Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson second quarter 2021 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 on 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 John Haley, Willis Tower Watson's Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone. And thank you for joining us on our second quarter 2021 earnings call. Joining me today is Mike Burwell, our Chief Financial Officer. Today, we'll review our results for the second quarter of 2021. Let me start by thanking our 45,000 plus colleagues for their resilience, their commitment and their focus on serving clients with excellence. At Willis Towers Watson, Our colleagues have persisted through an unprecedented global pandemic while simultaneously preparing for a proposed integration and for potential divestitures. What our teams have accomplished is nothing short of extraordinary. We're now moving forward with clarity. Today, I'm going to share some observations on the termination of our proposed business combination agreement with Aon. But I really want to focus on our strong second quarter results and excellent return to shareholders. In Q2, our team delivered outstanding results with organic revenue increasing by 8% compared to the second quarter of 2020. All our business segments contributed meaningfully to this result. Our adjusted operating margin improved by 390 basis points. This translates into 48% adjusted EPS growth rate in Q2 and 30% free cash flow improvement when normalized for one time item. Our 6% organic revenue growth for the first half reflects mid single digit or greater organic growth in three of our four segments. Turning now to the termination of our proposed business combination with Aon. We recently announced our mutual agreement to move forward independently. On behalf of Willis Towers Watson, I'd like to thank our counterparts at Aon for their professionalism over the past 16 plus months since we announced the transaction. I again would also like to thank our Willis Towers Watson colleagues for all of their efforts, as well as our clients for their continued support throughout this process. The proposed combination had significant regulatory momentum. A notable exception was the United States, where the parties reached an impasse with the Department of Justice. In the end, working closely with Aon, we decided to terminate our agreement. We're confident this is the right decision for Willis Towers Watson, for our colleagues, for our clients, and for all of our stakeholders, including our shareholders. Aon has already paid the $1 billion termination fee. We now move forward with confidence and from a position of strength. As we look to the future, we will build on our successes, which have been significant as evidenced by our performance over the last several quarters. We will also leverage our formidable resources, including our durable client relationships, our talented colleagues, and our healthy financial position. It's worth noting that our client retention rates have remained at the same level as prior years. Regarding colleagues, While we're disappointed that we've lost some valued colleagues in what has become a hot talent market, our top leadership ranks remain intact and our ability to compete continues unabated. We were pleased to announce last week that we would be reinstating our share buyback program, which had been suspended to comply with the terms of the agreement with Aon. Our announcement noted that we would be increasing the share repurchase program by $1 billion. This will include $500 million in accelerated share repurchases and $500 million in our normal program. Subject to market conditions and other factors, we believe we should be able to execute a majority, if not all, of the repurchases by the end of 2021. Our board of directors has authorized a 13% increase in our quarterly dividend payment, given our continued improvement in free cash flow. We've been paying down debt, and we expect to have retired almost $1 billion in total by the end of the year. This, together with the significant capacity we've generated, provides us with plenty of capacity to invest in both organic and inorganic growth going forward. We intend to use this capacity to make investments in our businesses so that we're well-positioned to address evolving client needs. We're excited about the significant opportunities across our whole portfolio of businesses, both brokerage and consulting. As a result, we've asked each of our business segment leaders to look at potential areas of growth for investment. We look forward to providing you with more details about this, as well as an update on the overall company at our upcoming Investor Day on September 9, 2021. I'd also like to announce today that we're conducting a review of strategic alternatives for Willis-Rhee, our reinsurance operations. The board has authorized us and our advisors to initiate such a process. While we highly value the Willis-Rhee platform and our colleagues who contribute to its success, we believe now is an appropriate time to explore strategic alternatives for this business. There can be no assurance the strategic alternatives review process will result in a sale of Willis-Ree or other strategic change or outcome. One other question that has been raised about how we will move forward independently is what is my transition plan? As part of our ongoing planning process, the board of directors has been working with me on CEO succession. I still intend to retire and I will continue to work with the board to ensure a smooth transition of the CEO role. This will require an announcement of my replacement in an adequate timeframe to ensure this is accomplished. Now let's move on to our second quarter results. Reported revenue for the second quarter was $2.3 billion, up 8% as compared to the prior year's second quarter, up 4% on a constant currency basis, and up 8% on an organic basis. In Q2, we experienced clear improvement in areas where revenue is tied to discretionary project spending as the economy continued to recover. Net income was $186 million. That's up 82% for the second quarter as compared to $102 million of net income in the prior year second quarter. Adjusted EBITDA was $557 million, or 24.4% of revenue for the second quarter, as compared to $441 million or 20.9% of revenue for the same period last year. That represents a 26% increase on an adjusted EBITDA dollar basis and 350 basis points of margin improvement. For the quarter, diluted earnings per share were $1.41, an increase of 96% as compared to the prior year. Adjusted diluted earnings per share were $2.66 for the second quarter reflecting an increase of 48% compared to the prior year. Overall, it