Willis Towers Watson Public Limited Company

Good morning and welcome to the Willis-Towers-Watson First Quarter 2020 Earnings Conference Call. Please refer to our website for the press release and supplement 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 means 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 in our most recent form, 10-K, and in other Willis Tower Watson's SEC filings. During the call, we may discuss certain non-GAAP financial measures. For reconciliations, other 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 Tower Watson's Chief Executive Officer. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining us on our 2020 First Quarter Earnings Call. Joining me today are Mike Burwell, our Chief Financial Officer, and Rich Keefe, our Head of Investor Relations. So before we get into our first quarter performance, I want to start by talking about COVID-19 and how we're managing Willis Towers Watson during this global pandemic. First of all, I hope all of you and your families are staying healthy. The safety and well-being of our colleagues has been our primary focus as the COVID-19 crisis escalated. and we've mobilized to mitigate the risk to our colleagues. The COVID-19 pandemic did not have a material adverse impact to our financial results for the first quarter of fiscal 2020. However, we expect that the impact of COVID-19 on general economic activity could negatively impact our revenue and results for the remainder of 2020. We're closely monitoring the spread and impact of COVID-19 while adhering to governmental health directors. directives, excuse me. We've implemented restrictions on business travel, office access, meetings, and events. We have thorough business continuity and incident management processes in place, including split team operations for essential workers and work from home protocols, which are now globally effective. We're communicating frequently with colleagues, clients, and critical vendors while meeting our objectives via remote working capabilities overseen and coordinated by our incident management response team. Before the pandemic, we were already experienced in working virtually and had implemented collaboration technologies and infrastructure for remote working that we believe are effective. Currently, more than 90% of our 45,000 colleagues are working remotely. For example, our top leaders are spread across the globe. and we've effectively operated this way as a management team for a number of years. So we were able to mobilize quickly to address this situation, and the agility of our colleagues is remarkable. I'm extremely proud of the way our colleagues have adapted. They continue to demonstrate their resilience and their commitment to support our clients' needs and one another. As you well know, we're in the business of providing solutions. We help clients optimize their benefits. We help them manage their risk. We help them develop their people. We help them make sure that they deploy their capital to protect and strengthen their institutions. These are valuable contributions during good times, and they're even more valuable during difficult times. We feel that our services and solutions are highly relevant to our clients, especially now. Willis Towers Watson will continue to be a source of support. and the trust is partnered to our clients as they navigate these unprecedented disruptions. While the long-term effects of this global crisis will take some time to manifest, we are focused on finding innovative ways to add value in an increasingly unpredictable and competitive marketplace. We will continue to be at the forefront of the issues and pressures our clients are facing, and we're structuring our services to meet those needs. I think Willis Towers Watson and our colleagues are going to be a great part of our clients' future success stories. Overall, from a business continuity perspective, we have maintained a high level of productivity to date, despite the recent disruptions brought on by the pandemic. Against this extremely challenging backdrop, we reported a solid first quarter. but we realize that the extent to which COVID-19 could impact our business and financial position will depend on future developments, which are difficult to predict. For that reason, we're taking a proactive approach to safeguard our company against this future uncertainty. We're entering this challenging environment from a relative position of strength, so maintaining our financial and operational performance momentum is paramount. We're prepared to take swift actions as necessary to help mitigate adverse consequences and preserve our margins in the event that we might sustain a prolonged negative impact to our operations. We will continue to monitor the situation and assess possible implications to the company and our stakeholders. Mike will provide further insight about the team's evaluation of contingency plans, about capital and liquidity, and the company's balance sheet shortly. We're a conservatively managed company with a strong foundation. While the current economic backdrop is challenging, we believe that we're well positioned to manage through this crisis and emerge successful. I have confidence in our colleagues, our strategy, and in the strength of our business. Managing the impact of the COVID-19 pandemic was not the only development for the company in the first quarter. On March 9th, we announced the entrance into a definitive agreement between Willis Towers Watson and Aon, which provides for the combination of Willis Towers Watson and Aon in all stock transaction. The combination with Aon is a natural next step in our journeys to service our clients in the areas of people, risk, and capital. Both firms have a shared belief in offering clients strong expertise, innovation, data-driven insights, and market-leading products and professional services. This deal gives us the opportunity to accelerate our growth strategy through innovation and collaboration. We're very 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. We expect the transaction to close in the first half of 2021, subject to the receipt of required shareholder approvals, required regulatory approvals, and the satisfaction of other customary conditions to close it. So now let's move on to our quarter one 2020 results. I'm pleased to report that despite this difficult environment, we've continued to deliver on our strategy and commitments, generating solid