Willis Towers Watson Public Limited Company

Good morning. Welcome to the WTW Earnings Conference Call. Please refer to www.co.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 statements section of the earnings press release issued this morning, as well as in the most recent Form 10-K and other subsequent WTWSCC filings. During the call, certain non-GAAP financial measures may be discussed. To provide direct comparability with prior periods, all commentary regarding the company's revenue growth results will be on a non-GAAP organic basis unless specifically stated otherwise. 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 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 2026 earnings call. Joining me today is Andrew Krasner, our chief financial officer. Julie Gebauer, our President of Health, Wealth, and Career, and Lucy Clarke, our President of Risk and Broking, are also joining us for our Q&A session. In the second quarter, we delivered strong results with 5% organic growth, 100 basis points of adjusted operating margin expansion, and $3.35 of adjusted diluted earnings per share, up 17% over the prior year. It was a quarter defined by both marketplace success and cost discipline. with strong enterprise adjusted operating margin expansion despite persistent global market volatility. R&B organic growth of 7% led the quarter with broad-based strength across geographies and lines of business, underscoring the durability of our global specialty model. Health, wealth, and career delivered 4% organic growth this quarter in line with our expectations, powered by continued strength in health. We expanded adjusted operating margins deliver double-digit earnings growth and continue to return capital to shareholders, demonstrating the strategy we've been executing is delivery. Our strong top and bottom line performance this quarter demonstrates the continued progress we've made in embedding AI and automation across the business to help us deliver more effective and efficient solutions for our clients. While we're encouraged by these early benefits, we see an even greater opportunity to deepen the value of our offerings, accelerate performance, and enhance efficiency. As a result, I'm excited to announce Propel, our AI acceleration plan, which we expect to be completed by the end of 2028. Before I dive into the details, let me explain how we got here and why we are announcing this now. Over the past year and a half, Building on our modernized technology and data foundation, we've invested extensively in creating and bringing in new AI tools, including through the acquisition of New Front, to enable us to capture the next wave of productivity and growth. With the latest significant AI advancements, we intend to create a step change in performance. We expect to capture efficiencies and generate approximately $400 million in run rate savings through an investment of approximately $625 billion, reflecting a disciplined cash cost to achieve ratio of about 1.6. We plan to reinvest a portion of the savings generated to support growth, ultimately delivering $350 million in net run rate savings. Together with our continued gains from operating leverage, this puts us on a clear path to an adjusted operating margin of approximately 30% in 2028. These gains are not just financial outcomes. They provide the resources to accelerate innovation across our business. We believe Propel represents one of the most compelling investment opportunities available to us. The combination of growth, productivity gains, and margin expansion we expect to generate offers attractive long-term returns while further strengthening our position with clients. That's why we're choosing to accelerate these investments now. The efficiencies we've previously captured have helped to fund investment and growth, and this plan is designed to amplify that. On recent calls, we've shared some of the benefits of these investments. In HWC, our compensation intelligence tool Rewards AI now serves more than 5,000 client users. roughly double the number we cited last quarter, demonstrating the rapid adoption of our AI solutions and the value they're delivering for clients. We've also realized deficiencies in our core retirement actuarial work, where standardization, process improvement, and automation are allowing us to backfill roles globally at a rate of nine for every 10 levers. In North America, for example, we reduced the time required for core evaluations by 7% in 2025. Artificial intelligence is already delivering value across BDNO with more than 20 AI capabilities now in production and additional solutions being deployed across service centers, member interactions, and administration operations. These technologies, which we package together as our violet suite, are helping to improve service delivery, automate routine work, and enhance productivity. With Violet, we've served more than 12 million plan participants while increasing use of benefit decision support by 52%, resolving more questions at the point of decision and reducing participant follow-ups by 60%. In R&B, we've been leveraging the capabilities of our AI-powered operating platform Neuron, which combines our existing technology with NuFront's Navigator system. Willis Navigator enables us to deploy agents that work across multiple legacy systems, handling the retrieval and task execution that used to consume hours of manual work. The results are tangible. Schedules of insurance that once took four hours are now generated in about five minutes. Real estate premium allocations that used to take two to four weeks are completed in minutes upon receipt of binders and final premiums. and contract reviews that once required lengthy manual redlining are now available on demand with the tool getting smarter over