Willis Towers Watson Public Limited Company

Welcome to the WTW fourth quarter and full year 2024 earnings conference call. Please refer to WTWCO.com for the press release and supplemental information that were 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 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 most recent Form 10-K and 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 fourth quarter and full year 2024 earnings call. Joining me today is Andrew Krasner, our chief financial officer. Before we begin, I'd like to acknowledge the devastating wildfires in California and express our deepest sympathy to all those affected. For our colleagues, clients, and business partners in the areas impacted, our thoughts are with you, and we will continue to lend our support through this difficult time. 2024 was a landmark year for WTW. The completion of our three-year Grow, Simplify, and Transform strategic priorities has strengthened our competitive position, and enabled us to deliver on our financial target for 2024. Thanks to our team's focus and collaboration, we entered 2025 with strong momentum in the market and all our businesses primed to perform. As we discussed at our investor day in December, three years of hard work to grow, simplify, and transform have made WTW a faster-growing, more focused, and more profitable company. We grew the business by making strategic investments in talent and innovation, simplified our business to become more efficient and agile, and transformed the business to modernize and enhance how we operate. The successful execution of our strategy was reflected in our fourth quarter and full year 2024 results. We delivered 5% organic revenue growth in the fourth quarter with an adjusted operating margin of 36.1%, up 190 basis points over the prior year. Excluding Transact, which we divested on December 31st, we recorded 6% organic revenue growth and 36.6% adjusted operating margin. Our transformation program, which is now concluded, delivered $27 million of incremental annualized savings during the quarter, bringing total savings over the life of the program to $473 million. Adjusted diluted earnings per share were $8.13, a 9% increase year-over-year. For the full year, we had organic revenue growth of 5%, in line with our mid-single-digit target, or 6%, excluding Transact. We expanded adjusted operating margin by 190 basis points year-over-year to 23.9%, or 24.4%, excluding Transact, fulfilling our commitment to annual margin expansion. Our adjusted diluting earnings per share were $16.93, up 17% year over year. We're proud of our 2024 performance and are excited for the next chapter at WTW as we implement our new strategy to accelerate performance, enhance efficiency, and optimize our portfolio. We're now focused on extending and amplifying our strengths and building on the solid foundation we've created over the last three years. To accelerate performance, we're focused on strengthening our core businesses, continuing to innovate, leveraging and expanding our global footprint, and advancing connections across our business. To enhance efficiency, we're committed to continuous improvement and delivering on our redo efforts to drive both margin and free cash flow improvement. And to optimize our portfolio, we'll proceed by investing organically and inorganically to improve our business mix, guided by a focused investment framework and a rebalanced capital allocation strategy. As we discussed at Investor Day, many of our strategic objectives represent an evolution rather than a revolution for our businesses. We feel confident about the path forward because we're focusing on and investing most heavily in our best performing ideas. Let me take a few minutes to share some color around several of our key client wins in the fourth quarter, reflecting our strategic priorities. Our industry-leading analytics capabilities were a key contributor to signing a major global logistics provider to a cross-segment contract, which includes all its global lines of insurance coverage as well as global benefits management. We previously worked with this client a much smaller mandate, And by using our risk intelligence software, it changed how the client thought about their insurance portfolio and who they wanted to work with. Together with the trust our team built, our innovative and collaborative solutions led the client to appoint us over their incumbent broker. We'll continue to focus on strengthening smart connections across our business and going to market collaboratively. In the fourth quarter, this approach, alongside our global service delivery model, helped us expand our existing relationship with a large global IT vendor to cover a full spectrum of insurance programs, global benefits management, and embark and engage implementations. Similarly, collaboration between our CRB and H&B teams in Asia and Europe helped secure a brokerage appointment across both businesses for a leading communications technology group in Asia, highlighting the connectivity of our businesses across segments and regions. In HWC, we're