Q2 2022 Willis Towers Watson PLC Earnings Call
[music].
Okay.
Good morning, and welcome to W. T. W second quarter 2022 earnings conference call.
Please refer to W. T W called C O dot 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 W. Gw's website.
Some of the comments on 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 me 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 our most recent Form 10-K.
And in other Willis towers, Watson's SEC filings during the call.
Certain non-GAAP financial measures may be discussed for a 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.
Now I'll turn the call over to Carl Hess W. Gw's Chief Executive Officer. Please go ahead.
Good morning, everyone. Thank you for joining us for WCW second quarter 2022 earnings call.
Joining me today is Andrew Krasner, our Chief Financial Officer.
In the second quarter W. Tw delivered results as expected built off the solid start we had to our year we.
<unk> organic revenue growth of 3% and adjusted diluted earnings per share of $2 32, as we continued to make progress on our strategic initiatives.
Our transformation program continued expense discipline and operating leverage from new business generation drove 30 basis points of adjusted operating margin.
Despite headwinds from our growth investments.
We also continued to execute against our capital allocation strategy and completed $471 million in share repurchases in the second quarter, bringing total share repurchases for 2022 to $2 7 billion.
Overall, we're pleased with our second quarter performance and remain confident in our ability to deliver against our financial goals in both 2022 and the longer term.
This confidence comes from our ongoing execution against our strategy to grow simplify and transform as well as our continued progress in rebuilding our talent and ramping our productivity.
Through the first half of the year, we've already seen top line benefits from our investments in talent and we expect that benefit to meaningfully accelerate in the second half of the year.
I am, particularly pleased with the result of our transformation initiatives, we realized $35 million of incremental annualized savings during the second quarter, bringing the total to 71 million cumulative since the program's inception or more than double our original $30 million target for 2022.
Accordingly, we are raising our guidance on cumulative run rate transformation savings identified by the end of 2022 from $30 million to over $80 million.
It is important to note that this increase is not simply pulling forward savings previously included in our $300 million medium term target.
Our focus on continuous improvement has helped us identify both areas in which we could accelerate progress as well with new opportunities and incremental sources of value add.
As a result, we now expect the program to generate annual cost savings in excess of $300 million by the end of 2024.
In the second quarter, we also made progress on our grow initiatives, bringing to bear the full capabilities of one W. Tw for our clients through both new and existing solutions.
Our strategic focus on scaling our global lines of business and corporate risk and broking is gaining traction in the market with growth in these lines exceeding the CRB average by 50%.
We also maintained a steady pace of new product launches focus you got high growth high need markets, such as ESG analytics and climate risk.
In April we launched our ESG analytics program at the U S. Women's conference. It is already generating early results by simplifying our client outreach and solving ESG data analytics and reporting needs for clients and it's been part of seven figure wins in two pilot markets in 2022.
We believe this solution has the potential to scale further in multiple markets around the world.
And we're building a world class suite of climate risk management tools and solutions under our climate quantified banner.
Following our development of the climate transition pathways accreditation framework and the launch of our climate transition index with stocks in 2021. This year, we introduced our climate transition value at risk data and software for asset managers and asset owners.
Earlier this month, we announced the acquisition of one of our longtime climate analytics and software partners further enhancing our technical capabilities.
Our investments in this area are positioning us to be a global leader in helping organizations manage climate transition risk.
While new products are important our approach to everyday innovation is also supporting our growth priority as we nimbly respond to legislative and other environmental changes.
As suggested by the everyday label Theres lots happening in this area. So I'll share just wanted to give you an idea.
In response to the U S Health care No surprises Act, we quickly developed and introduced transparency bundles.
Cost effective communication solution that supports clients in meeting their compliance obligations and is easily sold as an add on to our existing clients.
Lastly, together with our strategic growth initiatives, our intense focus on Onboarding talent has built a strong foundation for revenue growth in the second half of 2022 and beyond.
The pace of hiring in the second quarter matched that of the first quarter and our new hires in sales and client management roles doubled compared to the second quarter last year.
We also continued to see the benefit of retention efforts with voluntary attrition at reasonable levels and align with macro trends.
In sum we've been hard at work this quarter changing the way, we operate and creating a leaner more innovative and more agile W. Tw.
I am confident that as these initiatives mature they will improve our long term financial performance as we expect them to deliver significant shareholder returns.
Before I hand, it over to Andrew to discuss our financial results I want to take a moment to talk about the resilience of our business in the face of dynamic and challenging economic conditions.
We believe <unk> is well positioned to weather macroeconomic uncertainty, including both inflation and potential recession.
