Q3 2022 Willis Towers Watson PLC Earnings Call
The conference will begin shortly to raise your hand.
Good morning, and welcome to the W. T. W third quarter 2022 earnings conference call. Please refer to Wdw C O dot com, but the press release and supplemental information that was issued earlier today today's call is being recorded.
And we will be available for the next three months on W. Gw'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 <unk>.
By law.
For more detailed discussions 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 SEC filings.
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.
Refer to the most recent earnings release and other materials in the Investor Relations section of the Companys website.
I will now turn the call over to Carl Hess W. Two W's Chief Executive Officer. Please go ahead Sir.
Good morning, everyone.
Thank you for joining for WCW third quarter 2022 earnings call.
Joining me today is Andrew Krasner, our Chief Financial Officer.
Our third quarter performance reflects the increasing momentum we see in the business and our intense focus on delivering on our commitments.
As projected our organic revenue growth accelerated reaching 6% this quarter fueled by the great efforts of our colleagues and the strength of our global client model and further augmented by the investments we've made in talent and technology.
We generated adjusted diluted earnings of $2 20 per share.
And drove a 110 basis points of adjusted operating margin expansion. Thanks to our transformation program continued expense discipline and operating leverage from new business.
We also continued to execute against our capital allocation strategy completing $369 million in share repurchases in the third quarter.
That brings our year to date total to $3 1 billion.
We're pleased with our third quarter performance and our progress executing our strategy to grow simplify and transform gives us confidence in our ability to deliver against our guidance for 2022 and to drive growth and value creation over the long term.
A year ago at our Investor day, we laid out our strategy for how we take wdw forward and deliver robust shareholder returns.
Before getting into the details of the quarter I want to provide you with an update on these initiatives while it's still early in our journey and there is more work to do we have made substantial progress and are seeing encouraging signs that our investments and actions will yield long term improvement we expect.
Our transformation efforts that made the most immediate impact.
As I mentioned on our last earnings call. Our focus on continuous improvement has helped us identify new opportunities and incremental sources of value as well as areas in which we can accelerate prostate grace.
During the third quarter, we realized $29 million of incremental annualized savings.
This brings the total to $100 million in cumulative annualized savings since the program's inception far exceeding our original $30 million target for 2022.
Accordingly, we are raising our guidance on cumulative run rate transformation savings action by the end of 2022 from over $80 million to approximately $110 million.
The additional transformation savings. We've identified also supported the increase of the total annual cost savings. We expect the program to deliver by the end of 2024 from $300 billion to $360 million and as I said, there is still more work to do and we will continue searching for additional opportunities.
Meanwhile, our simplify and grow initiatives are powering the increasing momentum we see in the business.
One of our key simplify activities has been streamlining shared operations to improve sales and retention outcomes.
Our accelerated growth and robust pipeline demonstrate the progress we've made deploying this more agile model globally.
For our growth initiatives, we remain focused on investment in both core and fast growing markets and innovation to drive differentiation and better client outcomes.
And corporate risk and broking, our investments in specialized solutions and strategic hires for our global lines of business are meaningfully accelerating growth with most lines growing double digits this quarter.
And health wealth and career, we've seen strong uptake of our solutions that are cross sold across the segment and are increasingly bundling products into our core advisory work.
For example, Wdw's global apparel diagnostic tool is a sophisticated model, which provides refined evaluation of comprehensive catastrophe risks.
The bottle clarify its exposure to terrorism and 12 natural perils and includes live event tracking for events, such as Pandemics earthquakes and Windstorms.
We've recently enhanced this tool with hurricane tracking advisory and resiliency, scoring upgrading the sophisticated foundational tool with next level of analytics.
Analytics is a key area for new product development as well, including the recent launch of risk intelligence quantified or risk Iq.
This flexible and crystallized platform provides risk specialists with autonomous access to the breadth of WCW, leading risk and analytic solutions risk IQ puts managers and control of their analytic outputs, providing organizations with the ability to run business critical scenarios and prepare for potential losses.
<unk> is at the forefront when it comes to delivering valuable strategic solutions across this market and risk IQ further highlights our client centric capabilities.
Our new products reflect the evolution of our services to align with the changing needs of our clients.
In addition, our ongoing investments to rebuild our talent base are proceeding as expected.
The pace of hiring in the third quarter matched that of the first half of the year.
We also continue to see the benefit of retention effort with voluntary attrition remaining in line with macro trends.
One grow initiative from Investor day that has not been a focus for us to date is inorganic expansion.
