Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW first quarter 2025 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 the WTW's website. Some of the comments in today's call may contain forward-looking statements within the meaning of the Private Security 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 details discussed and these other risk factors, investors should review the forward-looking statement section of the earnings press release issued in this morning, as well as other disclosures in the most recent form 10-K on the other Willis Tower Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. A reconciliation of 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. It is now my pleasure to turn the conference over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for WCW's first quarter 2025 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. Julie Gebauer, our President of Health, Wealth, and Career, and Lucy Clark, our President of Risk and Broking, are also joining us for our Q&A session. In the first quarter, we built on our strong finish to 2024 and delivered 5% organic growth, 100 basis points of adjusted operating margin expansion, and $3.13 of adjusted EPS. This performance was in line with our expectations for quarterly pacing and supports our trajectory toward delivering our full year goals. These solid results are the product of our relentless focus on advancing our strategic objectives. In particular, our efforts to enhance efficiency are strengthening our ability to generate operating leverage and support margin expansion. We remain fully committed to our strategy and are confident in the benefits it will bring, and I want to thank all WTW colleagues for their hard work executing our plans. On that note, let me share our perspective on what we're seeing in the market and how it may affect our businesses. As we've discussed in the past, changing economic and regulatory conditions tend to drive demand for our services. The current heightened risk landscape and macroeconomic volatility create opportunities for us to help our clients manage their cost and risk profiles and lead their organizations through change. In risk and broking, concerns about global trade, potential inflationary pressures, and growing geopolitical risks have led to considerable uncertainty and elevated risk for many companies. These risks are not evenly distributed by industry, and we believe our specialty approach has enabled us to provide tailored counsel more quickly than we could have under our previous geographic alignment. For example, the global trade landscape has changed significantly due to new American tariffs on steel and other industrial goods, leading to unexpected cost increases in the rebuilding and replacement of damaged property. This poses a financial challenge for businesses dependent on insured property, And to address these risks, WTW introduced the Tariff Guard Endorsement, a strategic enhancement to commercial property coverage for natural resources companies. Together with the scale and depth of the solutions we offer, WTW is well positioned to continue to serve as a reliable and trusted partner for our clients. In HWC, the growing share of recurring revenue streams provides a stable, resilient foundation for navigating the current environment. Our deep expertise and strong analytical capabilities position us well to respond to the expected near-term increase in demand for benefits cost management projects, pension forecasting, workforce and total rewards modeling, communication support, and more. That said, the heightened geopolitical uncertainty is also creating near-term headwinds in certain areas, particularly in our North America career businesses. where some clients in certain industry sectors may choose to delay discretionary advisory work until they have greater clarity on the macroeconomic outlook. Similarly, we're likely to see a modest decline in assets under management-based fees in our investments business if capital market conditions persist. As a reminder, these businesses are a small minority of HWC. The vast majority of our HWC revenues are recurring in nature with client retention rates in the mid-90s, making us confident in our ability to sustain growth in HWC, even if economic conditions weaken. In addition, over the longer term, we expect macroeconomic changes to spur more demand for our services as clients seek support in responding to the new environment, a pattern we've seen in prior periods of regulatory shift. I'm confident in the resilience of our business and our colleagues, who have proven their ability to navigate challenging circumstances. Our colleagues' hard work is reflected in the momentum we have built in the market and a strong start we've made this year implementing our new strategy to accelerate performance, enhance efficiency, and optimize our portfolio. We've recorded many strategic wins this quarter that highlight our focus on accelerating performance. In R&B, the strength of our specialization strategy and our ability to deliver differentiated value through technical expertise Global collaboration and client centric solutions were key factors in these wins. In Europe, we secured a complex construction mandate tied to what is expected to become the largest urban development in the region. This opportunity was a result of the close coordination of our construction specialists globally and effective cross hauling from our regional colleagues. Also in Europe, we expanded our existing mandate with a major global airline to be the sole broker for property and casualty and local lines, displacing several of our major competitors due to our specialized industry focus, long-term relationship, and more efficient service models. Finally, we were appointed to provide both construction all risk and health and benefits coverage for a key player in the mining and metals sector in West Africa, driven by our innovative solutions, exceptional service offerings and competitive premiums. This appointment demonstrates our ability to offer clients integrated solutions across our R&D and HWC businesses and highlights the value of our global platform. In HWC, we successfully accelerated performance by growing our core business and making smart connections. For example, a global appliance manufacturer who arise on us for global pension actuarial