Our portfolio of businesses is relatively non cyclical we estimate that about 80% of our revenue basis recurring often built upon non discretionary solutions and services in.
In addition, our clients span a variety of industries and geographies and our solutions tend to increase in importance and value in complex economic environments.
For these reasons, our business is less sensitive to economic downturns than companies in some other industries.
As an example in 2020 when U S. GDP declined by 2%, we still posted organic revenue growth of 2%.
Kimberly if you looked at our predecessor companies results from the 2008 2009 economic downturn you'd see that they continue to grow organic revenues by 2% to 4%.
That said, we do have some exposure in economically sensitive lines of business, where the work. We do is discretionary in nature, primarily in our health wealth and career segment, but we would expect the impact of that exposure in a recession to be relatively low.
Overall, our performance in the quarter was aligned with our expectations and reflected our commitment to profitable growth and the successful execution of our strategy.
We continue to build momentum and remain focused on delivering on our long term goals.
In closing I want to express my gratitude to my incredible team of colleagues, who live our values and have delivered every day for our clients in a volatile and challenging environment.
With our sharpened focus we are well positioned to continue driving growth and executing on our transformation.
And with that I'll turn the call over to Andrew for more detail on our results.
Thanks, Carl Good morning, everyone. Thanks to all of you for joining us today.
Before turning to our results, let me take a minute to expand on Carl's comments about <unk> ability to navigate difficult economic conditions with.
With interest rates spiking and equity is exceptionally volatile in the second quarter. We believe the market is clearly signaling concerns about the near term future of the economy and corporate profits.
As Carl mentioned during previous economic downturns, WCW continue to thrive and grow revenues.
We have also repeatedly demonstrated our resilient cost structure, which has allowed the business to maintain its earnings power during challenging economic times.
Spite inflationary pressure on labor costs, and the post pandemic normalizing our variable costs, such as travel we remained steadfast and exercising financial discipline and our outlook on near term and long term margin expansion remains unchanged.
Turning to our financial results. The second quarter was in line with our expectations on an organic basis revenue was up 3% reflecting growth across most of our businesses.
Adjusted operating income was $314 million or 15.
<unk> 15, 5% of revenue for the quarter up 30 basis points from $318 million or 15, 2% of revenue in the same period last year as our growth and expense discipline combined to enhance our profitability.
The net result was adjusted diluted earnings per share of $2.32, representing 9% growth over the prior year.
Let's turn to our detailed segment results note that to provide clear comparability with prior periods all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise.
The health wealth and career, our HW C segment generated revenue growth of 2% on both an organic and constant currency basis compared to the second quarter of the prior year health, which is comprised of our health and benefits broking and consulting business delivered growth of 8%. This includes the gain recorded.
In connection with book of business settlements related to senior staff departures that occurred in 2021.
Excluding the book of business gain health organic growth was 3%, primarily driven by new client appointments and further bolstered by project work.
Wealth, which consists of our retirement and investments businesses had a revenue decrease of 7% for the quarter.
The decline was primarily due to a headwind from outsized performance fees that were recorded in the prior year quarter in our investments business as we've discussed previously.
We expect to see significant improvement in the wealth businesses during the second half of the year driven by new client acquisition and strong market demand for specialists work in response to market volatility and legislative change.
Career, which includes our work in rewards and employee experience businesses also contributed to the revenue growth for the segment, increasing 5% in the quarter.
This growth was largely driven by strong client demand for advisory work data products and software licenses.
And benefits delivery and outsourcing, which encompasses our benefits delivery and administration and our technology and administrative solutions businesses revenue increased 7% further prior year second quarter the increase.
It was largely driven by individual marketplace and reflected growth in Medicare advantage revenue in our direct to consumer business.
Outsourcing revenue also grew.
With new client appointments and growth across the existing client base, we continue to see a macro environment that supports growth opportunities for this business in 2022.
H WCS operating margin was 18, 7% this quarter compared to 18, 6% in the prior period, excluding the impact of foreign currency and onetime fees for book of business gains and performance fees. The margin expanded 80 basis points, driven by strong operating leverage and in year savings from our transfer.
Asian program.
Our near term and long term outlook for each WC remain positive if we expect its market leading solutions and the ongoing demand drivers in its core businesses to continue to drive organic growth.
Looking at risk and broking revenue was up 3% on an organic basis and 1% on a constant currency basis as compared to the prior year second quarter <unk>.
Excluding a modest headwind from book of business settlement activities RMB as organic revenue increased 4%.
Corporate risk and broking or CRB revenue increased 3% book of business settlement activity, which stemmed from senior colleague departures that occurred in 2021 declined nominally from the prior year, but did not meaningfully affect CRB is year over year organic growth rate.