Over the past year, we've developed a strong understanding of where we could benefit from deploying capital, which enables us to be a disciplined and opportunistic buyer.
I will share a more detailed outlook for 2023 next quarter and we continue to believe we will deliver on our long term organic growth and margin expansion expectations.
While we're on this topic I wanted to take some time to discuss our decision to reflect the impact of the Russian divestiture and our 2020 for guidance.
As you know during the first quarter of 2022, we announced our intention to transfer ownership of our Russian subsidiaries to local management and work to identify potential longer term offsets to the impact of the exit.
The transfer was completed in the third quarter and given the current conditions, we do not anticipate resuming operations there in the foreseeable future.
Wdw's operations, Russia, which were almost entirely within our risk and broking segment comprised approximately 1% of consolidated revenue for 2021, and we're highly profitable.
Due to the unusual circumstances under which the divestiture was made there were essentially no proceeds from the transfer.
As a result of this one off event, we are unable to replace the lost earnings through reinvestment of proceeds.
With the transaction complete we believe it is now appropriate to revise the starting and ending point of our long term guidance to reflect the divestiture of Wcw's Russian operations, just as we would any other significant transaction.
I wanted to make it very clear that despite revising our long term targets, we remain committed to delivering the same level of improvement mid single digit organic revenue growth and 400 to 500 basis points of adjusted operating margin expansion as we set out at Investor day.
Page four of the earnings release published earlier. This morning provides further disclosure on the divestiture and the related adjustments to our long term guidance.
Please note that our initial and revised targets exclude the potential effects of fluctuations in foreign currency rates.
The ongoing situation in Russia is a stark reminder of the heightened geopolitical and macroeconomic risks all businesses face today.
I wanted to take a moment to talk about how we're helping our clients navigate this complicated and uncertain landscape.
Our solutions help clients manage their human physical and financial capital to protect and strengthen their institutions and these tools only become more valuable in challenging times.
Inflation is top of mind.
Our clients are increasingly seeking our advice and solutions to manage the impact of inflation on wages healthcare cost pension and retirement plans.
With tight labor markets persisting solving these challenges is a strategic opportunity for clients and we're helping them optimize total rewards spend manage the cost of retirement and medical programs and efficiently fund and finance programs via pooling global underwriting captive strategies and delegated asset management.
Another hallmark of the current environment is how quickly it is changing.
In addition to working with our clients to manage traditional ever present risks, we're seeing strong demand from clients for innovative solutions and tools to help them identify quantify and manage fast moving risks such as more volatile financial markets climate change geopolitical tensions heightened ESG risk and reputation of <unk>.
The image to name a few.
We are rising to this challenge by bringing the best of our organization together globally, creating market, leading analytical tools to help clients make better informed decisions and crafting customized solutions to meet our clients' emerging risks.
Our performance in the quarter demonstrated our focus on delivering on our commitments and our pursuit of profitable sustainable growth.
We believe that the successful execution of our strategy and robust client demand in the face of a very complex risk environment will keep us on track to achieve our guidance for 2022.
We continue to build momentum and remain focused on achieving our goal is to create shareholder value.
And with that I'll turn the call over to Andrew.
Thanks, Carl Good morning, everyone. Thanks to all of you for joining us today.
As Carl mentioned, our clients are grappling with a host of macroeconomic and geopolitical challenges. Unfortunately.
We also continue to grapple with rising commercial insurance rates, while price increases appear to be moderating WCW Q2 commercial lines insurance pricing survey showed an aggregate increase of just below 6%.
Data for nearly all lines continue to indicate significant price increases with the exception of workers' compensation and D&O liability.
The largest price increase came from cyber followed by professional liability in light of these additional pressure point, we continue to focus on helping clients evaluate their options. So they can make better informed decisions about how to best manage their risk portfolios.
Turning to our financial results the third quarter was in line with our expectations on an organic basis revenue was up 6%, reflecting accelerating growth across all of our businesses.
Adjusted operating income was $284 million or 14, 5% of revenue for the quarter up 110 basis points from $264 million or 13, 4% 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 20, representing 27% growth over the prior year.
Let's turn to 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.
The health wealth and career or each WC segment generated revenue growth of 4% are both an organic and constant currency basis compared to the third quarter of last year.
Health, which is comprised of our health and benefits broking and consulting business delivered growth of 6%, primarily driven by increased demand for products and advisory work in North America spurred by clients focus on mitigating likely 2023 cost increases and by U S legislative changes.
<unk> also grew outside of North America, as a result of new client appointments and increases in healthcare premiums.
