Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW fourth quarter 2021 earnings conference call. Please refer to WTWCO.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 WTW'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 the other risk factors, investors should review the forward-looking statement section of the earnings press release issued this morning, as well as other discussions closures 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 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'm now turning the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Good morning, everyone, and thank you for joining us for WTW's fourth quarter 2021 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. I'm pleased to be here today for my first earnings call as WTW's CEO. I've officially been on the job for about six weeks, and it is truly an honor to lead this company. WTW looks very different than it did over 30 years ago when I first joined the company and it's been an extraordinary journey, one defined by continuous innovation and change. As we move forward as an independent company, we recognize the need to grow, simplify, and transform. Our recently refreshed brand and new matching stock ticker, WTW, are key signals of this new era. Our new brand evolves our identity to both reflect our rich history and also inspire our future. We may have a new brand, a new ticker, a new leadership team to set us on a bolder path, but certain things will never change. Our client focus, teamwork, integrity, respect, and excellence. These are our values. They're in our DNA and at the core of everything we do. WCW leadership and colleagues are excited about this bold new approach, and we hope you are too. I'm pleased to report that we continue to see progress in our independent path forward. As we mentioned back in October, we executed on our incentive plans, which provide both short-term and long-term retention benefits, and these have been well received. We've also seen significant measurable improvements in colleague engagement. Meanwhile, the pace at which we've been attracting new talent to fuel our path forward has been truly impressive. We hired more people in the second half of 2021 than we hired during the entire year in 2020, and the elevated attrition levels we saw in 21 are behind us. We also made some early progress in our transformation program, which Andrew will expand upon later in the call. Last but not least, we've been steadfast in applying financial discipline, as illustrated by our full-year margin and year-over-year margin improvement. As prudent stewards of our financial assets, we plan to continue our emphasis on returning capital to shareholders through share or purchases, which we believe provide the highest return opportunity. We're encouraged by the progress we're making on our strategic initiatives. While we have hard work ahead of us in 2022, we're kicking things off with renewed energy and conviction. Our talented colleagues will strive to meet and exceed the expectations of the clients and individuals we are privileged to serve. In the current environment, our clients are striving to create continuity and clarity in an environment of ongoing disruption. Future-focused leaders acknowledge that risk has become a mainstream element of business decisions and will remain so. Today, the frequency and complexity of threats continue to increase due to factors including geopolitics, economic volatility, population health, climate change, supply chain, talent, and technology. To combat threats and create opportunity, organizations must connect current and future risks, act on environmental, social, and governance and sustainability commitments, and build organizational resilience. The time to act is now. WTW's unique perspective connects solutions, strengthens organizations, and helps clients better prepare for and thrive in an uncertain future. For example, WTW designed the world's first parametric insurance solution for Belize's sovereign debt restructuring. This unique transaction includes targeted insurance protection to cover Belize's loan servicing obligation in the event of certain natural catastrophes such as hurricanes. Hurricanes can create large-scale devastation and disruption to economic activity, thereby halting development. The custom solution... allows Belize to focus scarce financial resources on recovery rather than debt servicing, and reflects WTW's commitment to using our expertise to shape and fortify resilience in the communities we serve. Before we discuss our fourth quarter results, I want to take a moment to directly address our talented and valued colleagues. We have an exciting future ahead filled with opportunity, and I'm delighted you're here to be part of it. Thank you for your hard work and dedication, And most of all, thank you for your commitment. I'm truly appreciative of your efforts to drive our vision to be the best company in the business and achieve our full potential as one WTW. I'm proud of the company we've built and I'm excited to be leading us through the next phase of our journey. So now let's turn to our financial results. Please note that all metrics referenced are on a continuing operations basis except where stated otherwise. As a reminder, we substantially completed the sale of Willis-Rhee on December 1st, 2021. We recorded a gain of 2.3 billion in connection with the disposal of Willis-Rhee. That gain is included in many of our GAAP profitability measures, which we'll point out as we move through the commentary. Overall, our results aligned with our expectations, but to be crystal clear, they do not reflect the near and long-term potential of this company to drive organic