The business generated growth across all regions, primarily from new business with notable strength in our M&A aerospace natural resources and Phoenix specialty lines.
International <unk> grew driven by growth in natural resources and construction lines.
Growth in North America, and Europe came from both new business and improved client retention driven by the expansion of our teams in those regions as colleague retention rates at senior levels have continued to show improvement.
In the insurance consulting and technology business revenue was up 9% compared to the prior year second quarter, driven by increased technology solution sales and higher demand for advisory work.
<unk> operating margin was 19, 7% for the second quarter compared to 23, 1% in the prior year second quarter. The margin decline was driven by our significant investment in new revenue producing and client service talent in Q2, RMB welcome new leaders across all geographies. These key hires will deliver.
Their industry expertise and specialty insights to clients across the globe in lines, such as construction aerospace FINEX natural resources and facultative.
Seeing steady improvements in our client pipeline has strengthened our conviction that the work we've done to rebuild our talent base will yield strong results throughout the second half of the year. We believe these actions will enable us to significantly accelerate organic growth and meet our longer term goal of mid single digit revenue growth for this business.
Now, let's turn to the enterprise level results in Q2, we generated profitable growth with adjusted operating margins, increasing 30 basis points to 15, 5% from 15, 2% in the prior year, primarily reflecting improved operating leverage and our transformation initiatives, which more than offset our.
Increased investments in talent during the period.
We continue to expect margin improvement each year as we work to deliver on our 2024 margin goals as Carl mentioned, our transformation initiatives will be a key contributor to this ongoing margin expansion. Our early efforts in this area have been very successful by accelerating shared services and workforce centralization efforts.
And identifying incremental opportunities to drive collaboration through real estate portfolio optimization, we have far surpassed our $30 million annualized run rate savings goal for the year as a result, we raised both our near and long term targets.
Foreign currency was a headwind on adjusted EPS of 17 through the first half of the year largely due to the strength of the U S dollar against the Euro assuming today's rates continue for the remainder of the year, we've updated our guidance related to our expected foreign currency headwind on adjusted earnings per share from a range of 15 to 20.
<unk> to a range of approximately 20% to 25.
We generated free cash flow of 198 million for the first six months of 2022 and $89 million decrease from free cash flow of $287 million in the prior year. This decrease was due primarily to the absence of cash generation from the now divested Willis re business as well as additional tax payments.
<unk> for both the Willis re sale and the deal termination fee received last year.
We continue to prioritize returning capital to shareholders and executed aggressively on this commitment during the second quarter of 2022, we paid $91 million in dividends and repurchased $2 1 million shares for $471 million.
Of that $471 million $253 million was completed during may and June .
We also raised our repurchase authorization by $1 billion to $6 5 billion of which approximately $2 1 billion remains we continue to be committed to deploying excess capital and free cash flow into our highest return opportunities and still believe that the return we can achieve for repurchasing shares remains highly attractive accordingly.
We expect to continue to deploy free cash flow in this manner subject to market conditions.
Overall, we're off to a good start in 2022 with the performance of the business ramping as we expected it would as we think about the rest of the year, we see macroeconomic challenges that will create demand for our services and opportunities to help clients with.
Continue to feel positive about the investments we have made in talent innovation and operational transformation and are confident those investments will drive organic revenue growth and margin expansion, we have forecast for the year and position us to achieve our 2024 goals.
With that let's open it up for Q&A.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone.
And in the interest of time, please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Okay.
Yes.
Our first question comes from Gregory.
Gregory Peters with Raymond James Your line is open.
Good morning, everyone.
So I guess, what I'd like to focus on is the revenue targets.
Slide eight I think you reiterated the target of achieving a $10 billion revenue.
Results in fiscal year 'twenty four.
And there's a lot of headwinds you've got Forex that's gone against you you have.
To dispose the Russian operations.
Potential weakening in some economies that I'm just curious about.
The pathway it would suggest that organic and total revenue growth has to accelerate the next couple of years to get your objectives. So can you give us some sense of how you think you can get to that $10 billion target.
Sure, Greg and good morning to you.
So when we originally set those targets back in Investor Day, right. We were looking at three years and a lot can happen over three years and some of which I think in terms of economic cycles. We we don't try and predict exactly when theyre going to occur, but we know they can occur. So we tried to chart a path that we thought was reasonably resilient against a variety.
D of economic conditions that might occur over the three year period, and we try not to get too excited about what might happen over quarter to quarter, because a lot of the things will even out FX headwinds can turn into FX tailwind.
