Q3 2019 Earnings Call

These forward looking statements are subject to risks and uncertainties actual results may differ materially from those discuss today and the company takes undertakes no obligation to update these statements unless required by law.

For a more detailed discussion of fees and other risk factors investors should review the forward Lookingstatements section.

Form 10-K , and then other Willis towers Watson SCC filings.

During the call you may discuss certain non.

A PE financial measures for reconciliations of the non G.A.P. measures as well as other information regarding these measures. Please refer to the most recent earnings release and other materials and the Investor Relations section of the company's website I'll now turn the.

Call over to John Haley Willis Towers Watson Chief.

Okay. Good morning.

Oh, sorry.

For the third quarter 2019, we continue to deliver solid financial performance.

With 9% overall constant currency revenue growth up 6% organic revenue growth and 120 basis points of adjusted operating margin expansion.

Likewise, we had revenue and operating margin growth in each of our business segments again this quarter.

Our overall this marks the fifth consecutive quarter in which we've generated organic revenue growth of 5% or greater along with improved margins. Our third quarter results reflect our focus to deliver consistent financial results across the company and create value for our clients.

Colleagues and shareholders.

This has been another successful quarter for Willis towers Watson, we continued to see solid performance in key high value added areas that of course, we also completed the acquisition of transact, which generated measurable revenue growth in the two months that followed over.

Overall I'm pleased with the progress we've made toward our full year goals, we continue to see strong demand for our services and solutions.

I feel good about our business and our ability to deliver a solid fourth quarter.

Before taking your through the details of our third quarter results I'd like to tell you about some exciting work, we're doing related to climate resilience as part of a public private collaboration along with leading organizations from across the global financial sector, various governments and other international institutions.

At launch the coalition already had commitments from over 30 organizations across the infrastructure investment value.

This will better direct investments towards infrastructures tech bubble of withstanding changing climate, providing a methodology to quantify the economic and financial benefits will enable financial markets to embed resilience upfront.

To date to that end Willis towers Watson is part of the coalition is committing to three main initiatives. The first is the development of analytical tools, including a physical risk pricing framework and the methodology to prioritize national resilient investment needs pricing the risk posed by climate change will create opera.

The third is working in close collaboration with other related initiatives such as the coalition for disaster resilient infrastructure and the coalition of finance ministers for climate action.

Working with the coalition, we'll be able to harness a unique combination of the rapid advancement of climate risk analytics, coupled with ambitious regulatory and investor led initiatives. So that vulnerable geographies continue to attract investment and the infrastructure is built to withstand future climatic risks, we're well positioned to do our part to help prevent.

Human and financial disasters transform mainstream it infrastructure investment and drive a shift towards a climate Brazilian economy for all countries all of which is aligned with our purpose to create clarity and confidence today for a more sustainable tomorrow.

So now, let's turn to our third quarter results.

Reported revenue for the third quarter was $2 billion up 7% as compared to the prior year third quarter and up 9% on a constant currency basis and up 6% on organic basis reported revenue included $36 million of negative currency movement. Once again this quarter, we experienced growth on on.

Quarter diluted earnings per share were 58 cents, an increase of 76% compared to prior year adjusted diluted earnings per share were $1.31.

Reported revenue for the first nine months of 2019 increased 3% as compared to the same period in the prior year increased 6% on a constant currency basis and was up 5% on an organic basis.

Now, let's look at each of the segments in more detail to provide clear comparability with prior periods. All commentary regarding results of our segments will be on an organic basis, unless specifically stated otherwise.

Segment margins are calculated using segment revenues and exclude unallocated corporate costs, such as amortization of intangibles certain transaction integration expenses, resulting from mergers and acquisitions as well as other items, which we consider non core to our operating results. The segment results do include discretionary comp.

And station.

Product revenue continued to drive revenue expansion in North America, while our increasing market share and global benefits management appointments and new local and regional wins contributed to the growth in other geographies health and benefits revenue growth was also aided by the lower revenue comparable in the prior year third quarter the prior year real.

Sales reflect the impact of adopting new revenue standard AMC six so six which resulted in certain revenue not being recognized.

Talent and rewards revenue grew 9% as a result of increased advisory work in North America, and International Technology and administration solutions revenue increased 11%. This quarter. This growth was build a new business activity, primarily in western Europe in Great Britain on top of high client retention rates.

Retirement returned to revenue growth this quarter with an increase of 1%, which was primarily driven by robust neogen de risking activity in the large planned market.

HCP is operating margin improved by 160 basis points to 27% compared to the prior year third quarter.

