Willis Towers Watson Public Limited Company

Good morning and welcome to the WTW Third Quarter 2022 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 winning the meaning of the Private Securities Reform Act of 1995, These forward-looking statements are subject to risk 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 more detailed discussions of these and other risk factors, investors should review 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-Towers-Watson 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 will now turn the call over to Call Hess, WTW's Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. Thank you for joining for WTW's third quarter 2022 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. Our third quarter performance reflects the increasing momentum we see in the business and our intense focus on delivering on our commitments. As projected, our organic revenue growth accelerated, reaching 6% this quarter, fueled by the great efforts of our colleagues and the strength of our global client model, and further augmented by the investments we've made in talented technology. We generated adjusted diluted earnings of 220 per share and drove 110 basis points of adjusted operating margin expansion thanks to our transformation program, continued expense discipline, and operating leverage from new business. We also continue to execute against our capital allocation strategy completing $369 million in share repurchases in the third quarter. That brings our year-to-date total to $3.1 billion. We're pleased with our third quarter performance and our progress executing our strategy to grow, simplify, and transform gives us confidence in our ability to deliver against our guidance for 2022 and to drive growth and value creation over the long term. A year ago at our Investor Day, we laid out our strategy for how we take WTW forward and deliver robust shareholder returns. Before getting into the details of the quarter, I want to provide you with an update on these initiatives. While it's still early in our journey and there is more work to do, we have made substantial progress and are seeing encouraging signs that our investments and actions will yield the long-term improvement we expect. Our transformation efforts have made the most immediate impact. As I mentioned on our last earnings call, our focus on continuous improvement has helped us identify new opportunities and incremental sources of value, as well as areas in which we can accelerate progress. During the third quarter, we realized $29 million of incremental annualized savings. This brings the total to $100 million in cumulative annualized savings since the program's inception, far exceeding our original $30 million target for 2022. Accordingly, we're raising our guidance on cumulative run rate transformation savings action by the end of 2022 from over $80 million to approximately $110 million. The additional transformation savings we've identified also support an increase to the total annual cost savings we expect the program to deliver by the end of 2024, from $300 million to $360 million. And as I said, there's still more work to do, and we will continue searching for additional opportunities. Meanwhile, our Simplify and Grow initiatives are powering the increasing momentum we see in the business. One of our key Simplify activities has been streamlining shared operations to improve sales and retention outcomes. Our accelerating growth and robust pipeline demonstrate the progress we've made deploying this more agile model globally. For our Grow initiatives, we remain focused on investment in both core and fast-growing markets and innovation to drive differentiation and better client outcomes. In corporate risk and broking, our investments in specialized solutions and strategic hires for our global lines of business are meaningfully accelerating growth, with most lines growing double digits this quarter. In health, wealth, and career, we've seen strong uptake of our solutions that are cross-sold across the segment and are increasingly bundling products into our core advisory work. Our focus on innovation is driving improvements to existing solutions as well as launches of new products. For example, WTW's Global Peril Diagnostic Tool is a sophisticated model which provides refined evaluation of comprehensive catastrophe risks. The model clarifies exposure to terrorism and 12 natural perils and includes live event tracking for events such as pandemics, earthquakes, and windstorms. We've recently enhanced this tool with hurricane tracking advisory and resiliency scoring, upgrading the sophisticated foundational tool with next-level analytics. Analytics is a key area for new product development as well, including the recent launch of Risk Intelligence Qualified, or RiskIQ. This flexible and personalized platform provides risk specialists with autonomous access to the breadth of WTW's leading risk and analytics solutions. RiskIQ puts managers in control of their analytic outputs, providing organizations with the ability to run business-critical scenarios and prepare for potential losses. WTW is at the forefront when it comes to delivering valuable strategic solutions across this market, and risk IQ further highlights our client-centric capabilities. Our new products reflect the evolution of our services to align with the changing needs of our clients. In addition, our ongoing investments to rebuild our talent base are proceeding as expected. The pace of hiring in the third quarter matched that of the first half of the year. We also continue to see the benefit of retention efforts with voluntary attrition remaining in line with macro trends. One growing initiative from Investor Day that has not been a focus for us to date is inorganic expansion. While we expect share repurchases to remain the primary avenue for capital deployment, we are still committed to identifying attractive opportunities to strengthen our portfolio and add scale and fill gaps in our capabilities via acquisitions as part of our broader capital allocation strategy, particularly with the market now tilting in favor of buyers. Over the past year, we've developed a strong understanding of where we could benefit from deploying capital, which enables us to be a disciplined and opportunistic buyer. The progress we have made to date gives us confidence that WTW is on the right path, but we also recognize that we have more work to do. We'll share a more detailed outlook for 2023 next quarter, and we continue to believe we will deliver on our long-term organic growth and margin expansion expectations. While we're on this topic, I wanted to take some time to discuss our decision to reflect the impact of the Russian