Wealth, which consists of our retirement and investments businesses grew 3% in the quarter. The growth was primarily attributable to higher levels of regulatory and project work in Europe as well as increased consulting work in North America.
The growth was partially offset by a nominal decrease in our delegated investment solutions business, which was pressured by declines in capital markets.
While we expect the headwind from these declines to persist into the fourth quarter, we see momentum building in the rest of the wealth business. During the remainder of the year driven by new client acquisition and strong demand for our specialist work in response to market volatility and legislative changes.
Career, which includes our working rewards and employee experience businesses also contributed to revenue growth for the segment, increasing 6% in the quarter.
Benefits delivery and outsourcing, which encompasses our benefits delivery and administration and our technology and administrative solutions businesses generated 2% revenue growth over the third quarter of 2021.
The increase was largely driven by individual marketplace and reflected growth in Medicare advantage revenue in our direct to consumer business <unk>.
Outsourcing revenue also increased due to new client appointments and growth across the existing client base. We continue to see an environment that supports growth opportunities for this business for the remainder of 2022 and beyond.
<unk> operating margin was 23% this quarter compared to 26% in the prior period the margin decline primarily to investments in resources and technology to support future revenue growth.
As economic uncertainty looms and market volatility persists companies are dealing with high inflation rates workplace stress caused by labor shortages as well as cost and risk management concerns related to pensions and health benefits.
Against this challenging backdrop H WC, it's helping companies better address employees needs, while managing business realities, our near and long term outlook for each of you see remains positive as we expect its market leading solutions and the ongoing demand drivers in its core businesses to continue to support organic growth.
Briskin Broking revenue was up 6% on an organic basis, and 3% on a constant currency basis compared to the prior year third quarter.
Corporate risk and broking or CRB revenue increased 6%.
The business generated growth across all regions, primarily from new business with double digit growth across most of our global lines of business book.
Book of business settlement activity was due to a senior colleague departures in 2021 and is consistent with the levels seen in the prior year period. Thus it did not affect CRB as year over year organic growth rate.
Both Europe and international <unk> growth with improved client retention, and notably strong new business and natural resources construction and aerospace.
Solid growth in North America was driven by strong contributions from both construction and M&A solutions.
In the insurance consulting and technology business revenue was up 2% on top of a tough comparable of 18% growth in the <unk>.
Prior year third quarter, primarily driven by increased technology solution sales on a year to date basis ICT has delivered strong growth trajectory.
Trajectory continues to point towards a strong finish in the fourth quarter.
<unk> operating margin was 13, 7% for the third quarter compared to 17, 5% in the prior year third quarter margin headwinds were driven by our significant investments in new revenue producing and client service talent.
Throughout this year RMB welcome new leaders and senior contributors across all geographies at both the regional and country level.
Leveraging their industry expertise. These key hires have begun to contribute to our performance, but we expect these contributions will become more meaningful going forward.
The steady improvement in our talent base and client pipeline has strengthened our conviction that the work we have done to rebuild our talent base is gaining traction and will yield strong results.
Now, let's turn to the enterprise level results in Q3, we generated profitable growth with adjusted operating margin, increasing 110 basis points to 14, 5% from 13, 4% in the prior year, primarily reflecting the benefit of strategic portfolio management, which was realized at the corporate led.
<unk> alongside transformation program savings, which were realized at the segment level, but were more than offset by our increased investment 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 and we're encouraged by the success of our early efforts by accelerating shared services and our workforce workforce centralization.
Efforts in addition to identifying incremental opportunities to drive collaboration through real estate portfolio optimization, we have far surpassed our original $30 million annualized run rate savings goal for the year as a result, we raised both our near and long term targets and now expect to deliver approximately 110 million cumulative run rate.
Savings by the end of 2022 and $360 million by the end of 2024.
Foreign currency was a headwind on adjusted EPS of <unk> through the first nine months of the year largely due to the strength of the U S dollar.
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 20% to 25 to a range of approximately 25 to 30.
We generated free cash flow of $337 million for the first nine months of 2022 compared to free cash flow of $1 8 billion in the prior year. This decrease was primarily due to the receipt of the $1 billion termination fee in the comparable period, the absence of cash generation from the now divested Willis re business.
And additional tax payments made this year on both the Willis re gain on sale and the termination fee.
Our U S GAAP tax rate for the third quarter was <unk>, 7% versus 22, 5% in the prior year, our adjusted tax rate for the third quarter was 16, 8% versus 23, 2% in the prior year.
The current year adjusted tax rate is lower primarily due to lower U S expense and excess tax benefit on share based compensation.
