Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson's third quarter 2020 earnings conference call. Please refer to the WillisTowersWatson.com 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 Willis Towers Watson's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Security 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 refer 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 Tower Watson's SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliation 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 would now like to turn the call over to Mr. John Haley, Willis Tower Watson's chief executive officer. Please go ahead.

Okay, thank you. Good morning, everyone. And thank you for joining us on our third quarter 2020 earnings call. Joining me today is Mike Burwell, our Chief Financial Officer. In the third quarter, we continued to navigate through challenging economic conditions. Nevertheless, I'm pleased with our financial performance. While our revenues continue to be impacted by the pandemic and the lockdown, particularly in our discretionary lines of business, Our overall performance reflects the durability and resilience of our business model. In many of our core businesses, we continue to experience new business generation, strong client retention rates, and increased operating leverage. We continue to reduce our controllable spending and improve our liquidity through prudent cash flow management. As we navigate through the COVID-19 lockdown and the resulting economic conditions, The well-being of our colleagues, clients, and communities remains at the forefront. It has been an arduous but transformative year. With great changes come new opportunities for growth, which is why we continue to be excited about the proposed Aon and Willis Towers Watson combination. COVID-19 has highlighted deficiencies in the way the world approaches people, risk, and capital issues, and we believe our combination with Aon will allow us to more proactively support our clients in developing solutions to problems that are inadequately managed today. COVID-19 has shown the world that the widespread cost of extreme events far exceed the upfront cost of prudent preparatory measures. Climate risk is one such area where we see protection gaps, and building greater resilience is critical. Similar to the COVID-19 pandemic, climate change will challenge many countries with the potential for profound socioeconomic destruction, highlighting the critical need for more efficient risk informed investment decision making to help save lives and economies from the foreseeable shocks in the years and decades ahead. I'm proud of the work that Lewis Towers Watson has done to get ahead of the curve on climate risk. As I announced in the fall of 2019, We're a founding member of the Coalition for Climate Resilient Investment, or CCRI. The CCRI is a public-private coalition of institutional investors, banks, insurers, rating agencies, and governments. And it was launched last year to produce solutions facilitating the integration of climate risk into investment policy. Our work on climate has involved multiple businesses and geographies. To focus our efforts, we introduced Climate Quantified at the World Economic Forum meeting in Davos earlier this year. This is galvanizing our work in helping organizations navigate climate risk. For example, we're working with a large financial institution to assess the exposure of asset portfolios to climate change. We've also been developing approaches to risk transfer, such as parametric insurance, which we believe enable protection against unpredictable but potentially devastating risks, protection that was previously unthinkable with traditional insurance. Willis Towers Watson is not a newcomer on this topic. In response to growing demand for our climate services and capabilities, we established the Climate Resilience Hub, which sits within the investment risk and reinsurance segment. Climate has been at the core of our research agenda for the last 15 years, well before this made the headlines. Climate has also been an integral component of the investment business research efforts, including those of our Thinking Ahead Institute. Overall, we've invested over $50 million over the last decade to support open climate and natural hazard research in partnership with institutions such as the National Center for Atmospheric Research, Columbia University, the National University of Singapore in Newcastle, Cambridge, and Exeter Universities. We continue to drive momentum on client resilience during this year's annual climate week in New York City. The annual climate week presented an opportunity for the company to promote resilience and sustainability, showcase global climate action, and maintain the critical momentum needed to manage climate risk. We also had the honor of participating in the World Economic Forum Sustainable Development Impact Summit, contributing towards important initiatives that will accelerate sustainability and resilience. The COVID-19 pandemic has dramatically highlighted what happens when countries and businesses do not prepare for long-term resilience and instead prioritize short-term considerations. Progress has been too slow in closing the protection gaps that exist. As we cited in our recently released white paper, both Aon and Willis Towers Watson share a strong commitment to helping clients navigate their most complex challenges. We're eager to bring new and innovative solutions to our clients, to help them meet their evolving needs and address global problems like climate risk. We believe our combined firm will have the capacity to take progressive action and implement systemic change that will have both