divestiture in our 2024 guidance. As you know, during the first quarter of 2022, we announced our intention to transfer ownership of our Russian subsidiaries to local management and work to identify potential longer-term offsets to the impact of the exit. The transfer was completed in the third quarter, and given the current conditions, we do not anticipate resuming operations there in the foreseeable future. WTW's operations in Russia, which were almost entirely within our risk and broking segment, comprised approximately 1% of consolidated revenue for 2021 and were highly profitable. Due to the unusual circumstances under which the divestiture was made, there were essentially no proceeds from the transfer. As a result of this one-off event, we are unable to replace the lost earnings through reinvestment of proceeds. With the transaction complete, we believe it's now appropriate to revise the starting and ending points of our long-term guidance to reflect the divestiture of WTW's Russian operations just as we would any other significant transaction. I want to make it very clear that despite revising our long-term targets, we remain committed to delivering the same level of improvement, mid-single-digit organic revenue growth and 400 to 500 basis points of adjusted operating margin expansion as we set out at Investor Day. Page four of the earnings release published earlier this morning provides further disclosure on the divestiture and the related adjustments to our long-term guidance. Please note that our initial and revised targets exclude the potential effects of fluctuations in foreign currency rates. The ongoing situation in Russia is a stark reminder of the heightened geopolitical and macroeconomic risks all businesses face today. I want to take a moment to talk about how we're helping our clients navigate this complicated and uncertain landscape. Our solutions help clients manage their human, physical, and financial capital to protect and strengthen their institutions, and these tools only become more valuable in challenging times. Inflation is top of mind. Our clients are increasingly seeking our advice and solutions to manage the impact of inflation on wages, healthcare costs, pensions, and retirement plans. With tight labor markets persisting, solving these challenges is a strategic opportunity for clients, and we're helping them optimize total award spend, manage the cost of retirement and medical programs, and efficiently fund and finance programs via pooling, global underwriting, captive strategies, and delegated asset management. Another hallmark of the current environment is how quickly it's changing. In addition to working with our clients to manage traditional ever-present risks, we're seeing strong demand from clients for innovative solutions and tools to help them identify, quantify, and manage fast-moving risks, such as more volatile financial markets, climate change, geopolitical tensions, heightened ESG risk, and reputational damage, to name a few. We're rising to this challenge by bringing the best of our organization together globally, creating market-leading analytical tools to help clients make better informed decisions, and crafting customized solutions to meet our clients' emergent risks. Our performance in the quarter demonstrated our focus on delivering on our commitments and our pursuit of profitable, sustainable growth. We believe that the successful execution of our strategy and robust client demand in the face of a very complex risk environment, will keep us on track to achieve our guidance for 2022. We continue to build momentum and remain focused on achieving our goal to create shareholder value. In closing, I want to thank our colleagues for their performance this quarter. We are truly appreciative of their dedication, service, and continued commitment to our vision. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. As Carl mentioned, our clients are grappling with a host of macroeconomic and geopolitical challenges. Unfortunately, they have also continued to grapple with rising commercial insurance rates. While price increases appear to be moderating, WTW's Q2 commercial lines insurance pricing survey showed an aggregate increase of just below 6%. Data for nearly all lines continue to indicate significant price increases, with the exception of works compensation and D&O liability. The largest price increase came from cyber, followed by professional liability. In light of these additional pressure points, we continue to focus on helping clients evaluate their options so they can make better informed decisions about how to best manage their risk portfolios. Turning to our financial results, the third quarter was in line with our expectations. On an organic basis, revenue was up 6%, reflecting accelerating growth across all of our businesses. Adjusted operating income was $284 million or 14.5% of revenue for the quarter, up 110 basis points from $264 million or 13.4% of revenue in the same period last year, as our growth and expense discipline combined to enhance our profitability. The net result was adjusted diluted earnings per share of $2.20, representing 27% growth over the prior year. Let's turn to our detailed segment results. Note that to provide comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. The health, wealth, and career, or HWC segment, generated revenue growth of 4% on both an organic and constant currency basis compared to the third quarter of last year. Health, which is comprised of our health and benefits broking and consulting business, delivered growth of 6%, primarily driven by increased demand for products and advisory work in North America spurred by clients' focus on mitigating likely 2023 cost increases and by U.S. legislative changes. Revenue also grew outside of North America as a result of new client appointments and increases in healthcare premiums. Wealth, which consists of our retirement and investments businesses, through 3% in the quarter. The growth was primarily attributable to higher levels of regulatory and project work in Europe, as well as increased consulting work in North America. The growth was partially offset by a nominal decrease in our delegated investment solutions business, which was pressured by declines in capital markets. While we expect the headwind from these declines to persist into the fourth quarter, we see momentum building in the rest of the wealth business during the remainder of the year, driven by new client acquisition and strong demand for specialist work in response to market volatility and legislative changes. Career, which includes our work and rewards and employee experience businesses, also contributed to revenue growth for the