We expect the full year 2022, adjusted tax rate to be relatively consistent with our historical rates.
We continue to pursue a disciplined capital allocation strategy that balances capital returned to shareholders with internal investments and strategic M&A to deploy our capital on the highest return opportunities during the third quarter of 2022, we paid $91 million in dividends and repurchased one 8 million shares for $369 million.
We are pleased by our progress with business performance ramping as we expected.
For the remainder of the year, we see macroeconomic environment that is creating demand for our services and opportunities to help clients with our unique combination of solutions.
We feel positive about the investments we have made in talent innovation and operational transformation and are confident these investments will continue to drive organic revenue growth and margin expansion.
With that let's open it up for Q&A.
Thank you, ladies and gentlemen, if you'd like to ask a question at this time, you will need to press star one one on your telephone keypad.
So there is enough time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
And one moment please for our first question.
Yeah.
Our first question coming from the line of Gregory <unk> from Raymond James Your line is now open.
Yes, good morning, everyone.
The first question will be on revenue.
Both the organic and the change in your fiscal 'twenty four.
Targets.
Okay.
Just curious Carl in your comments, you talked about macroeconomic issues, particularly there seemed to be some challenges in Europe et cetera.
And I'm curious.
How you're thinking organic is going to perform especially with some of your businesses overseas in light of these economic conditions and then.
If I think about the fiscal 'twenty four targets.
The revised target.
And implies a compound annual growth rate of 5% or a little bit higher.
Thats not something Thats happened very often in the history of wells Charles Watson. So just trying to bridge the gap between whats going on in the macro environment and what youre, suggesting potential.
Potential for the company.
Yes, sure Greg and good morning to you.
I look at it this way across our key growth drivers, which include strategic initiatives hiring an industry conditions, we do see momentum building that gives us confidence in achieving the targets. We've laid out our strategic growth initiatives are gaining traction for instance, we're making progress on scaling of our global lines of business.
Risks and broking and we do expect the growth in these lines, it's going to continue to exceed the CRB average material and we're also seeing a steady pace of new product launches and we're focusing on high growth end markets like ESG analytics and climate risk.
And what we've seen so far in terms of the performance of our new hires in front office sales and client management roles has reinforced our expectation that the benefits of that hiring activity will be meaningfully accelerate second.
In particular.
Trends in CRB gave us confidence in our improving growth outlook.
Looking macro REIT industry conditions remain generally favorable and our business has historically been insulated from general macro volatility and we're certainly seeing some of that.
The need for sound advice and risk management solutions typically only intensifies during dynamic times, such as these markets and many of our clients look to us for help in navigating and labor markets financial markets and the geopolitical environment.
Each WC, we are seeing strong demand and growth across the H WMC businesses.
The macro environment remains reasonably supportive and the buildup of our technology offerings further enhances our resilience.
And reinforces our confidence in our positioning.
In RMB, we think the company specific headwinds we've had are mostly behind us and expect we will continue to narrow that growth gap as our high reactions gained momentum.
Macro uncertainty is proving to be a bit of a tailwind as our.
Our clients seek to better manage their risk and a highly complex environment.
So just a point of clarification you ran through a lot of information and I appreciate that.
When I think about talent rewards that used to have a lot of economic sensitivity to it how does that bake into your.
Thought process as you had your fiscal year 'twenty four revenue targets.
Greg I'd point out two things right one is that the.
Effects of Covid and new ways of working are stimulated demand for services as our client base is sort of looking to manage their workforce in light of the changes to the nature of full time work in the gig economy. So some of the sensitivity we would have normally seen through the economic cycle.
Actually just hasnt been there this time.
And the second is we have pivoted the business over the years.
Rather pure consulting and project oriented business to be much more reliant on annuity revenue and software.
So it's simply a more resilient business than in the past.
Thanks for that clarification, my second question's just on the other parts of the fiscal 'twenty four.
The revised targets.
The margin.
Is lower.
The free cash flow numbers are lower and I was wondering if you could spend a minute and talk to us about the Gibson.
It gives and takes on those.
Revisions to those parts of your estimates.
Yes, sure Hi, Hey, Greg It's Andrew Thanks for the question.
On the margin it is purely a function of the impact of the Russian business as well as.
When we think the pacing of the incremental transformation savings will come online during during the three year period.
The free cash flow.
Guide change really has three components to it.
The first is the Russian divestiture, where we received no cash proceeds.
And I also had the loss of both the revenue and cash generation for future business, but also the receivables right that we already had accounted for which we are uncollectible.
