Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson third 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 or with 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 statements section of the earnings press release issued this morning, as well as other disclosures in our most recent form, 10-K, and in other Willis Towers Watson SEC filings. During the call, you 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. I'll now turn the call over to John Haley, Willis Towers Watson's chief executive officer. Please go ahead.

Okay. Good morning. Oh, sorry. Hello, everyone. Thanks for joining us on our third quarter earnings call. So with me here today is Mike Burwell, our Chief Financial Officer, and Rich Keith, Head of Investor Relations. We'll start by providing an overview of our results for the third quarter of 2019, and then we'll discuss the outlook for the remainder of the year. For the third quarter of 2019, we continued to deliver solid financial performance with 9% overall constant currency revenue growth, 6% organic revenue growth, and 120 basis points of adjusted operating margin expansion. Likewise, we had revenue and operating margin growth in each of our business segments again this quarter. Now, overall, this marks the fifth consecutive quarter in which we generated organic revenue growth of 5% or greater, along with improved margins. Our third quarter results reflect our focus to deliver consistent financial results across the company and and create value for our clients, colleagues, and shareholders. This has been another successful quarter for Willis Towers Watson. We continue to see solid performance in key high-value-added areas, and of course, we also completed the acquisition of Transact, which generated measurable revenue growth in the two months that followed. Overall, I'm pleased with the progress we've made toward our full-year goals. We continue to see strong demand for our services and solutions. I feel good about our business and our ability to deliver a solid fourth quarter. Before taking you through the details of our third quarter results, I'd like to tell you about some exciting work we're doing related to climate resilience as part of a public-private collaboration along with leading organizations from across the global financial sector, various governments, and other international institutions. Climate change poses a global threat from the world's most vulnerable nations to even the most advanced economies' critical infrastructure. I'm honored that Willis Towers Watson recently participated in the UN Climate Action Summit, launching the Coalition for Climate Resilient Investment. At launch, the coalition already had commitments from over 30 organizations across the infrastructure investment value chain, with assets under management totaling $5 trillion U.S., and those numbers are growing. We believe there is a crucial need to better understand the risk posed by climate change to our societies and economies and to reflect proper pricing for climate risk in financial decision-making. This will better direct investments towards infrastructures capable of withstanding a changing climate. Providing a methodology to quantify the economic and financial benefits will enable financial markets to embed resilience up front. To that end, Willis Towers Watson, as part of the coalition, is committing to three main initiatives. The first is the development of analytical tools, including a physical risk pricing framework, and the methodology to prioritize national resilient investment needs. Pricing the risks posed by climate change will create opportunities to build a network of resilient infrastructures in high-, medium-, and low-income countries, enabling us to better prevent future human and financial disasters. The second is the creation of innovative investments, such as resilience bonds. There are six country pilot projects where innovations such as these will be trialed. The third is working in close collaboration with other related initiatives, such as the Coalition for Disaster Resilient Infrastructure and the Coalition of Finance Ministers for Climate Action. Working with the coalition, we'll be able to harness a unique combination of the rapid advancement of climate risk analytics, coupled with ambitious regulatory and investor-led initiatives, so that vulnerable geographies continue to attract investment and that infrastructure is built to withstand future climatic risks. We're well positioned to do our part to help prevent human and financial disasters, transform mainstream infrastructure investment, and drive a shift towards a climate resilient economy for all countries, all of which is aligned with our purpose to create clarity and confidence today for a more sustainable tomorrow. So now let's turn to our third quarter results. Reported revenue for the third quarter was $2 billion, up 7% as compared to the prior year third quarter, and up 9% on a constant currency basis and up 6% on organic basis. Reported revenue included $36 million of negative currency movement. Once again this quarter, we experienced growth on an organic basis across all segments and all geographies. Net income was $80 million, up 74% for the third quarter, as compared to $46 million of net income in the prior year of third quarter. Adjusted EBITDA was $344 million as compared to the prior year third quarter adjusted EBITDA of $313 million, representing a 10% increase. For the quarter, diluted earnings per share were 58 cents, an increase of 76% compared to prior year. Adjusted diluted earnings per share were $1.31. Reported revenue for the first nine months of 2019 increased 3% as compared to the same period in the prior year, increased 6% on a constant currency basis, and was up 5% on an organic basis. Now let's look at each of the segments in more detail. To provide clear comparability with prior periods, all commentary regarding 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. Revenue for our largest segment, human capital