Q1 2023 Willis Towers Watson Public Limited Company Earnings Call
Speaker 1: You you.
Speaker 2: Good morning. Welcome to the WTW first quarter 2023 earnings conference call.
Speaker 2: Please refer to www.co.com from the press release and supplemental information that was issued earlier today.
Speaker 2: Today's call is being recorded and will be available for the next three months on WTW's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995.
Speaker 2: These forward-looking statements are subject to risks and uncertainties.
Speaker 2: Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law.
Speaker 2: For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release issued this morning, as well as other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings.
Speaker 2: During the call, certain non-GAAP financial measures may be discussed.
Speaker 2: For reconciliation of the non-GAAP measures, as well as other information regarding these measures.
Speaker 2: Please refer to the most recent earnings release and other materials in the investor relations section of the company's website.
Speaker 2: I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer.
Speaker 2: Please go ahead.
Speaker 3: Good morning, everyone. Thank you for joining us for WTW's first quarter 2023 earnings call.
Speaker 3: Joining me today is Andrew Krasner, our Chief Financial Officer. Our first quarter results were a great start for the year. The strong 8% organic revenue growth we delivered in the first quarter demonstrated our sustained momentum and intense focus as we continue to execute on our strategic priorities.
Speaker 3: We're particularly encouraged by the growing impact we're seeing from our recent investments in talented technology, which has strengthened the value we're able to provide our clients and yielded improved retention and new business growth. Operating leverage on this robust growth and the continued succession of our transformation program takes us on a path toward a brighter brand.
Speaker 3: drove 140 basis points of adjusted operating margin expansion over the prior year, which translated into adjusted diluting earnings per share of $2.84 for the quarter, an increase of 7% year over year.
Speaker 3: Overall, I'm very pleased with our Q1 results and with the excellent progress we've made since this time last year.
Speaker 3: We saw top-line growth across all our businesses, reflecting the increased value of WTW solutions in complex economic environments.
Speaker 3: Amid financial sector turmoil, high inflation, and ongoing geopolitical strife, we continue to see market dynamics that provide opportunities for WTW to respond to our clients' needs to improve outcomes and reduce risk.
Speaker 3: Now, I'd like to share some additional perspective on the reset of our near and long-term expectations for free cash flow announced this morning.
Speaker 3: Our previous target for three-year cumulative free cash flow through 2024 reflected our goal of substantially improving our free cash flow margin.
Speaker 3: This being in addition to achieving our revenue and margin targets.
Speaker 3: and we continue to believe that our long-term pre-cash flow improvement opportunities remain substantial and achievable.
Speaker 3: These opportunities include optimizing structural and contractual aspects of our business, enhancing our system and processes, and streamlining our working capital. However, we now believe that the best and most sustainable paths to realizing those opportunities will take us beyond the end of 2024.
Speaker 3: As a result, over the near term, we expect free cash flow as a percentage of revenue to improve significantly from 2022's base of 8% free cash flow margin.
Speaker 3: Over the longer term, we still anticipate growth toward peers-free cash flow margins, as the benefits from our improvement actions gain more traction and begin to drive a shorter conversion cycle.
Speaker 3: I want to make it very, very clear that we remain committed to delivering on our core operating results. Our achievements on those fronts so far, including our very solid start to 2023, give us confidence that we will be successful in delivering on those goals.
Speaker 3: Before turning it over to Andrew, I also want to update you on our Grow, Simplify, and Transform initiatives.
Speaker 3: Our Grow initiatives take advantage of the opportunities in both core and fast-growing markets using our analytics capabilities and specialist knowledge to help create a more valuable and differentiated client experience.
Speaker 3: In risk and broking, our specialized approach, coupled with the strategic hires we've made over the past year, has driven accelerated growth.
Speaker 3: In health, wealth, and career, we've had success cross-selling new solutions and products alongside our core advisory work.
Speaker 3: Our focus on specialization has driven us to find improvements to existing solutions, new product innovation, and most recently, identification and successful execution on opportunities for strategic collaboration. For example, we just announced a partnership with Zurich.
Speaker 3: involving digital trading within our Broking platform, which leverages data to structure risks to allow for a more competitive placement experience.