time. And these aren't pilots, they're live and in daily use. One of the key insights from our experience to date in both segments is the power of bringing together business and technology expertise. by forward deploying engineers alongside our client teams to ensure there's both technical and business oversight of the tools we develop. We've been able to not just preserve, but enhance client experience and service quality. This model lets us move faster and have more impact than we believe is possible with a silent approach. Propel represents an acceleration of technology adoption already underway across the company. Building on our technology deployment model and our successful experience to date, we plan to more extensively leverage our proprietary data, our process automation experience, and our AI capabilities to roll out new tools and solutions across our businesses. We expect these efforts to drive WTW's strategy forward to accelerate performance and to enhance efficiency while delivering innovations that improve client outcomes and reinforce WTW's differentiated strengths. Beyond these internal efficiencies, let me highlight how we're applying AI in the work we do for clients across our businesses. In health, wealth, and career, we're further embedding AI in our workflows for improved data injection and analysis, delivering enhanced insights that will allow our teams to provide solutions more quickly while maintaining the high standards our clients expect. were also automating high-value workflows, from benefits calculations to claims processing, while deploying AI agents to support both internal and external administrative processes and benefit communication delivery. Together, these initiatives will enhance our value proposition as we reduce clients' administrative burden, provide faster service, and enable our colleagues to spend more time providing high-value advice to clients. We're already putting this strategy into action as demonstrated by the launch of our AI workforce transformation solution in June. This solution helps clients pinpoint where AI can drive the greatest productivity, accelerate change adoption, address workforce management needs, adapt total rewards programs, and reflect new workforce skills and expectations. AI workforce transformation is built on our proprietary data, expertise across HWC, and tools including WorkView and ChangeView. and provides precise, actionable advice. And we're excited about our recently executed partnerships with TechWolf and SoftTech that will help clients move to action faster than their competition. Just as importantly, we're applying the solution within our own organization to identify similar opportunities to improve how we operate across WTW. In risk and broking, we'll continue to enhance and implement Neuron, our AI-powered operating platform across the entire placement lifecycle from client engagement and broker assistance through carrier submission and claims. Neuron's enabling us to build auditable agent-assisted workflows that simplify complex processes, automate manual work, and equip brokers with intelligent tools that improve speed, accuracy, and client service. CRB has a number of digital placement propositions already live in select countries and lines, including cyber in North America and international property in the United Kingdom, enabling carrier submissions and binding with minimal manual intervention. Digital placement's been operational for over a year, and we plan to quickly expand to more countries and product lines. In ICT, we see an opportunity to leverage our deep domain expertise combined with our leading insurance technology to deliver AI-enabled solutions that help insurers enhance underwriting, pricing, portfolio management and claims, creating new avenues for technology-driven growth. We're also developing agents to operate our tools within our clients' environments. and we're also enhancing how WTW operates internally by embedding AI across our enterprise functions. Through investments in AI solutions for finance, legal, HR, sales and marketing and IT, we expect to improve speed and decision making, improve front office support and create a more scalable and efficient company that can deliver better outcomes for our clients, colleagues and shareholders. As you can tell, I'm excited about the impact we anticipate Propel will have on our business. Let me steal a page from Andrew and share some of the financial highlights. We expect to deliver adjusted operating margin of approximately 30% in 2028 with meaningful benefits in both segments. And we expect a meaningful step up in our free cash flow margin commensurate with our operating margin expansion after the conclusion of the plan. Importantly, as we execute on this plan and realize savings, we'll continue to invest in attractive opportunities over the long term, with approximately $50 million in the savings earmarked for growth investments. Altogether, we anticipate the successful execution of Propel will result in significant improvements in productivity, efficiency, and long-term growth. Andrew will provide more detail on these numbers shortly. Finally, I want to emphasize this is not a change in strategy. We're moving faster using technology, automation, data, and AI in pursuit of two key objectives of our existing strategy, accelerate performance and enhance efficiency. These are mutually beneficial. What we've seen so far is that when we use technology to work more efficiently, it allows us to operate more effectively for our clients. Part of why I'm excited about this plan is that it frees our colleagues to focus on the work that delivers the most value, the analysis, judgment, and solutions clients count on us to provide. And we see the proof of that in our own performance. Times