Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW first quarter 2023 earnings conference call. Please refer to wtwco.com from 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 uncertainty. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section 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 reconciliations of the non-GAAP measures, as well as other information regarding these measures, please refer to the most recent earnings release other materials in the investor relations section of the company's website. I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for WTW's first quarter 2023 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. Our first quarter results were a great start for the year. The strong 8% organic revenue growth we delivered in the first quarter demonstrated our sustained momentum and intense focus as we continue to execute on our strategic priorities. We're particularly encouraged by the growing impact we're seeing from our recent investments in talent and technology, which has strengthened the value we're able to provide our clients and yielded improved retention and new business growth. Operating leverage on this robust growth and the continued succession of our transformation program drove 140 basis points of adjusted operating margin expansion over the prior year, which translated into adjusted diluting earnings per share of $2.84 for the quarter, an increase of 7% year over year. Overall, I'm very pleased with our Q1 results and with the excellent progress we've made since this time last year. We saw top-line growth across all our businesses, reflecting the increased value of WTW solutions in complex economic environments. Amid financial sector turmoil, high inflation, and ongoing geopolitical strife, we continue to see market dynamics that provide opportunities for WTW to respond to our clients' needs to improve outcomes and reduce risk. Now, I'd like to share some additional perspective on the reset of our near and long-term expectations for free cash flow announced this morning. Our previous target for three-year cumulative free cash flow through 2024 reflected our goal of substantially improving our free cash flow margin, this being in addition to achieving our revenue and margin targets. We have made timely and meaningful progress toward our goals for revenue and adjusted operating margins, and we continue to believe that our long-term free cash flow improvement opportunities remain substantial and achievable. These opportunities include optimizing structural and contractual aspects of our business, enhancing our system and processes, and streamlining our working capital. However, we now believe that the best and most sustainable paths to realizing those opportunities will take us beyond the end of 2024. As a result, over the near term, we expect free cash flow as a percentage of revenue to improve significantly from 2022's base of 8% free cash flow margins. Over the longer term, we still anticipate growth toward peers-free cash flow margins as the benefits from our improvement actions gain more traction and begin to drive a shorter conversion cycle. I want to make it very, very clear that we remain committed to delivering on our core operating results. Our achievements on those fronts so far, including our very solid start to 2023, give us confidence that we will be successful in delivering on those goals. Before turning it over to Andrew, I also want to update you on our grow, simplify, and transform initiatives. Our grow initiatives take advantage of the opportunities in both core and fast-growing markets using our analytics capabilities and specialist knowledge to help create a more valuable and differentiated client experience. In risk and broking, our specialized approach, coupled with the strategic hires we've made over the past year, have driven accelerated growth. In health, wealth, and career, we've had success cross-selling new solutions and products alongside our core advisory work. Our focus on specialization has driven us to find improvements to existing solutions, new product innovation, and most recently, identification and successful execution on opportunities for strategic collaboration. For example, we just announced a partnership with Zurich involving digital trading within our broking platform. which leverages data to structure risks to allow for a more competitive placement experience. Another example of our strategic partnerships is our new relations with Sapiens, a leading global provider of software for the insurance industry. We've partnered with Sapiens to create integrated solutions to help insurers underwrite policies more efficiently. These are both great examples of how our innovations are driving growth by streamlining the very complex business of risk management and modernizing traditional broking while giving our customers a quicker and more efficient experience. A third example is our partnership with Transamerica to oversee administration and record keeping for our recently launched LifeSite pooled employer plan in the U.S. This new product will allow employers to offer a market leading defined contribution plan and employee experience with limited demand on their internal resources. Shifting to our Simplify initiatives, we believe our improved sales and retention outcomes have resulted in part from our efforts to