Assertion can turn in back into growth and we think all of that can occur and we think we've got a portfolio of businesses that is reasonably resilient against a variety of economic conditions. So for instance, inflation can drive higher asset prices, which will drive in turn higher premiums and thus commissions.
We've got a health care business, where health care inflation will drive up the price of insurance and.
So on and so forth right. So the fact that we've got a diversified portfolio of businesses that have historically has performed pretty well across a variety of places the cycle gives us pretty good confidence now that's not to say Greg that we were there predicting Russia would happen, but we did allow for things like that to happen over a three year period.
It is simply the world's an uncertain place.
Okay, I guess my follow up question.
So many areas to touch on I think let's just focus on the hiring can you give us some additional detail around.
The new hires you've brought in in terms of percentage of the workforce or.
Just some some some granular details on what's going on we see the headlines it's kind of hard for us on the outside to get a sense of the progress being made because an announcement that youre hiring this broker that broker against the context of an organization it.
Employs thousands or tens of thousands of people, it's kind of hard to gauge what's really going on so additional detail that was helpful.
Sure Greg So as we've mentioned our hiring activity during our second quarter was matched that of the first quarter, which in turn was the highest it's been since 2019, our attrition rates on the other the other side are very consistent with industry benchmarks.
We used to gauge our progress there. So hiring has exceeded voluntary terminations are head count continues to increase we focus strongly on the front office and sales and client management jobs, and we're making we think very good progress and some of that yes. It is played out in the in the trade press, but we're net positive.
Positive, we're continuing to see people attracted to the proposition we represent and we were looking to hire people into positions that makes sense for our strategy right on the broker side, we think where we specialize we win and that's the reason our global lines continue to grow faster than our overall business.
And we think we are very attractive employer for people joining that.
We do think that.
As we've said right.
We bring the people on the revenue will follow over time.
And that's one of the reasons, we have confidence in sort of our improving accelerated revenue outlook for the rest of the year.
Got it okay, well those are my two questions. Thanks.
Thanks, Greg.
Okay.
Our next question comes from Paul Newsome.
With Piper Sandler your line is open.
Good morning.
Can you give us a little bit more detail about the impact of some of these.
Book gains on margins.
It looks like there was at least some unusual level of bookings in the quarter and maybe that had it.
Margin impact.
Something that would not necessarily be recurring respectively.
Yep.
Hi, Paul It's Andrew happy to happy to answer that one.
As you think about the margin for the various segments in the enterprise if you exclude the impact of the gain on sale and the performance fees right.
<unk> presented a headwind within the HW C.
The HIV margin as we mentioned during the prepared remarks would've expanded 80 basis points without that headwind.
Risk and broking would have been the same with or without the impact of the gain on sale and at the enterprise level. There would have been 60 basis points of margin expansion.
On an underlying basis, if you will.
Great. Thank you.
My second question actually was thinking about the comments you made.
The economic sensitivity.
In the past.
I think you referred to the predecessor company, where you're thinking of.
<unk> or towers or.
Both of them.
Combined because I think in.
We don't mind they were separate companies.
Youre absolutely right, we were separate and we were citing both in terms of how we performed during that period and I should add right. We've taken steps to further build up our resiliency in the businesses. Since then for instance, if you look at the mix of business between consulting and technology.
Neither our human capital for our insurance consulting and technology businesses, that's shifted far more towards the technology side of things.
Which means we're talking multiyear contracts that are.
Less sensitive to economic volatility and that was a very deliberate step we took to make sure that we thought that the business had.
More sustainability to the growth rates over time, but very deliberate on our part.
Okay I'll, let some other folks ask questions and I appreciate the help as always.
Not at all Paul.
Yes.
Okay.
Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, Good morning, My first question.
For the second half revenue growth so.
Your prepared remarks, you mentioned that you expect.
Matt if I, if I'm, calling to meaningfully accelerate in the back half. So can you give us a sense of how much.
Revenue Youre expecting from the new hires in the second half of this year and then also within your full year guidance of mid single digits.
Any additional gains in the back half of the year.
Yeah, sure Hi, Elyse, it's Andrew I'll start with the.
Concept of hiring translating into into growth.
We have been hiring at a at a fast pace.
But we have a lot of experience onboarding talent and it's always been the case that the revenue lags the hiring activity by several quarters as we said last quarter. We expect the first half of 'twenty two to be a gradual build in the second half to reflect.
All of the accelerating benefits and the narrowing gap with the industry.
What we saw in the first and second quarters remains consistent with those expectations with some positive trends in our corporate risk and broking segment.
We are seeing top line benefit.