work, chose us for their global benefits management work across more than 50 countries because of the strength of our global network and the strategic insight we delivered on program design and financing. In another example, we unseated a 20-year incumbent in winning the U.S. health and benefits outsourcing for a major hospitality company. They were compelled to make the change because of our engaging digital tools, our enterprise-grade administration platform, and our track record of delivering quality outcomes. Against a wide range of competitors, a major European financial institution selected us to assist them in a multi-year effort to redesign their group-wide job architecture, implement a new remuneration system, and support them with ongoing paid benchmarking. Our industry expertise and business-aligned process set us apart. We continue to focus on enhancing our efficiency through technology. I'm pleased to share that Liberty Specialty Markets is now using Neuron, WTW's digital trading platform, for live trading of D&L and cyber risks. Neuron connects brokers and insurers in real time, streamlining complex specialty risk placements. We expect more insurers to join the Neuron platform this year, further enhancing its value and efficiency. WeDo, WTW's enterprise delivery organization, is also driving greater efficiency. After investing in global service delivery centers for several years to help standardize our service delivery model, we're now better able to leverage automation, data, and AI to further increase margins and deliver more value to clients. For example, as part of WeDo's Write Technology strategy, we implemented a tool to automate critical data audit and validation tasks for retirement clients. we quickly scaled the solution to 22 countries by putting it in the hands of retirement teams in our global service delivery centers. Process improvements like this help WTW increase our agility and reduce costs while securing our clients' sensitive data. With regard to portfolio optimization, I'd like to highlight WTW's purchase of Global Commercial Credit, a specialist broker focused on trade credit and political risk insurance. The acquisition adds to our fast-growing specialty strategy and our geographic footprint in a key growth area of the North American market. Though it's a smaller acquisition, it reflects our focus on increasing our exposure to attractive, high-growth, and high-margin markets within our existing strategy. And finally, our reinsurance JV is progressing well. We're encouraged by the momentum and remain confident in its long-term contribution to growth and earnings. Overall, I'm pleased with how we started the year, delivering results in line with our expectations. We produced solid revenue growth that supported meaningful margin expansion across both segments. I remain confident in our ability to deliver on our 2025 outlook for mid-single-digit organic growth, adjusted operating margin expansion, adjusted EPS growth, and ongoing improvement in free cash flow margins. We're actively monitoring the macro environment and may adjust our outlook depending on how factors like trade negotiations affect economic stability and growth. We're prepared to proactively manage through changes and adjust priorities as needed to stay aligned with our financial objectives. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, and thanks for joining us today. In the first quarter, we delivered organic revenue growth 5% in line with our expectations. Adjusted operating margin expanded 100 basis points to 21.6% over Q1 2024, where 80 basis points excluding the impact of Transact. Adjusted diluted earnings per share were $3.13, excluding the impact of Transact. This reflects an increase of 8% over the prior year. As a reminder, we completed the divested share of Transact on December 31, 2024. which created a $1.14 headwind to adjusted diluted earnings per share for the full year 2025. As Carl discussed, our businesses are primed to perform, and our first quarter results reflect our confidence in the foundation we've established, along with our ongoing commitment to the strategic priorities and financial framework outlined during our investor day. 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 revenue grew 3% compared to the first quarter of last year. Growth for the quarter met our expectations, and we remain confident in HWC's full-year outlook for mid-single-digit growth and continued margin expansion, despite the potential headwinds from economic uncertainty in certain businesses that Carl mentioned. Our health business grew 6% this quarter. All regions saw growth, with double-digit increase outside North America driven by solid client retention, strong new business, geographic expansion in Saudi Arabia, and the ongoing appeal of our global benefits management solution. In North America, client retention and new mid-market sales led to an increase in commissions, while consulting fees increased with more projects focused on cost management and legislative change. With the potential for healthcare inflation to go even higher in the current environment, we expect that demand to continue. We continue to expect high single-digit growth in health for 2025 based on global market momentum, the successful introduction of new products, including our enhanced mid-market solution in North America, and our focus on sales excellence. Wealth revenue grew 2% in the first quarter, driven by low single-digit growth in the retirement business, and high single-digit growth in the investments business. In retirement, strong growth outside North America due to increased de-risking activity and growth in our life site solutions was partially offset due to the expected negative timing impact of project activity in North America relative to the prior year. Our investments business delivered high single-digit growth due to new product launches and the positive impact of favorable capital markets performance in the quarter. While the recent market volatility may impact second quarter results, particularly for investments, we continue to expect low single-digit growth in the wealth business for the year. Career growth was 1% this quarter, largely in line with our expectations. While growth was tempered somewhat as economic uncertainty led some clients to defer advisory work, we continue to see healthy