Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson 3rd Quarter 2021 Earnings Consent Call. Please refer to thewillistowerwatson.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 statement sections of the Earnings Press. Released issued this morning, as well as other disclosures and the most recent form 10-K and other Willis-Towers-Watson SEC filings during the call, certain non-JAP financial measures may be discussed. for reconciliations of the non-JAP measures, as well as the other information regarding these measures. Please refer to the most recent earnings released 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 Institute's Executive Officer. Please go ahead.

Thanks very much. Good morning, everyone, and thank you for joining us for our third quarter 2021 earnings call. Joining me today are Andrew Krasner, our Chief Financial Officer, and Carl Hess, our President and our future Chief Executive Officer. Today's call will be my last earnings call as CEO of this great company. Willis-Towers Watson looks remarkably different than it did 22 years ago when I first started as CEO of Watson Wyatt, and even more so than when I started at the Wyatt Company 44 years ago. It's been an amazing journey, and it underscores the resilience of this extraordinary organization. The combination of our exceptional people and strong value has enabled this company to reinvent itself and to continually evolve. Our history has been defined by constant innovation and change. Together, we forged a legacy of quality service and solutions with strong client relationships, and it built a Willis-Towers Watson culture of resilience, inclusion, and client focus. I'm proud of what we have achieved, and I feel fortunate to have had the opportunity to take the company this far with all of you. At the end of this year, I'll officially pass the baton to Carl Hess. Now is the time of reinvigoration for Willis Towers Watson. Carl's a great leader, focused on driving results and accountability by engaging colleagues. He has a wealth of knowledge and experience, and he has the skills to best lead the company during this transformative time. I have every confidence that Carl will be successful in creating a new way forward and leading Willis Towers Watson and our top talent to an even brighter future. As we bring our new leadership team into place, we're also building one Willis Towers Watson. One WTW is about working across businesses, geographies, and functions to achieve more and to be better. We're starting from a position of strength and recognize our potential. We're executing on our plan. We're focused on a bold new vision to be the best company in the business. We plan to drive change through new priorities to grow simplify, and transform. We'll grow by investing in talent, by capturing market share, by innovating, by expediting capabilities in evolving markets, and by bringing curated solutions to clients. We'll simplify by delivering more efficiently through technology and through standardization. For example, we've already begun by developing a plan to streamline to two business segments and three geographies at the beginning of 2022 and appointing a new global leadership team. We'll transform colleague and client experiences by streamlining our infrastructure, by fortifying our operations, and by evaluating our real estate needs. While there's no doubt work ahead of us, we have confidence in our plan, 1WTW, and most importantly, in our colleagues. As we continue to look ahead, I'm especially excited about the industry-leading work we've done and will continue to do in addressing climate risk. We recently launched Climate Transition Pathways, an accreditation framework that provides insurance companies and financial institutions with a consistent approach to identifying which organizations have robust transition plans. transition plans that are aligned to the Paris Agreement. And it supports the role of stewards in transition to a low-carbon economy. We also partnered with Contigo to launch an innovative family of climate transition indices driven by a next-generation methodology that directly quantifies the impact of the Paris-aligned climate transition on equity valuations. We intend to continue this momentum Next week, we'll proudly participate in the 26th United Nations Climate Change Conference of the Parties, or COP26. COP26 will bring together world leaders, government representatives, businesses, and citizens to collaborate on how to tackle the many facets of climate change and plan for action. Now let's move to our third quarter results. Please note that all metrics referenced are on a continuing operations basis, except where specifically stated otherwise. Reported revenue for the third quarter was $2 billion, up 4% as compared to the prior year third quarter, up 3% on a constant currency basis, and up 7% on an organic basis. Net income, which includes discontinued operations, was $919.4 million. up 672% for the third quarter as compared to $119 million of net income in the prior year third quarter. It should be noted that GAAP profitability measures include the $1 billion in proceeds received in connection with the termination of the proposed business combination with AI. Adjusted EBITDA was $427 million, or 21.6% of revenue for the third quarter, as compared to $372 million, or 19.6% of revenue for the same period last year, representing a 15% increase on an adjusted EBITDA dollar basis and 200 basis points of margin improvement. For the quarter, diluted earnings per share, which include discontinued operations, were $6.99, an increase of 140% as compared to the prior year. Adjusted diluted earnings per share were $1.73 for the third quarter, reflecting an increase of 32% compared to $1.31 in the prior year. Overall, it was a strong quarter. We grew revenue, we enhanced margin, and we increased earnings per share. Now let's look at each of the segments in some more detail. To provide clear comparability with prior periods, all commentary regarding results of our segments will be on 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 6% on an organic basis and 5% on a constant currency basis compared to the third quarter of the prior year. This