Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q4 2023 Earnings Call Transcript
Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q4 2023 Earnings Call Transcript February 6, 2024
Willis Towers Watson Public Limited Company misses on earnings expectations. Reported EPS is $5.98 EPS, expectations were $7.04. Willis Towers Watson Public Limited Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to the WTW Fourth Quarter and Full Year 2023 Earnings Conference Call. Please refer to the 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 statements section of the earnings press release issued this morning, as well as, other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings.
During the call, certain non-GAAP financial measures may be discussed. For reconciliation 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.
Carl Hess: Good morning, everyone. Thank you for joining us for WTW’s fourth quarter and full year 2023 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. WTW ended 2023 on a strong note and has begun 2024 with solid momentum, as we continue to execute on our grow, simplify and transform strategic priorities. In the fourth quarter, our world class solutions and maturing investments in talent helped generate robust organic revenue growth and our transformation program and expense discipline drove adjusted operating margin expansion and solid adjusted diluting earnings per share growth. Our performance steadily improved throughout 2023 and today WTW is stronger, more resilient and better positioned to achieve our goals.
We delivered 6% organic revenue growth in the fourth quarter with an adjusted operating margin of 34.2%, up 180 basis points over the prior year. Adjusted diluted earnings per share were $7.44, an 18% increase year-over-year. For the full year, we had organic revenue growth of 8% above our mid-single digit target. We also drove 110 basis points of year-over-year margin expansion to achieve an adjusted operating margin of 22%, fulfilling our commitment of annual margin expansion. Our adjusted diluting earnings per share were $14.49, an 8% increase over the prior year. We believe these results are the product of our strong global client model, our strategic investments in talent and technology, and our team's hard work and relentless focus on best-in-class delivery.
The progress we see within WTW and the enthusiastic response we're receiving from clients give us confidence that our strategies, our people and our investments are aligned with areas that we believe to be the greatest opportunities to drive sustainable, profitable growth and create shareholder value over the long-term. Let me take a few minutes to share the progress we've made and the opportunities ahead of us across our segments. Throughout 2023, our specialization strategy in Risk & Broking was a key driver of growth for both the segment and the enterprise. Our specialty businesses continue to have significantly higher growth than the rest of the segment. This growth, driven in large part by improved client retention, expansion of existing client relationships and our strength and ability to attract new clients and win back old ones, has validated our approach.
As a result, specialization continues to be our primary strategic focus in R&B. It allows us to create value for clients by tailoring solutions that close gaps in their risk management profiles. Together with digitization, data and analytics, we can create efficiencies that enable us to provide more timely and effective insurance services. Our approach to specialization is tailored to each geography in which we operate. In 2023, we built out 12 industry verticals in North America. That process is now complete, with colleagues, processes and infrastructure supporting that alignment. Given the success we've seen to date, we're in the process of launching this industry model across Western Europe, and we'll build out more industry verticals in our international region in 2024.
This model, together with our global reach, has us positioned to win an outsized share of complex mandates, such as our recent win of a multiyear construction project for a key player in the European energy sector. Our cutting edge data and analytics, and our ability to bring together superior industry and product expertise from our specialist teams across several countries set our proposal apart. We're also making good progress expanding into new and differentiated revenue streams, such as our new managing general underwriter, Verita, which is growing steadily since its initial launch in September. Just in the fourth quarter of 2023, we've onboarded brokers, found premiums, and received submissions from both external and our own brokerage clients.
In 2024, we'll focus on their expanding our MGA and MGU strategy to additional geographies. In addition to expanding our business platforms and offerings at Risk & Broking, we're continuing to invest in our people to win new business. Our colleagues who joined us during 2022 and 2023 have become increasingly productive and have brought our talent base back to full strength, as evidenced by the segment's strong organic revenue growth in the second half of 2023. Accordingly, we're now focused we're now focused on strategic and opportunistic talent investments. These investments should enhance our presence capabilities in the lines of business and geographies that we believe offer the greatest growth and profitability potential. We expect these efforts to continue throughout 2024 and beyond.