invested in building and expanding client relationships pays dividends. Let me provide you with a few examples from the quarter. In health, wealth, and career, our work and rewards team was selected by a Fortune 5 health solutions leader to anchor a multi-year enterprise transformation. What began as executive advisory work on leveling and compensation expanded into a broader mandate to implement our AI-enabled global grading system, build a career framework, and design incentive compensation. In another HWC win, one of the largest banks in the United States selected us through a competitive open RFP to lead an end-to-end assessment of its pension administration model and define a future state roadmap. We won this engagement against traditional competitors and strategy consulting firms on the strength of our longstanding trusted partnership, our fluency advising large financial institutions, and our proven track record supporting hundreds of pension administration clients and millions of participants. These wins reflect the strength of our trusted client relationships, differentiated technology, and deep expertise tailored to a client's requirements. In risk and broking, our specialization strategy continues to be a key differentiator in the marketplace as we deliver value through our technical expertise, global collaboration, and client-centric solutions. This quarter, we displaced the incumbent broker at a leading global asset manager who selected us for a three-year engagement built on our connected risk intelligence platform, which evaluates thousands of unique insurance program options and identifies trade-offs to maximize program efficiency. The win followed years of sustained senior level relationship building and a tailored demonstration for the client's treasury and risk management teams. We're also seeing strong momentum in two high growth sectors, Digital Infrastructure, and Power and Renewable Energy, where our recent investments in specialized talent and placement capacity are converting directly into wins. In Power and Renewables, we were appointed to build a multi-asset global insurance program for a major infrastructure investor developing a worldwide renewable energy portfolio, a win drawing on close collaboration among our private equity and power and renewables team across the UK, Italy, and France. and on a long-standing client relationship in a highly specialized sector. And in digital infrastructure, that same advisory-led, relationship-first approach won us a large-scale semiconductor fabrication project and a contractor-side placement on a multi-billion dollar data center construction project for one of our largest clients. These wins demonstrate the depth of our relationships and the importance of our specialty focus. Lastly, I want to reiterate our focus on the third objective of our strategy, portfolio optimization. We recently completed our acquisition of SMB Scala in Manzutti, a prominent regional Italian insurance broker, strengthening our footprint and specialist broking position in Italy, one of Europe's largest yet least penetrated insurance markets. Additionally, our new front integration remains on track, with cost synergies pacing mindlessly ahead of plan. Our disciplined and phased approach is already leading to tangible benefits across our business. For example, as you may have surmised from my earlier comments, we've integrated New Fronts Navigator, rebranded as Willis Navigator, now operating as part of our end-to-end Neuron platform, allowing us to streamline more than a dozen legacy systems into one. As part of Propel, we'll continue to evaluate ways to implement this technology in our other areas of our business. as we build the intelligence layer for insurance, risk, and human capital solutions, just as we described when we announced the New Front acquisition. To be clear, the synergies from integrating New Front are separate from and additive to the savings we expect from Propel. Let me conclude by providing some observations on market conditions. Some of the near-term headwinds we called out previously have persisted, with conditions in the Middle East and a softer labor market, leading certain clients to defer discretionary projects, particularly in Korea, where we observed a nearly 50% decline in project work in the Middle East. That said, we continue to see high health care inflation, regulatory change, rapid technological advancements, elevated geopolitical tension, economic uncertainty and market volatility driving robust demand for our advice and solutions. Our emphasis on specialization, data and analytics, and connected advice continues to resonate, especially in a risk environment that's moving faster than ever. For example, our latest directors and officers survey found that geopolitical risk now ranks among the top seven concerns for boards, up from 15th a year ago. And AI is now cited as a very or extremely important risk by well over half of respondents. As clients seek to adapt their businesses to these rapidly evolving challenges, they're increasingly leaning on WTW as a trusted advisor who can bring data, expertise, and technology to the table quickly and efficiently. Thanks to our team's strong strategic execution over the past five years, WTW is already well positioned for today's market, leveraging our proprietary data, specialist expertise, and trusted client relationships to deliver better outcomes. Propel will help us seize the opportunities we see to improve client outcomes, enhance our colleague experience, and create value for shareholders. We remain confident in our ability to deliver mid-single-digit organic growth, continued annual adjusted operating margin expansion, and improving free cash flow for 2026. And with that, I will turn the call over to Andrew.

