Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Please refer to the WTWCO.com for the press release and supplemental information that were issued earlier today. Today's call will be available for the next three months on the WTW's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of 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 company's most recent Form 10-K and in other filings the company has made with SEC. During the call, certain non-GAAP financial measures will be discussed. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the earnings press release issued this morning and other materials in the investor relations section of the company's website. I will 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 2024 Earnings Call. Joining me today is Andrew Krasner, our Chief Financial Officer. We delivered a strong second quarter, headlined by 240 basis points of year-over-year adjusted operating margin expansion, adjusted diluting earnings per share of $2.55, a 24% increase over prior year, and $361 million of free cash flow. These healthy bottom line results were the product of our continued robust organic growth, growing operating leverage across our businesses, and the ongoing success of our transformation program. We are very pleased with our sustained momentum from the success of our strategic initiatives alongside continuing favorite full market conditions. Our 6% organic revenue growth in the quarter represents the value proposition of our business, the impact of our investments in talent and technology, and the markets we have prioritized. Based on our strong first half performance and our continued confidence in our outlook and execution, we have raised the low end of our 2024 adjusted operating margin and adjusted EPS target ranges to 23.0 to 23.5% and $16 to $17 of EPS, respectively. In addition, thanks to the success and momentum of our transformation program, we've been able to identify additional savings and accordingly are raising our cumulative run rate transformation savings target from $425 million to $450 million by the end of 2024. We continue to expect mid-single-digit organic growth to achieve revenue of $9.9 billion plus. I'm pleased with our colleagues' focus and dedication in executing our strategic priorities. Our results and outlook reflect their hard work in delivering for our clients and driving improved productivity and efficiency. With that in mind, let me share some specifics on our recent progress and the opportunities ahead of us. As I mentioned, our rising productivity drove greater operating leverage this quarter, significantly bolstering our bottom-line performance. Our transformation efforts also contributed substantially to margin expansion, We achieved $24 million of incremental annualized savings this quarter, bringing the total to $394 million in cumulative annualized savings since the program's inception. As we near the end of our three-year transformation program, we're confident that the program has positioned us for further margin expansion over the long term. We now have the organization, processes, and capabilities in place to further optimize our cost structure, increase operational effectiveness, and improve profitability on an ongoing basis. In HWC, we continued to harness the strength of our portfolio to drive growth. We captured demand and added new clients in each of our core businesses, made many smart connections to better serve our clients' needs across different areas, and introduced new breakthrough solutions. That combination enabled us to achieve 5% organic revenue growth in the quarter, delivering accelerated growth across the health, wealth, and career businesses as we consciously manage BD&O growth to optimize earnings and cash flow. Growth was led by our health business, which generated 9% organic growth. Across the segment, we continue to see good levels of demand driven by healthcare inflation, strong employment, elevated pension fund status, new legislative and regulatory requirements, and other complexities in the macro environment. Our deep expertise and rich experience, combined with our data analytics and software solutions, position us well to help clients navigate the dynamic environment, from managing total rewards costs to de-risking pension plans. Our teams have successfully generated notable upticks in a number of areas. We've added several new global benefits management appointments with organizations that want to better manage costs and also improve their employees' experience. With a favorable interest rate environment, we've helped more clients initiate pension de-risking processes through bulk sums in the U.S. and annuity buy-ins and buy-outs in Great Britain. As we've helped guide clients on the implications of new pay transparency and equity requirements to the EU, more companies have engaged us for broad-based reward projects. In response to the strong employment market, we sold more compensation benchmarking surveys and more licenses for Embark, our employee experience portable. And our LifeSite Master Trust in Great Britain continues to grow, having just exceeded $20 billion sterling in assets under management. Our focus on smart connections across HWC has also continued to pay dividends. This past quarter, we worked with a large airline, which was already a global benefits management client of our health business. This client sponsored a large number of pension plans in multiple countries and needed help keeping these plans compliant, competitive, and well-run. Our GBM team introduced the client to our retirement team, which was able to provide a complete solution tailored to their retirement needs. Our strong existing relationship Together with our smart connections mindset helped us win a multi-year contract and gave our client a more developed service proposition with flexible pricing options. Another example involves a large automotive retailer where we secured a health and benefits consulting and brokerage relationship. To improve how their employees valued and utilized their benefits, we introduced our employee experience team who presented a personalized digital approach to communication that helped the plan members break through the complexity of the healthcare environment. This generated an interest in learning how we could help them simplify the administration of their benefit plans. And after hearing how our teams could also