results for the first quarter of 2021. Or 2020, excuse me. Reported revenue for the first quarter was $2.5 billion, up 7% as compared to the prior year first quarter, and up 8% on a constant currency basis, and up 4% on an organic basis. Reported revenue included $34 million of negative currency movement. Once again, this quarter we experienced growth on an organic basis across all of our segments. Net income was $313 million, up 7% for the first quarter, as compared to the $293 million of net income in the prior year first quarter. Adjusted EBITDA was $680 million, or 27.6% of revenue, as compared to the prior year adjusted EBITDA for the first quarter of $601,026.0% of revenue, representing a 13% increase on an adjusted EBITDA basis and 160 basis points of margin improvement. For the quarter, adjusted diluted earnings per share were $2.34, an increase of 6% compared to the prior year. Adjusted diluted earnings per share were $3.34, reflecting an increase of 12% compared to the 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 revenue 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 include discretionary compensation. The human capital and benefits HCB segment revenue was up 4%, on an organic and constant currency basis compared to the first quarter of the prior year. The health and benefits business delivered strong performance again this quarter, generating revenue growth of 7%, with increased project activity and product revenue continuing to drive revenue expansion in North America, while new local country wins and global benefit management appointments contributed to the growth outside of North America. Talent and rewards revenue increased nominally, mostly from increased benchmarking survey sales, which were largely offset by a decline in advisory activity as companies began pulling back on discretionary spending in the latter half of the quarter. Retirement revenue increased 1%, mainly as the result of an uptick in funding advice, guaranteed minimum pension equalization, and other project work in Great Britain and funding work in Canada. Technology and administration solutions revenue increased 11% as a result of new business activity and project work in Great Britain. HCB's operating margin improved by 30 basis points to 25% compared to the prior year first quarter. This improvement reflects top-line growth alongside careful cost management efforts. HCB is our largest segment, and we're confident about the future prospects of all of the businesses within it. In a business environment highly impacted by COVID-19 and the related economic downturn, employers look for ways to protect employees, customers, and operations while managing costs. HCB's experts are well-positioned to provide advice and solutions to help businesses react, adapt, and sustain through the crisis. Now let's look at corporate risk and broking, or CRB, which had a revenue increase of 4%, on an organic and constant currency basis as compared to the prior year first quarter. North America's revenue grew by 11% in the first quarter. The growth was driven from the gain on a book of business sale alongside new business wins. Western Europe contributed 5% revenue growth driven by strong renewals. Their growth was led by strong renewals including improved facultative business. Great Britain and internationals' revenue declined 3% and 2% respectively for the first quarter. Now, these results were negatively impacted by a change in the remuneration model for certain lines of business. This change, which is neutral to our operating income, results in lower revenue and an equal reduction in salaries and benefits expense. Absent this change, Great Britain's revenue increased by 6%, and internationals' revenue grew by 1%. primarily from new business with strong performance across most lines of business, including financial solutions, FinEx, PC Hub, and aerospace. CRB revenue was $739 million this quarter with an operating margin of 17.2%, which is materially flat compared to a 17.4% in the prior year first quarter. Turning to investment risk and reinsurance, or IRR. Revenue for the first quarter increased 6% to $615 million on a constant currency basis and increased 5% on an organic basis as compared to the prior year first quarter. Reinsurance with growth of 7% continued to lead the segment's growth through a combination of net new business and favorable renewals. Insurance consulting and technology grew by 5% mainly from technology sales. Investment revenue increased 6% with continued expansion of the delegated investment services portfolio. Our wholesale business was up 12% on an organic basis, mainly from new business wins. IRR had an operating margin of 45.1% as compared to 42.7% for the prior year first quarter. This improvement reflects top-line growth alongside the scaling of successful businesses. We continue to feel good about IRR's growth trajectory. IRR's portfolio of offerings unlocks potential and creates sources of value for our clients by focusing on their business priorities, capital, strategy, operations, technology, risk, and people. All of these are elements which remain important in an increasingly uncertain and competitive marketplace. Revenue for the BDA segment increased by 71% on a constant currency basis and 1% on an organic basis from the prior year first quarter. BDA's expanded mid and large market client base and increased project work resulted in the segment's growth. We continue to see strong demand for benefits outsourcing core services resulting in several new client wins. The BDA segment had revenue of $231 million with a minus 4.7% operating margin, up over 10% from a minus 15.3% in the prior year first quarter. The margin improvement was primarily driven by the top-line growth. We're optimistic about the long-term growth of this business. BDA offers practical solutions which enable plan sponsors to honor their commitments to employees and retirees, while reducing long-term financial liabilities and administrative burdens. It also helps millions of individuals optimize today's health and welfare opportunities for a better tomorrow. So overall, I'm very pleased with our progress. We produced strong revenue growth in the first quarter. We had steady financial performance across all businesses, meaningful margin expansion on an organic basis, and significant adjusted EPS growth, all while adapting to the rapidly changing global environment. So now I'll turn the call over to Mike.