Thanks, Carl. Good morning, and thanks, everyone, for joining us today. I'll first discuss our Q2 financials before I discuss Propel and how that strengthens our financial outlook. In the second quarter, we delivered organic revenue growth of 5%. Our growth figures throughout are on an organic basis, but I'll note that our recent acquisitions are performing well, contributing approximately three points to reported revenue growth this quarter at both the enterprise and segment levels. Adjusted operating margin was 19.5%. expanding 100 basis points over the prior year. Adjusted diluted earnings per share were $3.35 representing a 17% increase compared to Q2 2025. These results reflect the great client work being performed by our colleagues, our continued commitment to strong operational execution, and the benefits of our investments in talent and technology. Turning to our segment results, starting with health, wealth, and career. Organic revenue increased 4% in the second quarter, with growth driven primarily by continued strength in health and a steady performance from wealth. We remain confident in HWC's full-year outlook for mid-single-digit growth and continued margin expansion. Health grew 8% organically, driven by solid performance across all regions, supported by new business wins and project work on top of our healthy recurring revenue base. This builds on the 8% organic growth achieved in the prior year second quarter. We continue to expect high single-digit organic growth in health for 2026, supported by demand driven by high healthcare inflation and the important role of our specialty solutions in helping clients manage rising health-related costs. Wealth grew 2% organically, reflecting higher levels of retirement-related activity across geographies. Wealth has delivered 3% organic growth for the first half of the year, and we continue to expect growth at the high end of the low single-digit range for the full year 2026, as we anticipate recent trends will persist across the business. Career revenue was flat as higher levels of communications, change, and broad-based pay work were offset by constrained revenue in the Middle East due to the ongoing conflict. It is notable that outside of the Middle East, our career business grew 3% in the quarter with high single-digit growth outside North America. We expect momentum in career to improve in the second half of 2026, supported by our expanding pipeline of opportunities, including regulatory-driven activity, a positive outlook for a compensation benchmarking practice, and our AI workforce transformation offering that Carl discussed. We continue to expect low to mid single digit growth for the full year for career. Benefits delivery and outsourcing grew 1% organically as expanded outsourcing engagements and administration contracts were partially offset by lower individual marketplace commissions outside of the annual enrollment period, which falls in the fourth quarter. This is consistent with our expected pacing for the year. We continue to expect low single digit growth for BDNO for the full year. driven by fourth quarter activity based on our current pipeline for individual marketplace annual enrollment, client implementations, and regulatory-driven project work in our outsourcing business. HWC's operating margin in the second quarter was 24.1%, an increase of 30 basis points compared to the prior year, primarily driven by improved operating leverage and expense discipline. We expect to deliver continued margin expansion in 2026. Moving on to our risk and broking segment, organic revenue growth was 7% for the quarter. Corporate risk and broking delivered organic growth of 7% compared to 6% in the second quarter of last year, driven by new business activity, double digit growth in almost all of our specialty businesses, as well as strong client retention globally. North America led growth from a geography perspective with particular strength in construction, natural resources, surety, and M&A. This quarter's results reflected the sequential acceleration we signaled last quarter, as some of the activity that had been delayed early in the year moved forward broadly as we expected. The pricing environment remains competitive. In the second quarter, insurance rates continued to decline across most lines, with U.S. casualty a notable exception, where rates continued to rise. Despite the softer market, our specialization strategy and the breadth of our specialty offerings position us to keep growing through the cycle. For the first half of the year, CRB generated 4% organic growth, consistent with our full year expectation for mid-single-digit growth. In the second quarter, insurance consulting and technology grew 6% organically, following 5% growth in Q1, primarily reflecting strong software sales and new business wins, including multi-year deals in our technology practice. We continue to expect low to mid-single-digit growth for ICT for the full year. Turning back to RNV's results overall, we remain confident in our full-year growth outlook of mid-single digits and 100 basis points of margin expansion. RNV's operating margin was 22.2% in the second quarter, an increase of 100 basis points over the prior year, driven primarily by operating leverage on strong revenue growth and continued expense discipline, with no meaningful benefit from foreign exchange. Now let me turn to our enterprise-level results. For the second quarter, adjusted operating margin was 19.5%, representing 100 basis points of expansion versus the prior year, reflecting strong operating discipline and expense management. A growing share of this expansion is structural, driven by AI and automation embedded across our operating model. We expect these efficiencies to compound as adoption scales, supporting the margin trajectory we have laid out. Just as important, the capacity these tools free up is being reinvested into higher value client facing work and growth. So the benefit shows up in both our margins and in the solutions we deliver. Foreign currency was a six cent tailwind to adjusted diluted EPS for the quarter. Based on our current outlook and spot rates, we expect foreign exchange will