Furthermore, we see opportunity for continued strong new business growth as we work closely to help clients manage a complex and challenging risk environment marked by increasingly costly natural disasters, social inflation, and geopolitical conflicts. In HWC, we've leveraged the strength of our portfolio, driving growth through and across Health, Wealth, and Career, and BD&O. We've made significant progress by staying focused on our core businesses, by making connections across the organization where it adds value for clients, and by simplifying how we work. For example, we maintained or improved client retention rates across all of HWC, including excellent 98% retention rate for our retirement and outsourcing businesses. We added dozens of clients for our signature package solutions like our LifeSight Master Trust and Global Benefits Management offerings.
We expanded our relationships with more than 1,500 clients to include at least one new service offering, and we increased the size and scope of our hub teams in key centers around the world to enhance capacity and consistency. Our intense focus on cross-selling and making it simpler to do business with us is paying off. Across industries and services, more clients are coming to WTW for a full suite of solutions. Just to mention a few from this quarter, we had a software development firm move its global benefits consulting and brokerage work to WTW and appoint us to support their employee experience through our Embark portal and our Engage software. A major global financial corporation's simple survey request turned into a multiyear engagement for us that includes supporting the client with attracting and retaining talent and the delivery of a fully integrated total reward solution using one of our portals.
And we leveraged our existing pension actuarial and outsourcing relationships with a leading regional health system into support for a rollout of major changes to their health and benefits program, which include the creation of a temporary health and welfare service center. We're confident HWC will provide a solid foundation for growth in 2024. And as we've discussed on prior calls, complexity in the human capital landscape continues to increase, and finding the right solutions to our clients' unique needs in this environment requires a holistic, integrated, and consultative approach. Our ability to move quickly and deliver the right resources at speed helps our clients take advantage of changing conditions and create meaningful opportunities for HWC.
I'll highlight two trends we see as tailwinds for 2024. In our health business, clients are continuing to look for ways to address the increasing cost of healthcare around the world. They're turning to us for help with more effective plan management and specialty solutions that can improve their population's health status. And in our retirement business, clients are increasingly looking to capitalize on the change in the rate environment by derisking their pension plans through annuity buy-ins and buy-outs. With the funded status of the largest U.S. corporate pension plans having ended 2023 at 100%, we expect this trend will support growth in that business during 2024. We also expect our growing momentum with smart connections this quarter to continue into 2024 and also extends to cross-selling between our two segments.
We continue to arm all our colleagues with a solid understanding of our full range of services and the tools to identify and facilitate cross-segment opportunities. Two large client wins in the fourth quarter illustrate the power of this approach. A P&C insurance solution at a major media company that originated with one of our retirement colleagues and a multiyear health benefits design administration and broking engagement that began with a benefits review arranged by a CRB colleague. The progress we've made in enhancing our growth engines at HWC and R&B over the past two-plus years is also enabling us to drive increased margin expansion. During the fourth quarter, we saw a continuing improvement in productivity and a heightened focus on cost discipline.
Similarly, our transformation program continues to drive a significant benefit to our bottom line, enabling us to finish the year strong and to lay the foundation for another year of adjusted operating margin expansion. We realized $37 million of incremental annualized savings from our transformation program during the fourth quarter, bringing the total to $337 million in cumulative annualized savings since the program's inception. Thanks to the success and momentum of the program, we have been able to identify additional savings and accordingly are raising our cumulative run rate transformation savings target from $380 million to $425 million by the end of 2024. Looking ahead, we're confident that we're on the right path to achieve our 2024 targets of continued mid-single digit organic revenue growth, leading to at least $9.9 billion in total revenue, adjusted operating margins of 22.5% to 23.5%, adjusted diluted earnings per share of $15.40 to $17 and additional improvement in our free cash flow margin.