collaborate to deliver insights to improve the plan's effectiveness and help them reduce overall healthcare costs, they appointed us as their benefits outsourcer. In a third example, our segments collaborated when a team in CRB reached out to our health and benefits and retirement sector Our CRB team, who have been helping a client assess and manage integration risks in a newly acquired business, recognized that the client's needs went beyond property casualty risks to also include people risks requiring employee benefits expertise across multiple countries. We secured this win by offering complete M&A guidance, including strategic planning and brokerage services covering both corporate risk and employee benefits. We've previously highlighted how HWC has developed breakthrough solutions that are leading the market and delighted to share two more breakthroughs this quarter. First, knowing how highly employees value flexibility, members of our US retirement team helped one of our clients find a way through complex regulations and potentially challenging administrative requirements to introduce a new pension plan feature to help employees better manage their financial situation. Also, Our investments team launched our first ever dedicated private equity pool fund. The fund's innovative, semi-liquid structure and nature will be open to wealth and defined contribution clients. In risk and broking, our focus on specialization, investments in talent and technology, and top quality client service continues to sustain client retention rates in the mid-90s and generate substantial growth opportunities. This is evidenced by the segment's organic revenue growth of 10% for the quarter, fueled by our specialty businesses, which continue to outpace the growth of the rest of the segment. All of this is the product of our differentiated service offerings and ability to adapt to our clients' changing and complex risks. Our R&B specialization strategy is about delivering tailored solutions that address industry-specific risks and optimizing our client outcomes. One of our client wins this quarter included the insurance placement for an energy supplier who had a challenging loss record and complex risk profile and was under severe time constraints for securing an insurance solution. Thanks to our deep expertise in the natural resources sector across multiple geographies, we were able to provide the company with complete coverage in just one month. We continue to make good progress with Verita, our open market MGU in North America. Submission volume continues to increase each month as the brand is expanded across the U.S. with broad opportunities from different brokers. The team continues to evaluate and add new products to the platform to further accelerate revenue growth in the second half of the year and beyond. As we've mentioned, investments in our R&B talent base have also been a significant revenue growth driver for the segment. After a focused effort to replenish our talent base over the past few years, These new hires have become increasingly productive and are contributing to our strong organic growth in the segment. Our recent hiring efforts have been more opportunistic and strategic with a goal of enhancing our ability to achieve sustainable, profitable growth and create value. Lucy Clark, who's recently joined us, is one example of this type of strategic hire. Lucy's commitment to specialization, data and analytics, and exceptional client service makes her a perfect fit to lead risk and broking. We expect that our market presence, proven track record, and focus on talent will help further drive organic growth and margin expansion in the segment, building on the excellent work Adam Gerard has accomplished over the last five years. We are confident that our strategic investments in talent and technology, along with our specialization strategy, is leading to increased engagement with both new and existing clients. This heightened activity is crucial for driving our organic revenue growth and expanding margins for the rest of the year and beyond. In conclusion, I'd like to thank our colleagues for their unwavering commitment to WTW and to our clients, which helped us to achieve another solid quarter. We continue to effectively execute on our strategic priorities, setting us up to achieve our objectives for the year. I'm enthusiastic about our opportunities in the second half of the year, and have confidence that we are on the right path to achieving our goals for 2024. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, and thanks for joining us today. In the second quarter, we delivered organic revenue growth of 6% and drove adjusted operating margin expansion of 240 basis points, resulting in adjusted diluted earnings per share of $2.55, an increase of 24% over the prior year. As Carl mentioned, thanks to our solid results for the past two quarters and our confidence in what we expect to achieve in the second half of the year, we have raised the low end of our 2024 financial targets for adjusted operating margin and adjusted EPS, bringing the target ranges to 23 to 23 and a half percent and $16 to $17, respectively. In addition, we have been able to identify additional transformation savings and are raising our cumulative run rate target from 425 million to 450 million by the end of 2024. The total cost to achieve these savings is now estimated at 1.175 billion. These additions to the transformation program will help us drive further efficiencies as we remain focused on a strong finish to the program. Next, I'll spend some time reviewing our 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. Health, wealth, and career generated revenue growth of 5% compared to the second quarter of last year, in line with our expectations of mid-single-digit organic revenue growth for the segment for 2024. We noted last quarter that we expected health revenue growth to accelerate, and indeed, the business generated revenue growth of 9% for the quarter in comparison to 3% growth in Q1. North America generated strong growth as a result of increased project work. In addition, international and Europe delivered double-digit growth driven by strong client retention, new local appointments, and the continued expansion of our global benefits management client portfolio. Wealth grew 5% in the second quarter, driven by strong growth in our retirement business due to new client