Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW Second Quarter 2023 Earnings Conference Call. Please refer to the WTWCO.com for the press release and supplemental information that is 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 risk 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 statement 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 and 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 second quarter 2023 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. We continue to see our strategic initiatives resonate strongly in the marketplace, as reflected in the 7% organic revenue growth we recorded in the second quarter. This solid result reflected continued strong growth across our entire portfolio of businesses, despite significant challenges from outsized book of business sales in each of our segments in the prior year. Excluding book of business activity, organic revenue growth at the enterprise level would have been 9%. We're very encouraged by this sustained top line momentum and the positive response we've seen from clients to our investments in talented technology across all our businesses. At the same time, We faced margin headwinds from those investments, as well as wage inflation and prior year book sales that limited our progress on driving margin expansion and earnings growth this quarter. The continued success of our transformation program, which exceeded our expectations yet again, partially offsets these headwinds. All in all, adjusted operating margin declined by 90 basis points for the quarter, which resulted in adjusted earnings per share of $2.05. Though we had a decline in adjusted operating margin this quarter, as we've said before, our progress in margin expansion won't always be linear. However, we don't expect margin declines in any full-year period. Earlier this morning, we reset our 2024 adjusted operating margin and adjusted EPS targets. These updates reflect our margin and earnings performance to date and, as we've called out in the previous quarters, pension income headwinds that based on current market conditions we do not expect to subside importantly they also include our current assessment of the opportunities we see ahead of us with the benefit of being halfway through our three-year plan we lowered our 2024 target for adjusted operating margin to 22.5 to 23.5 percent from 23 to 24 percent while some of the change stems from the slower pace at which we've generated operating leverage It primarily reflects our opportunistic decision to further invest in talent and other key strategic initiatives, especially in our risk and broking segment. This incremental investment will further strengthen our long-term market position and drive continued strong organic growth beyond the 2024 forecast period. To elaborate a bit on that decision, I want to say a few words about where our R&B segment stands today and the opportunity going forward. Our differentiated service offering underpinned by our ability to adapt to our clients' changing needs, creates an incredibly compelling value proposition, and the success of this strategy in RMB so far is evident through the strong organic growth we've been able to deliver. Our focus on specialization, innovation, and top-quality client service has generated substantial momentum and opportunities we did not have 18 months ago. Earlier this month, our aerospace team won back the Airbus account, one of the largest in the sector, on the back of our strength and value proposition. And that success is not just happening in aerospace. Our global lines of business, such as P&C, marine and financial solutions, have continued to deliver meaningfully above-market growth, including double-digit growth in the second quarter. In North America, the build-out of 12 identified industry divisions continues at pace, with colleagues and infrastructure being aligned, and we expect most of this to be completed by year-end. Our traction in the marketplace has shown us there are even more opportunities here to deliver solid organic growth well into the future. But a fixed strategy is simply not an option in today's ever-changing risk landscape. To capitalize on these opportunities and meet client-specific needs, we're continuing to advance our specialization strategy and develop innovative products and services which will distinguish us in a way to best attract clients and talent. This requires developing differentiated offerings increasing strategic partnerships, and expanding our reach through platforms like MGAs, MGUs, and affinity products. Of course, high-quality talent is essential to drive these initiatives and turn our vision into a reality. And we've seen our rejuvenated strategy and independent brand become a lodestar for that talent, which will further fuel our success. We do appreciate the need to strike a balance between investing for incremental growth in the long term and capturing savings in the near term. While this investment in talent will partially offset the savings from our transformation program and tailwinds from higher investment income and lower pension service costs between now and 2024, we expect these efforts will drive greater operating leverage over the long term as productivity improves and we realize more efficiency from increased scale. Running a successful business is never a straight line. It's a journey filled with triumphs and challenges, and we've experienced both over the last 18 months. On one hand, the operating margin has benefited from our accelerated progress on the transformation program. Interest income has been higher, and our pension-related service costs have been more favorable than originally expected. At the same time, macroeconomic conditions have dampened demand for interest rate-sensitive businesses such as M&A, and the inflationary environment has put pressure on our operating costs, driving up wages and travel and entertainment. We are also focused on implementing cost-saving measures primarily focused on eliminating non-essential travel. While we've seen some progress in generating margin expansion from RMB, we know there is more to do. We remain confident that the right path to delivering margin expansion includes both driving organic revenue growth through our strategic investment and executing on transformation program savings and these efficiency measures. As a core part of our strategic decision to invest further in our specialization strategy and our talent base, We are excited to welcome Lucy Clark as the global leader of risk and broking in the third quarter of 2024. Lucy's committed to specialization, exceptional client service, and data and analytics, all directly aligned with WTW's competitive advantages and what we're doing in this space, making her the right person to accelerate the execution of our strategy. She has extraordinary market presence, a proven track record of delivering operational and financial results, and an intense focus on talent. We are delighted she is joining our team, and I look forward to welcoming Lucy to our team in the third quarter of 2024. Until then, Adam Garrard will continue to lead the segment, and after Lucy's arrival, Adam will become the chairman of Risk and Broking. Now, let me shift gears back to our updated 2024 adjusted EPS target. The revised target of $15.40 to $17 reflects the sizable pension income headwinds we've discussed on previous calls, a modestly higher expected tax rate, and the lower adjusted operating margin. The revised target also reflects a more narrow and precise range than our original figures, given that we're halfway through our target period of three years. I've already talked about the drivers behind our margin, so let me take a minute to cover the other two items. The most significant driver influencing our change to our EPS target is the sizable decline in expected pension income since we set our original 2024 target almost two years ago. We originally expected pension income to contribute $2 to $2.50 to adjusted EPS. As we communicated previously, the increase in interest rates and decline in capital market returns have created significant headwinds to pension income dynamics. As a result, we now expect pension income to contribute 35 to 85 cents, less than half of our original estimate. adjusted EPS in 2024. The change in expected pension income accounts for approximately $1.65 of the overall change in EPS target. We continue to expect pension income of $112 million in 2023 and will update you on our 2024 pension expectations during our fourth quarter call after the remeasurement process. The second driver impacting the EPS target change stems from the modest increase in tax rates. due to our updated estimates of future tax rates based on legislative changes. We expect the UK corporate tax rate increase will have a modest impact starting in 2023. While we continue to evaluate the OECD slash G20 guidance on the Pillar 2 global minimum tax released earlier this year, we expect the legislative changes may further increase the rate in 2024 and forward. Now, before I hand it over to Andrew, I want to step back for a moment and reflect on the progress of WTW since the tumult of 2021. In 2021, WTW had $9 billion of revenue, an adjusted operating margin of 19.9%, an EPS of $11.60. And the full impact of the termination of the business combination was not reflected in the company's financial results in that time. That occurred in 2022 when organic growth slowed, Book of business sale activity spiked, and we need to make substantial investment in both talent and transformation-related activities to position the company for future growth. Since that time, we've stabilized our business, rebuilt our talent base, significantly strengthened organic revenue growth, optimized capital management, returned significant capital to shareholders, and are transforming and simplifying our company to drive greater profitability. We are in a far better place from where we started. We remain committed to our strategic priorities of grow, simplify, and transform, and we are delivering meaningful strategic progress against these initiatives. We can see their contributions to our performance, including organic growth in line with our peers and $277 million of transformation savings. We remain committed to improving our core operating results to reach our revised 2024 goals and drive long-term earnings growth. I want to thank our colleagues for their dedication and performance this quarter. We are truly appreciative of their continued dedication 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.