As a trusted advisor HCB combines research data and strategic insight to address our clients. Most complex workforce challenges employers must constantly adapt to the inevitable changes brought on by today's business landscape as HCPCS results indicate the segments well positioned to continue growing profitably.

While providing solutions that keep pace with our clients evolving values.

Now, let's look at our corporate risk and broking or CRB, which had a revenue increase of 7% on a constant currency inorganic basis as compared to the prior year third quarter for the first nine months of 2019, CRB revenues grew 5% organically.

North America's revenue grew by 9% in the third quarter, primarily as a result of new business and improved retention the international regions revenue climbed 14% compared to the prior year, there was notably strong performance in construction and natural resources in central and Eastern Europe Middle East Africa comeback.

Combined with continued momentum in Latin America, particularly in Brazil, and in Central America and the Caribbean.

Western Europe contributed 2% revenue growth with the growth driven by strong new business in France, Denmark in Iberia, Great Britain had 2% revenue growth driven by new business in aerospace construction Infinix.

CRB revenue was $650 million $651 million with an operating margin of 12% as compared to an 11% operating margin in the prior year third quarter. The margin expanded due to topline performance coupled with continued cost management efforts. We're pleased with the CRP topline growth for the year as.

Well as the margin expansion for the quarter in the overall year CRB continues to make solid progress towards profitable growth.

Turning to investment risk and reinsurance our IR revenue for the quarter was $325 million, an increase of 3% on an organic basis and 5% on a constant currency basis as compared to the prior year third quarter with meaningful growth across all core businesses.

For the first nine months of 2019, IR, our revenues grew 5% organically.

Reinsurance with growth of 3% continued to lead the segment's growth through a combination of net new business and favorable renewals insurance consulting and technology grew by 4% mainly from technology product sales.

Investment revenue increased 2% with continued expansion of the delegated investment services portfolio on an organic basis wholesale revenue increased by 2% driven by growth in specialty overall, the wholesale business was up 14%, including the results from Miller's acquisition evolve.

Austin Galer, our maximum piece in business grew 1% primarily from increased commission income.

IR had an operating margin of 9% for both the current year and the prior year third quarter. Overall, we're pleased with the financial results of our IR. Our businesses. We expect the solid finish to the areas segment remains focused on executing against its goals, while continuing to develop innovative products and solutions, which will drive long term.

Formats.

Revenues for the benefits delivery in administration segment or BDCA increased by 42% from the prior year third quarter on a constant currency basis on an organic basis revenue grew 2% compared to the prior year third quarter be da's expanded mid and large market client base and increase price.

Correct work led the segment's growth we continued to see strong demand for benefit Outsourcings core service offerings, resulting in several several new client wins, the segment's third quarter growth was muted due to a revenue timing shift in individual market place for the first nine months of 2019 BD a revenue grew six per.

Transacts revenue growth track nicely in the two months following the acquisition, we're very encouraged by Transacts performance in their first couple of months with us and we continued to be excited about their future prospects. As this business continues to gain momentum. So in summary, I'm very pleased with our continue progress we delivered another.

Quarter solid financial performance and we expect a strong finish in the fourth quarter, placing us on track to deliver another positive financial performance for 2019 for the full year. We continue to expect strong revenue growth meaningful margin expansion and significant EPS growth finally, I'd like to thank our colleagues for their continued client folks.

This collaboration engagement and congratulate everyone on a good quarter.

Now I'll turn the call over to Mike.

Thanks, John and good morning to everyone. Thanks to all of you for joining us I'd like to add my congratulations to my fellow colleagues for another good quarter as well as thank our clients for their continued support and trust in us.

Now, let's turn to the financial overview.

Our third quarter continue to represent more positive results recognizing as our seasonally lowest quarter with strong organic revenue growth and robust margin expansion.

Adjusted operating income for third quarter was 231 million or 11.6% of revenue up 120 basis points from the prior year of 194 million or 10.4% as a percentage of revenue.

Now, let me turn to earnings per share EPS for the third quarters of 2019 and 18, our diluted EPS was 58 cents and 33 cents respectively.

For the third quarter of 2019, or adjusted EPS decreased nominally by less than 1% to $1.31 per share as compared to $1.32 per share in the prior year third quarter foreign currency caused a decrease in our consolidated revenue of 36 Melanie.

The 6 million for the quarter compared to the prior year third quarter with a one cent positive impact to adjusted diluted earnings per share this quarter.

As previously guided we continue to be adversely impacted by decrease and noncash pension income and a higher adjusted income tax rate this year.