The second component was the incremental cost to achieve the $60 million of transformation program savings at the same two and a half times rate that we've been talking about so that's an incremental $150 million.
And the third component is timing differences from cash tax payments made this year on both the termination fee and Willis re gain.
Which our Investor day guidance contemplated would incur entirely in 2021.
We've mentioned in our prepared remarks last quarter part of our decrease in free cash flow. This year was due to some of these tax payments taking place this year rather than.
When we had originally anticipated just due to some of the complexity and timing considerations.
Got it thanks for the detail.
Yes, perfect. Thank you.
Thank you and one for next question.
Our next question coming from the line of Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, Good morning, I wanted to go back.
It is a question on the guidance right. So if I look at the operating margin.
The new 2020 for guidance.
At the midpoint you are lowering that by.
$125 million.
And I know, Russia, right $120 million and it's a high margin business, but it seems like that is higher than just losing Russia is there something else going on there and or maybe it's just that the saves or backend loaded but it seems like there is some other earnings that are leaving 24 relative to your prior guide other than chess Russia.
Yes, I think at least it's Andrew I think some of the disconnect there maybe just when.
The timing of the saves incremental saves are coming online.
But the change in margin.
It has really been.
Driven purely by the.
The impact of the Russia the divestiture.
Okay, and then in terms of this current quarter right.
The segment margins for both.
Weaker, but there was lower unallocated expenses.
What is there something going on with the corporate unallocated expenses that drove them down this quarter.
And is that sustainable or was there just something difference between the corporate costs that you downstream to the segment this quarter versus prior periods.
Yes.
Margin expansion in the quarter was driven by the benefits of our transformation program savings and also some strategic portfolio management actions.
Which were more than offset by some of the increased investments in talent.
At the segment level.
We had corporate savings as well, but just not necessarily the same level of reinvestment that you would have seen within within the segments.
There is also the.
The impact of.
Some of these businesses that we decided to exit is coming out of the deal termination, which are not allocated to the new segments as well as the effective management of the stranded costs from the Willis re divestiture.
Are most of the Willis re stranded cost gone at this point.
I would say they are being effectively manage given that we are still in the midst of the transition services agreement with with Gallagher.
Okay. Thank you.
Thank you our next question now.
Our next question coming from the line up.
<unk> with Piper Sandler Your line is open.
Paul Newsome. Your line is open please check your mute button.
Alright.
Good morning, congrats on the quarter.
Sorry to beat a dead horse, but I got confused here.
Following the answer to Lisa's question.
About these expenses.
Impacting the 2000.
24 guidance.
So is it the <unk>.
We're ahead of <unk>.
Taking cost cuts but.
<unk> cost cuts are happening.
Some time.
Later time, perhaps perhaps.
Beyond 2024, and thats affecting the guidance.
And I apologize for my confusion.
Yes, no problem, Paul I was referring to the incremental $60 million.
That we announced on top of the.
Initial 300.
So it was really about the pacing of the incremental $60 million.
And that's it.
Happening sort of after 2024, so it has not.
Helping the 2020 for as much as we would.
Expect.
I think thats the right way to think about it will be more weighted towards the backend of the program rather than during.
During the current period, where near term.
Which I think is something you would expect by savings that we've identified later in the process.
No that makes sense I think we're still struggling a little bit with the math because of the.
It looked like there was quite a bit more than the.
Russian.
Russian loss.
Which is fine but.
It also looks like there was.
So less of an impact from cost cutting.
I guess on steel.
Apologize again through my confusion, but it doesn't seem like.
Numbers are adding quite the same like maybe theres something else in there that we were just missing putting apologize.
Confusion, yes.
Yes, no I think I think you.
You just need to be thinking about the margin on the Russian business in the appropriate fashion in <unk>.
Can triangulate on the re guide on the margin.
Okay.
I'll do that thank you very much I appreciate the help alright, great. Thanks Praful.
Thank you one moment. Please for our next question now next question coming from the line of David <unk> with Evercore ISI. Your line is open.
Hi, Thanks, good morning.
I just wanted to go back to the margin target reduction the one point reduction.
Maybe we could just put some numbers around Russia, some specific numbers, because I'm sort of calculating it being a 30 to 40 basis points.
Adverse impact on the margin so there is a bit more.
At least that I am thinking is in there. So maybe if you could just clarify that.
And then secondly on the fiduciary income.
I think that is something that is going to be a tailwind maybe could you just talk about.
How much of a benefit that that had this quarter.
And also is that I think thats going to increase going forward, that's going to help the margin I'm, assuming that's baked into the guide as well, but if you could just clarify that as well.