growth and margin expansion. As mentioned earlier, our hiring levels are among the highest in recent history, and we're confident that the peak of colleague departures is behind us. For the full year, we posted 6% organic revenue growth, and our adjusted operating margin was 19.9%. While the results reflect the expected delay, impact, and disruptions experienced earlier in 2021, the underlying strength of our business and our early progress on executing our strategy gives me confidence that we remain on track to deliver strong shareholder value over the longer term. Reported revenue for the fourth quarter was 2.7 billion, up 1% as compared to the prior year fourth quarter, up 2% on a constant currency basis, and up 4% on an organic basis. Income from operations was 690 million, or 25.5% of revenue for the fourth quarter, as compared to $579 million or 21.7% of revenue in the prior year fourth quarter. Adjusted operating income was $868 million or 32.1% of revenue for the quarter, up 170 basis points from $812 million or 30.4% of revenue in the same period last year. For the quarter, diluted earnings per share, which include discontinued operations, were $19.19, as compared to $3.66 in the fourth quarter of prior year. Adjusted diluting earnings per share were $5.67 for the fourth quarter, reflecting an increase of 9% and compared to $5.19 in the prior year. Now let's take a look at each of our 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 to be non-core to our operating results. The segment results include discretionary compensation. The human capital and benefits, or HCB, segment revenue was up 3% on an organic basis and constant currency basis compared to the fourth quarter of the prior year. For the full year of 2021, HCB revenue grew 3% organically. Technology and administration solutions revenue grew 11% in the fourth quarter, primarily due to increased project work in Great Britain and Western Europe. Our health and benefits revenue increased 6% for the quarter. The increase reflects robust demand in H&B consulting and a gain recorded in the connection with a one-off book of business settlement offset by slower growth in brokerage. The settlement relates to an isolated incident of senior staff departures from earlier in 2021. Talent and rewards revenue increased 3% in the quarter following growth of 17% in Q3 and 22% in Q2. Throughout the year, this growth has represented a rebound from the 2020 slowdown in discretionary projects, plus increasing market demand, particularly for products like compensation benchmarking surveys. The lower growth in Q4 relative to the prior two quarters reflects the typical seasonality of compensation survey sales, which peak in Q2 and Q3, as well as some capacity constraints for advisory services. With expectations for continued strong demand in product and advisory services, and having ramped up hiring in the fourth quarter, we are well positioned. Retirement revenue is down 1% compared to the prior year fourth quarter, with increased funding and guaranteed minimum pension equalization work in Great Britain offset by declines in North America due to a reduction in work in Canada to implement regulatory changes and lower demand for bulk lump sum projects. HCB's operating margin was 31.2% for the fourth quarter compared to 31.3% in the prior year fourth quarter. On a full year basis, HCB's operating margin improved to 27.0% from 26.0% in the prior year. Year over year, excluding the impact of currency and gains from book of business settlements, HCB's margin declined by 150 basis points for the fourth quarter, but increased by 90 basis points for the full year. The fourth quarter margin declined as a result of higher expense growth driven by hiring to meet expected strong market demand as we build capacity for robust revenue growth. The full-year margin increase reflects continued sustainable expense reduction efforts. Historically, HCV has had industry-leading margins, and we believe that trend will continue. HCV's overall market tailwind should continue to drive organic growth momentum for HCV. Both our near-term and long-term outlook on the segment remain positive, and our expectations for revenue growth are unchanged from what we communicated at Investor Day, mid-single-digit growth. Now, let's look at corporate risk and broking, or CRB, which had a revenue increase of 1% on an organic and constant currency basis as compared to the prior year fourth quarter. For the full year of 2021, CRB revenue grew 5% organically. Our hiring levels are the highest in recent history and colleague departure levels have decreased. North America's revenue was up by 4% in the fourth quarter, including gains recorded in connection with book of business sales and settlements. The book sales and settlements relate to producer departures occurring earlier in 2021. International's revenue increased 10% compared to prior year. There was strong performance in M&A in Asia and Australasia and natural resources in Eastern Europe. Latin America also contributed to international revenue growth with new business wins in Brazil and Central America. Great Britain's revenue declined 5% as a result of lost business and timing. The decline reflects the delayed impact of disruption from earlier in 2021. Revenue for Western Europe was down 5% due to the departure of senior staff prior to the deal termination, which continued to pressure the business in certain geographies. Although earlier departures have hindered our growth for several quarters, we are seeing some positive momentum. New client wins include one of the largest commercial and retail banks in the region. CRB's operating margin was 31.2% for the fourth quarter compared