segment, increasing 6% in the quarter. This growth was largely driven by strong client demand for talent and compensation products, including compensation benchmarking surveys, hiring assessments, and employee engagement offerings, which we see continuing. Benefits delivery and outsourcing, which encompasses our benefits delivery and administration and our technology and administrative solutions businesses, generated 2% revenue growth over the third quarter of 2021. The increase was largely driven by individual marketplace and reflected growth in Medicare Advantage revenue in our direct-to-consumer business. Outsourcing revenue also increased due to new client appointments and growth across the existing client base. We continue to see an environment that supports growth opportunities for this business for the remainder of 2022 and beyond. HWC's operating margin was 20.3% this quarter compared to 20.6% in the prior period. The margin declined primarily to investments in resourcing and technology to support future revenue growth. As economic uncertainty looms and market volatility persists, companies are dealing with high inflation rates, workplace stress caused by labor shortages, as well as cost and risk management concerns related to pensions and health benefits. Against this challenging backdrop, HWC is helping companies better address employees' needs while managing business realities. Our near and long-term outlook for HWC remains positive, as we expect its market-leading solutions and the ongoing demand drivers in its core businesses to continue to support organic growth. Risk and broking revenue was up 6% on an organic basis and 3% on a constant currency basis compared to the prior year third quarter. Corporate risk and broking, or CRB, revenue increased 6%. The business generated growth across all regions, primarily from new business, with double digit growth across most of our global lines of business. Book of business settlement activity was due to senior colleague departures in 2021 and it was consistent with the levels seen in the prior year period. Thus, it did not affect CRB's year-over-year organic growth rate. Both Europe and international led CRB's growth with improved client retention and notably strong new business in natural resources, construction, and aerospace. Solid growth in North America was driven by strong contributions from both construction and M&A solutions. In the insurance, consulting, and technology business, revenue is up 2% on top of a tough comparable of 18% growth in the prior year third quarter, primarily driven by increased technology solution sales. On a year-to-date basis, ICT has delivered strong growth. Its trajectory continues to point towards a strong finish in the fourth quarter. R&B's operating margin was 13.7% for the third quarter compared to 17.5% in the prior year third quarter. Margin headwinds were driven by our significant investments in new revenue producing and client service talent. Throughout this year, R&B welcomed new leaders and senior contributors across all geographies at both the regional and country level. Leveraging their industry expertise, these key hires have begun to contribute to our performance, and we expect these contributions will become more meaningful going forward. The steady improvement in our talent base and client pipeline has strengthened our conviction that the work we have done to rebuild our talent base is gaining traction and will yield strong results. Now let's turn to the enterprise level results. In Q3, we generated profitable growth with adjusted operating margin increasing 110 basis points to 14.5% from 13.4% in the prior year. primarily reflecting the benefits of strategic portfolio management, which was realized at the corporate level, alongside transformation program savings, which were realized at the segment level, but were more than offset by our increased investment in talent during the period. We continue to expect margin improvement each year as we work to deliver on our 2024 margin goals. As Carl mentioned, our transformation initiatives will be a key contributor to this ongoing margin expansion. and we're encouraged by the success of our early efforts. By accelerating shared services in our workforce centralization efforts, in addition to identifying incremental opportunities to drive collaboration through real estate portfolio optimization, we have far surpassed our original $30 million annualized run rate savings goal for the year. As a result, we raised both our near and long-term targets and now expect to deliver approximately $110 million cumulative run rate savings by the end of 2022, and $360 million by the end of 2024. Foreign currency was a headwind on adjusted EPS of 20 cents through the first nine months of the year, largely due to the strength of the U.S. dollar. Assuming today's rates continue for the remainder of the year, we've updated our guidance related to our expected foreign currency headwind on adjusted earnings per share from a range of 20 to 25 cents to a range of approximately 25 to 30 cents. We generated free cash flow of $337 million for the first nine months of 2022 compared to free cash flow of $1.8 billion in the prior year. This decrease was primarily due to the receipt of the $1 billion termination fee in the comparable period, the absence of cash generation from the now divested Willis-Ree business, and additional tax payments made this year on both the Willis-Ree gain on sale and the termination fee. Our U.S. gap tax rate for the third quarter was 0.7% versus 22.5% in the prior year. Our adjusted tax rate for the third quarter was 16.8% versus 23.2% in the prior year. The current year adjusted tax rate is lower, primarily due to lower U.S. expense and excess tax benefit on share-based compensation. We expect the full year 2022 adjusted tax rate to be relatively consistent with our historical rates. We continue to pursue a disciplined capital allocation strategy that balances capital return to shareholders with internal investments and strategic M&A to deploy our capital on the highest return opportunities. During the third quarter of 2022, we paid $91 million in dividends and repurchased 1.8 million shares for $369 million. We are pleased by our progress, with business performance ramping as we expected. For the remainder of the year, we see a macroeconomic environment that is creating demand for our services and opportunities to help clients with our unique combination of solutions. We feel positive about the investments we have made in talent, innovation, and operational transformation, and are confident these investments will continue to drive organic revenue growth and margin expansion. With that, let's open it up for Q&A.