immediate and long-term impact in four key areas, navigating new forms of volatility, building a resilient workforce, rethinking access to capital, and of course, addressing the underserved. So, let's move on to our third quarter results. Reported revenue for the third quarter was $2 billion. That's up 1% as compared to the prior year third quarter, flat on a constant currency basis and down 1% on an organic basis. Reported revenue included $17 million of positive currency movement. Similar to the last quarter, we experienced solid financial performance in areas where we have a well-established market position, mature relationships, and annuity or compliance-driven businesses. We faced some headwinds in areas where our revenue is more aligned to discretionary project spending. Net income was $122 million, up 53% for the third quarter as compared to $80 million of net income in the prior year third quarter. Adjusted EBITDA was $382 million or 19% of revenue as compared to the prior year adjusted EBITDA for the third quarter of $344 million or 17.3% of revenue. That represents an 11% increase on an adjusted EBITDA dollar basis and 170 basis points of margin improvement. For the quarter, diluted earnings per share, which included a gain on the sale of Max Matison, were 93 cents, an increase of 60% as compared to the prior year. Adjusted diluted earnings per share were $1.33 for the third quarter, reflecting an increase of 2% 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 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 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 do include discretionary compensation. The human capital and benefits, or HDB, segment revenue was down 2% on an organic and constant currency basis compared to the third quarter of the prior year. That's primarily as a result of a decline in demand in our talent and rewards business. Talent and rewards revenue decreased 9% with the economic turmoil related to the COVID-19 lockdowns adversely impacting workforce dynamics at many companies and dampening the need for advisory work globally. Our health and benefits revenues increased 1% for the quarter. We experienced strong client retention in North America, alongside new global benefit management and local brokerage appointments outside North America. Retirement revenue was flat compared to the prior year, with reduced de-risking activity in North America being balanced by increased funding and GMP equalization work in Great Britain. Technology and administrative solutions revenue declined in Western Europe and international, primarily as a result of non-recurring project work that had enhanced the prior year's results. Despite the pressure on revenue, HCB's operating margin decreased by only 30 basis points compared to the prior year third quarter as a result of careful cost management efforts. We remain confident about the long-term prospects of our HCB segment. Work environments have changed dramatically this year, forcing many companies to rethink their approach to work and rewards. HCB there is to help clients make the tough decisions needed to unlock their organizational resilience and push forward. Now let's look at corporate risk and broking, or CRB, which had a revenue decrease of 1% on an organic and constant currency basis as compared to the prior year third quarter. North America's revenue was down by 4% in the third quarter. This was mainly a result of a tough comparable from the prior year, which benefited from the one-off sale of a book of business. Revenue for international and Western Europe increased 3% and 4%, respectively, driven by new business and strong renewal. Great Britain's revenue declined 2% for the third quarter. Great Britain's results were negatively impacted by a change in the remuneration model for certain lines of business. This change, which is neutral to operating income, results in lower revenue and an equal reduction in salaries and benefits expense. Absent this change, Great Britain's revenue increased by 2%, primarily from strong performance across most lines of business, including financial solutions and FinEx. CRB revenue was $649 million for the quarter with an operating margin of 12.5% compared to 651 million revenue with an operating margin of 12.4% in the prior year third quarter. The margin improvement was due to top line growth coupled with cost containment efforts. CRB combines research data and strategic insight to address our clients' most complex risk challenges. Companies must constantly adapt to today's ever-changing business landscape, and we believe CRB is well-positioned to provide solutions that keep pace with our clients' evolving needs. Turning to investment risk and reinsurance, or IRR. Revenue for the third quarter was $331 million. an increase of 3% on an organic basis and flat on a constant currency basis as compared to the prior year third 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 revenue was up 1%, mainly from technology sales. Investment revenue increased 4% with continued expansion of the delegated investment services portfolio. Max Matisse in revenue increased primarily from increased commission income. As a reminder, we sold the Max Matisse in business in the third quarter and they will not be included in our Q4 results. Our wholesale business was down 12% on an organic basis with pressure across all lines and lower investment returns. IRR had an operating margin of 8.6% as compared to 9.3% for the prior year third quarter. We continue to feel good about IRR's momentum. IRR's portfolio of offerings provides organizations with information needed to understand their risk and how it affects capital and their financial performance. Advising clients