continuing to focus on our core businesses that have sustained mid-single-digit growth since 2016 and delivered 3% organic growth or 6% organic growth, including Transact, in the fourth quarter. HWC's strategic priorities of core growth, smart connections, and innovation will enable us to build on our strong financial track record with sustained revenue growth and further margin expansion. Many of our new business wins in HWC in the fourth quarter reflect these priorities. We continue to add new multi-year client contracts in our core service areas due to our deep technical expertise, sophisticated analytics, and our ability to create breakthroughs that matter. Our focus on smart connections resulted in wins that extend across service areas. For example, one of the world's fastest growing international airlines chose us as their ongoing pension investment advisor global retirement governance advisor, and outsourcing provider. We want health and benefits plan management and communications work for a Fortune 500 diversified manufacturing company, unseating decades-long incumbents. And one of the largest nonprofit healthcare systems in the United States awarded us a long-term outsourcing, retirement, and employee experience contract. And so did a leading logistics company based in Europe. In R&B, as our specialization strategy continues to generate strong results, we're focused on deepening our expertise and expanding our existing specialty line into new geographies while building the talent and tools to support new specialized lines. In the fourth quarter, we delivered high single digit organic growth in R&B and won a number of large contracts that reflect the value of our specialization strategy. In CRB, across border teams, spanning multiple specialties, created a customized construction program for a Middle Eastern megaproject of an Asian manufacturing company. Our global collaboration and local expertise helped us secure the work for all risk coverage for the project. And in ICT, we won a multi-year software contract with a large insurer, driven by our global analytics capabilities and the efficiency of our technology solutions. I also want to take a moment to highlight our progress on optimizing our portfolio. As I mentioned earlier, we completed the sale of Transact for $632 million on December 31st and expect this divestiture to strengthen our growth rates, operating margins, and free cash flow starting in 2025. We're also reentering the reinsurance market through a joint venture with Bain Capital, and Andrew will provide some financial details on that later. And as we discussed at Investor Day, we're taking a focused and disciplined approach to organic investment. We're prioritizing improving our business mix, expanding our reach across the insurance value chain, and enhancing our margins and cash flow. We'll be thoughtful about the opportunities we pursue, recognizing the importance of minimizing business disruption, and creating clear cultural alignment. As I look at the year ahead, I feel confident in our position and our outlook for 2025. We have strong momentum in the market. We continue to make steady progress against our strategy, and the political and regulatory changes we're seeing in the U.S. and elsewhere across the globe tend to support client demand for our services. We introduced a financial framework at Investor Day in December that calls for mid-single-digit organic growth continued annual adjusted operating margin expansion, annual adjusted EPS growth, and ongoing growth in free cash flow and free cash flow margin. Andrew will share more details on our financial performance and outlook shortly. But before I hand it over to him, I want to take a moment to reflect on what we've gained from the journey that we've been on these past three years. We have grown, we have simplified, and we have transformed, and we are much better for it. I have never been more optimistic about WTW's future. We are more focused, more connected, more efficient, and more aligned than we've ever been. And we're keenly focused on realizing our potential to create value for our shareholders. We're well positioned to accelerate performance and deliver profitable growth through innovation and expansion into attractive markets. We're continuing to enhance efficiencies across the company for continued margin expansion and free cash flow improvement. And we're optimizing our business next to elevate our financial performance and our strategic position. I want to thank all our colleagues for their contributions to improving WTW and for their continued commitment to our clients and our company. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, and thanks for joining us today. In the fourth quarter, we delivered organic revenue growth of 5% or 6% excluding Transact. Adjusted operating margin expanded 190 basis points to 36.1%, or 36.6% excluding Transact. Adjusted diluted earnings per share were $8.13, an increase of 9% over the prior year. For the full year, we delivered organic revenue growth of 5% or 6% excluding Transact. Adjusted operating margins expanded 190 basis points to 23.9%. Excluding Transact, our margin expanded 210 basis points to 24.4%. Adjusted diluted earnings per share were $16.93, up 17% over the prior period. Our full year results reflect our strong execution against our grow, simplify, transform strategic priorities, positioning us well as we entered 2025. 