Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson Second Quarter 2019 Earnings Conference Call. Please refer to our website for 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 uncertainties. Actual results may differ materially from those discussed today on the company's 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 statements 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 reconciliation of 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's Chief Executive Officer. Please go ahead.

Okay, thanks very much, and good morning, everyone, and thank you for joining us on our second quarter earnings call. Joining me here today is Mike Burwell, our chief financial officer, and Rich Keefe, head of investor relations. Today, we'll review our results for the second quarter and the first half of 2019, as well as update the outlook for the remainder of the year. I'm pleased with our second quarter financial results and the continued momentum in our business. We generated strong organic top line growth of 6 percent for the second quarter of 2019 and 160 basis points of adjusted operating margin expansion. This marks the fourth consecutive quarter in which we've generated organic revenue growth of 5 percent or greater and improved margins. Likewise, we had revenue and operating margin growth in each of our business segments this quarter, reflecting solid demand for our solutions and services throughout our portfolio of businesses. This has been an exciting and productive quarter for Willis Towers Watson, and as I reflect on our second quarter and the year-to-date results, I'm extremely pleased with the significant steps we've made to improve the company's growth profile and position the company for continued long-term growth. In our core businesses, we've had great success, driven by new business generation, strong retention rates, and increased operating leverage across our core businesses. On the acquisition front, I'm delighted to announce that we completed the Transact acquisition yesterday, and today we welcome over 1,300 talented colleagues from Transact to the Willis Towers Watson community. There's tremendous energy and optimism around the benefits of this powerful combination. The Transact acquisition rapidly accelerates Willis Towers Watson's direct-to-consumer U.S. healthcare strategy and significantly strengthens Willis Towers Watson's growth profile in the healthcare space. Transact provides Willis Towers Watson with a true end-to-end consumer acquisition and engagement platform for healthcare by adding scale, retail capabilities to our portfolio of expertise, and it significantly enhances our reach and agility in penetrating the expanse of the Medicare market. Also, this strategic acquisition positions us for success in the unsubsidized individual consumer portion of the Medicare market space that we currently do not widely serve, and it opens up new service offering opportunities. Similarly, it allows us to efficiently and effectively capitalize on the secular trends that are currently driving growth in the Medicare space. Together, we'll have tremendous capacity with a licensed agent workforce of over 2,000. Moreover, Transact's leading-edge digital technology capabilities and sales and marketing expertise, combined with Willis-Towers Watson's scale and operational excellence, will further strengthens our position as the leader in the growing private Medicare marketplace. Most important, we believe that this acquisition creates value for all stakeholders. For our clients and consumers, it broadens our client base so that we can help individuals in underserved markets navigate their healthcare options. For our business partners, it will allow us to develop deeper collaborative relationships, especially with our carrier partners, as well as deliver greater volume. And for our shareholders, it creates both immediate accretion as well as significant long-term revenue and profitable growth opportunities. In addition to Transact, we'll continue to execute our broader growth strategies around innovation. We believe our investments in innovation have helped further enhance our business portfolio and improve the integrated value proposition we deliver to clients. as well as help us continue our leading position in the areas in which we operate. Innovation at Willis Towers Watson is an important element of what it is that we bring to life. To that end, we're continuing to invest in new innovative solutions, as in recent years we've introduced several specialty solutions, such as LifeSite, AMX, Innovisk, and Connected Risk Intelligence. Building on this progress, we recently announced two initiatives that that we've implemented that are targeted to create further organic and inorganic growth. The first is our launch of WTW Strategic Ventures, an initiative aimed at creating strategic growth opportunities by investing in emerging digital and technology-enabled businesses across insurance, risk, and human capital. The second initiative includes the formation of a new growth board. which will increase the company's organic innovation efforts by supporting early-stage ideas that have the potential to create new markets, new customer channels, and new business models. Working together with our existing New Venture Investment Committee, the Growth Board will help to expand Willis Towers Watson's innovation pipeline. WTW Strategic Ventures is core to the company's growth strategy. by enhancing our capabilities to identify and develop strategic opportunities and alliances aimed at delivering tangible value to our clients. These new initiatives will source investments and utilize relationships within the venture capital community, clients, and industry connections to support innovation and organically with the growth board to create new offerings in areas of strategic interest to the company. Now let's move on to our second quarter 2019 results. Reported revenue for the second quarter was $2.0 billion, up 3% as compared to the prior year second quarter, and up 6% on a constant currency and organic basis. Reported revenue included $51 million of negative currency movement. Once again, this quarter we experienced