result represented sequential revenue improvement compared to our prior quarter, which was driven by continued increased demand for advisory service. Talent and rewards revenue increased 22%, driven by strong market demand for broad-based rewards advisory work, coupled with talent and compensation products, inclusive of compensation surveys, hiring assessments, and employee listing and engagement offerings. Our health and benefits revenue increased 5% for the quarter. We continue to grow revenue from advisory work in North America, driven by U.S. legislative changes and strategic benefit reviews. Revenue also grew outside of North America as a result of global benefit management and local brokerage appointments. Retirement revenue was flat compared to the prior year, with funding and guaranteed minimum pension equalization work in Great Britain offset by declines in North America, as less favorable market conditions for de-risking work drove lower demand for bulk lump sum work. Technology and administration solutions revenue grew 9%, primarily due to increased project work and new business activity in Great Britain. HCB's operating margin increased by 210 basis points compared to the prior year third quarter as a result of continued sustainable expense reduction efforts. We're pleased with HCB's sequential improvement and with their margin growth. Historically, HCB has had industry-leading margins, and we believe that trend will continue. HCB's talent base remains stable, and overall market tailwinds should continue to drive organic growth momentum for HCB. Both our near-term and long-term outlook on HCB remain positive. Now let's look at corporate risk and growth, or CRPs. which had a revenue increase of 6% on an organic and constant currency basis as compared to the prior year third quarter. North America's revenue was up by 12% in the third quarter, driven by new business, particularly in M&A, FinEx, construction, and aerospace lines. International and Great Britain's revenues increased 4% and 2% respectively for the third quarter. The revenue increases were primarily driven by growth in the retail and FinEx insurance lines. Revenue for Western Europe was up nominally due to growth in Poland and Sweden being largely offset by the departure of senior staff, which pressured business in certain geographies. CRB's revenue was $697 million for the quarter, with an operating margin of 16.3%. compared to 647 million of revenue with an operating margin of 12.5% in the prior year third quarter. The 380 basis point margin improvement mainly reflects the continuation of effective cost containment and, to a lesser degree, the benefit of gains from book of business sales and settlements. From time to time, colleagues who manage client relationships lead the company. When we lose colleagues such as those, it may result in them joining competitors. The impact of this on revenue may be delayed. This dynamic, which was most pronounced in our corporate risk and broking segment in the second and third quarters of 2021, has caused CRB's organic growth to trail industry expected averages so far in 2021, and we expect the gap to narrow by the end of the first half of 2022. During the third quarter, we focused on stemming attrition and hiring talent. On a net basis, core CRB headcount is down about 100 colleagues, or just under 1% as compared to the third quarter of last year. We have executed on our incentive plans, which provide both short-term and long-term retention benefits, and we believe attrition rates have already peaked for CRB. So, while we may have some transitory headwinds ahead of us, we expect that the worst of the business disruption is behind us, and our longer-term outlook for CRB remains positive. Now turning to investment risk and reinsurance or IRR. Revenue for the third quarter was $172 million, an increase of 10% on an organic basis and a decrease of 24% on a constant currency basis as compared to the prior year third quarter. IRR revenue excludes the reinsurance line of business, which has been reported as discontinued operations. It also excludes revenue from Max Matisse, which was sold in September of 2020, and Miller, IRR's wholesale broking subsidiary, which was sold in March of 2021. The insurance consulting and technology business, with revenue growth of 18%, led the segment's growth, with increased demand for advisory work alongside technology sales. The investment business grew by 6%. from performance fees, new business, and growth in delegated assets under management. IRR had an operating margin of 12.9%, up 360 basis points, as compared to 9.3% for the prior year third quarter. The strong margin expansion was a result of careful cost containment efforts coupled with solid top-line growth. Revenue for the benefits delivery and administration, or BDA segment, increased by 7% on an organic basis and constant currency basis from the prior year third quarter. The growth in revenue was largely driven by individual marketplace, primarily by Transact, which contributed $111 million to BBA's top line this quarter, with growth in Medicare Advantage and Life 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 $242 million with a minus 7.9% operating margin as compared to revenue of $226 million and an operating margin of minus 5.3% in the prior year third quarter. The margin decline was largely due to an increase in sales capacity ahead of the 2022 annual enrollment period which will usher in expansion opportunities for both our individual marketplace and benefits outsourcing lines of business. We continue to feel positive about the momentum of our PBA business going into the fourth quarter, which is our seasonally strongest quarter. So, in conclusion, 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 undergoing a massive shift in our go-forward strategy. In closing, I'd like to express my deepest gratitude to our colleagues, our clients, and our shareholders for their trust in Willis Towers Watson and for the opportunity to be CEO of this extraordinary organization. I believe the company's well-positioned to meet the opportunities and challenges that lie ahead, and it's been a privilege to serve you. Now I'll turn the call over to Andrew.