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 and less specifically stated otherwise. Health, wealth, and career revenue grew 3% compared to the fourth quarter of last year. Excluding Transact, HWC revenue grew 6%. For the full year, HWC generated 4% organic growth or 5% excluding Transact, which was in line with our outlook for the segment as we outlined at Investor Day. Our health business grew 18% for the quarter, or 16% excluding book of business activity. All geographies achieved double-digit growth, with new business and strong client retention being the primary contributors. The continued expansion of our global benefits management client portfolio, which we discussed at Investor Day, was a meaningful driver as well. We also saw robust consulting project activity in Europe, and, as expected, Timing of consulting projects and commissions positively impacted our North America results. We expect health to deliver high single-digit growth in 2025 based on our 2024 new business success and our current pipeline and sales focus. Wealth revenue grew 3% in the fourth quarter, driven by low single-digit growth in our retirement business. We saw strong demand for LifeSite in Europe, as well as consulting projects to implement legislative changes. North America also grew on the back of higher levels of project activity. Our investments business delivered low single-digit growth despite a strong comparable due to new business wins and successful new solutions. We continue to expect low single-digit growth in the wealth business. Career delivered 1% revenue growth in the quarter below our expectations. Timing limited growth in the quarter with some sold projects delayed to Q1. For the full year, career recorded 4% organic growth and we are confident that career will continue growing at similar mid-single-digit levels. Benefits delivery and outsourcing revenue declined 2% versus the fourth quarter of last year. Excluding Transact, BD&O revenue grew 1%, with notable growth in project work in benefits outsourcing and new client wins and retirees shopping for new plans in individual marketplace. Excluding Transact, BD&O grew 2% for the full year, 2024, despite facing a significant headwind from a large client that insourced its health and benefits administration, as we've discussed in previous quarters. Looking ahead, we expect BD&O to grow at a mid-single-digit rate. HWC's operating margin for the fourth quarter was 41.9%, an increase of 140 basis points compared to the prior year, primarily driven by transformation savings. For the full year, HWC's operating margin grew by 170 basis points to 29.7%, and by 180 basis points excluding Transact to 31.4%. As we mentioned at Investor Day, for 2025, we expect continued margin expansion in HWC. Moving to risk and broking, fourth quarter revenue was up 7% on an organic basis, or 8% excluding book of business activity on top of a double-digit comparable in the prior year. Operating margin expanded 60 basis points to 33.5%, despite an 80 basis point combined headwind from book of business activity and a decline in interest income. For the full year, risk and broking revenue saw 8% organic growth. Excluding the impact of book of business activity and interest income, R&B's growth rate was also 8%. Corporate risk and broking had a solid quarter, growing 6%. Excluding book of business activity and interest income, CRB revenue grew 8% on top of a double-digit comparable, with contributions from all regions and driven by continued improvement in client retention levels globally and strong new business generation. As Carl mentioned, our specialization strategy continues to lead the way, with facultative, surety, and marine specialty lines having been major contributors to the strong growth performance this quarter. Robust new business activity across a wide range of lines drove growth in Great Britain and Western Europe, which delivered double-digit growth as a whole and in a number of countries in the region with particular strength in facultative, construction, natural resources, financial solutions, FinEx, marine, and aerospace. North America's growth was supported by strong client retention and new business growth. Our international region had strong organic growth across the board with notable double-digit increases in Latin America, Central Europe and Asia, as well as many of our specialty lines. Moving on to our insurance consulting and technology business, revenue was up 11%, led by strong technology sales and modest growth in consulting services. As we discussed at Investor Day, our ongoing investment in technology is driving an intentional mix shift in ICT, creating value for our clients by integrated technology and consulting solutions. Looking