Yes sure.
The large <unk>.
Recast.
It is important to keep in mind that the margin on that business as we've said is more than double.
The.
Enterprise wide margin.
So you can use that to get to the re casted margin range.
Then on investment income.
We havent disclosed the specific numbers I think youll see some information in the Q that might be helpful. In framing that we are definitely starting to see some modest benefit from the rising rate environment.
Come through in the financials, but of course as rates rise, we've got to turn it over investment portfolios and that takes time to work through the system fully.
Yes, I mean back to Russia for just one second I mean, you've got to recognize as you think about our Russia business. We had been operating there for over 40 years right.
At a very strong position in the country.
The nature of the business was largely project based work one off.
Starts with a pretty high profit margin.
But it was a minimal local presence required to service business and we were able to.
Leverage our existing global operating infrastructure on the global platform and thus able to do in the country in a very cost effective manner.
Okay.
Got it okay.
Okay, I guess it was much higher than double than I guess, the enterprise wide margin than much higher.
Okay. That's helpful.
And then maybe just switching gears on.
On M&A I, just noticed I mean, the cash balance is very high.
You guys are.
I think under your leverage target by quite a bit.
And yet the buyback I think is definitely a little bit light versus I think just given the cash position and the leverage profile. So I'm wondering are you guys.
Planning any larger scale M&A or I guess why haven't we seen the buyback really ramp up just given the cash on the balance sheet.
So I'll start on M&A, and maybe Andrew can comment a bit about buybacks.
As we laid out.
Dusters Investor day.
Intentional portfolio management to optimize value is fundamental to our simplify initiatives and we're still looking across our options to create value for shareholders and that includes divestitures as well as opportunistic M&A opportunities and now that the markets finally, tilting in favor of buyers a bit that should strengthen our.
Look for opportunities to strengthen our capabilities in key functional areas and important geographies, but.
We're continuing to employ a disciplined capital allocation strategy that balances capital return with internal investments and strategic M&A to look for the highest return possibilities.
And just on the <unk>.
Repurchase front.
Have been.
Pretty pretty consistent in our messaging that share repurchases are going to come at the pace of free cash flow generally speaking unless we find alternative uses for that.
<unk>.
I won't get into the details of the cash balance, but we do consider that cash balance as well as the free cash flow, we're looking at repurchases decisions as well as our financial leverage.
And with rates, where they are.
We're very thoughtful about incremental leverage.
And the cost at that.
It comes with that.
Got it so yes, so the cash target balances kind of $1 5 billion sort of where it ended the quarter is kind of the cash level that you guys think is necessary to run at.
No I don't think I think we can run leaner than that but we do have to keep cash on hand for.
Future obligations as well as funding share repurchases and managing the cash flow.
Okay.
Thank you.
Okay. Thanks.
Thank you and one for our next question.
And our next question coming from the line of Andrew <unk> with Credit Suisse. Your line is open.
Hey, Thank you and good morning.
I'm trying to get at.
Net staffing in the third quarter, how did that improve incrementally and just around that may be.
I think Andrew talked earlier about a.
A survey of Willis's.
Our clients are seeing pricing in the aggregate up 6% on average.
And then you've talked about 6% organic revenue growth so.
With a I interpret that meaning that youre kind of client base has been very stable very.
Very flattish and the uptick in organic revenue has been largely by pricing and exposure growth.
And then the part B if it is net staffing how did that change Q over Q.
So let me start with staffing and we don't do head count on a quarterly basis, we will discuss head count.
<unk>.
Okay.
Hiring has been strong.
And the hiring.
<unk> Q3 match that in the first half.
And.
Its fortified by the fact of.
You can see the benefit on our retention efforts.
Voluntary attrition has remained consistent with the macro environment and the external benchmarks, we used to measure this.
Our year to date hiring has exceeded voluntary terminations our head count.
Tejas increase and sort of getting to the revenue aspect to your question, we anticipate that the contributions equivalent our talent base to become more meaningful going forward.
Alright.
And just just on the dynamics around around growth rates. There is theres different factors pushing and pulling in opposite directions right. So I think we've been pretty clear that coming out of the <unk>.
Breakup of the transaction last year that things like retention rate were challenged particularly.
Particularly in certain geographies and certain lines of business and of course in the opposite direction, you have rate and new business and things of that nature. So there are offsetting factors that contribute to the organic growth profile.
Got it.
And not to not to belabor too much.
The issue.
The issue of the revenue target change Carl you seem.
Somewhat optimistic last quarter that you had.
Some puts and takes where were you really wouldn't have to worry.
