Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q3 2023 Earnings Call Transcript

Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q3 2023 Earnings Call Transcript October 26, 2023

Willis Towers Watson Public Limited Company beats earnings expectations. Reported EPS is $2.24, expectations were $2.07.

Operator: Good morning. Welcome to the WTW Third Quarter 2023 Earnings Conference Call. Please refer to the wtwco.com for the press release and supplemental information that was 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.

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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 third quarter 2023 Earnings Call. Joining me today is Andrew Krasner, our Chief Financial Officer. We had a strong third quarter, delivering 9% organic revenue growth and adjusted diluted earnings per share of $2.24, maintaining our top-line momentum as we continue to execute on our strategic priorities. Excluding book of business activity, organic revenue growth at the enterprise level would have been 10%. This solid result was fueled by the great efforts of our colleagues, the strength of our global client model, the investments we've made in talent and technology, and the resiliency of our business. Notably, our bottom-line performance this quarter was driven by 170 basis points of year-over-year adjusted operating margin expansion.

The positive impacts of both our recent cost-saving measures and the growing productivity of our new hires led to a strong finish for the quarter. Additionally, we realized $23 million of incremental annualized savings from our transformation program during the third quarter. This brings the total to $300 million in cumulative annualized savings since the program's inception. We are well-positioned for further adjusted operating margin expansion over the long term, driven by organic revenue growth from our unique offerings and strategic hires, the continued progress of our transformation program, and a strengthened focus on cost discipline. In the near term, we expect year-over-year margin expansion for the fourth quarter and the full year as a result of operating leverage and increasing contributions from our expense management initiatives.

We're pleased with our third quarter performance, and our progress gives us confidence in our ability to drive profitable growth and create value over the long-term. As I touched on last quarter, our focus on specialization and our risk and broking segment has been one of the key drivers of our strong organic growth. We've generated substantial momentum by developing innovative products and services, engaging in strategic partnerships, and building platforms like MGAs, MGUs, and affinity products. For example, one of our major client wins for the quarter included an affinity solution that delivers compelling insurance products via digital channels to customers of a major manufacturer of luxury vehicles. This showcased our specialized expertise in the automotive industry and high net worth personal lines of business, as well as our successful track record in global affinity insurance programs.

Our strategic focus on specialization continues to drive strong growth in our specialty lines, which continue to grow much faster than our average R&D growth. As we've mentioned last quarter, based on the strong market response we've seen to date, we're expanding our pursuit of these initiatives. For example, we recently announced the WTW will launch Verita, a new MGU focused on select industries, which will further advance our specialization strategy in risk and broking in North America. Verita will initially focus on the industry verticals of real estate, hospitality and leisure, financial institutions, and professional services. Our team's deep knowledge of these industries, together with our insurance expertise, will enable Verita to have a comprehensive understanding of our clients' risks.

This will allow us to offer best-in-class, holistic insurance solutions while maintaining underwriting discipline. The target customers for Verita are growing companies seeking more flexible, tailored insurance solutions. And over time, we aim to expand Verita into more industries as we grow the platform. Our analytic tools and expertise in insurance advisory and brokerage give our clients confidence that they're getting the best value for their premium dollars. This quarter, our portfolio was expanded to include the global actuarial review for a leading P&C insurer and the brokerage of a global renewal energy program by a world-class player in the energy sector. Data analytics and specialty expertise are also key growth drivers for our health, wealth, and career segment.

For example, we've had record success for our compensation benchmarking participation in sales, with more than 43,000 companies participating in our surveys at the end of September, and we've introduced new talent intelligence reports, which examine hot skills and high-demand jobs across industries to help our clients make better-informed decisions on work and rewards issues. We've also continued to build our healthcare benchmarking and specialty services. Earlier this year, we enhanced our pharmacy offering with an expansion of our RX collaborative and a new product for mid-market organizations. This past quarter, we launched two new pharmacy partnerships to help plan members save on costs. Another key to our HWC success is the differentiated smart connections we're making across distances and geographies.