ahead, we continue to expect mid to high single-digit growth from both CRB and ICT. R&B's operating margin was 33.5% for the quarter, a 60 basis point increase over the prior year fourth quarter, primarily due to operating leverage from our organic revenue growth as well as transformation savings, partially offset by headwinds from book of business activity and declining interest income. As we outlined in December, we continue to expect to deliver 100 basis points of average annual adjusted operating margin expansion in R&B over the next three years, driven by operating leverage and additional efficiencies, including the deployment of our global broking platform and workflow optimization. Now let's turn to the enterprise level results. Adjusted operating margin for the fourth quarter was 36.1%, a 190 basis point increase over prior year, primarily driven by greater operating leverage and continued benefits from our now completed transformation program. We had $27 million of incremental annualized transformation savings, bringing the total to $473 million of cumulative savings since the program's inception. Foreign exchange was a headwind to adjusted EPS of $0.08 for the quarter. Based on our current outlook and at current spot rates, we expect foreign exchange to be a headwind of approximately $0.18 on adjusted EPS for 2025. Our US GAAP tax rate for the quarter was 26% versus 15.7% in the prior year. Our adjusted tax rate for the quarter was 21.3% compared to 19.1% for the fourth quarter of 2023. Our full year adjusted tax rate was 21.5%. We expect our 2025 tax rate to be relatively consistent with that of 2024, though we do see some potential for a modestly more favorable rate. As Carl mentioned, W2W completed the sale of the Transact business on December 31st. We believe this sale will help us sharpen our strategic focus, simplify our portfolio, and accelerate our progress towards our long-term free cash flow margin goals. The transaction resulted in a pre-tax loss and related impairment charges of over $1 billion each, which are reflected in the full year gap results. These are one-time non-cash charges and are not included in adjusted diluted earnings per share. We generated free cash flow of 1.4 billion for the full year of 2024, an increase of 184 million from prior year, primarily driven by operating margin expansion, partially offset by cash outflows related to transformation and discretionary compensation payments. Given the sale of Transact, the wind down of our transformation related cash spending and expected annual margin expansion We expect to continue expanding our free cash flow margin in 2025 with partial offsets from residual cash transformation expenses and cash taxes on the Willis re-earnout payment, which will be classified as cash flow from operating activities. During the quarter, we returned $484 million to our shareholders via share repurchases of $395 million. and dividends of $89 million, bringing us to $1.26 billion in capital return to shareholders for the full year. Before wrapping up, I want to take a few minutes to provide some thoughts on 2025. First, we are making some changes to our non-GAAP metrics to better reflect how we view our core operating performance and to better align with industry reporting. Starting with Q1 2025, we will exclude pension income from adjusted EPS, adjusted EBITDA, and the adjusted effective tax rate. Also, free cash flow and free cash flow margin will reflect cash outflows for capitalized software costs. Please refer to the appendix of our supplemental slides for detailed information on these upcoming changes and the recast of our historical non-GAAP measures. Second, as we discussed at Investor Day in December, we are now in a position to rebalance our capital allocation approach thanks to the success of our growth, simplify, and transform priorities. We intend to maintain share repurchases as the primary form of capital return and a central component of our capital allocation strategy. We expect to allocate approximately $1.5 billion to share repurchases in 2025, subject to marketing conditions and potential capital allocation to organic and inorganic investment opportunities. We plan to continue to invest in talent and our platform to drive sustainable growth and expand margins. We will also increasingly emphasize M&A aligned with our strategic priorities of improving our business mix, expanding our reach across the insurance value chain and enhancing our margins and free cashflow. As part of our investment program, we will be making initial investments in our reinsurance joint venture to support its development as a startup venture, which we expect to be a 25 to 35 cent headwind to adjust DPS this year. Finally, We introduced our financial framework at Investor Day in December and have provided some financial considerations for 2025 in our release and slides, most of which I've discussed in these comments as well. In closing, we are very pleased with our strong business performance in 2024 and expect this momentum to continue in 2025. With that, let's open it up for Q&A.