About pressures you seem confident that you could meet those 'twenty two targets for 2024, so now as you've made a change due to Russia.
Like to know is.
What what would give us confidence that we're not going to see another <unk>.
<unk>.
For the weaker end.
And if there is another change what might be some of the risks.
That are kind of prominent in your mind right now.
Yes, so when we came up with our initial targets, what we looked at a variety of scenarios.
To what could happen between now and 2024 right different economic outlooks.
All sorts of different things, but I don't think we factored in that we would be divesting a business of the scope and size of Russia for no cash proceeds to reinvest alright.
That I think is inevitable one off that we felt justified in the transparency.
Transparency, we're giving you on recasting targets.
But.
Thought that we were going to have a divestment towards zero, yes was a bit outside the mainstream and frankly, I think that is a bit unique and extraordinary.
So bottom line you feel very confident in 'twenty, four and then with that that extra $60 million of expense saves would that get you back in 25.
That.
Operating margin target of 24 to 25.
We're very pleased with the with.
With the progress we're making.
Okay.
On the expense savings and Thats one of the reasons why we said we'd maintain sort of.
The delta between starting in.
To get there and we actually see more daylight developing that's why we raised 336.
Okay, and maybe if I could just sneak one last in.
Yeah.
And you did Karl you mentioned at the beginning of.
Attractive opportunities for M&A could you could you give us a sense of what areas maybe that had kind of prompted you to see practices.
What pockets of your businesses might compelling.
So what I was speaking of attractive Friday was the fact that valuations appear to be coming down from levels, where we just didn't think that they can be value accretive to us alright.
Alright, and so.
There are opportunities across the span of the businesses. We operate in as we look to what makes sense for us right, it's going to be whether it's a geographic adjacency of an attractive economy.
That will fit our business profile.
Or a specialty area, where we see that fitting in very nicely to what we do very well in the marketplace.
Okay. Thank you.
Yeah.
Thank you and one for next question next.
Next question coming from the line of Mark Hughes with <unk>. Your line is now open.
Mark Hughes your line is open.
Okay. Thank you.
Yes, good morning.
Benefit delivering outsourcing some of your competitors have had.
Jeff there are assumptions around customer longevity and here I'm talking about transact.
Sort of curious your current view about above.
About your assumptions there.
Also curious.
Your view of the competitive environment, as we kind of get into enrollment season, how the.
Our competition look in terms of the push for leads and advertising that sort of thing.
Okay.
Sure. So let me begin with the second part of that and I'll get to your assumptions.
We are.
Quite happy with our positioning on transact and the opportunity.
Again, this is a place where the.
The market addressable to us expands by 10000 people a day, that's how many people become Medicare eligible newly per Medicare every day and the people who are the percentage of people, who decided to buy in a Medicare advantage plan, rather traditional Medicare continues to rise and we expect to go from 40% to.
Over 50% by the end of the decade clearly growth potential in this market.
As you pointed out right there has been some volatility amongst our competitors and the carriers and that does have some effect on us.
Some retention in the market retrenchment in the market with some of our competitors.
That can impact us to our advantage.
But certainly churn in carriers books of business kidney impact our persistency rates, but we have taken steps right I think that put us in a different position to most of our competitors.
We fortified our lead qualification process and have set up a post placement customer care team to make sure that people are satisfied with the coverage there are electric and that plus our disciplined cost management enables us we think to continue growing.
Others have to slowdown to focus on their profitability.
With respect.
Respect to persistency rates right. This is something we examine right within the portfolio.
On a line by line basis.
We.
We use independent actuaries to make sure that we're validating.
Our team's view of what we think the persistence equal pay.
Yes.
We continue to evaluate how the market looks and what that will be.
I appreciate it thank you.
Yes.
Thank you one moment our next question.
And our next question coming from the line of Mark Marcon with Baird. Your line is now open.
Hey, good morning, it's Mark Marcon from Baird.
You mentioned that head count is actually up on a sequential basis relative to Q2.
Salaries and benefits are down by two 4% year over year to 7%.
Sequentially.
The primary reason why salaries and benefits are down on a dollar basis because of FX.
And a small element of Russia, you mentioned that the <unk>.
Presence on the ground was fairly minimal so I'm just trying to understand that element.
To what.
What do you attribute to the decline too.
Yes, I think FX is.
A meaningful component of the difference that youre seeing there in that line item.
Given where our employee bases are located.
I would add that part of part of.
Our transformation program involves workforce relocation.
We simplify where we do work.
And so.
Not front office for the significant part of our mid and backups.
