Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson first quarter 2021 earnings conference call. Please refer to the 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 the 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 risk and uncertainty. 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 the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of these 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.

Thank you, and good morning, everyone, and thank you for joining us today on our first quarter 2021 earnings call. Joining me today is Mike Burwell, our Chief Financial Officer. Today, we'll review our results for the first quarter of 2021. I'm pleased with our first quarter financial results and the continued momentum in our business. We generated organic revenue growth of 4% and 110 basis point adjusted operating margin improvement. Each of our operating segments contributed to the margin expansion this quarter, driven by new business generation, strong retention rates, and increased operating leverage across our core businesses. Through the first quarter of 2021, our colleagues continued their tremendous efforts to serve our clients through these challenging times and delivered a strong financial performance. I'd like to extend my heartfelt thanks to all our colleagues for their dedication, professionalism, and support of one another. Thank you for continuing to bring your very best to the table every day. Your solidarity and resilience are truly inspiring. Our accomplishments in quarter one are reflective of our purpose and action. The impact of our work extends to the people in our client organizations, to each other, and to our communities. For many of us, this greater impact is our why. It's the purpose behind the work we do, creating clarity and confidence today for a more sustainable tomorrow. Grounded in this sense of purpose, we've continued to partner with our clients, to help strengthen their resilience and progress towards long-term success. The events of the past year have sharpened our focus. Our clients, our colleagues, and our other stakeholders expect us to conduct our business with integrity and in an environmentally and socially responsible manner with high ethical standards. We take these expectations seriously and have embraced principles that are aligned with our business priorities. are consistent with our commitment to ethical and sustainable practices, and demonstrate our respect for the communities in which we operate around the globe. For this reason, Willis Towers Watson has partnered with companies worldwide to increase racial justice by joining the World Economic Forum's Racial Justice in Business Initiative. The purpose of this initiative is to build more equitable and just workplaces for professionals with underrepresented racial and ethnic identities. Willis Towers Watson is among 44 founding members, representing 5.2 million employees and 13 industries. As part of this ongoing global conversation with leading organizations worldwide, we can both learn from them to increase racial diversity and inclusion inside the company and contribute our own ideas to address the issue more broadly. In working towards the goal of improving the communities which we serve, I'm proud to say we recently announced our commitment to delivering net zero greenhouse gas emissions in alignment with the science-based targets initiative by 2015 at the latest, with at least 50% reduction by 2030. Through improvements to energy efficiency in our operations, leveraging virtual meeting tools, promoting recycling, and encouraging our colleagues to adapt environmentally responsible habits, The company aims to minimize its carbon emissions and any other related harmful environmental impacts. Turning now to our proposed combination with Aon, we continue to be excited about the potential of the combined firm and are committed to its completion. Upon close, we will serve a common purpose, to serve clients and improve communities, blending the best of both of our firms. We'll innovate on behalf of our clients and co-create solutions to address unmet client needs. We will build inclusive and diverse teams, engage colleagues, and enable them to deliver their full potential. During the first quarter, we continued to build momentum towards closing the transaction with Aon and made significant progress in our integration planning efforts. We anticipate closing in the first half of 2021, subject, of course, to regulatory approvals. Now, let's move on to our first quarter results. Reported revenue for the first quarter was 2.6 billion. That's up 5% as compared to the prior year first quarter, up 1% on a constant currency basis, and up 4% on an organic basis. In quarter one, we continued to face some headwinds due to macroeconomic factors such as COVID-19. In the prior year, we only started to see the impacts near the end of the first quarter. We've started to experience some improvement in areas where revenue is tied to discretionary project spending. Similar to last quarter, we experienced solid financial performance in areas where we have a well-established market position, mature relationships, and annuity or compliance-driven business. Net income was $736 million, up 135% for the first quarter, as compared to $313 million of net income in the prior year first quarter. It should be noted we disposed of our Miller Wholesale business on March 1, 2020, for $696 million in proceeds and a gain of $356 million on a tax-free basis, or $2.73 per share. Adjusted EBITDA was $730 million, or 28.2% of revenue for the first quarter of as compared to 680 million or 27.6% of revenue for the same period last year, representing a 7% increase on an adjusted EBITDA dollar basis and 60 basis of margin improvement. For the quarter, diluted earnings per share were $5.63, an increase of 140% as compared to the prior year. This included a net $350 million gain on disposal of operations and mostly resulting from the sale of our Miller Wholesale business. Adjusted diluted earnings per share were $3.64 for the first quarter, reflecting an increase of 9% compared to the prior year. Overall, it was a solid quarter. We grew revenue, we enhanced margin performance, and we increased earnings per