Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson second quarter 2020 earnings conference call. Please refer to WillisTowersWatson.com 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 Willis Towers Watson's 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 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 the most recent Form 10-K and in other Willis Towers Watson's SEC filings. During the call, certain non-GAAP financial measures may be discussed. 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 Mr. John Haley, Willis Towers Watson's chief executive officer. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us on our second quarter 2020 earnings call. Joining me today are Mike Burwell, our chief financial officer, and Rich Keefe, our head of investor relations. In the second quarter, we continue to navigate through an uncertain and unprecedented economic downturn. Nevertheless, I'm pleased with our financial performance. While our results were somewhat impacted by the pandemic, our overall performance reflects the strength, the diversity, and the durability of our business model. In many of our core businesses, we continued to see new business generation, strong retention rates, and increased operating leverage. We also reduced our controllable spending and improved our liquidity through prudent cash flow management. I'm extremely proud of the work we've done to build the company's operational resilience and strong balance sheet, both of which have provided a foundation for long-term sustainable growth. Before delving further into our second quarter performance, I'd like to give a brief update on a couple of important topics. During our last earnings call, I talked about the COVID-19 crisis and the measures we have taken to mobilize and mitigate the risks to our colleagues. Now, we're taking what we've learned from the global pandemic to work together even better and are reimagining our workplace and our work activities. This is no longer about reacting to the COVID-19 situation. It's about proactively using the experience of the last few months to create a more flexible, agile future. We want to leverage and enhance what we've learned to explore how we can work differently. And we want to ensure we maintain the key elements of our culture that keep our colleagues engaged and inspired. A working group that includes leaders from across the company has been convened to plan for this next phase of our journey. Their work focuses on reimagining our workplace across core themes. including collaboration, learning and development, and external stakeholder engagement. I continue to be impressed with the agility of our colleagues and their commitment to clients and each other in the wake of this global pandemic. Against the rapidly evolving backdrop of the last few months, our colleagues around the world quickly embraced the immense amount of change spurred by COVID-19 and remained resolute in providing excellent client service. Likewise, our colleagues have rapidly embraced the prospect of the Aon combination and are generally enthused and looking forward to the many opportunities that lie ahead. On July 8th, we filed our definitive joint proxy statement. I'm sorry, on July 8th, we filed our definitive joint proxy statement in connection with the proposed combination with Aon. We've continued to work towards obtaining the necessary regulatory approvals and consents, and we'll hold the necessary meetings for shareholders to vote on the transaction on August 26th. We remain on pace to close the transaction in the first half of 2021, subject to the satisfaction of the applicable closing conditions. We continue to be excited about this next step in our evolution and about the overall future of this industry. We design and deliver solutions that help manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. COVID-19 has highlighted deficiencies in the way the world approaches risk. These unprecedented times warrant a reappraisal of how companies assess uncertainty and strengthen the rationale for the combination with AI. We're eager to bring new and innovative solutions to our clients to meet their evolving needs and solve global problems. As a general matter, the COVID-19 pandemic did not have a material adverse impact to our financial results for the second quarter of fiscal 2020. However, the pandemic did impact revenue growth, particularly in some discretionary lines, and we expect that the impact of COVID-19 on general economic activity will could negatively impact our revenue and results for the remainder of 2020 and potentially even longer. So now let's move on to our quarter two 2020 results. Reported revenue for the second quarter was $2.1 billion, up 3% as compared to the prior year second quarter, up 5% on a constant currency basis, and flat on an organic basis. Reported revenue included $35 million of negative currency movement. We experienced good financial performance in areas where we have a well-established market position, mature relationships, and annuity or compliance driven business. We didn't perform as well in areas where our revenue is tied to discretionary projects. Our clients are facing tough times and making difficult decisions. In that context, initiatives that are aimed at reducing costs and risk are higher priorities. We continue to work with our clients to find practical solutions for these challenges. Net income was $102 million, down 32% for the second quarter as compared to the $149 million of net income in the prior year second quarter. Adjusted EBITDA was $441 million, or 20.9% of revenue, as compared to the prior year adjusted EBITDA for the second quarter of $425 million, or 20.8% of