Q1 2023 Willis Towers Watson Public Limited Company Earnings Call
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Yeah.
Good morning, welcome to the W. T W first quarter 2023 earnings conference call.
Please refer to U W. T. W. O dot com from 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. T. W 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.
<unk> results may differ materially from those discussed today and the company undertakes no obligation to update these statements unless required by law.
For a more detailed discussion of these and other risk factors investors should review the forward looking statements section of the earnings press release issued this morning as well as other disclosures in our most recent Form 10-K and in other Willis towers Watson He SEC filings.
During the call certain non G. A a P financial measures may be discussed.
For a reconciliation of the non G. A a measure as well as other information regarding these measures.
Please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website.
I'll now turn the call over to Carl Hi, Debbie.
W. E T W. Chief Executive Officer. Please go ahead.
Good morning, everyone. Thank you for joining us for W. Tw's first quarter 2023 earnings call.
Joining me today is Andrew <unk>, our Chief Financial Officer.
Our first quarter results were a great start for the year.
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.
We're particularly encouraged by the growing impact received from our recent investments in talent and technology, which have 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 success of our transformation program drove a 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.
Overall, I am very pleased with our Q1 results and with the excellent progress we've made since this time last year.
We saw top line growth across all our businesses.
And the increased value of Ww solutions and complex economic environments.
Amid financial sector turmoil high inflation and ongoing geopolitical strife, we continued to see market dynamics that provide opportunities for ww to respond to our clients' needs to improve outcomes and reduce risk.
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.
Our previous target for three year cumulative free cash flow through 2024 reflected our goal of substantially improving our free cash flow margin.
This big in addition to achieving our revenue and margin targets.
We have made timely and meaningful progress toward our goals for revenue and adjusted operating margins and we continue to believe that our long term free cash flow improvement opportunities remains substantial and achievable.
These opportunities include optimizing structure on 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 path to realizing those opportunities will take us beyond the end of 2024.
As a result over the near term, we expect free cash flow as a percentage of revenue to improve significantly from 2020 twos base of 8% free cash flow margin.
Over the longer term, we still anticipate growth towards peers free cash flow margins as the benefits from our improvement actions gained more traction and begin to drive a shorter conversion cycle.
I wanted 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.
Before turning it over to Andrew I also want to update you on our growth simplify and transform initiatives.
In risk and broking or specialized approach coupled with our strategic hires we've made over the past year have driven accelerated growth.
Our focus on specialization has driven us to find improvements to existing solutions, new product ovation and most recently identification and successful execution on opportunities for strategic collaboration.
For example, we just announced a partnership with Zurich involving digital trading within our broking platform, which leverages data to structure risks to allow for a more competitive placement experience.
Another example of our strategic partnerships is our new relationship with sapiens, a leading global provider of software for the insurance industry. We've partnered with sapiens to create integrated solutions to help insurers underwrite policies more efficiently.
They are both great examples of how our innovations are driving growth by streamlining the very complex business of risk management and modernizing traditional broken.
While giving our customers a quicker and more efficient experience.
A third example is our partnership with Transamerica to overseas administration and record keeping for our recently launched lifestyle pooled employer plan in the U S.
This new product will allow employers to offer a market leading defined contribution plan and employee experience with limited demand on their internal resources.
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 of our business.
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 consistent with the expected pacing of the $100 million in incremental run rate savings, we expect to generate from the program. This year.
This brings the total to $224 million in cumulative annualized savings since the program's inception.
We continue to search for additional opportunities for savings.
Overall, we believe we're making progress toward our long term organic growth margin expansion and EPS targets.
Continued execution of our strategic initiatives this quarter delivered healthy organic revenue growth.
Strong adjusted operating margin expansion and further savings from our transformation program.
In closing I want to thank our colleagues for their performance this quarter and our unwavering dedication we.
We are truly appreciative of their continued commitment to our vision and there is lots of us focus on our strategic priorities to grow simplify and transform.
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, 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 <unk>.
Just below 5%.
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. So they can make more informed.
It's about how to best manage their risk in the current environment.
