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.