and benefits, or HDB, was up 6% on an organic and constant currency basis compared to the third quarter of the prior year. For the first nine months of 2019, HCB revenues grew 4% organically. The health and benefit business grew 7% this quarter. New business and product revenue continued to drive revenue expansion in North America, while our increasing market share and global benefits management appointments and new local and regional wins contributed to the growth in other geographies. Health and benefits revenue growth was also aided by the lower revenue comparable in the prior year third quarter. The prior year results reflect the impact of adopting new revenue standard, ASC 606, which resulted in certain revenue not being recognized. Talent and rewards revenue grew 9% as a result of increased advisory work in North America and international. Technology and administration solutions revenue increased 11% this quarter. This growth was built on new business activity, primarily in Western Europe and Great Britain, on top of high client retention rates. Retirement returned to revenue growth this quarter with an increase of 1%, which was primarily driven by robust pension de-risking activity in the large plan market. HCB's operating margin improved by 160 basis points to 27% compared to the prior year third quarter. As a trusted advisor, HCB combines research data and strategic insight to address our clients' most complex workforce challenges. employers must constantly adapt to the inevitable changes brought on by today's business landscape. As HCB's results indicate, the segment's well-positioned to continue growing profitably while providing solutions that keep pace with our clients' evolving values. Now let's look at our corporate risk and broking, or CRB, which had a revenue increase of 7% on a constant currency and organic basis as compared to the prior year third quarter. For the first nine months of 2019, CRB revenues grew 5% organically. North America's revenue grew by 9% in the third quarter, primarily as a result of new business and improved retention. The international region's revenue climbed 14% compared to the prior year. There was notably strong performance in construction and natural resources in Central and Eastern Europe, Middle East, and Africa compared to combined with continued momentum in Latin America, particularly in Brazil and in Central America and the Caribbean. Western Europe contributed 2% revenue growth with the growth driven by strong new business in France, Denmark, and Iberia. Great Britain had 2% revenue growth driven by new business in aerospace construction and FinEx. CRB revenue was $651 million. with an operating margin of 12% as compared to an 11% operating margin in the prior year third quarter. The margin expanded due to top-line performance coupled with continued cost management efforts. We're pleased with the CRB top-line growth for the year as well as the margin expansion for the quarter and the overall year. CRB continues to make solid progress towards profitable growth. Turning to investment risk and reinsurance, or IRR, revenue for the quarter was $325 million, an increase of 3% on an organic basis and 5% on a constant currency basis as compared to the prior year third quarter, with meaningful growth across all core businesses. For the first nine months of 2019, IRR revenues grew 5% organically. Reinsurance, with growth of 3%, continued to lead the segment's growth, through a combination of net new business and favorable renewals. Insurance consulting and technology grew by 4%, mainly from technology product sales. Investment revenue increased 2%, with continued expansion of the delegated investment services portfolio. On an organic basis, wholesale revenue increased by 2%, driven by growth in specialty. Overall, the wholesale business was up 14%, including the results from Miller's acquisition of Alston Gaylor. Our Max Matisse in business grew 1%, primarily from increased commission income. IRR had an operating margin of 9% for both the current year and the prior year third quarter. Overall, we're pleased with the financial results of our IRR businesses. We expect a solid finish to the year as the segment remains focused on executing against its goals while continuing to develop innovative products and solutions which will drive long-term performance. Revenues for the Benefits Delivery and Administration segment, or BDA, increased by 42% from the prior year third quarter on a constant currency basis. On an organic basis, revenue grew 2% compared to the prior year third quarter. BDA's expanded mid- and large-market client base and increased project work led the segment's growth. We continued to see strong demand for Benefit Outsourcing's core service offerings resulting in several new client wins. The segment's third quarter growth was muted due to a revenue timing shift in individual marketplace. For the first nine months of 2019, BDA revenue grew 6% organically. BDA's operating margin improved by 14% to a negative 12% compared to a negative 26% in the prior year third quarter. Top-line growth and greater operating leverage both contributed to the segment's margin improvement. Transact's revenue growth tracked nicely in the two months following the acquisition. We are very encouraged by Transact's performance in their first couple of months with us, and we continue to be excited about their future prospects as this business continues to gain momentum. So in summary, I'm very pleased with our continued progress. We delivered another quarter of solid financial performance, and we expect a strong finish in the fourth quarter, placing us on track to deliver another positive financial performance for 2019. For the full year, we continually expect strong revenue growth, meaningful margin expansion, and significant EPS growth. Finally, I'd like to thank our colleagues for their continued client focus, collaboration, engagement, and congratulate everyone on a good quarter. Now I'll turn the call over to Mike.