As Karl mentioned, we had a strong start to the year with first quarter revenue up 8% on an organic basis and solid growth across our portfolio of businesses.
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.
The net result was adjusted diluted earnings per share of $2 84.
A 7% increase 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 segment generated revenue growth of 6% on both an organic and constant currency basis compared to the first quarter of last year.
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 managed plant costs as well as from strong growth in international with new client appointments supplemented by health care inflation and increases in clients covered populations.
Well it grew 4% in the first quarter. The growth was primarily attributable to higher levels of retirement work in Europe , and North America, including compliance and Derisking projects, along with new client acquisitions. This growth was partially offset by a nominal decrease.
<unk> business, which continued to be pressured by the declines in capital markets that occurred in the second half of 2022.
Career experienced 4% growth in the quarter driven by increased demand for advisory services and increases in data and software license sales.
Benefits delivery and outsourcing generated 7% growth in the quarter. The increase was driven by new outsourcing clients and compliance projects plus strengthen our individual marketplace with growth from higher volumes and placements of Medicare advantage and life policies HD.
<unk> operating margin was 24% this quarter compared to 27% in the same prior year period. This strong margin growth was primarily due to higher operating leverage.
Riskin Broking revenue was up 10% on an organic basis and 5% at a constant currency basis compared to the prior year first quarter.
Corporate risk and broking had an outstanding quarter with an organic revenue increase of 10% driven by growth across all regions in most lines of business, primarily from new business and improved retention 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.
Investment income was $12 million for the quarter due to higher rates and impacted organic growth for the quarter by one percentage point.
North America had a strong quarter due to new and renewal business and increased retention a result of the strategic investments and initiatives that Carl highlighted earlier.
Europe also had solid new business performance across a number of product lines, including aerospace financial solutions and natural resources 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.
And the insurance consulting and technology business revenue was up 7% over the prior year period, primarily driven by increased sales and retention new technology solutions.
<unk> operating margin was 19, 9% for the first quarter compared to 21, 6% in the prior year first quarter.
Margin headwinds reflect the inclusion of profits up until the date of deconsolidation from our now divested Russia business in the comparable period.
This headwind margins improved as a result of organic revenue growth in CRB transformation savings gain on sale and interest income.
Really offset by the run rate impact of 2022 strategic investment hires 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.
Now, let's turn to the enterprise level reserves, 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 and the attainment of our 2024 and margin goals. Please note that the margin tailwind created by interest income and book a visit settlement activity was off.
Set by the margin headwind from the divestiture of our highly profitable Russia business, whose results were included in the prior year up until the date of deconsolidation.
Foreign currency was a headwind on adjusted EPS of <unk> <unk> for the first quarter largely due to the strength of the U S. Dollar assuming today's rates continue for the remainder of the year, we expect a foreign currency headwind on adjusted earnings per share of <unk>, Our U S. GAAP tax rate for the quarter was 19, 5% versus 27, 5% in the prior year.
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Our adjusted tax rate for the quarter was 25% 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 which became effective on April one.
Our strong balance sheet gives us continued confidence in our ability to execute a disciplined capital allocation strategy that balances capital returned to shareholders with internal investments and strategic M&A to deploy our capital in the highest return opportunities during the quarter, we paid $87 million in dividends and repurchased approximately 430.
2000 shares for $104 million.
We continue to view share repurchases as an attractive use of capital.
We generated free cash flow of $92 million for the first quarter of 2023.
<unk> to free cash flow of negative $10 million in the prior year with $102 million year over year improvement in free cash flow was primarily driven by more favorable working capital improvements, resulting mostly from higher cash collections and lower discretionary compensation payments made in the current year quarter as compared to the prior year quarter.
Our Q1 results are reflective of the progress we've made since the beginning of 2022, we've come a long way stabilizing the business rebuilding our talent base strengthening our organic revenue growth and accelerating the transformation program to drive greater profitability in the future. We're committed to delivering the same success with free cash flow generation.
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 2020 twos base of 8% free cash flow margin and in the longer term, making continual progress in moving more towards peer levels.