growth on both an organic basis across all of our segments. Net income was $149 million, up 129% for the second quarter, as compared to the $65 million of net income in the prior year second quarter. Adjusted EBITDA was $425 million, or 21% of revenue, as compared to the prior year adjusted EBITDA for the second quarter of $392 million, or 20% of revenue, representing an 8% increase on an adjusted EBITDA dollar basis. For the quarter, diluted earnings per share were $1.06, an increase of 141% compared to the prior year. Adjusted diluted earnings per share were $1.78, reflecting an increase of 5% compared to prior year. Overall, it was a solid quarter. We grew revenue and earnings per share and had enhanced adjusted EBITDA margin performance. For the first half of the year, we're very pleased with our financial results. Reported revenue growth for the first half of 2019 was up 2% as compared to the same period in the prior year, and up 5% on both a constant currency and organic basis. Adjusted EBITDA for the first half of 2019 was $1.0 billion, or 23.5% of revenue, an increase from adjusted EBITDA of $949 million, or 22.2% of revenue, for the same period in the prior year. representing an increase of 130 basis points in adjusted EBITDA margin over the same period in the prior year. Now, let's look at each of the segments in some 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 they exclude unallocated corporate costs, such as amortization of intangibles, certain transaction and integration expenses resulting from M&A, as well as other items which we consider non-core to our operating results. The segment results do include discretionary compensation. Revenue for our largest segment, human capital and benefits, HCB, was up 5% on an organic and constant currency basis compared to the second quarter of the prior year. For the first half of the year, HCB revenues grew 4% organically. The health and benefits business delivered another strong performance this quarter with revenue growth of 12%. New business and product revenue continue to drive revenue expansion in North America and while our accelerating market share in global benefit management appointments contributed to the growth in other geographies. Health and benefits revenue growth was also aided by the lower revenue comparable in the prior year second quarter. The prior year results reflect the impact of adopting the new revenue standard, ASC 606, which resulted in certain revenue not being recognized. Talent and rewards revenue increased 5% as a result of increased advisory and survey work in North America and Great Britain. Technology and administration solutions revenue increased 6% this quarter. The growth was built on new business activity, primarily in Western Europe and Great Britain. While most of HCB's businesses grew, we did experience a decline in retirement revenue of 1%. This is mainly as a result of the impact of a tough comp bubble from the prior year, which benefited from non-recurring project work. HCB's operating margin improved by 200 basis points to 21% compared to the prior year's second quarter. HCB has the services, products, and intellectual capital that match the many issues our clients are facing. HCB is anchored by its strength in core service offerings, and we remain confident in the segment's ability to deliver growth well into the future. Now let's look at corporate risk and broking, or COB, which had a revenue increase of 5% on a constant currency and organic basis as compared to the prior year's second quarter. For the first half of the year, CRB revenues grew 5% organically. North America's revenue grew by 6% in the second quarter, primarily as a result of new business. The international region's revenue climbed 8% compared to prior year. This growth was largely driven by new business wins and higher renewals in Central America and the Caribbean, as well as new business wins in Asia and Australasia. Western Europe contributed 5% revenue growth with the growth led by strong renewals in Sweden, in addition to due business wins in large and mid-market accounts in Iberia and France. Great Britain had 4% revenue growth, predominantly from aerospace business, driven by satellite launches and transit activity. CRB revenue was $690 million, with an operating margin of 15%, as compared to a 14% operating margin in the prior year's second 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 all of our colleagues in CRB have made over the last year. To see the steady top-line growth and 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 second quarter increased 9% to $409 million on a constant currency basis and increased 8% on an organic basis as compared to the prior year's second quarter, with clear acceleration in all lines of business. For the first half of the year, IRR revenues grew 6% organically. Reinsurance, with growth of 10%, continued to lead the segment's growth. through a combination of net new business and favorable renewals. Insurance consulting and technology grew by 7%, mainly from technology product sales. Investment revenue increased 4%, with continued expansion of the delegated investment services portfolio. Assets under delegated management reached $135 billion at quarter end. On an organic basis, wholesale revenues increased by 11%, driven by growth in specialty and overall wholesale business, was up 20%, including results from Miller's acquisition of Alston Gaylor. Our Max Matisse and business grew 6%, primarily from increased commission income. IRR had revenue of $409 million and an operating margin of 27% compared to 23% for the prior year's second quarter. This improvement reflects top-line growth alongside scaling of successful businesses. Overall, we continue to feel positive about the momentum of our IRR business for 2019. Revenues for the BDA segment increased by 6% from the prior year second quarter, primarily due to increasing membership counts and client base. Project work and out-of-scope services further enhanced the segment's revenue growth. Individual marketplace revenue returned to growth this quarter as seasonality for this business continues to shift. Benefit outsourcing revenues grew 13% as a result