acquisitions and increased project work, including pension de-risking work in North America and additional work required in a peak valuation year in Great Britain. We also delivered solid growth in our investments business due to improvements in capital markets and growth from our LifeSite solution. Career delivered 4% revenue growth in the quarter, primarily driven by broad-based compensation assignments in work and rewards in North America and Europe, as well as projects related to communication work and employee experience. We also saw growth in our product revenue with more sales of Embark, our employee experience portal. Our compensation benchmarking participation continues to be elevated over 2023, which should lead to accelerated growth in the second half of 2024. Benefits delivery and outsourcing was flat for the quarter. Solid growth in outsourcing from increased project work more than covered the revenue headwind related to the client we mentioned last quarter who insourced its health and other benefits administration. This growth was offset by a decrease in our Medicare-related business, where we deliberately moderated growth to reflect market developments, maximize profitability, and improve free cash flow outcomes. Said differently, we do not simply chase growth at any cost in this business. HWC's operating margin was 21.9%, an increase of 360 basis points compared to the prior year second quarter, primarily driven by operating leverage and transformation savings. Moving to risk and broking, revenue was up 10% on an organic basis for the second quarter, with no meaningful impact from book of business activity. Interest income was $29 million for the quarter, up $14 million from the second quarter last year. Corporate risk and broking had another exceptionally strong quarter with organic growth of 11%, primarily driven by higher levels of new business, strong client retention, and renewal increases across all geographies. Our specialty lines continue to be major contributors to the strong growth performance, led globally by our facultative, construction, crisis management, and financial solutions teams. Growth across CRB in Europe was led by financial solutions, facultative, FinEx, and crisis management. North America CRB had solid growth driven by new business and higher renewal business from crisis management, natural resources, construction, real estate, hospitality and leisure, as well as healthcare and life sciences. Our international region had double digit organic growth across all sub regions led by countries in Central and Eastern Europe, Middle East and Africa and Latin America. In terms of rates, we see a continued improving landscape with favorable outcomes for clients. We see a stabilizing and softening market in some of our largest lines of business, such as property, caused by the increasing supply of capacity from insurers. The market for financial lines continues to soften, albeit with slower rate reductions in the past quarter. An exception to that is cyber, where the market is softening faster. Across all specialty lines, we see a mix, for example. In political risks and trade credit, the market is stable with some small premium rises. The same in casualty, where the market remains challenged for primary risks, especially those with North America exposures. Insurance consulting and technology revenue was flat compared to prior year due to tempered demand, mainly in the consulting business in North America and the UK. However, we have taken corresponding expense actions to protect our margins. We expect ICT to achieve mid single digit growth for the full year. R&B's operating margin was 20.6% for the quarter, a 450 basis point increase over the prior year second quarter, primarily due to operating leverage driven by solid organic revenue growth in CRB, disciplined expense management, interest income, and transformation savings. Now, let's turn to the enterprise level results. At the enterprise level, adjusted operating margin for the quarter was 17%, a 240 basis point increase over the prior year, primarily driven by greater operating leverage and the benefits of our transformation program. We had 24 million of incremental annualized transformation savings, bringing the total to 394 million of cumulative savings since the program's inception. The program continues to better position us to drive operating leverage going forward. Our unallocated net was negative 106 million for the second quarter and reflects the inclusion of a $13 million provision for significant litigation. We continue to expect the full year 2024 balance to be relatively consistent with 2023. Foreign exchange was a headwind to adjusted EPS of 3 cents for the quarter. At current spot rates, we expect foreign exchange to be a headwind of approximately 10 cents on adjusted EPS for the year. Our U.S. GAAP tax rate for the quarter was 15.6% versus 19.8% in the prior year. Our adjusted tax rate for the quarter was 22.6% compared to 23.7% for the second quarter of 2023. We continue to expect our adjusted tax rate for the year to be close to our 2023 rate, excluding the one-time items we mentioned at year end. During the quarter, we returned $290 million to our shareholders via share repurchases of $200 million and dividends of $90 million. We continue to view share repurchases as an attractive use of capital to create long-term shareholder value and be the central focus of balanced capital allocation. We continue to expect share repurchases to total approximately 750 million in 2024, subject to marketing conditions and other relevant factors. We generated free cash flow of 361 million for the six months ended June 30th, an increase of 11 million from prior year, primarily driven by operating margin expansion, partially offset by cash outflows related to transformation and discretionary compensation payments. The free cash flow results for the quarter are in line with our expectation, as free cash flow margin was not intended to be linear for the year. We continue to be confident in our expectations of year-over-year improvement in our full-year free cash flow margin. Our strong top line and bottom line performance this quarter reflects our ongoing momentum and the exemplary efforts of our colleagues to drive greater productivity and efficiency. We expect this to continue into the second half of the year and are confident in achieving our 2024 targets.