Expecting that to meaningfully accelerate in the second half.
Looking beyond that you should expect that the hires we're making now will continue to make a contribution and even larger contribution as we move into 2023.
And your I'm, sorry at least the second question.
I was just curious does the full year guidance. When you say mid single digit organic are you expecting any additional book gains for just what we saw in the second quarter.
Yes, we still expect to see some throughout the remainder of this year that relate to 2021 events as we've seen through the first half of this year.
We do expect them to return to a normalized level overtime.
And just a general comment right as we try to give you our outlook on things.
No known stride and whether it's book gains are performance fees and changes in that.
We're trying to factor that in into our expectations rather than treat those as surprises that we're trying to give you later in the period.
We are.
Okay, and then when you guys. When you guys say mid single digit organic.
I don't want to thank you guys have ever to find that I know some peers had said that.
5% or greater.
Do you see that as four or five like when you set the baseline for mid single digit.
What percentage or anything.
Yes, yes.
You are in the correct range in terms of how we think about it at least.
Yeah.
Okay. Thank you.
Have a great.
Thank you.
Thank you. Our next question comes from David Mora Madden with Evercore ISI. Your line is open.
Hi, Thanks, Good morning, just wanted to follow up a little bit on the hiring.
It sounds like that's accelerated and head count has grown on a quarter over quarter basis.
I'm wondering specifically.
If we're looking at it on a year over year basis are we at a point, yet where we're seeing head count growth on a year over year basis, particularly in producer roles in RMB.
Yes, and yes, thats quite correct, we very deliberately targeted beginning with just about a year ago, making sure that we focused on rebuilding our front office and Thats good.
A good deal of success in doing exactly that.
So we're very happy with the progress we've made in increasing our head count.
Year over year, and our continued to look for the right people to bring on.
To continue to accelerate our growth but.
The direct answer to your question David is yes.
Great. Thanks, that's helpful and then I just wanted.
On the cost saves it's good to see that you guys are ahead of schedule and increase the target the $300 million target it sounds like.
The incremental upside is coming from some of the real estate optimization that you guys are doing could you just remind me of the 300 million plus I guess now over $300 million of cost saves how much is coming from real estate optimization.
And what does that imply about how much of your real estate footprint footprint you plan to cut.
So as we identified at our Investor Day presentation, We've got three major buckets with respect to the transformation program. We've got real estate our footprint. There we've got technology and what we can do to accelerate our journey to the cloud and standardized technology across the organization and we've got.
Operational efficiency measures that we're taking.
As we look toward our improved outlook, we see potential in all of these not just real estate you are correct that real estate was the first element of the program, we could move on and we have acted expeditiously, but our improved outlook for.
Over $300 million. So the program is from all those cylinders not just the real estate program in isolation.
Got it and just to follow up on that is it.
I remember there was a $180 million to $200 million of the 300 was coming from real estate.
Just real estate optimization.
Any sort of sense for how much of your total real real estate footprint you plan to you plan to cut.
That's embedded in that outlook.
Yes, I think the your reference to the 180, there is probably a ballpark figure based on.
Some graphical representation of what we put out there.
As we think about our footprint it.
It is a meaningful reduction in our footprint, we won't get into specifics in terms of what percentage of our real estate portfolio that is but it is quite significant.
And as Carl has discussed in the past right the.
Sort of Reconfiguring of that workspace that remains after the fact to foster client interactions and collaborations with our with our colleagues.
Yes, we're actually taking the call here.
David from our Philadelphia Office was one of the early conversions, we have made towards looking towards the new footprint.
It's actually a great place to meet people.
Great. Thank you.
Our next question comes from Robert <unk> with Goldman Sachs. Your line is open.
Hi, good morning.
Could you talk about that.
And takes on free cash flow in the quarter and how you see free cash flow.
Growing throughout the remainder of the year.
Yes, absolutely Robert Thanks for the question.
The decrease in free cash flow was primarily driven by the elimination of cash generation from <unk>, which was divested as well as some additional tax payments, resulting from both the Willis re sale and the receipt related to the termination.
Payment from the business combination.
So that's what's really driving that change our focus as you can imagine remains on our long term goal of the of the $5 billion to $6 billion by 2024 that we said at Investor Day.
As opposed to any sort of short term performance or volatility that may arise quarter to quarter.
Got it. Thank you and then just a second question going back to the transformation initiative.
The comments were that the savings were in a pull forward of savings. So I guess my question is is it fair to assume that the $50 million increase in your 2022 savings target also is a $50 million increase to the $300 million run rate and then.
In an upside scenario.
