Willis Towers Watson Public Limited Company

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 three months on our website. 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 authenticity. Actual results may differ materially from those discussed today and the company undertakes the 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 release towers that wasn't set. SEB fillings. We may cover certain non-GAAP financial measures. For a compilation 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, Mike Burwell, our Chief Financial Officer, and Rich Keith, 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 our 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 of 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 a recent announcement to acquire Transact. We're extremely excited to bring Transact 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 chains. We believe Transact 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 Transact's 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 two 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 continue to expect closing will occur in the third quarter of 2019. Now, let's move on to our quarter one 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 $2.15, an increase of 34% compared to the 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 it 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 non-core to our operating results. The segment results do include discretionary compensation. The human capital and 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 and 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 non-recurrence 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 one 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. HCV'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. HCV is our largest segment. We're confident about the future prospects of all the businesses within it, on both a 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 and 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 region's 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 the 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 and 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 Austin Gaylor 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 softer 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 having 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 the 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 remain 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 produced strong earnings growth in the first quarter. We had strong revenue growth. We had meaningful margin expansion and significant adjusted APS growth, all while 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 continuing to shift towards faster-growing areas. We expect to reap benefits from our investments in areas focused on innovation and such as digital and technology, and we're confident in our ability to complete and successfully integrate Transact. Now I'll turn the call over to Mike.

Thanks, John. And I'd like to add my congratulations to our colleagues for another good quarter and a thanks to our clients for their continued support and trust in us. The first quarter represented a good start to the year with strong organic revenue growth, robust margin expansion, and underlying adjusted EPS growth. Now I'll 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 for the prior year first quarter adjusted operating income of $443 million, or 19.3 percent 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 percent 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 12 cents in the quarter. Likewise, as previously guided, we were adversely impacted by a decrease in non-cash pension income compared to the prior year, which results in a year-over-year decline of 12 cents in the quarter. Excluding the combined headwinds from currency of 12 cents, the reduced pension returns of 12 cents, and a little bit higher tax rate of 2 cents, versus a prior year, adjusted EPS growth was approximately 20 percent. From an effective tax rate perspective, our U.S. GAAP tax rate for the first quarter was 18.8 percent versus 16.3 percent in the prior year. Our adjusted tax rate for the first quarter was 20.1 percent, up slightly from the 19.7 percent rate in the prior year first quarter. This increase in the effective tax rate for the quarter compared to the prior year was primarily due to additional taxes on global intangible low tax 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 computations 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 four-year guidance due to one-time or discrete tax benefits related to excess tax benefits of share-based compensation and valuation allowance releases in certain non-U.S. jurisdictions. 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 an increase in liabilities on our balance sheet, which is largely offset by a corresponding increase in assets. The grossed-up total was approximately $1.5 billion. For the first quarter of 2019, our free cash flow was negative $104 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 to income taxes and pension contributions. As we think about cash flow generation for the 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 paid approximately $77 million in dividends and did not repurchase any shares in the first quarter of 2019. 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 will remind you that our fourth quarter is our seasonally highest quarter, primarily a result of our enrollment activity within our benefits administration and delivery business. Also concerning the H&B brokering recapture from the adoption of ASC 606, we recaptured approximately $11 million in Q1 2019 within the HCB segment and expect to recapture the remainder by the end of Q3 2019. The adjusted effective tax rate is still expected to be around 22%, excluding any potential discreet items, and we still expect free cash flow growth of 15% or better. Foreign exchange created a 12-cent headwind to adjust EPS in the first quarter of 2019. Assuming exchange rates remain at current levels, we expect an FX headwind of around 15 cents 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 transact acquisition, which is expected to close in Q3 2019. Overall, we delivered solid financial performance in the first quarter. While I'm pleased with the results and the continuing momentum of our business, there's still a lot of opportunity ahead and we remain focused on driving the execution. And I'll turn the call back to you, John.