Thanks, John. And I'd like to express my gratitude to our 45,000 colleagues for delivering another good quarter, despite the difficulties we're experiencing as a result of the COVID-19 pandemic. I would also like to thank our clients for their continued support and trust in us. Helping clients solve complex problems is at the heart of everything we do at Willis Towers Watson, and we fully intend to continue being a reliable source of strength for the clients we serve around the world as they confront their unique pandemic-related challenges. Our 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 $360 million, or 14.6% of revenue, down 90 basis points from the prior year first quarter income from operations of $359 million, or 15.5% of revenue. The decline was principally due to a non-cash charge, which resulted from the abandonment of internally developed software that was no longer commercially viable. Adjusted operating income for the first quarter was $525 million, up $33 million from $492 million in the prior year first quarter. Adjusted operating income margin remained flat at 21.3% of revenue. Adjusted operating margin would have been 40 basis points higher if we had normalized for the acquisition of Transact. Now let me turn to earnings per share. For the first quarters of 2020 and 2019, our diluted EPS was $2.34 and $2.20, respectively. For the first quarter of 2020, our adjusted EPS was up 12% to $3.34 per share as compared to $2.98 per share in the prior year first quarter. Foreign exchange was aligned with our expectations, resulting in a net unfavorable impact of approximately $0.03 for the quarter. Let me turn to our effective tax rate. Our U.S. GAAP tax rate for the quarter was 20% versus 18.8% in the prior year. Our adjusted tax rate for the first quarter was 20.4%, up slightly from the 20.1% rate in the prior year first quarter. The prior year effective tax rate was lower primarily due to discrete valuation allowance releases in certain non-U.S. jurisdictions. Turning to the balance sheet. As the COVID-19 situation continues to evolve, I believe we are well positioned to navigate this uncertain period of time. We ended the first quarter with a strong capital and liquidity position. The broad and global nature of the pandemic has had a profound impact on our clients and broadly reduced liquidity around the world. We believe our business model is resilient, and we have completed comprehensive operational and financial planning to prepare for all scenarios. including the possibility of a deep and long economic downturn impacting the industries and markets we serve. Understanding the impact this can have on Willis Towers Watson, we are proactively managing our balance sheet to help maximize our financial flexibility. To that end, we exited the first quarter with ample liquidity with cash and cash equivalents of $898 million and $850 million of capacity on our undrawn revolving credit facility. We aim to continue to maintain a strong and durable balance sheet and are looking to conserve cash in this current environment by leaning into our cost and efficiency initiatives. These actions include implementing a series of cost management strategies, including hiring and travel freezes, reducing our variable cost structure for discretionary spending categories, and curtailing some of our capital expenditures. In addition, we continue to monitor the situation and take appropriate proactive measures to to further reduce cash outflow and preserve adequate liquidity if demand for solutions or services deteriorates. For the first quarter of 2020, our free cash flow was negative 43 million versus negative 105 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 improvement in free cash flow is primarily due to more timely billings and collections. In terms of capital allocation, we paid approximately $84 million in dividends and did not repurchase any shares in the first quarter of 2020. As a reminder, given certain prohibitions as a result of the transaction agreement in connection with our pending business combination with Aon, we do not expect to repurchase any shares during the remainder of 2020. Let's talk about our full year 2020 guidance. We are not yet seeing signs of a real slowdown in the business, but the signs of economic concern are all around us. As John mentioned earlier, the economic fallout from COVID-19 had no material impact on the company's financial results for the first quarter of 2020, but this is not indicative of its potential impact on the company results for the remainder of the year. The duration of the pandemic, the full magnitude of its economic impact, and the subsequent speed of recovery remain unknown. Considering this uncertainty in the economy, we are withdrawing our previous provided guidance for fiscal year 2020. Since we are unable to accurately forecast the impact of these factors, we believe that it's impractical to provide detailed financial guidance at this time. The company will reassess this position once we have a clear understanding of the depth, duration, and geographic reach of the pandemic. However, I want to reassure you that we remain agile and disciplined in the way we allocate our resources, to ensure business continuity and efficient operations while still maintaining a very strong balance sheet. Overall, we delivered solid financial performance in the first quarter. Despite the near-term uncertainty in the global market, I remain confident in the underlying fundamentals of our business. We've been through challenging times before as a company, and we believe we're well-positioned to manage through the current situation and emerge even stronger. We believe that fundamentally our business is strong, We believe we manage our operations well, and we have a diverse portfolio of businesses that help us through difficult times. We believe our portfolio of businesses is both resilient and flexible. We believe that our experience, our dedication, and our operational strength will enable us to weather these tumultuous times and to continue to create long-term value for all our stakeholders. So now I'll turn the call back to you, John.