was a very strong quarter. We grew revenue, we enhanced margin performance, and we increased earnings per share. So now we'll 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 do include discretionary compensation. The human capital and benefits, or HCB segment revenue, was up 5% on an organic basis and 4% on a constant currency basis compared to the second quarter of the prior year. This result represents a strong return to revenue growth, which was driven by increased demand for advisory services across various lines of business. Talent and rewards revenue increased 22%, with a major uptick in executive compensation and rewards strategy work. We anticipate continued strong demand for broad-based rewards and transaction projects in the second half of the year, with demand evident across all geographies. We are also experiencing strong participation rates across various data survey products in the midst of a tight labor market and companies looking to attract and retain talent, which should fuel growth in the second half of the year. Our health and benefits revenue increased 1% for the quarter, on top of similar growth in the second quarter of 2021. We continue to grow revenue from advisory work in North America and global benefits management and local brokerage appointments outside of North America. However, this growth was partially offset by lower commission-based revenue, which was tied to prior year book sales. In this business, we anticipate a stronger second-half performance driven by U.S. legislative changes alongside pent-up demand for strategic benefits reviews. Retirement revenue was up 3% compared to the prior year, driven primarily by funding and guaranteed minimum pension equalization, or GMP, work in Great Britain. We expect high demand for GMP work to continue through the remainder of 2021 and into 2022 and 2023. Technology and administration solutions revenue grew 2%, primarily due to increased project work and new business activity in Great Britain. We're optimistic about growth opportunities for this business as clients are engaging with us to deliver more high-touch solutions with higher-end service levels to support their employee base. HCB's operating margin increased by 210 basis points compared to the prior year second quarter, as a result of continued expense reduction efforts. We're very pleased with HCB's sequential improvement and margin growth. Our long-term outlook on HCB remains positive. Now let's look at corporate risk in Broking or CRV, which had a revenue increase of 8% on an organic and constant currency basis as compared to the prior year's second quarter. North America's revenue was up 13% in the second quarter, driven by gains on book of business sales alongside new business across all regions, particularly in the FinEx and marine lines. Revenue for Western Europe increased 3% due to new business and renewal expansion, particularly in retail and FinEx. Great Britain and internationals revenue increased 2% and 9% respectively for the second quarter. The revenue increases were primarily driven by new business wins across multiple lines, including FinEx, aerospace, construction, marine, and retail insurance lines. CRB revenue was $788 million for the quarter with an operating margin of 22.9% compared to $701 million of revenue with an operating margin of 19.2% in the prior year second quarter. That's up 15% from 2019. The 370 basis point margin improvement contributes to a two-year increase of 770 basis points and reflects the continuation of effective cost containment. Consistent with last quarter, CRB once again delivered strong top line growth and improved profitability. CRB's second quarter performance is encouraging as we look toward the future. As the economic outlook improves, we believe our corporate risk and broking segment will see the demand for mitigating asset exposures and other insurance and risk mitigation strategies increase, set against the backdrop of a firm market. We expect to see investment in large-scale infrastructure projects, building volumes in transportation, and increasing deal volume in M&A. Our CRB segment is focused on delivering industry and product expertise and has a mature strategy in place across all its global lines of business. We believe that the depth of our talent in these global communities, coupled with our connected broking and risk and analytics strategies, continue to enable us to deliver innovative solutions to both existing and prospective clients. Turning to investment risk and reinsurance, or IRR. Revenue for the second quarter was $400 million, an increase of 15% on an organic basis and a decrease of 7% on a constant currency basis as compared to the prior year second quarter. This organic growth is on top of 3% revenue growth in the 2020 second quarter. The constant currency change reflects the divestitures of our wholesale subsidiary Miller and our Max Matisse in business. The investment business with revenue growth of 44% led the segment's growth with new business and higher fees. Investment's growth was aided further by increased performance fees. Insurance consulting and technology revenue was up 13% compared to the second quarter of the prior year when revenue growth was modest. This business benefited from increased demand for advisory work. Reinsurance revenue grew 4%. through a combination of net new business and favorable renewal factors. Revenue growth was partially offset by a decline in investment income due to lower interest rates. IRR had an operating margin of 33.3%, up 460 basis points as compared to 28.7% for the prior year's second quarter. The strong margin expansion was a result of careful cost containment efforts coupled with solid top-line growth. Our investment risk and reinsurance segment is seeing strong demand from insurers for technology, advice, and analytics, driving new business across our insurance consulting and technology and reinsurance businesses. We believe we're well positioned to provide leading advice and innovative solutions to our clients in the transition to a low-carbon future. 