revenue. Representing a 4% increase on an adjusted EBITDA dollar basis, and 10 basis points of margin improvement. For the quarter, diluted earnings per share were 72 cents, a decrease of 32% compared to the prior year. Adjusted diluted earnings per share were $1.80, reflecting an increase of 1% compared to the prior year. Overall, it was a solid quarter. We grew revenue and adjusted 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 results of our segments will be on an organic basis, unless specifically stated otherwise. Segment margins are calculated using segment revenue, and they 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 down 2% on an organic and constant currency basis compared to the second quarter of the prior year, primarily as a result of a decline in demand in our talent and rewards business. Talent and rewards revenue decreased 19% with the uncertain economic conditions related to COVID-19, having created cost constraints and affecting workforce dynamics at many companies, dampening client need for advisory work globally. The decline was partially mitigated by modest growth in HCB's other businesses. Our health and benefits revenue increased for the quarter. In addition to strong client retention, we had an increase in consulting assignments in North America, as well as new global benefit management and local brokerage appointments outside of North America. Retirement revenue increased nominally, mainly as a result of an uptick in funding advice and guaranteed minimum pension equalization work in Great Britain. Technology and administrative solutions also increased in Western Europe and international, attributed to increased project work. Despite the shortfall in revenue, HCB's operating margin decreased by just 20 basis points compared to the prior year's second quarter. And that was as a result of careful cost management efforts. We remain confident about the long-term prospects of our HCB business. Employers experienced unprecedented and significant changes to their ways of working in 2020. Our clients are facing many new challenges as they make plans to restore stability. HCB's experts remain prepared to help them rethink their human capital efforts and employee benefits in the wake of COVID-19. 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's second quarter. North America's revenues grew by 9% in the second quarter from new business wins alongside favorable rates. International and Western Europe's revenue increased 8% and 1%, respectively, driven by new business and strong renewals. Great Britain's revenue declined 5% for the second quarter, primarily due to a decline in marine and retail activity that was related to COVID-19. CRB revenue was $701 million this quarter with an operating margin of 19.2% compared to $690 million of revenue with an operating margin of 15.2% in the prior year second quarter. The margin improvement was due to top line growth alongside cost containment efforts. This year has been and will continue to be an extraordinary time for the insurance industry. CRB is committed to keeping our clients fully informed about what they should expect and have a plan for the uncertainty they're experiencing. Turning to investment risk and reinsurance, or IRR, revenue for the second quarter increased 1% to $413 million and increased 2% on both a constant currency basis and organic basis as compared to the prior second quarter. Reinsurance, with a growth of 6%, continued to lead the segment's growth through a combination of net new business and favorable renewals. Insurance consulting and technology revenue was flat as growth in technology sales was largely offset by declines in consulting projects. Investment revenue increased 1% with the continued expansion of the delegated investment services portfolio. Our wholesale business was up 1% on an organic basis, mainly from new business wins. IRR had an operating margin of 28.7% as compared to 26.9% for the prior year's second 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 provides clients with the information needed to make strategic decisions in this uncertain and dynamic environment. We have a deep understanding of risk and all the ways it affects capital and organizations' financial performance. Our core focus is to provide clients with a superior understanding of the risk they face and then advise them on the best ways to manage the risk of extreme outcomes. Revenues for the BDA segment increased by 66% on a constant currency basis and decreased 3% on an organic basis from the prior year's second quarter. The growth in reported revenues was driven by Transact, which contributed $87 million to BDA's top line. The decline in organic revenue was primarily due to a shift in timing in our individual marketplace business. The decline was partially offset by benefits outsourcing increase in revenue, which was largely driven by its expanded client base. The BDA segment had revenues of $209 million with a minus 4.2% operating margin as compared to a minus 20.1% in the prior year second quarter. The margin improvement was primarily driven by the top-line growth. We're optimistic about the long-term growth of this business. In the COVID-19 era, sustaining health benefits is more difficult than ever. BDA's solutions empower employers, employees, and retirees to navigate the changing world of benefits through a tailored, integrated experience that combines consulting expertise with innovative technology. Overall, I'm pleased with our progress. We delivered steady financial performance across most businesses, modest margin expansion, and adjusted EPS growth, all while adapting to the rapidly changing global environment. Now, I'll turn the call over to Mike.