For the third quarter of 2019 reduced pension income resulted in a 10 cents adjusted EPS decreased compared to the prior year third quarter, while the higher adjusted income tax rate in the third quarter of 2019 also resulted in a 10 cents adjusted EPS decrease compared to the prior year third quarter.

Excluding the combined headwinds from the reduced pension returns of 10 cents higher taxes of 10 cents and Transacts transact dilution of four cents.

Our underlying adjusted EPS growth compared to the prior year third quarter would've been approximately 15% higher.

Turn to our effective tax rate, our U.S. GAAP tax rate for the third quarter was 20.4% versus negative 28.1% in the prior year third quarter.

Our adjusted income tax rate for the third quarter was 22.2% up 15 from 15.9% in the prior year third quarter. As a reminder, the prior year third quarter included a onetime tax benefit from the release of evaluation allowance on certain state deferred tax assets.

We continue to evaluate the impact of global tax reform on our effective tax rate, including the effect of new taxes associated with computations for changes, resulting from update interpretations and assumptions issued by the taxing authorities.

As a result effective tax rate is subject to movements and we will continue to update as more analysis and information becomes available.

Moving to the balance sheet, we didnt have a strong financial position as a reminder, in the first quarter, we implemented the new lease accounting standard. This or is this has this result had no material impact to our operating income, but dissolve increase in liabilities on our balance sheet, which are largely offset by a corresponding increase in assets. The gross up totaled approximately 1.5.

Billion.

During the quarter, we successfully issued a 1 billion and senior notes comprised of 450 million of 10 year notes and $550 million of 30 year notes, we're very pleased with the results of this financing.

We feel that this transaction helps with our efficiency of our capital structure provides additional financial flexibility.

The bond proceeds were used to prepay a portion of them out on based on outstanding under our term loan commitment, resulting from the transact acquisition and repay borrowings under our revolving credit facility.

During the quarter, we generated 262 million their free cash flow up from the prior year third quarter free cash flow of 253 million, bringing our year to date free cash flow to 445 million a decrease on free cash flow of 507 million for the first nine months of the prior year.

The year over year decline in free cash flow is primarily due to higher cash tax payments for income taxes, resulting from us and global tax reform.

2019, first quarter bonus payments and working capital changes.

We're expecting free cash flow to finished strongly in the fourth quarter, which is our highest generating quarter.

Terms of capital allocation, we paid approximately $85 million dividends and repurchased $96 million Willis towers Watson stock in the third quarter of 2019.

For the first nine months of 2019, we repurchased approximately 147 million in Willis towers, Watson stock and paid approximately 245 million and dividends.

We remain committed to deleveraging in the near term and returning our leverage.

Ratio to historic levels.

As we move ahead into the fourth quarter, Let's review, our full year 2019 guidance.

For the company, we continue to expect constant currency revenue growth for 2019 to be in the range of 78% and organic revenue growth in the range of 4% to 5%.

Full year, adjusted operating income margin expected to be around 20%.

The adjusted effective tax rate is still expected to be around 22%, excluding any potential discreet items.

We continue to look at tax planning strategies, which might lower the ready on the longer term basis.

We will provide an update on this in our fourth quarter earnings call.

Expect free cash flow to be in the 1.1 to 1.2 billion range for the current year.

Foreign exchange was one cents tailwind to adjusted EPS in the third quarter of 2019, but was 11 cents headwind to adjusted EPS for the first nine months of 2019.

We expect FX to be around four cents headwind adjusted EPS for the remainder of year, resulting in overall headwind around 15 cents for the full year 2019.

We continue to expect adjusted diluted earnings per share to be in the 10 75 to 11 10 range for the full year 2019.

In summary, we've seen good acceleration in revenue growth and positive operating leverage this quarter, which should continue to position us well to execute on our plans. This year I'm pleased with the results and continued momentum of our businesses Theres still lot of opportunity ahead and remain focused on driving execution now I'll turn the call back over to John .

Thanks, Mike and so with that I'd like to open the call to where your questions.

Please standby will component probably combat compiled acuity roster.

Your first question comes from Mike Xerium skills.

Hey, good morning.

When we think about the the guidance range and for Q any any kind of.

Items, we should be thinking about it but the biggest drivers from.

Technical items accounting items, there should be thinking about or is it just you know.

Yes.

Like I I don't think Theres anything that we would point to like that I think it will be.

Quarter with the normal sorts of things I mean, theres always issues.

Around particularly in CRB. When you can recognize revenue for projects something gets delivered December thirtyth versus January 3rd or something like that there's issues when things go into quarter, but.