streamline the backend shared operations of our businesses. This has enabled us to deploy a more cohesive and consistent global model that leverages our scale and provides a smoother client experience from prospect to renewal. Finally, our transformation program delivered $75 million of incremental annualized savings during the first quarter, consistent with the expected pacing of $100 million in incremental one-rate savings we expect to generate from the program this year. This brings the total to $224 million in cumulative annualized savings since the program's inception. We continue to search for additional opportunities for savings. Overall, we believe we're making progress toward our long-term organic growth, margin expansion, and EPS targets. Continued execution of our strategic initiatives this quarter delivered healthy organic revenue growth, strong adjusted operating margin expansion, and further savings from our transformation program. In closing, I want to thank our colleagues for their performance this quarter and their unwavering dedication. We are truly appreciative of their continued commitment to our vision and their relentless focus on our strategic priorities to grow, simplify, and transform. 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. Our clients continue to face a host of economic challenges, including rising commercial insurance rates. However, pricing increases appear to be moderating as our fourth quarter 2022 commercial lines insurance pricing survey showed an aggregate increase of just below 5%. Data for nearly all lines continue to indicate price increases, with the exception of workers' compensation and directors' and officers' liability. The largest price increases came in commercial auto, followed by commercial property. We continue to focus on helping our clients with our specialized knowledge and risk and broking capabilities so they can make more informed decisions about how to best manage their risk in the current environment. As Carl mentioned, we had a strong start to the year, with first quarter revenue up 8% on an organic basis and solid growth across our portfolio of businesses. Our adjusted operating margin was 18.6%, a 140 basis point improvement over prior year, reflecting our growth and expense discipline, along with the benefits of our transformation program. The net result was adjusted diluted earnings per share of $2.84, a 7% increase 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 segment generated revenue growth of 6% on both an organic and constant currency basis compared to the first quarter of last year. Revenue for health increased 8% for the quarter, primarily due to increased project work in North America related to helping clients implement legislative changes and manage plan costs, as well as from strong growth in international with new client appointments supplemented by healthcare inflation, and increases in clients covered populations. Wealth grew 4% in the first quarter. The growth was primarily attributable to higher levels of retirement work in Europe and North America, including compliance and de-risking projects along with new client acquisitions. This growth was partially offset by a nominal decrease in our investments business, which continued to be pressured by the declines in capital markets that occurred in the second half of 2022. Career experienced 4% growth in the quarter, driven by increased demand for advisory services and increases in data and software license sales. Benefits delivery and outsourcing generated 7% growth in the quarter. The increase was driven by new outsourcing clients and compliance projects, plus strength in our individual marketplace with growth from higher volumes and placements of Medicare Advantage and life policies. HWC's operating margin was 24% this quarter compared to 20.7% in the same prior year period. This strong margin growth was primarily due to higher operating leverage. Risk in broking revenue was up 10% on an organic basis and 5% on a constant currency basis compared to the prior year first quarter. Corporate risk in broking had an outstanding quarter with an organic revenue increase of 10% driven by growth across all regions and most lines of business, primarily from new business and improved retention. As we've indicated, book of business settlement activity has slowed after the uptake over the last two years, with only a one percentage point impact on organic growth for the quarter. Investment income was 12 million for the quarter due to higher rates and impacted organic growth for the quarter by one percentage point. North America had a strong quarter due to new and renewal business and increased retention, a result of the strategic investments and initiatives that Carl highlighted earlier. Europe also had solid new business performance across a number of product lines, including aerospace, financial solutions, and natural resources, as our focus on building and strengthening our industry and product specializations continues to deliver robust growth. International also contributed to organic growth with double-digit growth in all regions. In the insurance consulting and technology business, revenue was up 7% over the prior year period, primarily driven by increased sales and retention in technology solutions. R&B's operating margin was 19.9% for the first quarter, compared to 21.6% in