Thanks, John, and good morning to everyone. Thanks to all of you for joining us. I'd like to add my congratulations to my fellow colleagues for another good quarter, as well as thank our clients for their continued support and trust in us. Now let's turn to the financial overview. Our third quarter continued to represent more positive results, recognizing it's our seasonally lowest quarter with strong organic revenue growth and robust margin expansion. Let me first discuss income from operations. Income from operations for the third quarter was $107 million, or 5.4% of revenue, up 450 basis points from the prior year. Third quarter income from operations was $17 million, or 0.9% of revenue. Adjusted operating income for the third quarter was $231 million, or 11.6% of revenue, up 120 basis points from the prior year of $194 million, or 10.4% as a percentage of revenue. Now let me turn to earnings per share, or EPS. For the third quarters of 2019 and 2018, our diluted EPS was $0.58 and $0.33, respectively. For the third quarter of 2019... Our adjusted EPS decreased nominally by less than 1% to $1.31 per share as compared to $1.32 per share in the prior year third quarter. Foreign currency caused a decrease in our consolidated revenue of $36 million for the quarter compared to the prior year third quarter with a one cent positive impact to adjusted diluted earnings per share of this quarter. As previously guided, we continue to be adversely impacted by a decrease in non-cash pension income and a higher adjusted income tax rate this year. For the third quarter of 2019, reduced pension income resulted in a 10-cent adjusted EPS decrease compared to the prior year third quarter, while the higher adjusted income tax rate in the third quarter of 2019 also resulted in a 10-cent adjusted EPS decrease compared to the prior year third quarter. Excluding the combined headwinds from the reduced pension returns of 10-cents, higher taxes of 10-cents, and transact dilution of 4-cents, Our underlying adjusted EPS growth compared to the prior year third quarter would have been approximately 15% higher. Let's turn to our effective tax rate. Our U.S. cap tax rate for the third quarter was 20.4% versus negative 28.1% in the prior year third quarter. Our adjusted income tax rate for the third quarter was 22.2%, up from 15.9% in the prior year third quarter. As a reminder, the prior year third quarter included a one-time tax benefit from the release of evaluation allowance on certain state deferred tax assets. 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 movement and we will continue to update 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 were largely offset by a corresponding increase in assets. The gross up totaled approximately $1.5 billion. Later in the quarter, we successfully issued a $1 billion in senior notes comprised of $450 million of 10-year notes and $550 million of 30-year notes. We're very pleased with the results of this financing. We feel that this transaction helps with our efficiency of our capital structure and provides additional financial flexibility. The bond proceeds were used to prepay a portion of the amount outstanding under our term loan commitment, resulting from the transact acquisition and repay borrowings under our revolving credit facility. During the quarter, we generated $262 million of free cash flow, up from the prior year third quarter free cash flow of $253 million, bringing our year-to-date free cash flow to $445 million, a decrease in free cash flow of $507 million for the first nine months of the prior year. The year-over-year decline in free cash flow is primarily due to higher cash tax payments for income taxes, resulting from U.S. and global tax reform, 2019 first quarter bonus payments, and working capital changes. We're expecting free cash flow to finish strongly in the fourth quarter, which is our highest generating quarter. In terms of capital allocation, we've paid approximately $85 million in dividends and and repurchased $96 million of Willis Towers Watson stock in the third quarter of 2019. For the first nine months of 2019, we repurchased approximately $147 million in Willis Towers Watson stock and paid approximately $245 million in dividends. We remain committed to deleveraging in the near term and returning our leverage ratio to historic levels. As we move ahead into the fourth quarter, let's review our full year 2019 guidance. For the company, we continue to expect constant currency revenue growth for 2019 to be in the range of 7% to 8% and organic revenue growth in the range of 4% to 5%. Full-year adjusted operating income margin is expected to be around 20%. The adjusted effective tax rate is still expected to be around 22%, excluding any potential discrete items. We continue to look at tax planning strategies which might lower the rate on a longer-term basis. We'll provide an update on this in our fourth quarter earnings call. We expect free cash flow to be in the $1.1 to $1.2 billion range for the current year. Now moving on to transaction integration expenses. We expect to incur about $20 million in costs as a result of the Transact acquisition, primarily related to transaction costs associated with the deal. For an exchange, it was $0.01 tailwind to adjust EPS in the third quarter of 2019, but it was $0.11 headwind to adjust EPS for the first nine months of 2019. We expect FX to be around $0.04 headwind adjusted EPS for the remainder of the year, resulting in an overall headwind of around $0.15 for the full year of 2019. We continue to expect adjusted diluted earnings per share to be in the $10.75 to $11.10 range for the full year of 2019. In summary, we've seen good acceleration in revenue growth and positive operating leverage this quarter, which should continue to position us well to execute on our plans this year. I'm pleased with the results and continued momentum of our businesses. There's still a lot of opportunity ahead, and we remain focused on driving execution. And I'll turn the call back over to John.