A client's simple request for data can lead to additional consulting opportunities for us. It's also done to enhance our solutions systematically. Our updated workforce management offering, which combines financial analysis, health assessment, and communication tools, is but one example that led to millions of dollars of incremental revenue this past quarter. Another example is our life site solution, our defined contribution pooled employer plan. We've expanded life site to the U.S. earlier this year and are pleased to report that we've contracted with our first U.S. client, while we added clients with $2.5 billion of asset value in Great Britain, Ireland, and Belgium. Across WTW, the confluence of innovation and collaboration is driving consistent, sustainable growth.

I'm energized by how our journey to one WTW is increasingly delivering new opportunities made possible by bringing together our diverse capabilities. Finally, I want to touch on capital allocation. As we've said in the past, we'll continue to take a balanced approach with a focus on allocating our capital to the highest return opportunities. In the third quarter, we bought back $350 million of stock and expanded our repurchase authorization, demonstrating that share repurchases remain our top priority. As we enter the fourth quarter, I'm encouraged by the strong client response to the hard work we've done growing, simplifying, and transforming our business. We continue to see momentum building as our unique offerings help clients evaluate and manage their risks and opportunities in a complex macro environment.

We are committed to harnessing this momentum to drive greater operating leverage over time. We believe that our transformation program and disciplined expense management, combined with consistent and sustainable growth opportunities, will support near-term and long-term margin expansion. I want to thank our colleagues for their performance this quarter. I'm truly appreciative of their dedication, service, and continued commitment to our vision. Now, before turning it over to Andrew, I'd also like to acknowledge the escalating conflict in the Middle East. The violence, devastation, loss of life, and impact on innocent civilians are profoundly saddening. Our primary focus in times of tragedy is on the safety of our colleagues and their families.

Thankfully, our colleagues who work in the region continue to be safe. We remain in regular contact and are providing the assistance they need. We support all of our colleagues and clients, as well as their friends and family in the region, as they cope with this difficult situation. And with that, I'll turn the call over to Andrew.

Andrew Krasner: Thanks, Carl. Good morning, everyone. Thanks for joining us today. As Carl mentioned, our third quarter revenue was up 9% on an organic basis, and excluding Book of Business activity, organic revenue growth would have been 10%. This growth reflects the increasing productivity of our new hires and the impact of our strategic focus on specialization in Risk & Broking and increased demand from clients seeking solutions to manage the impact of inflation on healthcare costs, pensions, retirement plans, and human capital in HWC. I'm very pleased with the progress of our transformation program, which delivered $23 million of incremental annualized savings during the third quarter. This brings the total to $151 million in cumulative annualized savings this year.

Our progress on the transformation program and our strength and focus on cost management will help us drive continued operating leverage. I will now discuss our detailed 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 9% on an organic basis and 8% on a constant currency basis compared to the third quarter of last year. We feel confident in our pipeline and anticipate that the segment will finish off the year with good results and in line with historical trends. Revenue for health increased 7% for the quarter or 8% without considering the impact of book of business activity.

We delivered solid growth across all regions driven by the continued expansion of our global benefits management client portfolio, new local clients, expanding consulting work for existing clients and increased brokerage income. Wealth grew 7% in the third quarter. The growth was primarily attributable to strong momentum in retirement, with increased de-risking activity and consulting work in North America. Retirement also grew in Europe as a result of de-risking work, regulatory compliance support, and pension brokerage. Investments grew as a result of new client acquisitions and higher fees, which more than offset headwinds from the negative impact of capital market performance. Career delivered 8% growth in the quarter driven by increased compensation survey sales, executive compensation work, and other work-based advisory services, including pay transparency work and change communication services.

Benefits delivery and outsourcing generated 14% growth in the quarter. The increase was driven by strength in outsourcing for new clients and increased compliance and other project activity in the individual marketplace with growth from higher volumes and placements of life and Medicare Advantage policies. As a reminder, we typically generate about 50% of the revenue for our individual marketplace business during the fourth quarter, and we expect the growth next quarter to be relatively in line with historical trends. HWC's operating margin increased 350 basis points from the prior year third quarter to 23.8%. This margin increase was attributable to both improved operating leverage and transformation savings. Operating leverage was driven by a positive spread with revenue outpacing expense growth and some timing between quarters.