to 32.3% in the prior year fourth quarter. On a full year basis, CRB's operating margin improved to 23.0% from 21.2% in the prior year. Excluding the impact of currency and the benefit of book and business sales and settlements, the margin declined 240 basis points for the fourth quarter, but increased by 80 basis points for the full year. The fourth quarter decline was mostly due to investments to support future growth. The full year margin expansion reflects the continuation of effective cost management. CRB's organic growth trailed industry expected averages for the last three quarters of 21, primarily as a result of elevated colleague departures and reduced hiring during the period when the business combination was pending. Two trends that we believe are now behind us. Currently, we expect to see lower growth in the first half of 2022 compared to the second half of 2022 as the gap versus industry expected averages narrows. While events in previous quarters have challenged us and temporary headwinds from those events remain, our outlook for CRV remains positive with mid-single-digit revenue growth over the longer term. Turning to investment risk and reinsurance, or IRR, revenue for the fourth quarter was $199 million, an increase of 32% on an organic basis and a decrease of 2% on a constant currency basis as compared to the prior year fourth quarter. IRR revenue includes a gain from a book of business settlement, which relates to reinsurance assets that did not transfer in connection with the sale of Willis-Reed. IRR excludes all other revenue associated with the reinsurance line of business, which has been reported as discontinued operations. It also excludes revenue from Max Matheson, which was sold in September of 2020, and Miller, WTW's wholesale broking subsidiary, sold in March of 2021. These sales account for the wide disparity between organic and constant currency. The insurance consulting and technology, or ICT, business, where revenue was up 5%, led the segment's growth with increased demand for advisory work alongside technology sales. Our investment businesses grew revenue by 11% from new business, growth in delegated assets under management, and to a lesser extent, increased performance fees. IRR's operating margin was 25.3% for the fourth quarter compared to 12.5% in the prior year fourth quarter. On a full year basis, IRR's operating margin improved to 19.5% from 14.5% in the prior year. Excluding the impact of currency and the benefit of book of business settlements, the margin declined 240 basis points for the quarter, but increased by 220 basis points for the full year. The fourth quarter decline was primarily caused by the headwind created from divestitures. The prior year fourth quarter margin includes the contribution of the now divested Miller subsidiary, while the current year fourth quarter margin does not, which distorts comparability. Miller subsidiary was sold in March of 2021. The full year margin expansion was the result of careful cost management efforts combined with strong top-line growth from the two businesses that remain in IRR, ICT, and investments. Turning to the benefits delivery and administration segment, or BDA, revenue increased by 5% on an organic and constant currency basis from the prior year fourth quarter. The growth in revenue was largely driven by individual marketplace due to a favorable shift in the revenue timing for our B2B Medicare exchange business, along with continued strength in our direct-to-consumer business. The benefits outsourcing business also contributed significantly to BDA's revenue growth with increased project work driven by temporary federal policy changes affecting group healthcare plans. BDA's operating margin was 49.2% in the fourth quarter and 22.4% the full year, having declined year over year by 110 basis points and 150 basis points respectively. The year-over-year margin decline for both the fourth quarter and the full year was the result of increased investing in resources for the 2022 annual enrollment period, coupled with headwinds on lead conversions. The BDA segment has posted 10% organic growth for two consecutive years, and we continue to feel positive about the momentum of this segment. Overall, our financial results for 2021 are in line with our expectations, reflecting the complexity of navigating a significant strategic shift, along with some bright spots, highlighting our commitment to profitable growth. I'm pleased we effectively managed our cost and delivered margin expansion and adjusted EPS growth despite top-line growth pressures. In closing, I want to reiterate my gratitude to our colleagues and also thank our clients and shareholders for their support. I believe the company is well-positioned to capitalize on the opportunities that lie ahead. I look forward to reinvigorating growth and to successfully executing our transformation plans. I am confident the best is yet to come as we boldly look to lead and shape our industry going forward. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us. As expected, the fourth quarter performance faced headwinds from the delayed impact of disruptions from earlier in the year. They reflect the challenges we've previously identified and are actively working to address. To that end, we continued to push forward with our strategic goals as we finished up the year and made some early progress on our transformation efforts. In the fourth quarter, we incurred restructuring charges totaling $26 million. From the actions taken in 2021, we expect to have annualized savings of $20 million, primarily from the reduction of real estate costs, the benefits of which will be recognized in 2022. The $20 million gets us two-thirds of the way towards our $30 million annualized run rate savings goal for 2022. For the full year of 2021, we generated profitable growth, increasing adjusted operating margin to 19.9% from 18% in the prior year. The adjusted operating margin expansion was comprised of 150 basis points of underlying growth stemming from financial discipline. This was coupled with with around 100 basis points of growth from gains on book of business sales and settlements, partially offset by around 60 basis point headwind from prior divestitures and FX. The expansion of our adjusted operating margin, despite top-line growth pressures, highlights our dual commitments to growing profitably and focusing on cost management. As a result, we continue to expect margin improvement each year as we deliver on our 2024 margin goals. Now I'll turn to the overall detailed financial results. Income from operations for the fourth quarter was $687 million or 25.4% of revenue, up from the prior year fourth quarter income from operations of $579 million or 21.7% of revenue. Adjusted operating income for the fourth quarter was $868 million or 32.1% of revenue, up 170 basis points from $812 million or 30.4% of revenue, in the prior year fourth quarter. For the fourth quarters of 2021 and 2020, our diluted EPS from continuing operations were $4.54 and $3.62 respectively. For the fourth quarter of 2021, our adjusted EPS was up 9% to $5.67 per share as compared to $5.19 per share in the prior year fourth quarter. Further, Discontinued operations represented a $14.64 loss on a diluted EPS basis for the fourth quarter of 2021 and a $0.04 on diluted EPS basis for the fourth quarter of 2020. Total diluted EPS, including both continuing and discontinued operations, increased to $19.19 for the fourth quarter of 2021 compared to the prior year fourth quarter of $3.66. Foreign currency rate changes caused a decrease in our consolidated revenue of $19 million, or 1% of revenue, for the quarter compared to the prior year fourth quarter, with a $0.06 headwind to adjust diluted earnings per share this quarter. Our U.S. GAAP tax rate for the fourth quarter was 20.8% versus 19.5% in the prior year. Our adjusted tax rate for the fourth quarter was 21.1%, up from the 17.6% rate in the prior year. The increase was due to the geographic distribution of profits. Turning to the balance sheet, we ended the fourth quarter with a strong capital and liquidity position with cash and cash equivalents of $4.7 billion and full capacity on our undrawn $1.5 billion revolving credit facility. WTW remains well-positioned from a liquidity perspective. We continue to have significant financial flexibility, which allows us to invest in transforming the company's operations to unlock growth potential while simultaneously returning capital to shareholders. Free cash flow, which includes discontinued operations, was $1.9 billion in the year ended 2021 compared to $1.6 billion in 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 integration fees of $948 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 compensation and benefit payments of approximately $250 million, and $383 million in tax payments primarily related to the disposal of Willis-Reed. Absent these items, free cash flow would have been $1.8 billion, up 15% versus the prior year. I want to point out that we made some changes to our statement of cash flows to reflect new guidance on restricted cash presentation in FASB ASC 230. These changes consisted of revising the classification of WTW's fiduciary fund balances on a consolidated statement of cash flows for the last three years. These revisions had no impact to our cash flow for operating activities or free cash flow metrics. In terms of capital allocation, we paid $374 million in dividends for the year ended December 31st, 2021, and repurchased 7.2 million shares for $1.6 billion. We remain committed to deploying excess capital and cash flow into share repurchases. As part of our Investor Day discussion, we communicated approximately $4 billion of near-term share repurchases and a willingness to fund further share repurchases using our free cash flow unless other investment opportunities with superior return potential arise. At current price levels, we believe that repurchasing WTW stock continues to be our highest return opportunity, and we have significant resources to capitalize upon that. With $1.6 billion completed in 2021 and another $1 billion completed through today, the pace of our share repurchases highlights the conviction we have in the future of WTW and the plans we laid out at Investor Day, despite the current headwinds. We expect to conclude the remainder of the roughly $4 billion of repurchases as expeditiously as practical, depending on market conditions and other factors. At our Investor Day, we also announced our plans to streamline the structure of our organization by changing from four segments to two segments, effective January 1, 2022. We are now operating under that new structure with just two segments, risk and broking, and health, wealth, and career. Accordingly, going forward, our financial reports, supplemental disclosures, and related commentary will reflect our new structure. Our 2021 financial results are a reflection of our resilience and our focus on strategic priorities. Although we have had near-term business challenges, we have undeniably strong assets, which gives me confidence in our ability to continue driving value for our stakeholders. There is a lot of opportunity ahead, and we remain focused on executing our strategy and setting the path for sustainable success. And now I'll turn the call back to Carl. Thanks, Andrew. And now we'll take your questions.