As free cash flow generation remains a high priority, we have made enhancements to our original improvement plans to strengthen our organizational focus on cash flow as you may have seen in our proxy statement. We have added free cash flow of the Kpis for annual incentives in the executive compensation program and are working on implementing cash flow linked kpis for others in the organization.
<unk> to drive broader accountability across the company. In addition, we are focused on pursuing long term structural and contractual improvements to the cash aspects of how our business is operating 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, it would pose a significant headwind to our 2024 adjusted EPS target.
<unk> income, which is sensitive to macroeconomic conditions is re measured at year and accordingly, we will provide additional guidance on our 2020 for pension income expectations and the resulting impact to the adjusted EPS target. When we release Q4 2023 earnings results. Overall, we are excited by the strong start to 2023 with business for.
<unk> ramping up as expected and the benefits of our investments in talent and technology starting to meaningfully contribute to results. In addition, our successful transformation efforts and operating leverage have allowed us to continue to drive margin expansion.
We have made consistent progress in our commitments for organic revenue growth and increased operating margins and EPS with that let's open it up for Q&A.
Okay. Thank you.
At this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question today comes from Sea Gregory Peters of Raymond James.
Peter.
Good morning, Carl and Andrew.
I guess.
Let's kick off.
The Q&A with.
Or the organic and risk and broking seems to be accelerating.
I'm looking over your comments in the slide deck.
At the same time, we're seeing some compression on operating margin, so I guess as I.
Think about that maybe comment on.
Where we are in the hiring superb the hiring cycle, our reinvestment cycle talent.
And how you think about organic I know you don't really like to guide quarterly but it seems like there is quarterly sequential improvement how are you thinking about it for the balance of the year.
Sure Great. Thanks, and good morning to you.
So I mean, we're actually very pleased right with the progress we've made in terms of the revenue acceleration and risking broking.
While there is some rate pressure specifically in financial lines.
In our M&A business.
We're just simply economic activity in terms of merchant acquisition has declined.
That hasnt effect, we're actually really pleased with the momentum across the portfolio, we're growing in particular.
Particularly our global lines and we continued to grow across all geographies, we do see the momentum building up the hires we've made.
Since the.
The last part of 'twenty, one going into 'twenty two.
These people continue to contribute I think we've seen momentum buildup in what they are bringing to revenue and the bottom line that we anticipate that to be a helpful accelerate during the rest of the year.
In addition, the results in insurance consulting and technology driven by software sales are encouraging.
Sort of recurring revenue helps build a.
Base that continues to be a strong performer for us.
The environment for our services remains.
One where we have a lot of optimism regarding that.
These are 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 to the business as I've said before right, we will never stop that but.
Think we've actually largely reloaded across the portfolio in terms of not having significant major gaps in what we're able to deliver to the marketplace and that's been one of the reasons that the results are what they are.
Hey, Greg It's Andrew I think just one other thing to think about as it relates to organic growth.
In risk and broking and across the enterprise as well is that in Q2 of <unk>.
Last year, there were $45 million of.
I had a question around margin as well within the segment for the quarter.
So risk and broker had a margin decrease of 170 basis points, excluding interest income of $12 million in bookings of $7 million. The margin decrease was about 310 basis points.
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 and margin.
Thank you for that I, just wanted to follow up on that the margin headwinds it feels like that.
That we shouldnt 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.
The hiring will normalize the normalized hiring well 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.
But with regard to the full year were excited about the trajectory for margin growth within risk and broking.
As you know we ensure to ensure we maximize our future growth potential and as Karl mentioned rates started making some meaningful investments in the revenue producing talent.
We're now beginning to see those results.
So that combined with the efficiencies created for transformation.
I have confidence in the continued acceleration in margin improvement in that business over time.
It makes sense I guess the other question.
I'll pivot to the free cash flow revision.
And as part of your 2020 for guidance and I know you slipped in a comment about EPS in Russia, and the other headwinds there, but our pension excuse me but.
Hey, Thanks, Good morning, just looking at some of the drivers of the strength in global lines over the last year or so.