How much more savings do you think you could you could get here because it looks like youre getting youre finding additional savings.
Yes, so the increase for the current year is a combination of things that we've been able to accelerate some real estate some non real estate.
But also some new opportunities that we have identified as the as the program has moved along.
So I'm not sure that the direct translation of the excess this year.
Applies uniformly to in excess of the entire program.
We do expect.
Two.
Think about our more detailed guidance going forward and if there is stuff to share there we would do that about when we give.
Thoughts on 2023 towards the end of the year.
Thank you.
Okay.
We have a question from Mark Hughes with Trust your line is open.
Yes. Thank you good morning.
Growth in Medicare advantage I know that's been a.
<unk>.
Dislocated area lately.
Thank you were alluding to the macro environment supporting growth.
That apply to the Medicare advantage as well, how do you see that shaping up particularly.
We've got an early look at maybe enrollment season.
So early days for enrolment season, Mark and good morning, I'll address sort of both of those first of all in terms of the market opportunity.
As we are fond of siting right 10000 people become newly eligible for Medicare every day.
The percentage of Medicare eligible to buy advantage plan, rather than just used traditional Medicare continues to rise. It expect it to go from just over 40% to more than 50% by the end of the decade. So there's clearly growth potential in this market.
Even not even take into account current.
Receiving Medicare.
Now with respect to sort of indications for the year remember most of transaction revenue is fourth quarter Rite AIDS that are.
Basketball of our selling season so.
So Q1 Q2 Q3.
I think early days and really difficult to infer sort of what's happening today into what that might mean for the end of the year when our debt our big sales campaign.
Annual enrollment takes place.
Okay, none of the capital management front.
But a good amount of stock back this quarter or is this a reasonable run rate for the balance of the year.
Okay.
Yes, I think it's I think it's fair to say that the rate at which we have acquired shares during.
The end of last year in the first half of this year.
It would come down as we've said before we expect that to manage a share buybacks using our free cash flow generation.
As opposed to the large amount of cash that we had on our balance sheet from.
The sale of Willis re and the termination payments. So I think thats a good way to think about.
Okay. Thank you very much.
Thank you.
Okay.
Our next question comes from Iran, Kinner with Jefferies. Your line is open.
Hi, good morning, everybody.
My first question.
Going back to the.
Cost save target that now increasing to above $300 million by the end of 2024.
What does that mean for the operating profit margin target of 24% to 25 is that also increasing and if not what.
<unk>.
No.
The the profit margin.
<unk> target out in 2024.
A range right. So it provides for.
Variability in opportunities that we may uncover along the way. So I think I think the right way to think about that is still the 20% to 25% target.
And one point I'd, just like to make about the transformation program in general while this is a three year program. We don't anticipate at the end of it we're going to be done finding opportunities for continued margin improvement across the organization.
The entire management team is committed to looking at how we can be the best and most efficient wdw we can be.
And so that's one of the reasons, we've seen additional opportunities.
In the prior quarter.
<unk> have caused us to tell you, where we think we're headed on that but at the end of the day.
Regardless of what the outcome is with transformation program will be continue to look for further opportunities to be an efficient company.
Got it.
And then.
I think both in your prepared comments and in response to a previous question around the margin impact from.
The book gains in H H C W.
Lumped in the book gains with performance fees, when you were making these adjustments.
Just conceptually am I thinking about it correctly that the bookings would have been adjusting those how it would have been a bad guy to margin, but then it's more than offset by a good guy from the performance fee adjustment.
Yes in terms of the headwinds and the <unk> margin I think youre thinking about that right.
The right way to examine all of the one time items is to look at the headwinds and the tailwind and the headwind from the performance fee was larger than the tailwind from gains on sale.
At an enterprise level onto <unk>.
I think it's.
It will be disclosed in the Q that will get filed later today. So you cannot you can pick up that scale from there.
Thank you.
Thank you.
Yes.
We have a question from Brian Meredith with UBS. Your line is open.
Yes. Thanks, two questions here first Carl just curious could you talk a little bit about with client retention levels that looked like and maybe break it out between the two business segments and how thats been trending over the last call. It 12 months and does that also give you some more confidence in your ability to to make that mid single digit organic growth in the second half of the year.
Yes, I'll try to keep that from a qualitative perspective, as we don't disclose retention rates, but.
I look at it this way right last year, we were a year ago, you pretty much of the day, we're at a point of maximum uncertainty for the organization.
Which did have an effect on retention rates in the business.
It clearer destiny and strategy that our clients. So I think I appreciate and like <unk>.