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press star 1 1 on your telephone keypad. In the consideration of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. And one moment, please, for our first question. Now, first question coming from the line of St. Gregory readers from Raymond James. Your line is now open.

Good morning, everyone. The first question will be on revenue, both the organic and the change in your fiscal 24 targets. Just curious, Carl, in your comments, you talked about macroeconomic issues, particularly there seem to be some challenges in Europe, et cetera. And I'm curious, you know, how you're thinking organic is going to perform, especially with some of your businesses overseas in light of these economic conditions. And then, you know, if I think about the fiscal 24 target, the revised target, you know, it implies a compound annual growth rate of, you know, 5% or a little bit higher. And that's not something that's happened very often in the history of Willis Charles Watson. So just trying to bridge the gap between what's going on in the macro environment and what you're suggesting is potential for the company?

Yeah, sure, Greg, and good morning to you. So I look at it this way. Across our key growth drivers, which include strategic initiatives, hiring, and industry conditions, we do see momentum building that gives us confidence in achieving the targets we've laid out. Our strategic growth initiatives are gaining traction. For instance, we're making progress on scaling our global lines of business and corporate risk and broking. And we do expect that growth in these lines is going to continue to exceed the CRB average material. And we're also seeing a steady pace of new product launches. And we're focusing on high growth and high need markets like ESG, analytics, and climate risk. And what we've seen so far in terms of the performance of our new hires and front office sales And client management roles has reinforced our expectation that the benefits of that hiring activity will meaningfully accelerate the second half. In particular, some positive trends in CRB give us confidence in our improving growth outlook. I think looking macro, right, industry conditions remain generally favorable, and our business has historically been insulated from general macro volatility, and we're certainly seeing some of that. The need for sound advice and risk management solutions typically only intensifies during dynamic times such as these in the markets, and many of our clients look to us for help in navigating issues in labor markets, financial markets, and the geopolitical environment. In HWC, we're seeing strong demand and growth across the HW and C businesses. The macro environment remains reasonably supportive, and the buildup of our technology offerings further enhances our resilience. and reinforces our competence and our positioning. In R&B, we think the company-specific headwinds we've had are mostly behind us and expect we'll continue to narrow that growth gap as our high reactions gain momentum. Macro uncertainty is proving to be a bit of a tailwind as our clients seek to better manage their risk in a highly complex environment.

So just a point of clarification, you ran through a lot of information. I appreciate that. When I think about talent rewards, that used to have a lot of economic sensitivity to it. You know, how does that bake into your thought processes? You had your fiscal year, 24 revenue targets.

Greg, I point out two things, right? One is that, you know, the effects of COVID and new ways of working are stimulating demand for services as our client base is sort of looking to manage their workforce in light of the changes to the nature of full-time work in the gig economy. So some of the sensitivity we would have normally seen through the economic cycle actually just hasn't been there this time. And the second is we have pivoted that business over the years from a rather pure consulting and project-oriented business to be much more reliant on annuity revenue and software. So it's simply a more resilient business than in the past.

Thanks for that clarification. My second question was just on the other parts of the fiscal 24, the revised targets. The margin is lower. The free cash flow numbers are lower. And I was wondering if you could spend a minute and talk to us about the, you know, the gives and takes on those, the revisions to those parts of your estimates.