share. Now, let's take a 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 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 HCB segment revenue was flat on an organic basis and constant currency basis compared to the first quarter of the prior year and generated this similar level of revenue with one less billing day this year. This result represents sequential revenue improvement compared to our prior quarter, which was driven by increased demand for advisory services across various lines of business. Talent and rewards revenue decreased nominally, with the uptick in executive compensation and rewards strategy work offset by declines in our traditional survey sales and communications and change management offerings. Our health and benefits revenue was flat for the quarter. We continue to grow revenue from advisory work in North America and global benefit management and local brokerage appointments outside of North America. However, this growth was offset by lower commission-based revenue, which was tied to prior year book sales. Retirement revenue was also flat compared to the prior year, with funding and guaranteed minimum pension equalization work in Great Britain offset by declines in North America resulting from one less billing day and less de-risking activity. Technology and administration solutions revenue grew moderately, primarily due to increased project work and new business activity in Great Britain. HCB's operating margin increased by 20 basis points compared to the prior year first quarter as a result of continued expense reduction efforts. We're pleased with HCB's sequential improvement and margin growth. Our long-term outlook on HCB remains positive. The pandemic has changed the needs and demands of workers and workplaces. HCV stands ready to help clients navigate the transition. Now let's look at corporate risk and broking, or CRB, which had a revenue increase of 5% on an organic and constant currency basis as compared to the prior year first quarter. Great Britain and internationals' revenue increased 8% and 15% respectively for the first quarter. The revenue increases were primarily driven by new business winds most notably in natural resource and FinEx insurance lines. North America's revenue was up by 6% in the first quarter, driven by strong renewals across all regions, but also particularly in the FinEx lines. Revenue for Western Europe decreased 2% due to both the timing of some revenue moving to later quarters and the departure of some senior staff, which pressured business in certain geographies. CRB revenue was $810 million for the quarter with an operating margin of 20.0% compared to $739 million of revenue with an operating margin of 17.2% in the prior year first quarter. The 280 basis point margin improvement reflects the continuation of effective cost containment. To see the strong top line growth and improved profitability in the first quarter is encouraging and and we remain optimistic about both CRB's short-term and long-term growth prospects. In a world marked by uncertainty, CRB goes beyond the traditional boundaries of insurance products and risk management to deliver services that help organizations prepare for what may lie ahead. Turning to investment risk and reinsurance, or IRR, revenue for the first quarter was $605 million. an increase of 4% on an organic basis, and a decrease of 5% on a constant currency basis as compared to the prior year first quarter. Reinsurance with growth of 4% continued to lead the segment's growth through a combination of net new business and favorable renewal factors. The insurance consulting and technology and investment businesses all so contributed to the segment's revenue growth. Both lines of business were up 8% compared to the first quarter of the prior year, having benefited from increased demand for advisory work. Insurance consulting and technology revenue growth was aided further by increased software sales. The wholesale business was down 14% on an organic basis. Although that's reported as organic, about half of the decline was because we transferred wholesale special contingency risk business to the CRB segment in the fourth quarter of 2020. The remainder of the revenue decline was largely caused by ongoing pressure on various insurance lines from COVID-19. As a reminder, we sold the wholesale business on March 1, 2021. IRR had an operating margin of 47.9%, up 280 basis points, as compared to 45.1% for the prior year first quarter. The strong margin expansion was a result of careful cost containment efforts coupled with solid top line growth. IRR helps businesses and communities to sustainably navigate the risks and opportunities ahead. IRR's powerful combination of advisory services, technology solutions, and analytical capabilities continues to create value for companies as they reevaluate risk and reinforce resilience post-pandemic. Revenue for the benefits delivery and administration, or BDA segment, increased by 23% on an organic basis and 24% on a constant currency basis from the prior year first quarter. The growth in revenue was largely driven by individual marketplace, primarily by transactions. which contributed $148 million to BDA's top line this quarter with growth in Medicare Advantage products. The benefits outsourcing business also contributed to the increase in revenue, which was largely driven by its expanded client base. The BDA segment had revenue of $287 million with a 2.5% operating margin, as compared to revenue of $231 million and a negative operating margin of minus 4.7% in the prior year first quarter. We continue to feel positive about the momentum of our BDA business for 2021. For many people, the pandemic has highlighted the importance of securing health and wellness plans that meet their individual needs. BDA provides education, communication, and decision support tools that empower employers, employees, and retirees to navigate the changing world of benefits. Overall, I'm very pleased with our results this quarter. We delivered strong overall financial performance with top-line growth, margin expansion, and EPS growth, all while continuing to make progress against strategic initiatives and our proposed combination with Dayan. Now I'll turn the call over to Mike.