the prior year first quarter. Margin headwinds reflect the inclusion of profits up until the date of deconsolidation from our now divested Russia business in the comparable period. Absent this headwind, margins improved as a result of organic revenue growth in CRB, transformation savings, gain on sale and interest income, partially offset by the run rate impact of 2022 strategic investment hires. As we expected, last year's key hires have begun to contribute to our performance in a meaningful way as exemplified by the solid organic growth this quarter. And we continue to expect a ramp up in production this year. Now let's turn to the enterprise level reserves. We generated profitable growth this quarter with our adjusted operating margin increasing 140 basis points to 18.6% from 17.2% in the prior year. This improvement reflects the benefits of higher operating leverage from the increased top-line growth and transformation-related savings, which we expect to continue to be a key contributor to our ongoing margin expansion and the attainment of our 2024 margin goals. Please note that the margin tailwind created by interest income and book of business settlement activity was offset by the margin headwind from the divestiture of our highly profitable Russia business, whose results were included in the prior year up until the date of deconsolidation. Foreign currency was a headwind on adjusted EPS of 6 cents for the first quarter, largely due to the strength of the U.S. dollar. Assuming today's rates continue for the remainder of the year, we expect a foreign currency headwind on adjusted earnings per share of 5 cents. Our U.S. GAAP tax rate for the quarter was 19.5% versus 27.5% in the prior year. Our adjusted tax rate for the quarter was 20.5% compared to 21.1% in the prior year. The current quarter adjusted tax rate is lower, primarily due to the favorable impact of discrete items in the current year. The adjusted tax rate for the full year may increase moderately as a result of the UK corporate tax rate increase, which became effective on April 1st. Our strong balance sheet gives us continued confidence in our ability to execute a disciplined capital allocation strategy that balances capital return to shareholders with internal investments and strategic M&A to deploy our capital in the highest return opportunities. During the quarter, we paid $87 million in dividends and repurchased approximately 432,000 shares for 104 million. We continue to view share repurchases as an attractive use of capital. We generated free cash flow of 92 million for the first quarter of 2023 compared to free cash flow of negative 10 million in the prior year. The $102 million year-over-year improvement in free cash flow was primarily driven by more favorable working capital improvements, resulting mostly from higher cash collections and lower discretionary compensation payments made in the current year quarter as compared to the prior year quarter. Our Q1 results are reflective of the progress we've made since the beginning of 2022. We've come a long way, stabilizing the business, rebuilding our talent base, strengthening our organic revenue growth and accelerating the transformation program to drive greater profitability in the future. We're committed to delivering the same success with free cash flow generation. Though our actions on free cash flow have not yet yielded results within the timeframe we expected, we remain focused in the near term on driving meaningful improvement in our free cash flow margin for 2022's base of 8% free cash flow margin. And in the longer term, making continual progress and moving more towards peer levels. As free cash flow generation remains a high priority, we've made enhancements to our original improvement plans to strengthen our organizational focus on cash flow. As you may have seen in our proxy statement, we have added free cash flow as a KPI for annual incentives in the executive compensation program and are working on implementing cash flow linked KPIs for others in the organization to drive broader accountability across the company. In addition, we are focused on pursuing long-term structural and contractual improvements to the cash aspects of how our businesses operate. As you might expect, this is the area where we have the largest class of opportunities to improve, but those opportunities are the most time consuming to realize. As a reminder, full year 2023 pension income is expected to be about 112 million. If this level of pension income remains consistent in 2024, it would pose a significant headwind to our 2024 adjusted EPS target. Pension income, which is sensitive to macroeconomic conditions, is re-measured at year-end. Accordingly, we will provide additional guidance on our 2024 pension income expectations and the resulting impact to the adjusted EPS target when we release Q4 2023 earnings results. Overall, we are excited by the strong start to 2023. with business performance ramping up as expected and the benefits of our investments in talent and technology starting to meaningfully contribute to results. In addition, our successful transformation efforts and operating leverage have allowed us to continue to drive margin expansion. We have made consistent progress in our commitments for organic revenue growth and increased operating margins in EPS. With that, let's open it up for Q&A.