Been extremely helpful in terms of making sure that the core base of our revenue, which is recurring revenue from clients. We think it's about 80% across the organization remains very very strong and they continue to hand us new opportunities to deepen those relationships.
There is a variety across the portfolio. So our for instance, our retirement business is incredibly sticky and remained so over the past several years. Despite any disruption you might have seen.
And we're seeing that play forward and just the exact same way it has over the past few decades right our talent business.
The career at <unk>.
Historically had been more project oriented and so there is just simply a lower retention rate inherent to that business again, which we've addressed through our buildup of our software offerings, which are stickier in nature.
On the.
R&D side right. Our analysis indicates that a lot of our growth is actually coming from new.
Which is a very healthy sign for what we've been doing and as we've stabilized retention rates in the business following.
The last couple of years worth of activity.
That stabilization should lead to the acceleration of growth expected during the rest of the year.
Great. Thanks, and then second one for Andrew I'm just curious.
Sherri income that Youre that youre getting.
What impact did that have in the quarter and maybe on a year over year basis.
The benefits potentially on margins in inorganic growth I imagine there is a nice little pickup.
Yes I.
I don't have all of that detail at hand, Brian , but you are right for every quarter.
25 basis points rate move that we pick up about $4 million of investment income given the investable fiduciary cash. So it has started to have an impact however.
We have to have the <unk>.
Portfolio turnover right to be able to reinvest at the higher rates. So it does take a little bit of time to to work through the P&L, but we are seeing positive impact and momentum there.
Great. Thank you.
Our next.
Comes from Shlomo Rosenbaum with Stifel. Your line is open.
Hi, Good morning, Thank you for taking my questions.
Carl I thought I'd, just ask you a little bit about how youre thinking about the accelerated and incremental cost savings you are generating from the program over the course of this year and just Holistically actually are you thinking about that as hey, anything extra that we find we really wanted to just focus on driving the topline of the business continued higher.
<unk> continued investments or are you thinking that there'll be some of that will drop to the bottom line.
Yes. Thanks, Shlomo good morning, I view this as a bit of an and right. We have a three year target for revenue we have a three year target for margin and we want to chart a sensible course.
That gets us to that at the end of the day, so they're going to be times, where we invest for growth and theyre going to be times, where we will take the savings and recognize that we've been able to permanently transform ourselves to be a more efficient company.
And we want to judge that as circumstances come right. So I think that will be a quarter to quarter thing.
I wouldn't read too.
Individual quarter into a pattern of how we're going to balance those two out but we have a set of goals and we know that there is tension between them and it's our job as a management team to get there at the end of the day and that is an active discussion that Andrew and I have all the time.
Okay.
And then was there any.
Impact to the business by excluding the Russia stuff from last year now as we've talked a lot about book of business, we talked about.
Investment income fees, but was there anything the Russia business that was a negative year over year.
Yes, I mean, we.
When we announced that we were.
Exiting.
The country and the business there.
Disclosed some information in an 8-K that would give you the size of the ongoing impact from a revenue perspective. So yes, there is a bit of a headwind from a revenue perspective.
Most notable in our risk and broking business as you might expect just given the history of our business, they're focused on that part of the market.
Okay. Thanks.
Okay.
Okay.
Our next question comes with from Josh Shanker with Bank of America. Your line is open.
Yes, Thank you and I appreciate some of the color on earlier questions. So I wanted to dig a little deeper on.
On the move from $30 million to $71 million of cost savings so far with.
Opportunity, maybe even over 80 by the end of the year, that's a big change and I guess can you talk about one real estate rationalization.
Restructuring specialists can you walk through what happens that you can find so quickly opportunities to save money.
I'm just curious.
There's a lot of money and congratulations I'm wondering how that works.
Yes, sure I'll start on the real estate side, where.
As we sat down and continuously analyze the real estate portfolio, there were opportunities to reconfigure or exit space that we're economically attractive that we're.
It necessarily apparent to us when we sketched out the program.
At the at the end of last year that drove a meaningful part of it.
And as we moved along there were similar types of situations.
<unk> two <unk>.
In other areas of our business, where we were able to take advantage of some right shoring opportunities that.
It made economic sense for the business and then the other part that drove that was also.
New opportunities right that had hadn't been uncovered at the outset of the program that we were able to identify and execute on relatively quickly.
I would point out.
Before we extrapolate too far right then the next phase of opportunities right will require a more measured approach right things like technology modernization.
Our process optimization.
Don't want to disturb our business momentum and so we will be approaching those in a measured way consistent with the overall timing we have around the program.
Okay, and then I think I know the answer given other questions, but if you have put thing organic growth in the three buckets.
Retention, new business and <unk>.