Yep, sure. Hi, Greg. It's Andrew. Thanks for the question. On the margin, it is purely a function of the impact of the Russian business as well as, you know, when we think the pacing of the incremental transformation savings will come online during the three-year period. The free cash flow guide and change really has three components to it. The first is the Russian divestiture where we received no cash proceeds and also had the loss of both the revenue and cash generation from future business, but also the receivables that we already had accounted for, which were uncollectible. The second component was the incremental cost to achieve the $60 million of transformation program savings at the same two and a half times rate that we've been talking about. So that's an incremental $150 million. And the third component is timing differences from cash tax payments made this year on both the termination fee and Willis-Ree gain, which our investor day guidance contemplated would incur entirely in 2021. You know, as we've mentioned in our prepared remarks last quarter, part of our decrease in free cash flow this year was due to some of these tax payments taking place this year rather than, you know, when we had originally anticipated just due to some of the complexity and timing considerations.

Got it. Thanks for the detail. Yep. Perfect. Thank you.

Thank you. And one more for our next question. And our next question coming from the lineup, Elise Greenspan with Wells Fargo. Your line is open.

Hi, thanks. Good morning. I want to go back, you know, to the question on the guidance, right? So if I look at the operating margin in the new 2024 guidance, at the midpoint, you're lowering that by $125 million. And I know Russia, right, $120 million, and it's a high margin business, but it seems like that is higher than just losing Russia. Is There's something else going on there, or maybe it's just that the saves are back and loaded, but it seems like there's some other earnings that are leaving 24 relative to your prior guide other than just Russia.

Yeah, I think, Lisa, Sandra, I think some of the disconnect there may be just when the timing of the saves, the incremental saves are coming online. But the change in margin has really been driven purely by the impact of the Russia divestiture.

Okay. And then in terms of this current quarter, the segment margins were both weaker, but there was lower unallocated expenses. Is there something going on with the corporate unallocated expenses that drove them down this quarter? And is that sustainable or was there just something different between the corporate costs that you downstream to the segment this quarter versus prior periods?

Our margin expansion in the quarter was driven by the benefits of our transformation program savings and also some strategic portfolio management actions, which were more than offset by some of the increased investments in talent seen at the segment level. We had corporate savings as well, but just not necessarily the same level of reinvestment that you would have seen within the segments. There was also the impact of some of these businesses that we decided to exit coming out of the deal termination, which are not allocated to the new segments, as well as the effective management of the stranded costs from the Willis-Reed Investiture.

Are most of the Willis Restranded costs gone at this point?

I'd say they're being effectively managed, given that we are still in the midst of a transition services agreement with Gallagher.

Okay, thank you.

Thank you, Muimum, for our next question. Now our next question, coming from the lineup, Paul Newsome with Piper Sandler. Your line is open. Paul Newsome, Yolanda Sulpin.

Please check your mute button. Good morning. Sorry to beat a dead horse, but I got kind of confused here following your answer to Lisa's question about these expenses impacting the 2024 guidance. So is it the idea that we're ahead of taking cost cuts, but those cost cuts are happening sometime at a later time, perhaps beyond 2024, and that's affecting the guidance. And I apologize for my confusion.

Yep, no problem, Paul. I was referring to the incremental $60 million that we announced on top of the initial $300 million. So it was really about the pacing of the incremental $60 million.

And that's happening sort of after 2024, so it's not helping the 2024 as much as we would expect?

I think that's the right way to think about it. It'll be more weighted towards the back end of the program rather than during the current period or near term.

Which I think is something you'd expect by savings that we've identified later in the process.

No, that makes sense. I think we're still struggling a little bit with the math because it looked like there was quite a bit more than the Russian loss in the event, which is fine. But it also looked like there was sort of less of an impact from the cost cutting. So I guess I'm still apologizing again for my but it just doesn't seem like the numbers are adding up quite the same. Maybe there's something else in there that we are just missing. But again, I apologize for my confusion.

Yeah. No, I think you just need to be thinking about the margin on the Russian business in the appropriate fashion, and you can triangulate on the re-guide on the margin. Okay.

Yeah. I'll do that. Thank you very much. Appreciate the help. Great.

Great. Thanks, Paul.

Thank you. One moment, please, for our next question. And our next question coming from the line of David Bochmanen with Evercore ISI. Your line is open.