Speaker 3: Another example of our strategic partnerships is our new relationship with Sapiens, a leading global provider of software for the insurance industry.
Speaker 3: We've partnered with Sapiens to create integrated solutions to help insurers underwrite policies more efficiently. These are both great examples of how our innovations are driving growth by streamlining the very complex business of risk management and modernizing traditional broking, while giving our customers a quicker and more efficient experience.
Speaker 3: A third example is our partnership with Transamerica to oversee administration and record keeping for our recently launched LifeSite pooled employer plan in the US.
Speaker 3: This new product will allow employers to offer a market-leading defined contribution plan and employee experience with limited demand on their internal resources.
Speaker 3: Shifting to our simplify initiatives, we believe our improved sales and retention outcomes have resulted in part from our efforts to streamline the back-end shared operations in our business.
Speaker 3: This has enabled us to deploy a more cohesive and consistent global model that leverages our scale and provides a smoother client experience from prospect to renewal. Finally, our transformation program delivered $75 million of incremental annualized savings during the first quarter.
Speaker 3: consistent with the expected pacing of $100 million in incremental one rate savings we expect to generate in the program this year.
Speaker 3: This brings the total to $224 million in cumulative annual life savings since the program's inception.
Speaker 3: We continue to search for additional opportunities for savings.
Speaker 3: Overall, we believe we're making progress toward our long-term organic growth, margin expansion and EPS targets.
Speaker 3: Continued execution of our strategic initiatives this quarter delivered healthier organic revenue growth.
Speaker 3: strong adjusted operating margin expansion, and further savings from our transformation program.
Speaker 3: In closing, I want to thank our colleagues for their performance this quarter and their unwavering dedication.
Speaker 3: We are truly appreciative of their continued commitment to our vision and their relentless focus on our strategic priorities to grow, simplify, and transform.
Speaker 3: And with that, I'll turn the call over to Andrew.
Speaker 3: Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. Our clients continue to face a host of economic challenges, including rising commercial insurance rates. However, pricing increases appear to be moderating as our fourth quarter 2022 commercial lines insurance pricing survey showed an aggregate increase of just below 5%.
Speaker 3: Data for nearly all lines continue to indicate price increases with the exception of workers' compensation and directors' and officers' liability. The largest price increases came in commercial auto followed by commercial property. We continue to focus on helping our clients with our specialized knowledge and risk and broken capabilities.
Speaker 3: so they can make more informed decisions about how to best manage their risk in the current environment.
Speaker 3: As Karl mentioned, we had a strong start to the year with first quarter revenue of 8% on an organic basis and solid growth across our portfolio of businesses.
Speaker 3: Our adjusted operating margin was 18.6%. A 140 basis point improvement over prior year, reflecting our growth and expense discipline along with the benefits of our transformation program.
Speaker 3: The net result was adjusted diluted earnings per share of $2.84, a 7% increase over the prior year.
Speaker 3: 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 and less specifically stated otherwise.
Speaker 3: The Health, Wealth, and Career segment generated revenue growth of 6% on both an organic and constant currency basis compared to the first quarter of last year.
Speaker 3: Revenue for health increased 8% for the quarter, primarily due to increased project work in North America related to helping clients implement legislative changes and manage plan costs, as well as from strong growth and international with new client appointments supplemented by healthcare inflation and increases in client covered populations.
Speaker 3: well through 4% in the first quarter. The growth was primarily attributable to higher levels of retirement work in Europe and North America, including compliance and de-risking projects along with new client acquisitions.
Speaker 3: This growth was partially offset by a nominal decrease in our investments business, which continued to be pressured by the decline in capital markets that occurred in the second half of 2022.
Speaker 3: Career experience 4% growth in the quarter driven by increased demand for advisory services and increases in data and software license sales.
Speaker 3: Benefits delivery and outsourcing generated 7% growth in the quarter. The increase was driven by new outsourcing clients and compliance projects plus strength in our individual marketplace with growth from higher volumes and placements of Medicare Advantage and Life policies.