through these turbulent times continues to be IRR's core focus. Revenue for the benefits delivery and administration, or BDA segment, increased by 26% on a constant currency basis, and increased 6% on an organic basis from the prior year third quarter. The growth in revenue was primarily driven by Transact, which contributed $96 million to BBA's top line this quarter. The benefits outsourcing business also contributed to the increase in revenue, which was largely driven by its expanded client base. The BBA segment had revenues of $226 million, with a minus 5.3 operating margin as compared to minus 11.9% in the prior year third quarter. The margin improvement was primarily driven by the top-line growth. We're optimistic about the long-term growth of this business. The pandemic has threatened the well-being of people all over the globe. In this time of heightened stress and uncertainty, BDA empowers employees and retirees by providing easy access to the tools they need to understand their benefit options and to take control of their healthcare. Overall, I'm pleased with our progress. We delivered steady overall financial performance with modest margin expansion and adjusted EPS growth despite the lingering economic turmoil. So 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 extend my gratitude to our colleagues for another solid quarter. as well as thank our clients for their continued support and trust in us through this challenging environment. I am proud of our leadership, our colleagues, and our overall resiliency demonstrated by our businesses. Now let's turn to our financial overview. In the third quarter, we continue to face some headwinds from the COVID-19 pandemic, but we are reassured by the demand for our services and solutions and by our ability to reduce discretionary expenses and to manage our cash. We were pleased to see another solid quarter of profitability with underlining adjusted EPS growth and remarkable 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 third quarter was $73 million, or 3.6% of revenue, down 180 basis points from the prior year third quarter income from operations of $107 million, or 5.4% of revenue. Adjusted operating income for the third quarter was $238 million or 11.8% of revenue up 20 basis points from $231 million or 11.6% of revenue in the prior year third quarter. The third quarters of 2020 and 2019, our diluted EPS were 93 cents and 58 cents respectively. For the third quarter of 2020, our adjusted EPS was up 2% to $1.33 per share as compared to $1.31 per share in the prior year third quarter. Foreign exchange had a 3 cent impact on EPS for the third quarter. Our U.S. GAAP tax rate for the third quarter was 27.6% versus 20.4% in the prior year. Our adjusted tax rate for the third quarter was 30%, up from 22.2% rate in the prior year, The current quarter effective tax rate was higher as a result of the enacted statutory tax rate changes in the U.K., requiring us to remeasure our U.K. deferred tax liabilities and recognize a discrete deferred tax expense of approximately $11 million or $0.08 per share during the three months ended September 30, 2020. Turning to the balance sheet. As the COVID-19 situation continues to evolve, I believe that we are well prepared to navigate the uncertainty that lies ahead. We ended the third quarter with a strong capital liquidity position with cash and cash equivalents of $1.6 billion and full capacity on our undrawn $1.25 billion revolving credit facility. We had no borrowings under our credit facility during the quarter. Our debt to adjusted EBITDA has improved from 2.7 at 9-30-2019 and 2.4 at 12-31-2019 to 2.3 at 9.30, 2020. Willis Towers Watson remains well positioned from a liquidity perspective. We aim to continue to maintain a strong and durable balance sheet and continue pushing forward our cost and efficiency initiatives. We continue to monitor the ever-evolving impact of the pandemic and we're prepared to take appropriate measures as needed to preserve our financial position. For the third quarter of 2020, our free cash flow was $473 million versus $262 million in the prior year, bringing our year-to-date free cash flow to $1 billion, an increase of 130% from $445 million for the first nine months of the prior year. The year-over-year improvement in free cash flow is due to a combination of prudent working capital management and a disciplined approach to managing spend. In terms of capital allocation, we paid $259 million in dividends and did not repurchase any shares in the nine months ended September 30, 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 a general matter, the COVID-19 pandemic did not have a material adverse impact to our overall financial results for the third quarter of fiscal 2020. However, the pandemic did impact revenue growth, particularly in some discretionary lines, and we expect the effects of COVID-19 on general economic activity could negatively impact our revenue results for the remainder of 2020 and beyond. The duration of the pandemic, the full magnitude of its economic impact, and the subsequent speed of recovery remain unknown. In the meantime, we remain focused on maintaining a strong balance sheet, liquidity, and financial flexibility. The COVID-19 pandemic has caused considerable economic upheaval. but I'm very proud of the leadership team and the resolve of our colleagues in supporting our clients during these difficult times. These third quarter results are a direct reflection of the agility of our global model. Overall, we delivered a solid financial performance in the third quarter, and I remain confident in our ability to continue driving value for all our stakeholders. And now I'll turn the call back to John.