That said Mike is there anything the only thing I would add to your comments John would be the annual enrollment period that we that you see happened, but again, it's blocking and tackling as you said John in terms of normal process, but obviously with transact being on board and what we do overall and benefits delivering administration.

We see that will drive in the fourth quarter, Yes, I'm in the fourth quarters are really big quarter for us. So it's an out of the outsized importance for the rest of it but there is there is no nothing nothing that we think as a special feature I guess that we would direct your attention too.

Okay understood in the last question.

In terms of the.

The the big decreasing.

Interest rates globally.

An impact to 2020 expenses or or free cash flow as results of that thanks.

Yes, so I think the the level of interest rates.

With with lower interest rates. It can have a negative effect on how well funded a plan appears to be so.

Thats a bit of initial I don't think that necessarily drives a lot of.

Extra activity, one way or another though.

The added it's not so much the level of interest rates as it's sort of the path they've been following that can lead to.

Increased bulk lump sum work and I think we called out that we did see some increased bulk lump sum work in the third quarter. This year, we expect to see maybe not as much but still some increased bulk lump sum work year over year in the fourth quarter. So we're seeing that effect, but not particularly big effects, one way or another.

John and I would just add.

When you look at we run the and think about our guidance for the year and as you said a big portion of it comes in the fourth quarter in terms of revenue and profits and were up 150 basis points of margin improvement for the first first nine months.

We'll update.

We won at our yearend call in terms of what we think about in terms of looking at fiscal year 2000 and beyond.

Thank you.

Okay. Thanks.

Your next question comes from Mark Mark cone from Baird.

Hi, good morning, and nice quarter I was wondering if you could talk a little bit of belts.

What you're seeing.

You can be on with regards to the more discretionary elements given the macro environment. It sounds like everything is going really well just wondering if there is.

As any headwinds out there that you sense or.

Or the level of confidence in terms of being able to navigate the environment.

Yes, Mark that thanks for the question I think that.

So the way you phrased it reflects how I feel about that I was talking about some of the other day in saying that I thought that given some of the noises you hear about the macro environment.

Things are going surprisingly well in in HCB generally and as you notice talent and rewards, which is really the most discretionary part that we have there was up I think it was 9% for the quarter. So.

We're not seeing a pullback of that I think theres probably.

A couple of effects from that but one of them is I think over the years, we have really delays.

Okay.

The team continues to work very hard and is well received in the marketplace and so we see that continuing into the future.

Terrific, Mike can you talk a little bit about the free cash flow guidance for this year, it's pretty wide range with one quarter to go it sounds like.

Maybe there's some timing aspects but.

Longer term multi year, we're still looking at 15%.

Better, but just wondering if you could just elaborate.

Sure.

Maybe I'll just make a quick comment before I turn it over a but Mike and then Michael jump in on some of the details, but I think mark you're right. It is a it is a relatively a broad range and.

We're on pace for about a billion one we think right now.

But we have some opportunities, we think two and Michael talk a little bit about them too.

Get it up above that.

We've been hit by.

Greater cash tax payments this year than we originally expected and so that's been a that's been a real drag here and that's not going away, we're going to have that that's going to be there for the rest of the year.

But we have some working capital efforts that we think we could maybe improve Mike Doolin, yes, John So I just to emphasize the points a one fourth quarter as is the very large quarter. When you look at us in terms of free cash flow.

As you probably know Mark was greater than 500 million last year for us it was over half our free cash flow and and so thats. The John talked about pacing thats going on there we did have higher cash tax payments that happened in the current year as we saw effective rate was up on a year over year basis and that ultimately translated into more cash tax payments as we.

Filed our returns in the various countries in which we operate we're very focused on our working capital management, it's something that we're continuing to focus on and believe that we will see those improvements.

And Thats why we gave that that that collective range in terms of where we are.

And then lastly can you just talk a little bit by the way Mark Mark could I, just maybe just to interject, though.

One one point that I don't think we addressed in your question, we do feel good about the 15% going forward generally yes.

Thanks Terry.

Can you just talked about transaction and it sounds like that's got good momentum.

How you see that building out over a multi year horizon.

Yes, I mean I. Thank you for asking Mark Mark I mean, we're very excited about transact and to have them. If in the fall than me that started obviously when we were going through the process and and working that as gene works and the team, we're really going through that and what we continue to see was a very strong market.

We see that 10000 retirees are hitting every single day, when we look at our enrollment level. They continue to move at a very very strong pace.

The management team at transact is doing.

Great job and being supported by others.

And VDI and so all signs are just very rarely positive in terms of what we're seeing so very strong market.

We're seeing what we've got set up.

Technology that people want to be able to.

Okay.