of new client wins and special projects. For the first half of the year, BDA revenue grew 8% organically. The BDA segment had revenue of $126 million with a negative 20% operating margin, up approximately 600 basis points, from a negative 26% in the prior year second quarter. Top-line growth and greater operating leverage both contributed to the segment's margin improvement. Our BDA offerings remain fundamental to our business growth engines of our enterprise strategy. The addition of Transact will further boost their growth. We're excited about the long-term growth potential of this business. So, in summary, I'm very pleased with our continued progress in the second quarter. We produced strong revenue growth, meaningful margin expansion, and adjusted EPS growth, all while continuing to invest in our future and return capital to shareholders through dividends. I'd like to thank our 43,000-plus colleagues for their contributions. Our talented colleagues and the way they serve clients are a quarter of our long-term success, and they delivered another quarter of strong results. I continue to be inspired by their energy and passion for serving our clients and their unwavering dedication to creating a truly winning client experience. As we look forward to the remainder of 2019 and beyond, our future remains bright. 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, as well as thank our clients for their continued support and trust in us. As John mentioned, we are very excited about the completion of the Transact acquisition, as this transaction shows Willis Towers Watson renewed focus on strategic M&A opportunities. Our second quarter represented another positive result 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 second quarter was $176 million. or 8.6% of revenue, up 540 basis points from the prior year's second quarter. Adjusted operating income for the second quarter was $299 million, or 14.6% of revenue, up 160 basis points from the prior year's second quarter. Let me turn to earnings per share, or EPS. For the second quarter of 2019 and 2018, our diluted EPS was $1.0644, respectively. The prior year quarter was impacted by $0.55 of transaction integration expenses. For the second quarter of 2019, our adjusted EPS was up 5% to $1.78 per share as compared to $1.70 per share in the prior year's second quarter. Foreign currency caused a decrease in our consolidated revenue of $51 million for the quarter compared to the prior year's second quarter, but had no impact to adjusted diluted earnings per share this quarter. As previously guided, we were adversely impacted by a decrease in non-cash pension income in compared to the prior year, which resulted in a year-over-year decline of 14 cents this quarter. Excluding the combined headwinds for reduced pension returns of 14 cents and higher taxes of 4 cents versus the prior year second quarter, adjusted EPS growth was approximately 15%. Talking about our effective tax rate, our U.S. tax rate for the second quarter was 19.7% versus 12.7% in the prior year second quarter. Our adjusted income tax rate for the second quarter was 21.4%, up from the 19.7% rate in the prior year's second quarter. The increase in the 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. 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 GILTI. the various 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. Moving to the balance sheet, we continue to have a strong financial position. As a reminder, 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 are largely offset by a corresponding increase in assets. The gross-up totaled approximately $1.5 billion. During the quarter, we generated $287 million of free cash flow, bringing our year-to-date free cash flow to $183 million, a decrease from free cash flow of $254 million for the first half of the prior year. The year-over-year decline in free cash flow is due to higher compensation payments as well as some timing related to cash tax payments. We're expecting free cash flow to build over the remainder of 2019. In May, our Board of Directors approved our quarterly cash dividend of $0.65 per share. In terms of capital allocation, we paid approximately $84 million in dividends and repurchased $51 million of Willis Towers Watson stock in the second quarter of 2019. Related to the Transact acquisition, we have principally financed the purchase through debt. As part of the acquisition of Transact, we have secured financing up to $1.1 billion in the form of a one-year unsecured term loan. We are committed to deleveraging in the near term and returning our leverage ratio to historic levels. As we move ahead into the third quarter, I'd like to review our revised outlook. Willis Towers Watson is raising its 2019 guidance primarily to reflect the acquisition of Transact. For the company, we now expect constant currency revenue growth for 2019 to be in the range of 7% to 8%, and organic revenue growth in the range from 4% to 5%. Full year adjusted operating income margin expected to be around 20%. The adjusted effective tax rate is still expected to be around 22%, excluding any potential discrete items, and we expect free cash flow growth of 15% or better. Now, moving on to transaction integration expenses. We expect to incur between $20 to $25 million in cost as a result of the transact acquisition, primarily related to transaction costs associated with the deal. Foreign exchange was immaterial to adjust the EPS in the second quarter of 2019, but was $0.12 headwind to adjust the EPS in the first quarter of 2019. We expect FX to be around $0.03 headwind adjusted to adjust the EPS for the remainder of the year, resulting in an overall headwind of about 15 cents for the full year 2019. We are raising our adjusted diluted earnings per share guidance to a range of $10.75 to $11.10 for the full year for 2019 versus our previous guidance of $10.60 to $10.85. Overall, we delivered solid financial performance in the second quarter. While I'm pleased with the results and the continued momentum of our businesses, there's still a lot of opportunity ahead, and we remain focused on driving and making sure we execute. And I'll turn the call back to you, John.