create an incremental tailwind of approximately five cents in the second half of the year, resulting in a tailwind of approximately 35 cents for the full year. Our US GAAP tax rate for the quarter was 19.8% compared to negative 6.8% in the prior year, and our adjusted tax rate was 19.6% compared to 18% for the second quarter of 2025. We continue to expect our adjusted tax rate to be relatively consistent with the prior year. Free cash flow for the six months ended June 30th was $360 million, up $143 million from $217 million in the prior year first half. The year-over-year increase was primarily driven by operating margin expansion. As a reminder, our free cash flow is seasonally weighted for the second half of the year, and we expect a significant majority of full-year free cash flow to be generated in the second half. For the full year, we continue to expect to expand our free cash flow margin even while we begin funding Propel. This improvement reflects operating margin expansion, which preserves our capacity for continued capital return to shareholders. During the quarter, we repurchased $450 million of WTW shares, taking advantage of an attractive opportunity to deploy capital at prevailing market prices. We also paid quarterly cash dividends of $90 million, or 96 cents per share. Our current capital allocation priorities remain unchanged. We continue to expect share repurchases of at least $1 billion for the full year, subject to market conditions and potential capital allocation to organic and inorganic investment opportunities. We continue to view share repurchases as an attractive and disciplined use of capital and we retain significant flexibility to return capital to shareholders as our free cash flow builds through the year. Before turning to Q&A, I want to expand on Propel, which Carl outlined. As he noted, Given the benefits we've seen from our technology investments to date, we are accelerating our focus in these areas to drive growth and productivity across the business. We expect to generate approximately $400 million in run rate savings and reinvest a portion of the savings generated to support growth, ultimately delivering $350 million in net run rate savings by the end of 2028. The cash cost to achieve these savings is approximately $625 million, and we expect to incur approximately $25 million in non-cash charges. The roughly $400 million in savings will be driven primarily by process automation and by redeploying capacity from administrative work to client facing work. As we scale AI and automation across the enterprise, we expect to streamline high volume work, improve productivity, better align our workforce with strategic priorities and enable our colleagues to focus on delivering greater value for clients. We also expect to benefit from a simpler operating model, better use of shared capabilities, lower third-party spend, and over time, the retirement of duplicative tools and legacy technology. Importantly, we view Propel as a highly attractive capital allocation opportunity. Based on the benefits we expect to generate, the returns on these investments compare favorably with other uses of capital available to us. While the costs are recognized through the income statement as incurred, We believe investing in capabilities that enhance growth, improve productivity, and expand margins is the right long-term decision for WTW and its shareholders. While our fiscal 2026 guidance remains unchanged, we're updating our medium-term margin target through 2028 to reflect the benefits of these initiatives. Let me walk you through those changes. We expect the benefits of Propel to begin contributing meaningfully in 2027 and to compound through 2028 resulting in an adjusted operating margin of approximately 30% in 2028. The pacing of the margin improvement will depend on when we take certain cost actions and make reinvestments to drive growth. As we realize these efficiencies, we expect to reinvest in businesses that we've previously called out as investment priorities, where we see durable accretive growth in attractive markets, as well as additional analytics and scalable digital solutions that strengthen our client value proposition. Turning to the segments, let me first level set against our prior outlook. Our prior outlook ran through 2027 and was framed as annual margin expansion of roughly 100 basis points per year in risk and broking and continued incremental margin expansion in health, wealth, and career. Propel gives us the visibility to extend that horizon and target specific adjusted operating margins of approximately 30% at the enterprise level, approximately 35% in health, wealth, and career, and approximately 30% in risk and broking, all in 2028. I want to be clear, these targets reflect more margin improvement than our prior guidance implied, and they build on the goals we laid out previously. While we are already confident in our ability to generate operating leverage, the implementation of FRPEL introduces an incremental margin expansion opportunity that we are well positioned to capture. Lastly, a word on free cash flow. As we said previously, we expect our free cash flow margin to improve in line with our adjusted operating margin. Consistent with that, once the plan is complete and the related cash costs subside in 2029, we expect a significant improvement in free cash flow margin, reflecting the stepped-up adjusted operating margin we'll be generating at that point. Importantly, we do not expect Propel to have a meaningful impact on our near-term capital return plans, including share repurchases. Over time, we expected to enhance our ability to return capital to shareholders. We believe Propel creates a clear path to a more efficient technology enabled operating model while preserving the expertise and client relationships that differentiate WTW. We will remain disciplined on execution, benefit realization, and reinvestment as the program scales. Our second quarter results reflect that same discipline across the business and continue progress against our strategic and financial objectives reinforcing our confidence in delivering on our commitments. With that, let's open it up for Q&A.