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. We believe this unique combination enables us to deliver industry-leading expertise and innovative solutions to help our clients navigate challenges and leverage opportunities as the socioeconomic legacy of the pandemic continues to evolve and the world adapts to meet the increasing challenge of climate change events. Revenue for the benefits delivery and administration, or BDA segment, increased by 14% on an organic basis and 16% on a constant currency basis from the prior year second quarter. The growth in revenue was largely driven by individual marketplace, primarily by Transact, which contributed $116 million to BDA's top line this quarter. with its growth in Medicare Advantage products. The benefit outsourcing business also contributed to the increase of revenue, which was largely driven by its expanded client base. The BVA segment had revenue of $242 million with a negative 4.3% operating margin as compared to revenue of $209 million and a negative operating margin of 4.2% in the prior year's second quarter. This nominal margin decline was largely due to our increasing sales capacity ahead of the 2022 annual enrollment period, which will usher in expansion opportunities for both our individual marketplace and our benefits outsourcing lines of business. We continue to feel positive about the momentum of our BDA segment for the remainder of 2021. So overall, I'm very pleased with our results this quarter. Thanks to our colleagues' outstanding efforts and our clients' commitment, we delivered strong broad-based overall financial performance across all of our business segments. We saw good top-line growth, we saw meaningful margin expansion, and we saw EPS growth on top of a solid second quarter in 2020. 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 over the past 16 months, and they have continued to deliver. They remain committed to our vision and upheld our values. They went above and beyond to support our company, our clients, and one another. I'm extremely grateful for their patience, commitment, and resilience. We delivered continued progress for both the quarter and year-to-date period, including 8% revenue growth in Q2 Through the first half of the year, we translated strong organic revenue growth into excellent operating income growth and almost doubled earnings per share, demonstrating the resilience of the Willis Towers Watson business model. We continue to expect mid-single-digit revenue growth for the full year 2021. I would note that our reported revenue included the favorable impact from changes in FX rates driven by a weaker U.S. dollar versus most currencies. Our strong revenue growth and ongoing operational discipline, as well as sound cost management, contribute to an adjusted operating income margin growth of 390 basis points in Q2 and 240 basis points through the first half of the year. It should be noted the growth in our margins was driven by the speed of revenue growth, which outpaced our expense growth. While we made investments in people, operations, and technology to enable long-term growth over the first half, we expect to increase these investments during the second half of the year. We also anticipate some resumption of T&E costs over the second half of the year as well, though we anticipate continued leverage of technology to conduct much of our business remotely, enabling us to sustain our improved efficiency and reduced carbon footprint. Looking forward, we expect to deliver margin expansion for the full year 2021 and over the long term. Moving back to the results for the second quarter, we've translated strong operating income into adjusted EPS growth of 48% in Q2 and 23% year-to-date. Foreign currency changes had a favorable impact to revenue of $87 million, or 4% in Q2 versus the prior year, and no impact to diluted earnings per share. If currency was to remain stable at today's rates, we'd expect a modest tailwind to adjusted diluted earnings per share for the full year. As John mentioned, Ann and WTW mutually agreed to terminate our business combination agreement and move forward independently. in accordance with the business combination agreement and has paid the $1 billion termination fee. Free cash flow increased 30% year-to-date when adjusted for the $185 million for the previously announced Stanford and Willis Towers watch and merger settlements and higher incentive comp and benefit-related items of $249 million. We continue to expect to drive free cash flow growth over the long term, building on our efforts over the past couple of years. We expect our CapEx expenditures to increase in the second half of the year as we invest in technology to grow our business. Given our outlook for the long-term free cash flow growth, we see share repurchases as the highest return on capital opportunity for capital allocation. As John noted, we plan to implement an accelerated share repurchase strategy of $500 million in addition to our normal share repurchase plans. We look to execute as much as practical in just the year 2021, and we also raised our dividend by 13%. Now turning to our balance sheet and debt capacity. We had $2.2 billion of cash on our balance sheet at the end of the quarter. We plan to pay off $450 million of debt outstanding in August 2021. We have no borrowings outstanding under our $1.25 billion credit facility. We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. And considering our June 30th balance sheet, we have plenty of additional debt capacity for discretionary use in the second half of the year. Over the long term, we expect to return to our past practice of growing debt as EBITDA grows. It should be noted that free cash flow generation in the second half of the year is seasonally stronger than in the first half of the year, and we will look to allocate cash for our best use based on return on capital. In summary, we ended the second quarter in a very strong position as we delivered strong top-line and bottom-line results. While the termination of our combination with AM was not the outcome we originally intended, The opportunity for WTW as a standalone business is strong and exciting. We believe our disciplined approach to return on capital, combined with our continued improved cash flow delivery and increased debt capacity provides flexibility to improve shareholder value creation over the long term. It should be noted our U.S. GAAP tax rate for the second quarter was 33.8% versus 42.2% in the prior year. Our adjusted tax rate for the second quarter was 19.3%. versus 22.2% rate in the prior year. The current year quarter effective tax rate includes a 40 million deferred tax expense related to the enacted UK statutory tax rate change. However, the prior year effective tax rate was higher due to additional expense recognized in connection with the temporary provisions of the CARE Act. We anticipate our annual effective adjusted tax rate will be between 20 and 21% for the full year. We're very pleased with these second quarter results, and they're a direct reflection of our incredibly talented colleagues and unwavering commitment to client service. Our second quarter results were very encouraging. We have momentum. We have solid financial results, 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 you, John.