Thanks, John. And I'd like to express my gratitude to all of our colleagues. who have shown remarkable resilience as they've continued to collaborate by virtual means and operate effectively through this challenging environment. The second quarter was unlike any other we have seen. I'm extremely proud of our team and our performance. The results demonstrate the durability of our business model and the agility of our colleagues to not only adapt to rapidly changing conditions, but to continue to deliver for our clients while also producing solid financial results. The second quarter was challenging, but we are reassured by the demand for our services and solutions, for our ability to reduce discretionary expenses and to manage our cash, and by our team's overall creativity. We're pleased to see continued overall revenue and underlying adjusted EPS growth and robust free cash flow growth. Now I'll turn to the overall detailed financial results. I'll start with income from operations. Income from operations for the second quarter was $163 million, or 7.7% of revenue, down 90 basis points from the prior year's second quarter, income from operations of $176 million, or 8.6% of revenue. Adjusted operating income for the second quarter was $296 million, or 14% of revenue, down 60 basis points from $299 million, or 14.6% of revenue, in the prior year's second quarter. Our second quarter 2020 unallocated net expenses grew to $109 million from $58 million in the prior year's second quarter. The costs in this category primarily relate to corporate functions and other unbudgeted costs that we don't directly allocate to the segments each quarter, including items such as true-ups on benefit and stock compensation expense accruals, incentive accrual adjustments, and E&O and legal settlement items. So let me provide additional detail on the increase for Q2. During the quarter, we had a lower-than-normal vacation usage pattern stemming from the pandemic, which required a $12 million vacation expense to be booked within unallocated net. Likewise, we've had some year-over-year increases related to timing around incentives, E&O accruals, and business taxes. Now, let me turn to earnings per share. For the second quarters of 2020 and 2019, our diluted EPS was $0.72 and $1.06, respectively. For the second quarter of 2020, our adjusted EPS was up 1% to $1.80 per share as compared to $1.78 per share in the prior year's second quarter. Foreign exchange had a de minimis impact on EPS for the second quarter. Our U.S. GAAP tax rate for the second quarter was 42.2% versus 19.7% in the prior year. Our adjusted tax rate for the quarter was 22.2%, up slightly from the 21.4% rate in the prior year. The current year U.S. GAAP effective tax rate is higher due to a $35 million discreet tax expense primarily related to an incremental base erosion anti-abuse tax, or BEAT, recognized during the second quarter in connection with the temporary income tax provisions of the CARES Act. The temporary provisions of the CARES Act are applicable to tax years 2019 and 2020. Utilizing these temporary provisions, the company will realize a cash tax benefit in 2020 of approximately $40 million. Turning to the balance sheet, as the COVID-19 situation continues to evolve, I believe that we are well positioned to navigate the uncertainty that lies ahead. We ended the second quarter with a strong capital and liquidity position, with cash and cash equivalents of $1.1 billion and full capacity in our undrawn $1.25 billion revolving credit facility. We aim to continue to maintain a strong and durable balance sheet. I'm looking to conserve cash in the current environment, by leaning into our cost and efficiency initiatives. We will continue to monitor the situation and intend to take appropriate measures to further reduce cash outflow and preserve adequate liquidity if demand for our solutions or services deteriorates. For the second quarter of 2020, our free cash flow was $593 million versus $287 million in the prior year, bringing our year-to-date free cash flow to $550 million an increase of 201% from the $183 million for the first half of the prior year. The year-over-year improvement in free cash flow is due a combination of our cash process improvements, prudent working capital management, and disciplined approach to managing spend. In terms of capital allocation, we paid $171 million in dividends and did not repurchase any shares in the first half of 2020. As a reminder, given certain prohibitions in 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. As John mentioned earlier, the economic fallout from COVID-19 generally had no material impact on the company's overall financial results for the second quarter of 2020. But we believe this is not an indicative of its potential impact on the company results for the remainder of the year and beyond. 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 previously withdrew our original guidance for 2020. We continue to be unable to predict the extent of the impact of COVID-19 pandemic. The company will reassess its position once we have a clear understanding of the depth, duration, and geographic reach of the pandemic. In the meantime, we remain focused on maintaining a strong balance sheet, liquidity, and financial flexibility. The changes brought on by COVID-19 pandemic are and continue to be formidable. but I'm very proud of the leadership and personal sacrifices demonstrated by our colleagues in supporting our clients during these very difficult times. These second quarter results are a direct reflection of the continued support from our clients, our colleagues, and all our stakeholders. Overall, we delivered solid financial performance in the second quarter. Despite the near-term uncertainty in the global market, I remain confident in the underlying fundamentals of our business, and I'll turn the call back to John.