Thanks, John, and good morning to everyone. Thanks to all of you for joining us. First, I'd like to extend my appreciation to all our colleagues. We've asked a lot of our teams and our colleagues continue to pull together and deliver. I'm proud of all the work they have done to continue supporting our clients, each other, and the communities in which we work and live. We're off to a solid start this year. While we continue to face some headwinds from COVID-19 pandemic, we are reassured by the improved demand for our discretionary services and solutions. and by our ability to generate profitable growth. We're pleased to see another quarter of solid revenue growth with underlying adjusted EPS growth. While free cash flow decreased, it improved when normalized for certain significant litigation and compensation payments made this quarter. Now I'll turn to the overall detailed financial results. Income from operations for the first quarter was $452 million, or 17.5% of revenue, up 290 basis points from the prior year first quarter income from operations of $360 million or 14.6% of revenue. Adjusted operating income for the first quarter was $579 million or 22.4% of revenue up 110 basis points from $525 million or 21.3% of revenue in the prior year first quarter. For the first quarters of 2021 and 2020, our diluted EPS were $5.63 and and $2.34, respectively, which included the $359 million gain on disposals. For the first quarter of 2021, our adjusted EPS was up 9% to $3.64 per share, as compared to $3.34 per share in the prior year first quarter. Foreign currency rate changes caused an increase in our consolidated revenue of $86 million, a 4% of revenue for the quarter, compared to the prior year first quarter, with $0.12 tailwind to adjusted diluted EPS per share this quarter. Our U.S. GAAP tax rate for the first quarter was 11.5% versus 20% in the prior year. The current quarter tax rate was lower primarily due to the tax-exempt disposal of our Miller business. Our adjusted tax rate for the first quarter was 20.5% up nominally from 20.4% in the prior year. Turning to the balance sheet. We ended the first quarter with a strong capital and liquidity position with cash and cash equivalents of $2 billion and full capacity in our under on $1.25 billion revolving credit facility. We also successfully reduced our leverage profile by repaying $500 million of bonds outstanding during the quarter. Willis Towers Watson remains well positioned from a liquidity perspective. We need to continue to maintain a strong and durable balance sheet and continue pushing forward on our cost savings and efficiency initiatives. As the economic recovery unfolds, we will continue to monitor the ever-evolving impact of the pandemic and are prepared to take appropriate measures as needed to preserve our financial position. Free cash flow was in negative $165 million compared to negative $43 million in the prior year. The decrease in the year-over-year free cash flow was due to the net legal settlement payments of approximately $185 million in respect to the previously announced Stanford and Willis Towers Watson merger. settlement, and higher incentive compensation and benefit-related items of approximately $180 million. Absent these one-off items, free cash flow would have increased, more accurately reflecting our run rate improvements in working capital and cost containment efforts. We've made tremendous progress to improve our free cash flow in 2020, and we remain dedicated and focused on maintaining our progress in this area in 2021. In terms of capital allocation, in the first quarter of 2021, we paid approximately $92 million in dividends. We do not expect to repurchase any shares for the remainder of 2021, given certain prohibitions in the transaction agreement with Aon in connection with our pending business combination. Pension contributions to our qualified plans totaled $86 million in the first quarter, and we are currently projecting contributions of $126 million for 2021. As a general matter, COVID-19 pandemic did not have a material adverse impact on our overall financial results in 2020 or in the first quarter of 2021. However, the pandemic did continue to impact revenue growth, particularly in some discretionary lines, and we expect the effects of COVID-19 on general economic activity may continue to negatively impact our revenue and results for the remainder of 2021. 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. We're very pleased with these first quarter results. They're a direct reflection of our resilience and our continued focus on strategic priorities. Our first quarter results were very encouraging. We have momentum, solid financial results, and a strong balance sheet, and an excellent team, which gives me confidence in our ability to continue driving value for all our stakeholders. And I'll turn the call back to John.