Risk & Broking revenue was up 10% on both an organic and constant currency basis compared to the prior year of third quarter. Excluding the $10 million year-over-year impact from book of business activity, Risk & Broking grew at an exceptional 12%. As a reminder, there were about 10 million of book of business sales in R&B in the fourth quarter of 2022. We currently expect a similar amount of book of business settlements next quarter, and therefore do not expect a meaningful year-over-year impact from book of business activity in Q4. However, the timing for settlements can be difficult to predict and may drag into the following year. Corporate Risk & Broking had another strong quarter, delivering organic revenue growth of 10% and continuing the positive growth trajectory we have seen over recent quarters.

Excluding book of business activity, CRB grew at 12%. This result was primarily driven by strong new business growth and improved client retention. Pricing had a moderate positive impact on the quarter. Interest income was up $19 million for the quarter due to higher rates and the reclassification of interest income previously recorded in corporate. As noted last quarter, due to the cessation of the co-broking agreement with Gallagher, interest income directly associated with Risk & Broking fiduciary funds is now allocated to this segment. The exceptional growth in Q3 was also driven by continued strong return on investment in our specialty lines. Globally, the strongest growth came from our facultative, financial solutions, natural resources, surety and construction lines of business.

Europe had the exceptional quarter with double digit growth in a number of countries led by our P&C retail and direct business, as well as construction, aerospace and financial solutions. International also contributed to strong organic growth led by Latin America. North America benefited from strong new business and increased client retention across most lines of business, despite headwinds in our M&A business and from the impact of book of business activity. In the insurance consulting and technology business, revenue is up 9% over the prior year period, driven by increased sales and technology solutions, including strong new business and higher project activity. R&B's operating margin was 15.7% for the third quarter, an increase of 200 basis points compared to the prior year third quarter.

The expected ramp up in production from our strategic hiring efforts drew greater operating leverage, while tailwinds from increased interest income were offset by headwinds from gain on sale activity and foreign currency. Increased contribution from transformation, as well as targeted expense management measures we put in place earlier this year, also contributed meaningfully to margin expansion. We are beginning to see our expense management actions deliver results, including coordinated efforts on reducing spend for internal travel and vendor spend. We continue to expect these actions to benefit our margin next quarter. Turning back to enterprise level results, our adjusted operating margin was 16.2%, a 170 basis point increase over prior year.

Excluding book of business activity, the margin would have increased 220 basis points year-over-year, benefiting from transformation savings, as well as the impact of interest income. The net result was adjusted diluted earnings per share of $2.24. Foreign exchange had minimal impact on EPS for this third quarter. Assuming today's rates continue for the remainder of the year, we now expect a foreign currency headwind on adjusted earnings for share of $0.07 for the year. Our U.S. GAAP tax rate for the quarter was 15.5% versus 0.7% in the prior year. Our adjusted tax rate for the quarter was 24.3% compared to 16.8% in the prior year, reflecting the non-recurring nature of discrete tax benefits reflected in the prior year rate. We continue to expect the full year adjusted tax rate to be modestly above the prior year.

Our strong balance sheet gives us continued confidence in our ability to execute a disciplined capital allocation strategy that balances capital return to shareholders with internal investments and strategic M&A to deploy our capital in what we believe to be the highest return opportunities. During the quarter, we paid $88 million in dividends and repurchased approximately 1.7 million shares for $350 million. As Carl mentioned, we continue to view share repurchases as an attractive use of capital to create long-term shareholder value. Last month, we raised our repurchase authorization by $1 billion, of which approximately $1.5 billion remains. In the first half of the year, we had about $450 million of share repurchases. We expect a similar amount for the second half of the year, subject to market conditions, among other relevant factors.

Additionally, we repaid $250 million of debt that matured during the quarter with a portion of the proceeds from our May debt issuance. Year to date, we have generated free cash flow of $707 million compared to free cash flow of $337 million during the same period in the prior year. The improvement of $370 [ph] million was due to the non-recurrence of prior year headwinds, including realized losses on foreign currency hedges, payments made in the prior year for certain discretionary compensation, and taxes for one-time gains recorded in connection with the Willis resale and the deal termination payment. These tailwinds were partially offset by increased transformation program-related costs. We are very pleased with our improving business performance and expect this momentum to continue for the rest of the year.

I am very proud of the leadership team and the resolve of our colleagues in the continued support of our clients. Our investments in talent, innovation, and operational transformation have helped drive organic revenue growth, and we are confident that this will translate into sustained growth in margins, EPS, and free cash flow. And with that, let's open it up for Q&A.

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