increases in local and regional market share. Talent and rewards fourth quarter revenue increased by 7% as compared to the prior year fourth quarter. The net growth was primarily due to strong market demand for compensation surveys globally and for advisory work in North America, Western Europe, and international. As expected, the retirement business experienced nominal growth compared to the prior year fourth quarter. A lower level of de-risking projects like bulk lump sums in North America was more than offset by growth in Great Britain related to more favorable pricing on consulting projects and growth in international from strong project activity in Asia. Our technology and administration solutions or TAS revenue grew moderately compared to the prior year fourth quarter with increased revenues in Germany from new client implementations. The operating margin for the HCB segment was 24%, an increase of 3% from the prior year fourth quarter. Revenue growth and disciplined expense management contributed to the margin growth. Now turning to the HCB results, including the impact of the new revenue standard, the HCB segment had revenues of $843 million and an operating margin of 30%. Now let's look at corporate risk and broking, or CRB, which had a revenue increase of 5% on both a constant currency and organic basis as compared to the prior year fourth quarter. North America's revenue grew by 7% in the fourth quarter, with strong results across all lines of business. International, Western Europe, and Great Britain each contributed 4% revenue growth. International continued its momentum. driven primarily by new business wins in Asia and Latin America. Great Britain and Western Europe generated several new business wins in construction, energy, and claims management. CRB revenues were $812 million with an operating margin of 30% as compared to a 27% operating margin in the prior year fourth quarter. The margin expanded due to the top-line performance coupled with continued cost management efforts. Now turning to the CRB results, including the impact in the new revenue standard. For the quarter, CRB had revenues of $816 million and an operating margin of 29%. We continue to be optimistic about the momentum in our CRB business going forward. Turning to investment risk and reinsurance, or IRR. Revenue for the fourth quarter increased 5% to $297 million on a constant currency basis, and increased 8% on an organic basis as compared to the prior year fourth quarter. Operating margins were negative 1%, a slight improvement versus the same period last year. This was driven by revenue growth in the reinsurance, insurance consulting and technology, investment, and wholesale businesses, which all delivered mid-single-digit growth or better. Reinsurance had strong growth primarily driven by net new business performance in North America. while the insurance consulting and technology growth was driven by technology sales in EMEA and consulting project activity in the Americas. Investment grew due to new client wins and continued growth in delegated investment services. Wholesale growth was driven mainly through the specialty business units. Overall, the fourth quarter 2018 margin expanded due to the robust revenue growth for the quarter. Now turning to the IRR results, including the impact of the new revenue standard, IRR had revenues of $280 million and an operating margin of 2%. We continue to feel very positive about the momentum of the IRR business in 2019. Revenues for the BBA segment increased by 8% from the prior year fourth quarter. Driven by increased enrollments, our individual marketplace revenues increased by 5%. while the remaining businesses in the segment generated 11% growth, led by benefits outsourcing. Increased membership and new clients drove the revenue increase in benefits outsourcing, while the group marketplace business continued to grow, primarily due to new clients and customized active exchange projects. So let me turn to the 2019 enrollments. As we mentioned in our previous earnings call, Enrollment continued to look strong in both the mid-market and large market space. We added about 300,000 lives during the 2019 enrollment period. The individual marketplace exchange enrollment seasonality has been shifting as the business matures. We're seeing enrollment spread more evenly throughout the year due to off-cycle enrollments and agents, and a more modest increase in enrollments during the fall enrollment season. To that end, we expect to enroll another 55,000 to 65,000 retirees during 2019 via off-cycle enrollments and agents. The BVA segment had revenues of $209 million with a 28% operating margin, up 5% as compared to the prior fourth quarter. The expansion in margin was a result of the strong revenue growth as well as our ability to continue to scale these businesses. The BDA segment reflecting the new revenue standard had revenue of $390 million and an operating margin of 61%. The primary driver of this difference is due to the effect of the new revenue accounting standard on individual marketplace. These revenues must now be recognized at the date of placement rather than prorating them starting at their effective date. So under the new standard, the majority of the revenue generated by annual enrollment activity in the fall is now recognized immediately. whereas under the old standard, this revenue would have started to be recognized in January 2018 on a pro rata basis throughout the year. So this change results in higher revenue recognition in the fourth quarter of the calendar year under the new standard. In summary, I'm very pleased with our progress. We produced strong earnings growth in the fourth quarter and for the full year. We had strong revenue growth. I had meaningful margin expansion and significant adjusted EPS growth. all while continuing to invest in our future and return capital to shareholders through dividends and share repurchases. I'd like to thank all of our colleagues for their unwavering commitment to delivering outstanding service and also our clients for their continued support of Willis Towers Watson. Now I'll turn the call over to Mike.