As occurred in our international businesses.
Where we tend to enjoy what lower wage structures.
We also have the impact of our transformation program.
Where again, where folks are located and making sure that the savings are coming through and you're seeing some of that materialize there as well.
And I would imagine Youre also optimizing.
Different roles.
The expenses of various roles in order to optimize things from a long term perspective.
What extend those trends continue.
When we think about it just as it relates to that if the head count continues to.
To go out.
Yes, we're always looking to make progress in that ratio. It's a constant focus for us as I said optimizing the workforce is a really important component of the transformation program.
And hence the comp and Ben that falls out of that.
As a important metric and thats not just necessarily location right that can be automation.
Great and then with regards to this going back to the prior question with regards to transact I mean is that your general sense that.
Based on everything that you're currently seeing out in the market.
Transact should be able to go back to it's kind of a historic level of performance or are there elements that would make it more like last year.
Just because of.
Certain.
Vagaries in the market right now.
Yes.
A couple of things there I think one it's important to remember that growth rates will likely moderate as that business becomes bigger and bigger that's just the simple.
Fact of the math.
The other thing to keep in mind.
Is that over 50% of the individual marketplace business.
The use of generated in the fourth quarter. So it's best to think about that business on a full year basis, not focus on any particular quarter.
We performed very strong this year and continue to feel positive that our current market positioning and we're also encouraged by the early signs we're seeing for the quarter, but again, it's still very early enrollment season.
Thank you Juan luck our next question next.
Next question coming from the line of Robert <unk> with Goldman Sachs. Your line is open.
Hey, maybe an update on the magnitude of bulk settlements you might expect in <unk> and beyond.
Because I know you've maintained the organic growth outlook for 2022, but you faced a.
Difficult compare with the $74 million in book sales from <unk> to 'twenty one.
Yes.
We still expect to see some book sales throughout the rest of the year that relate to 2021 events.
We do expect those to normalize even further as 2021 receives from preview.
This dynamic was anticipated in our long term forecast for mid single digit growth.
And as you pointed out and as a reminder, in Q4 of 2021.
It was approximately $74 million of book sales.
<unk> 39 of that within the segments.
We do not anticipate that level to repeat this year.
Okay. Thanks, and can you give us some more color on the tailwind you're seeing in the wealth business.
Particularly in the UK and with respect to the <unk>.
Increase in project activity related to financial market volatility.
Yes so.
When markets fluctuate a lot our client base in the wealth business specific our retirement business.
Needs too often.
Re forecasting of what their cash funding requirements further accounting expense requirements are going to be just generates a significant amount of project work for us.
The markets were there major defined benefit plans.
And when the volatility stops that work will stop but we don't seem to have any lack of volatility these days.
I'd, probably offset a bit by the fact that within the wealth business of course, we have our investments business and a certain amount of that business.
Based upon asset based fees.
With lower capital market levels over the year that has been a bit of.
For that business.
Thank you.
Last question coming from the line of Meyer Shields with <unk> W. Your line is open.
Good morning, and my Cameco.
Yes, hi.
Hi.
Thanks.
Two quick questions. If I can first I guess.
One of the questions, we're getting a lot. This morning, an email or whether there are other regions of the world.
Where you similarly have very outside margins that are like Russia, just in terms of understanding the scope of the margin expansion program and where does apply.
So.
Pete.
As with any diversified business, we're going to have.
Places and lines of business that are more profitable than the group average and less profitable group average.
And so the answer is we have some right but.
Or generally.
Areas, where we have either specialist capability, that's hard to replicate.
Or that there are regulatory barriers to entry. So there is competition from Nike plus an open competition are going to be areas, where there may be opportunities to have higher profits than average in the business.
So.
The answer is there are places however, we are a broadly diversified business.
We do just discuss where our revenue was sourced from.
And so there aren't many geographies, where we have significant revenue concentration of the size of Russia, you can see our top five list.
Sure.
Okay. That's helpful. And then just going back to transact very briefly.
Because another.
Competitors are pulling back.
And providing a better opportunity for near term growth at transact because that can have a negative impact on cash flow.
That's a dynamic that we manage very closely as you can imagine so we do make sure that the growth. We are targeting is profitable growth and do balance that against the cash consumption in that in that line of business. So we don't expect it to be a significant drag but of course.
We do manage that dynamic closely.
Okay fantastic. Thank you.
Okay. Thank you.
Thank you I'm showing no further questions at this time.
Ladies and gentlemen that does one conference for today. Thank you for your participation you may now disconnect everyone have a great day.
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