Speaker 3: HWC's operating margin was 24% this quarter compared to 20.7% in the same prior year period. This strong margin growth was primarily due to higher operating leverage. Risk in broking revenue is up 10% on an organic basis and 5% at a constant currency basis compared to the prior year first quarter.
Speaker 3: Corporate risk in broking had an outstanding quarter, with an organic revenue increase of 10%, driven by growth across all regions and most lines of business, primarily from new business and improved retention.
Speaker 3: As we've indicated, book of business settlement activity has slowed after the uptick over the last two years with only a one percentage point impact on organic growth for the quarter.
Speaker 3: Investment income is 12 million for the quarter due to higher rates and impacted organic growth for the quarter by one percentage point.
Speaker 3: North America had a strong quarter due to new and renewal business and increased retention, a result of the strategic investments and initiatives that Karl highlighted earlier. Europe also had solid new business performance across a number of product lines, including aerospace, financial solutions, and natural resources.
Speaker 3: as our focus on building and strengthening our industry and product specializations continues to deliver robust growth. International also contributed to organic growth with double digit growth in all regions.
Speaker 3: In the insurance consulting and technology business, revenue was up 7% over the prior year period primarily driven by increased sales and retention in technology solutions.
Speaker 3: R&B's operating margin was 19.9% for the first quarter compared to 21.6% in the prior year first quarter.
Speaker 3: Margin headwinds reflect the inclusion of profits up until the date of deconsolidation from our now-divested Russia business in the comparable period.
Speaker 3: Absent this headwind, margins improved as a result of organic revenue growth in CRB, transformation savings, gain on sale, and interest income.
Speaker 3: of 2022 strategic investment hires.
Speaker 3: As we expected, last year's key hires have begun to contribute to our performance in a meaningful way as exemplified by the solid organic growth this quarter, and we continue to expect a ramp up in production this year.
Speaker 3: Now let's turn to the enterprise level results. We generated profitable growth this quarter with our adjusted operating margin increasing 140 basis points to 18.6% from 17.2% in the prior year. This improvement reflects the benefits of higher operating leverage from the increased top line growth and transformation related savings, which we expect to continue to be a key contributor to our ongoing margin expansion.
Speaker 3: adjusted EPS of $0.06 for the first quarter, largely due to the strength of the US dollar. Assuming today's rates continue for the remainder of the year, we expect a foreign currency headwind on adjusted earnings per share of $0.05.
Speaker 3: Our US gap tax rate for the quarter was 19.5% versus 27.5% in the prior year. Our adjusted tax rate for the quarter was 20.5% compared to 21.1% in the prior year. The current quarter adjusted tax rate is lower primarily due to the favorable impact of discrete items in the current year. The adjusted tax rate for the full year may increase moderately as a result of the UK corporate tax rate increase.
Speaker 3: 132,000 shares per 104 million. We continue to view share repurchases as an attractive use of capital. We generated free cashflow of 92 million for the first quarter of 2023, compared to free cashflow of negative 10 million in the prior year. The 102 million year over year improvement in free cashflow was primarily driven by more favorable working capital improvements.
Speaker 3: organic revenue growth and accelerating the transformation program to drive greater profitability in the future.
Speaker 3: We're committed to delivering the same success with free cash flow generation.
Speaker 3: Though our actions on free cash flow have not yet yielded results within the timeframe we expected, we remain focused in the near term on driving meaningful improvement in our free cash flow margin for 2022's base of 8% free cash flow margin, and in the longer term, making continual progress and moving more towards peer levels.
Speaker 3: As free cash flow generation remains a high priority, we've made enhancements to our original improvement plans to strengthen our organizational focus on cash flow.
Speaker 3: As you may have seen in our proxy statement, we have added free cash flow as a KPI for annual incentives in the Executive Compensation Program and are working on implementing cash flow link KPIs for others in the organization to drive broader accountability across the company.
Speaker 3: In addition, we are focused on pursuing long-term structural and contractual improvements to the cash aspects of how our businesses operate.
Speaker 3: As you might expect, this is the area where we have the largest class of opportunities to improve, but those opportunities are the most time consuming to realize. As a reminder, full year 2023 pension income is expected to be about $112 million. If this level of pension income remains consistent in 2024,
Speaker 3: it would pose a significant headwind to our 2024 adjusted EPS target.