Hi. Thanks. Good morning. I just wanted to go back to the margin target reduction, the one-point reduction. Maybe we could just put some numbers around Russia, some specific numbers. I'm sort of calculating it being a 30 to 40 basis point adverse impact on the margin. So there's a bit more, at least that I'm thinking is in there. So maybe if you could just clarify that. And then secondly, on the fiduciary income, you know, I think that is something that is going to be a tailwind. Maybe could you just talk about how much of a benefit that that had this quarter to

um and also is that you know i think that's going to increase going forward that's going to all help the margin i'm assuming that's baked into the guide as well but if you could just clarify that as well yeah sure on the uh margin uh recast the you know it's important to keep in mind that the margin on that business as we've said is more than double the uh enterprise-wide margin So you can use that to get to the recasted margin range. And then on investment income, we haven't disclosed the specific numbers. I think you'll see some information in the queue that might be helpful in framing that. We are definitely starting to see some modest benefit from the rising rate environment.

um come through in in the financials but of course as rates rise we've got to turn over investment portfolios and that takes time to work through uh the system fully yeah i mean back to russia for just one second i mean you've got to recognize as you think about our russian business you know we had been operating there for over 40 years right we had a very strong position in the country um the nature of the business was largely project-based work you know one-off uh and starts with a pretty high profit margin, but it was a minimal local presence required to service business. And we were able to leverage our existing global operating infrastructure on the global platform and thus able to do business in the country in a very cost-effective manner.

Got it. Okay. Okay. I guess it was much higher than double than I guess the enterprise-wide margin then, much higher. Um, okay. That's helpful. Um, and, and then, you know, maybe just switching gears on, um, on MNA, I've just noticed, I mean, the cash balance is very high. Um, you guys are, are, um, you know, I think under your leverage target by quite a bit. Um, and yet the buyback I think is, is definitely a little bit light versus I think just given the cash position and the leverage profile. So I'm wondering, are you guys contemplating any larger scale M&A? Or I guess why haven't we seen the buyback really ramp up just given the cash on the balance sheet?

So I'll start on M&A and maybe Andrew can comment a bit about buybacks. As we laid out in Nestor's Investor Day, intentional portfolio management to optimize value is fundamental to our simplify initiatives. And we're still looking across our options to create values for shareholders. And that includes divestitures as well as opportunistic M&A opportunities. And now that the market's finally tilting in favor of buyers a bit, that should strengthen our – look for opportunities to strengthen our capabilities in key functional areas and important geographies. But we're continuing to employ a disciplined capital allocation strategy that balances capital return with internal investments and strategic M&A to look for the highest return possibilities.

And just on the repurchase front, you know, we have been pretty consistent in our messaging that share repurchases are going to come at the pace of free cash flow, generally speaking, unless we find alternative uses for that. I won't get into the details of the cash balance, but we do consider that cash balance as well as the free cash flow when looking at repurchases decisions, as well as our financial leverage. And with rates where they are, we're very thoughtful about incremental leverage and the cost that comes with that.

Got it. So the cash target balance is kind of $1.5 billion, sort of where it ended the quarter, is kind of the cash level that you guys think is necessary to run at?

No, I don't think, I think we can run leaner than that, but we do have to keep cash on hand for, you know, future obligations as well as, you know, funding share repurchases and managing the cash flow.

Thank you.

Okay, thanks.

Thank you, Nguyen Van for our next question. And our next question coming from the line of Andrew Clickerman with Credit Suisse. Your line is open.

Hey, thank you and good morning. I'm trying to get at net staffing in the third quarter. How did that improve incrementally? And just around that, maybe as I think Andrew talked earlier about a survey of Willis's where clients are seeing pricing in the aggregate up 6% on average. And then you've talked about 6% organic revenue growth. So would A, I interpret that meaning that your kind of client base has been very stable, kind of very sladdish, and the uptick in organic revenue has been largely by pricing and exposure growth. And then the Part B of it is net staffing. How did that change Q over Q? So let me start with staffing.

And, you know, we don't do headcount on a quarterly basis. We will discuss headcount detail in our 10K. But hiring has been strong. And the hiring activity in Q3 matched that in the first half. And, you know, it's fortified by the fact of, you know, we see the benefit of our retention efforts. Voluntary attrition has remained consistent with, you know, the macroenvironment. and the external benchmarks we used to measure this. So our year-to-date hiring has exceeded voluntary terminations. Our headcount continues to increase. And sort of getting to the revenue aspect of your question, we anticipate that the contributions from the improvement of our talent base become more meaningful going forward.