Andrew will touch on our 2024 guidance in more detail shortly. In closing, our performance in 2023 reflected our hard work to grow, simplify, and transform our business over the past two-plus years. I'm proud of the progress we've made and excited about the opportunities ahead. Based on our momentum and our healthy pipeline, I'm confident we can deliver continued, sustainable and profitable growth in 2024 and beyond. I want to thank our colleagues for their dedication, service and continued commitment to our clients and to WTW. And with that, I'll turn the call over to Andrew.
Andrew Krasner: Thanks Carl. Good morning and thanks for joining us today. As Carl mentioned, we finished the year with strong momentum putting us in a solid position to achieve our 2024 targets. And I'd like to share some further details on our financial results. We delivered organic revenue growth of 6% in the fourth quarter, bringing the full year growth rate to 8%. The ramp up in productivity of our investment hires, our specialization strategy in Risk & Broking and the ongoing demand for our benefits and human capital services in HWC continue to fuel the strong top-line growth. Alongside this robust growth, we also drove margin expansion for both the quarter and full year at the enterprise level and in each of our segments.
The result was adjusted diluted earnings per share of $7.44 for the quarter and $14.49 for the year. 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 4% compared to the fourth quarter of last year and finished the year with 6% growth. Going into 2024, we feel confident in the outlook and expect another year of similarly positive results for the segment. Revenue for Health increased 6% for the quarter or 5% when excluding the impact of some modest book-of-business activity. We delivered solid growth across all regions driven by increased brokerage income and the continued expansion of our Global Benefits Management client portfolio in Europe and international.
Wealth grew 5% in the fourth quarter. Retirement growth was driven by increased project work related to derisking activity in North America as well as additional project work and pension brokerage in Europe. Investments also contributed significantly to growth for the quarter reflecting new client acquisitions and higher fees. Career delivered 6% growth in the quarter driven by increased compensation survey sales, executive compensation and board advisory services and project work related to employee experience. Benefits Delivery and Outsourcing generated 3% growth in the quarter. The increase was driven by higher volumes and placements of Medicare Advantage and life policies in our individual marketplace business and increased project activity and benefits outsourcing.
HWC's operating margin increased 150 basis points compared to the prior fourth quarter to 40.5%, primarily driven by transformation savings. For the full year, HWC's operating margin increased 190 basis points over prior year to 28%. Risk & Broking revenue was up an exceptional 12% on an organic basis for the fourth quarter. Interest income was $27 million for the quarter, up $17 million from the fourth quarter last year. Note that beginning with Q1 2024 results, we plan to include the impact of investment income on organic growth at the segment and enterprise levels in our materials. For the full year, Risk & Broking grew 10% organically. We are expecting mid-single digit or better organic revenue growth for the segment in 2024 with continued contributions from our investments in talent and platforms as we identify and pursue opportunities in line with our specialization strategy.
Corporate Risk & Broking had another strong quarter, growing 12% and continuing the organic revenue growth trajectory we have seen in the business over the last couple of quarters. Higher levels of new business activity, improved client retention and increased renewal revenue from rate increases drove robust organic revenue growth. Our specialty lines continue to be major contributors to the strong growth performance, led globally by natural resources, facultative, FINEX, financial solutions, crisis management and construction. Strong growth across CRB in Europe was led by P&C, retail, facultative, natural resources and FINEX. North America CRB benefited from strong new business in construction, natural resources, marine, aerospace, real estate and hospitality and leisure, as we saw strong demand in the industries in which we specialize.
Our international region also contributed with exceptional organic growth, including strong growth across all sub regions led by Latin America. In the Insurance Consulting & Technology business, revenue was up 8% over the prior year period on top of a strong comparable, driven by increased sales in technology solutions, including strong new business and higher project activity. R&B's operating margin was 32.9% for the fourth quarter, a 460 basis point increase over the prior year fourth quarter. We continue to see our hiring efforts yield strong results and rising productivity, driving greater operating leverage. The margin also benefited from transformation, continued expense discipline and tailwinds from increased interest income, partially offset by some modest foreign exchange activity and investments in people and technology platforms.