Speaker 3: Pension income, which is sensitive to macroeconomic conditions, is re-measured at year-end. Accordingly, we will provide additional guidance on our 2024 pension income expectations and the resulting impacts of the adjusted EPS target when we release Q4 2023 earnings results. Overall, we are excited by the strong start to 2023.
Speaker 3: We have made consistent progress in our commitments for organic revenue growth and increased operating margins and eps.
Speaker 3: progress in our commitments for organic revenue growth and increased operating margins and EPS. With that, let's open it up for Q&A.
Speaker 2: Thank you. At this time, we will conduct the question and answer session.
Speaker 2: As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced.
Speaker 2: To withdraw your questions, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker 2: Our first question today comes from C. Gregory Peters of Raymond James. Mr. Peters? Good afternoon. Hi, guys.
Speaker 4: Good morning, Carl and Andrew. I guess let's kick off the Q and A with the organic and risk and broking seems to be accelerating. And looking over your comments in the slide deck, at the same time, we're seeing some compression on operating margins. So I guess.
Speaker 4: is I think about that maybe comment on, you know, where we are in the hiring super, the hiring cycle or reinvestment cycle of talent. And, you know, how you think about organic, I know you don't really like to guide quarterly, but it seems like there's quarterly sequential improvement. How are you thinking about it for the balance?
Speaker 3: specifically in financial lines and in our M&A business, where just simply economic activity in terms of merchant acquisition has declined and that has an effect. We're actually really pleased with the momentum across the portfolio. We're growing particularly our global lines and we continue to grow across all geographies.
Speaker 3: We do see the momentum building up the hires we've made since the last part of 21 going into 22. These people continue to contribute and we've seen momentum build up in what they're bringing to revenue. And the bottom line, we anticipate that to be a helpful accelerant during the rest of the year.
Speaker 3: In addition, the results in insurance consulting and technology driven by software sales are encouraging. This is sort of recurring revenue, helps build a base that continues to be a strong performer for us. The environment for our services remains...
Speaker 3: One where we have a lot of optimism regarding that, you know, these are a, we are able to help clients with their risk management and risk mitigation strategies across a variety of macroeconomic conditions. So I think we're pretty well poised for the year ahead. We continue to look for good talent in the business. As I've said before, right will never stop that.
Speaker 3: think about as it relates to organic growth, you know, and risk and broking and across the enterprise as well as that in Q2 of last year there were, you know, 45 million of book sales. So we just want to be, you know, thoughtful about that going forward as it relates to organic growth. And I think, you know, you also...
Speaker 3: had a question around margin as well within the segment for the quarter. So, you know, risk and broking had a margin decrease of 170 basis points and excluding interest income of 12 million and book gains of 7 million, the margin decrease was about a 310 basis points.
Speaker 3: However, interest income and book gains were more than offset by a $37 million operating income headwind from the deconsolidation of the Russia business, which happened in the first quarter of last year. And that component equated to a 340 basis point margin headwind. So absent that, some growth there in margin.
Speaker 4: Thank you for that. I just want to follow up on that and the margin headwinds. It feels like, you know, that that we shouldn't be seeing these type of headwinds as we move through the year. Is there any point in time where you think you'll hit that inflection? Where...
Speaker 4: the hiring will normalize, the normalized hiring will reflect in the margin results. Clearly Russia is now over with after first quarter, but just trying to see how you guys are thinking about the cadence of margins this year.
Speaker 3: Yeah, as you know, we don't give margin guidance by segment, but with regard to the full year, we're excited about the trajectory for margin growth within risk and broking. As you know, to ensure we maximized our future growth potential, and as Carl mentioned, started making some meaningful investments in the revenue producing talent, and we're now beginning to see those results from those investments to come.
Speaker 4: as part of your 2024 guidance, and I know you slipped in a comment about EPS in Russia and the other headwinds there, but our pension, excuse me, but on free cash flow, can you talk about how the free cash flow update might affect your ability to buy stock back in the future? And maybe just give us an updated view on that.