demand in areas such as pay transparency, incentive design, and pay benchmarking. Revenue growth is expected to be weighted towards the second half of the year due to the typical seasonality and compensation surveys and timing of project work. As Carl highlighted, the lack of economic and policy clarity may impact the growth of the career business in the short term. However, support for legislative changes and cost management will continue to create demand. And as we highlighted in Investor Day, Our focus on product and technology offerings will further mitigate the downside risk associated with the uncertainty. Nonetheless, we see a wider range of potential outcomes for career this year and anticipate growth in the low to mid single digit range. Benefits delivery and outsourcing saw 1% growth versus the first quarter of last year. BZNO revenue benefited from increased project and core administration work in Europe. We expect growth to accelerate throughout the year with the incidence of special project work to support regulatory changes and the timing of new client implementations. We continue to expect BD&O to grow at a mid-single-digit rate for the year. HWC's operating margin in the fourth quarter was 26.7%, an increase of 160 basis points compared to the prior year, or a 40 basis point improvement, excluding the impact of the transactive vestiture, demonstrating our ability to consistently deliver margin expansion. We have a strong track record of margin expansion in AHWC, and we will continue to build on that during 2025. Moving to risk and broking, first quarter revenue growth was 7%, marking nine consecutive quarters of high single-digit to double-digit growth. Our specialization strategy and our investments in talent, technology, and innovation continue to bear fruit. Corporate risk and broking had another strong quarter, growing 8%, or 9% when excluding both book of business activity and interest income. Notably, this is on top of 9% growth in the first quarter of 2024. CRB's growth was broad-based across all regions. Our specialization strategy remains a key growth driver for CRB, and specialty continues to outpace the rest of the segment's growth. We continue to see sustained client retention rates in the mid-90s and strong new business generation around the world. Globally, our construction, facultative, crisis management, and surety specialty lines were major contributors to the strong growth performance this quarter. From a geographic perspective, North America had a solid start to the year with notable contributions from our natural resources, surety, and M&A businesses. Furthermore, we saw a double-digit growth in our specialty lines across our Great Britain, Western Europe, and international geographies driven by strong new business generation. Moving on to our insurance consulting and technology business, revenue was up 3% across both our technology and consulting practices. As we discussed at Investor Day, our ongoing investment in technology is driving an intentional shift in the mix of offerings in ICT, creating value for our clients by integrating technology and consulting solutions. Q1 growth in ICT was consistent with our projections, and we continue to expect mid-single-digit growth for the full year. For risk and broking in total, we continue to expect mid to high single-digit growth for the full year. R&B's operating margin was 22% for the quarter, a 120 basis point increase over the prior year first quarter. This is primarily due to operating leverage from our organic revenue growth as well as transformation savings partially offset by a combined 100 basis point headwind from foreign currency, lower interest income, and the absence of gain on sale activity. As we outlined at our investor day last 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 quarter was 21.6%, a 100 basis point increase over prior year, primarily driven by greater operating leverage, which includes the benefits of our now-completed transformation program. Regardless of the macro environment, we remain confident in our operational visibility and control, which strengthens our conviction in delivering margin expansion this year. Foreign exchange was a headwind to adjusted EPS of 9 cents for the quarter. Based on our current outlook and current spot rates, We expect foreign exchange to have no material impact on adjusted EPS for the full year, as the $0.09 headwind from Q1 will unwind by the end of the year. Our U.S. GAAP tax rate for the quarter was 21.5% versus 19.9% in the prior year. Our adjusted tax rate for the quarter was 22.7% compared to 22.3% for the first quarter of 2024. We expect our 2025 tax rate to be relatively consistent with that of 2024. Free cash flow was negative 86 million for the first quarter of 2025, a decrease of 50 million from the prior year, primarily driven by the absence of cash collections related to Transact and increased compensation payments. Since Transact historically recorded cash inflows in the first half of the year, followed by larger cash outflows in the second half of the year, Transact's sale will be a net tailwind to free cash flow on a full year basis. As a reminder, free cash flow and free cash flow margin now reflect cash outflows for capitalized software costs for all periods presented in the earnings materials. For the full year, we continue to expect to expand our free cash flow margin, driven by the sale of Transact, the wind-down of transformation-related cash outflows, and expected annual margin expansion, with a partial offset from cash taxes on the Willis re-earnout payment, which have not yet been paid. During the quarter, we returned $288 million to our shareholders via share repurchases of $200 million and dividends of $88 million. As we discussed at Investor Day in December, share repurchases will remain our primary form of capital return and a central component of our capital allocation strategy. We continue to expect to allocate approximately $1.5 billion to share repurchases in 2025, subject to market conditions and potential capital allocation to inorganic investment opportunities. Given our balanced approach to capital allocation, 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 cash flow. In closing, we are encouraged by our business performance in Q1 and expect to achieve our outlook for 2025. With that, let's open it up for Q&A.