For the full year, R&B's operating margin increased 60 basis points over prior year to 21.8%. As Carl mentioned, we plan to continue to opportunistically invest in talent and strategic initiatives in the segment in line with our previous announcement. For 2024, we continue to expect margin expansion on a full year basis. Given the business seasonality and uncertain pacing of the investments, please note that the scale of R&B margin expansion may vary from quarter-to-quarter. At the enterprise level, adjusted operating margin for the quarter was 34.2%, a 180 basis point increase over prior year. For the full year, we saw 110 basis points of margin improvement to 22%. The benefits of our transformation program drove a large part of our margin expansion for the year.
We had $37 million of incremental annualized transformation savings for the fourth quarter, bringing the total to $337 million since the program's inception. As Carl mentioned, we are raising our transformation savings target to $425 million by the end of 2024. The additional savings will primarily come from technology modernization and process optimization, which we expect to further reduce our cost structure and help unlock additional long-term growth and cost savings opportunities. The total amount of costs to achieve is now estimated at $1.125 billion. Along with their direct return on investment, these additions to the transformation program will serve as the catalyst for additional improvement by creating an infrastructure from which to drive further efficiencies.
Our unallocated net was $296 million for the full year of 2023, an increase of $31 million over prior year, primarily due to a headwind from a one-time favorable item reflected in the prior year balance. Foreign exchange was a $0.02 tailwind on adjusted EPS for the quarter and a $0.06 headwind for the year. At current spot rates, we expect foreign exchange to have a $0.02 headwind on adjusted EPS for 2024 with no impact in Q1. We recorded $109 million in pension income for 2023, relatively in line with our expectations. For 2024, we expect $88 million in pension income, with the decrease driven by market performance and interest rate movements. Our U.S. GAAP tax rate for the quarter was 15.7% versus 17.7% in the prior year. Our adjusted tax rate for the quarter was 19.1% compared to 22.2% for the fourth quarter of 2022.
Our U.S. GAAP tax rate for the year was 16.8% versus 15.4% in the prior year. And lastly, our adjusted tax rate for the year was 20.9% consistent with prior year. Notably, there were nonrecurring items in Q4, which resulted in one-time tax items in our 2023 adjusted tax rate. Excluding these benefits, our adjusted tax rate would have been 22.4% and our adjusted diluted EPS would have been $14.22. We expect our full year adjusted tax rate in 2024 to be closer to our 2023 adjusted tax rate, excluding these one-time benefits. In 2023, we returned nearly $1.4 billion to our shareholders with share repurchases of 1 billion and dividends of $352 million. We continue to execute a disciplined capital allocation strategy and currently view share repurchases as an attractive use of capital to create long-term shareholder value.
We expect to continue repurchasing our shares in 2024 under our current share repurchase authority of which approximately 1.3 billion remains. We expect approximately $750 million of share repurchases in 2024 subject to market conditions among other relevant factors. We generated free cash flow of $1.2 billion in 2023, representing a free cash flow margin of 12.6% above our target of 12%. The improvement from the prior year was driven by the non-recurrence of one-time headwinds reflected in the comparable period operating margin expansion and improvement in transacts cash flow. These improvements were partially offset by increased transformation program related costs. Turning to our 2024 financial targets. We continue to expect mid-single digit organic revenue growth as we work towards our revenue goal of $9.9 billion plus.
We expect our adjusted operating margin to expand toward the high-end of the 22.5% to 23.5% range. We also expect to deliver on our adjusted diluted earnings per share target of $15.40 to $17. Finally, we expect incremental improvement in our free cash flow margin. Our results for the fourth quarter and full year 2023 are a testament to our continued strategic progress, our operational execution and our colleagues' relentless focus on serving our clients. We are very pleased with our performance and expect our momentum to continue into 2024 as we focus on delivering on our targets. With that, let's open it up for Q&A.
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