And just on the dynamics around growth, there's different factors pushing and pulling in opposite directions. So I think we've been pretty clear that coming out of the breakup of the transaction last year that things like retention were challenged, particularly in certain geographies and certain lines of business. And of course, in the opposite direction, you have rate and new business and things of that nature. So there are offsetting factors that contribute to the organic growth profile.

Got it. And not to belabor too much the issue of the revenue target change. Carl, you seemed somewhat optimistic last quarter that you had some puts and takes where you really wouldn't have to worry about pressures. You seemed confident that you could meet those 22 targets for 2024. So now, as you've made a change due to Russia, What I'd like to know is what would give us confidence that we're not going to see another change for the weaker? And if there is another change, what might be some of the risks that are kind of prominent in your mind right now?

Yeah, so when we came up with our initial targets, we looked at a variety of scenarios to what could happen between now and 2024, different economic outlooks, different all sorts of different things. I don't think we factored in that we would be divesting a business of the scope and size of Russia for no cash proceeds to reinvest. That, I think, is enough of a one-off that we felt justified in the transparency we're giving you on recasting targets. But the thought that we were going to have a divestment for zero Yes, well, it's a bit outside the mainstream. And frankly, I think that is a bit unique and extraordinary.

So bottom line, you feel very confident in 24. And then with that, that extra 60 million of expense saves, would that get you back in 25 for that operating margin target of 24 to 25?

We're very pleased with the progress we're making. and the expense savings. And that's one of the reasons why we said we'd maintain sort of the delta between starting and end to get there. And we actually see more daylight developing. That's why we raised $300 to $360.

Okay. And maybe if I could just sneak one last in. And you did, Carl, you mentioned at the beginning attractive opportunities for M&A. Could you... Could you give us a sense of what areas maybe that have kind of prompted you to see some attractive, you know, what pockets of your businesses might be compelling?

So while I was speaking of attractive, right, it was the fact that, you know, valuations appear to be coming down from levels where we just didn't think that they could be value-accretive to us, right? And so... There are opportunities across the span of the businesses we operate in. As we look to what makes sense for us, right, it's going to be whether it's a geographic adjacency of an attractive economy that will fit our business profile or a specialty area where we see that fitting in very nicely to what we do very well in the marketplace.

Okay. Thank you.

Thank you. One more for our next question. Now, our next question coming from the line of Marcus with Truist. Your line is now open. Marcus, your line is open.

Okay, thank you. Good morning. In the benefits delivery and outsourcing, some of your competitors have had to adjust their assumptions around customer longevity, and here I'm talking about Transact. I'm just sort of curious here. current view about about your assumptions there. Then also curious your view of the competitive environment as we kind of get into enrollment season, how the competition looks in terms of the push for leads and advertising, that sort of thing.

Sure. So let me begin with the second part of that and I'll get to the assumptions. You know, we're I'm quite happy with our positioning on Transact and the opportunity. Again, this is a place where the market addressable to us expands by 10,000 people a day. That's how many people become Medicare eligible newly for Medicare every day. and uh the people who the percentage of people who decide to buy a medicare advantage plan rather traditional medicare continues to rise and expect to go from 40 to over 50 by the end of the decades there's clearly growth growth potential in this market um you know as you point out right there's been some volatility amongst our competitors and in the carriers that does have some effect on us uh some retention in the mark uh retrenchment in the market with some of our competitors And that can impact us to our advantage. But certainly churning carriers' books of business can impact our persistency rates. But we have taken steps. I think that put us in a different position to most of our competitors. We fortified our lead qualification process and have set up a post-placement customer care team to make sure that people are satisfied with the coverage they're electing. And that, plus our disciplined cost management, enables us, we think, to continue growing while others have to slow down to focus on their profitability. With respect to persistency rates, this is something we examine within the portfolio on a line-by-line basis. And we use independent actuaries to make sure that we're validating our team's view of what we think the persistency will be and continue to evaluate how the market looks and what that will be.

I appreciate it. Thank you.

Thank you. One moment for our next question. Our next question coming from the line of Mark Markin with Baird. The line is open.

Good morning. It's Mark Markin from Baird. You mentioned that headcount is actually up on a sequential basis relative to Q2. Salaries and benefits are down by 2.4% year-over-year, 2.7% sequentially. Is the primary reason why salaries and benefits are down on a dollar basis because of FX? And as a small element of Russia, you mentioned that the presence on the ground was fairly minimal. So I'm just trying to understand that element and to what, you know, what do you attribute to the decline to?

Yeah, I think FX is a meaningful component of the difference that you're seeing there in that line item, you know, given where our employee bases are located.