Thanks, John. We all wish you the best in your retirement at the end of the year. Good morning, everyone. Thanks to all of you for joining us. First, I'd like to extend my appreciation to all of our colleagues. We have 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. As John noted, we continue to make progress in the third quarter, highlighted by another quarter of strong organic revenue growth continued operational improvement, and effective capital management. We are reassured by the continued improved demand for our discretionary services and solutions and by our ability to generate profitable growth. Moreover, we feel we are well positioned to execute on the long-term goals we announced during the Investor Day meetings that we hosted last month. We are excited about the early progress we are making with our transformation efforts. The investments we're making to transform our operations will create better scalability, more flexibility, and enhance colleague and client experience. Through streamlining global platforms, rightshoring operations, rationalizing real estate, and modernizing IT, we expect to deliver $300 million in expected cost reductions and contribute 300 basis points of margin improvement toward our fiscal year 2024 adjusted operating margin target of 24% to 25%. Now, I'll turn to the overall detailed financial results. As a reminder, you can see the detailed quarterly continuing operations results for 2020 and 2021 year-to-date on page 9 of the supplemental materials. Income from continuing operations for the third quarter, which included the $1 billion termination fee, was $1.1 billion, or 57.3% of revenue, up from the prior year third quarter income from operations of $66 million, or 3.5% of revenue. Adjusted operating income for the third quarter was $264 million, or 13.4% of revenue, up 120 basis points from $231 million, or 12.2% of revenue in the prior year third quarter. For the third quarters of 2021 and 2020, our diluted EPS from continuing operations was $7.08 and $0.91, respectively, and that 2021 figure includes the $1 billion termination fee. For the third quarter of 2021, our adjusted EPS was up 32% to $1.73 per share as compared to $1.31 per share in the prior year third quarter. Further, discontinued operations represented a $0.09 loss on a diluted EPS basis for the third quarter of 2021 and $0.02 of diluted EPS basis for the third quarter of 2020. Total diluted EPS, including both continued and discontinued operations, increased to $6.99 for the third quarter of 2021 compared to the prior year third quarter of $0.93. Foreign currency rate changes caused an increase in our consolidated revenue of $27 million or 1% of revenue for the quarter compared to the prior year third quarter with negative $0.01 headwind to adjusted diluted earnings per share this quarter. Our U.S. GAAP tax rate for the third quarter was 22.5% versus 26.6% in the prior year. Our adjusted tax rate for the third quarter was 23.3%, down from 29.3% in the prior year, which was elevated due to the unfavorable impact of non-recurring discrete items. Turning to the balance sheet, We ended the third quarter with a strong capital and liquidity position, with cash and cash equivalents of $2.2 billion and full capacity on our undrawn $1.5 billion revolving credit facility. We also successfully reduced our leverage profile by repaying $450 million of bonds outstanding during the quarter. Willis Towers Watson remains well positioned from a liquidity perspective. We aim to continue... to maintain a strong and durable balance sheet and believe we have significant financial flexibility. Free cash flow, which includes discontinued operations, was $1.7 billion in the first nine months of 2021 compared to $1 billion in the same period of the prior year. The increase in year-over-year free cash flow was due to the receipt of the termination fee net of increased transaction and integration fees of $942 million. This was partially offset by net legal settlement payments of approximately $185 million for the previously announced Stanford and Willis Towers Watson merger settlements and higher incentive compensation of approximately $189 million. Absent these items, free cash flow would have been $1.2 billion or up 17.3% versus the prior year. In terms of capital allocation, we paid $275 million in dividends for the nine months ended September 30th and repurchased 4.5 million shares for $1 billion. At our recent investor day, we communicated that we expect to generate $10 to $11 billion of cash through 2024. We remain committed to deploying that capital into share repurchases to capitalize on short-term price weakness. At current price levels, Willis-Harris Watson stock continues to be our highest return opportunity, and we have significant resources to capitalize upon that. As part of our Investor Day discussion, we communicated approximately $4 billion of near-term share repurchase activity. With the first $1 billion completed, we will commence repurchases with the remaining component of that in 2021 and expect to conclude that during 2022. Looking ahead to the fourth quarter and full year, we recognize that the company's recent strategic shifts, alongside unique macroeconomic factors, have created complexity in setting expectations for our performance for the year. This year, our core performance metrics have been clouded by discontinued operations reporting, a one-time $1 billion termination fee, divestitures, and a still evolving economic recovery. So we would like to clarify and say that for the full year 2021, we expect to produce around 6% organic revenue growth and an adjusted operating margin of 19.5%, 20% on a continuing operations basis. We expect this to be the new baseline to begin the path to our fiscal year-end 2024 goal of 24% to 25% adjusted operating margin. Please note that the 2021 margin guide includes the negative impact of stranded costs from the sale of Willis-Ree, which we intend to right-size during the period in which we receive cost relief under a transition services agreement. Going forward, we prefer to keep a focus on long-term value drivers of the business and will not continue providing quarterly or annual guidance. We are very pleased with these third quarter results, and they are a direct reflection of our resilience and our focus on strategic priorities. We have strong momentum, solid financial results, a robust balance sheet, and an excellent team, which gives me confidence in our ability to continue driving value for all our stakeholders. As I think about our future, I'm excited to continue to work with Carl and the rest of the leadership team to drive the company forward and explore the opportunities ahead. I have confidence in our leadership team, Lewis Towers Watson's talented colleagues, and in our strong culture. And now I'll turn the call back to John.