Rice for what you're selling.
I imagine to get in step with your peers. The element that's been weak so far as the new business production has retention been on par with your expectations are you getting the price.
What are your services.
Yes.
As we look at growth to date, and where we expect the growth to come from price will be a contributor but as you sort of alluded to not the main driver right New business has been in line with our expectations and we will we expect to continue to accelerate given all of the hiring that's taking place as Karl mentioned in the in the <unk>.
Front office.
The retention rates are in line with our expectations. They have improved over the last year. We continue to expect improvement in that metric as we continue through the rest of the year and into into next year.
Thank you very much.
Thank you.
Yes.
Our next question comes from Ryan Tunis with Autonomous your line is open.
Yes.
Thanks, Good morning.
Yes, so back in February in the 10-K, you guys disclosed.
Number of unsold seats I think it was 2800 <unk> could you give us an update on what that number looks like today.
I don't think we have that to hand, Ryan. So we can follow up to the extent.
We've got a comparable before you sure no problem and then.
On the wealth business.
You mentioned some.
Some headwinds do you think it will get better in the second half of the year could you give us some idea of.
Ignoring those headwinds this quarter I think you said it was negative 7% organic but stripping out those headwinds where did you see core organic in the wealth business and into Q.
Okay.
So I think the answer is absolutely absent that performance fee.
It would have been down three and thats, principally due to timing work within the retirement business retirement is the bulk of our wealth business right.
Our retirement business and our our investments business retirement, a bigger business for us and so the timing of that project work.
Is the principal cause of that decline, we actually have visibility into.
A rebound in activity during the remainder of the year.
Thank you.
Our next question comes from Mark Mark Cohn.
With Baird. Your line is open.
Good morning, and thanks for taking my questions.
I have two questions that are macro related the first one is.
Aside from broking are there opportunities to raise prices in any areas.
With any sort of significance given the inflationary environment, we're starting to hear from other companies that have.
I've been taking up price.
Where historically they haven't.
Just wondering if you have any opportunities from that perspective.
We do we have our consulting businesses.
Charge on a variety of basis, but one of them is still good old billable hours and we have the ability to modify billing rates.
Some of that is subject to contracts enforced, which may specify our day rates, but others are prevailing rates and we have that flexibility so and.
That is something we do look at.
And all sorts of economic conditions.
Great.
Sounds like you're Opportunistically, taking advantage of the environment and doing that.
We look to pull all levers in our portfolio when it comes to the revenue side of our business as well as the expense side. So I think being safe answer to that is yes.
Okay, Great and then the second one is.
Obviously, we're in a slowing macro environment. There is no doubt about that there is some debate about whether or not we're entering a recession or not.
I'm wondering how are you thinking about.
Levers.
To continue to hit the targets, obviously youre your you've got a cost reduction program that's.
That's proving to be even more successful, but just wondering if things get a little bit worse.
Historically like Julie's business.
Been highly responsive to the fluctuations and we've made adjustments.
Philosophically how are you thinking about that given that we're in the process of rebuilding head count rebuilding recruiting and retaining this do you still have the flexibility to make adjustments or how should we think about it.
Are you more focused on the three year goal in a year falls a little bit short.
Because of the macro.
That's not really the overriding concern.
I think it's an and and the way we approach. This right. We don't ignore the short term, we certainly don't ignore the long term and we manage the business for the greatest amount of resilience. We can and there is there are as I said there are levers we can pull here right. I mean, one of them is like many firms in the industry a lot of our compensation is variable and.
So as our performance varies.
Are we sure.
The rewards and the burdens of that variation in performance.
So that's one.
<unk> done our best to sort of again transform our businesses. So they are less economically sensitive and julie's done a lot of work over the years and just that and any.
Our rear side of the business the wealth side, the health side or are less economically sensitive and so as I said as we move from a pure consulting provider to a solutions provider.
We've taken some of the economic sensitivity out of that business I think particularly what makes this one a little interesting right now is that.
There is still great demand for our career business in the light of the great resignation and now the great. What are we going to do about inflation.
And so the demand for our services looks very strong over the short term despite the economic clouds, we're seeing.
Great. Thank you.
Thank you and Thats all the time, we have for question I would like to turn the call back to management for closing remarks.
Thank you very much great question today, and really happy for the engagement with you.
I just want to point out that while we think we have made good strides and I appreciate the chance to explain how we are managing this business going forward.
There is more to do right.
As we said earlier in this call right.
Of the three year program. We've outlaid is a good start to achieving all of the Ww can be we think we have a great future ahead, and we look forward to continued dialogue with you as we achieve and have a great day everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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