I would add that part of our transformation program involves workforce relocation as we simplify where we do work. And so not front office, but a significant part of our mid and back office hiring has occurred in our international businesses where we tend to enjoy lower wage starts.

We also have the impact of our, you know, transformation program and, you know, where, again, where folks are located and making sure that the savings are coming through and you're seeing some of that materialize there as well.

And I would imagine you're also optimizing, you know, different roles and, you know, the expenses of various roles in order to optimize things from a long-term perspective. To what extent could those trends continue? You know, when we think about it, just as it relates to that, if the headcount continues to go up.

Yeah, we're always looking to make progress in that ratio. It's a constant focus for us. As I said, optimizing the workforce is a really important component of the transformation program. And hence, the comp and VIN that falls out of that is an important metric. And that's not just necessarily location, right?

That can be automation.

Great. And then with regards to this, going back to the prior question with regards to Transact, I mean, is it your general sense that based on everything that you're currently seeing out in the market that Transact should be able to go back to its kind of historic

level of performance or are there elements that would make it more like last year just because of certain you know vagaries in the market right now yeah yeah a couple of things there I think one it's important to remember that you know growth rates will likely moderate as that business becomes bigger and bigger that's just the the simple you know fact of the math The other thing to keep in mind is that over 50% of the individual marketplace business revenues are generated in the fourth quarter. So it's best to think about that business on a full-year basis, not focus on any particular quarter. We've performed very strong this year and continue to feel positive about our current market positioning. And we're also encouraged by the early signs we're seeing for the quarter. But again, it's still very early in enrollment season.

Thank you. One more for next question. And our next question coming from the line of Robin Cox with Goldman Sachs. Your line is open.

Hey, maybe an update on the magnitude of book settlements you might expect in 4Q and beyond. Because I know you've maintained the organic growth outlook for 2022, but you face a difficult compare with the 74 million in book sales from 4Q21.

Yeah, we still expect to see some book sales throughout the rest of the year that relate to 2021 events. We do expect those to normalize even further as 2021 recedes from view. This dynamic was anticipated in our long-term forecast for mid-single-digit growth. And as you point out, and as a reminder, in Q4 of 2021, you know, there was approximately 74 million of book sales. Thirty nine of that was in the segments. You know, we do not anticipate that level to repeat this year.

Okay, thanks. And can you give us some more color on the tailwinds you're seeing in the wealth business, particularly in the UK, and with respect to the increase in project activity related to financial market volatility?

Yeah, so when markets fluctuate a lot, right, our client base in the wealth business, this is our retirement business, needs to often, you know, demand re-forecasting of what their cash funding requirements or their accounting expense requirements are going to be. So it just generates a significant amount of project workforce in the markets where there are major defined benefit plans. And, you know, when the volatility stops, that work will stop. But, you know, we don't seem to have any lack of volatility these days. I probably offset that a bit by the fact that within the wealth business, of course, we have our investments business. And a certain amount of that business is, you know, based on asset-based fees. And with, you know, lower capital market levels over the year, that has been a bit of a headwind for that business.

Thank you. And our last question coming from the line of Meyer Schultz with KBW. Your line is open.

Good morning. Am I coming through? Yes.

Hi, Meyer.

Hi. Good morning. Thanks. So two quick questions, if I can. First, I guess one of the questions we're getting a lot this morning in email is whether there are other regions of the world where you similarly have very outside margins that are like Russia, just in terms of understanding the scope of the margin expansion program and where it does apply.

So as with any diversified business, we're going to have uh places and lines of business that are more profitable than the group average and less profitable than group average uh and uh so you know the answer is we have some right but uh you know are generally uh the areas where we have either specialist capability that's hard to replicate uh or that there are regulatory barriers to entry so there is competition but it might be less than open competition are going to be areas where there may be opportunities to have higher profits than average in the business. So the answer is there are places. However, we are a broadly diversified business, and we do discuss where our revenue is sourced from. And so there aren't many geographies where we have significant revenue concentration of the size of Russia. You can see our top five listed in 10K.

Okay, that's helpful. And then just going back to Transact very briefly, to the extent that other competitors are pulling back and providing, I guess, a better opportunity for near-term growth at Transact, is that going to have a negative impact on cash flow?

That's a dynamic that we manage very closely, as you can imagine. So we do make sure that the growth we're targeting is profitable growth and do balance that against the cash consumption in that line of business. So we don't expect it to be a significant drag, but, of course, we do manage that dynamic closely.

Okay, fantastic. Thank you. Good. Thank you.

Thank you. I am showing up for the questions at this time. Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect. Everyone have a great day.