Q2 2023 Willis Towers Watson Public Limited Company Earnings Call
Good morning, welcome to the W. T. W. Second quarter 2023 earnings Conference call. Please refer to the W. T. W. C O dot com for the press release and supplemental information that is issued earlier today.
This call is being recorded and will be available for the next three months on W. Tw'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 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 SEC filings during the call certain non G. A a P financial measures may be discussed or reconciliations of the non G. A a P measures as well.
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 Hess Wdw's, Chief Executive Officer. Please go ahead.
Okay.
Good morning, everyone. Thank you for joining us for Ww second quarter 2023 earnings call.
Joining me today is Andrew Krasner, our Chief Financial Officer.
We continue to see our strategic initiatives resonate strongly in the marketplace as reflected in the 7% organic revenue growth we recorded in the second quarter.
These solid results reflected continued strong growth across our entire portfolio of businesses. Despite significant challenges from outsized book of business sales in each of our segments in the prior year.
Excluding book of business activity organic revenue growth at the enterprise level would have been 9%.
We're very encouraged by the sustained top line momentum and the positive response, we've seen from clients to our investments in talent and technology across all of our businesses.
At the same time, we faced margin headwinds from those investments as well as wage inflation and prior year book sales that limited our progress on driving margin expansion and earnings growth this quarter.
The continued success of our transformation program, which exceeded our expectations, yet again, partially offset these headwinds.
All in all adjusted operating margin declined by 90 basis points for the quarter, which resulted in adjusted earnings per share of $2.05.
So we had a decline in adjusted operating margin this quarter as we've said before our progress in margin expansion won't always be linear. However, we don't expect margin declines in any full year period.
Earlier this morning, we reset our 2024 adjusted operating margin and adjusted EPS targets.
These updates reflect our margin and earnings performance to date and as we've called out in previous quarters. The pension income headwinds that based on current market conditions, we do not expect to subside.
They also include our current assessment of the opportunities. We see ahead of us with the benefit of being halfway through our three year plan.
We lowered our 2024 target for adjusted operating margin to 22, 5% to 23, 5% from 23% to 24%.
While some of the change stems from the slower pace at which we generated operating leverage it primarily reflects our opportunistic decision to further invest in talent and other key strategic initiatives, especially in our risk and broking segment. It's in.
Incremental investments will further strengthen our long term market position and drive continued strong organic growth beyond the 2024 forecast period.
To elaborate a bit on that decision I want to say a few words about where our RMB segment stands today and the opportunity going forward.
Our differentiated service offering underpinned by our ability to adapt to our clients' changing needs creates an incredibly compelling value proposition and the success of this strategy in RMB. So far is evident through the strong organic growth, we've been able to deliver.
Our focus on specialization innovation in top quality client service has generated substantial momentum and opportunities. We did not have 18 months ago.
Earlier this month, our aerospace team won back the Airbus account one of the largest in the sector on the back of our strength and value proposition.
And that success is not just happening in aerospace our global lines of business, such as PNC Marine and financial solutions have continued to deliver meaningfully above market growth, including double digit growth in the second quarter.
North America, the build out of 12 identified industry divisions continues at pace with colleagues in infrastructure being a line and we expect most of this to be completed by year end.
Our traction in the marketplace is shown as there are even more opportunities here to deliver solid organic growth well into the future.
But our fixed strategy is simply not an option in today's ever changing risk landscape.
To capitalize on these opportunities and meet client specific needs, we're continuing to advance our specialization strategy and develop innovative products and services, which will distinguish us in a way to best attract clients and talent.
This requires developing differentiated offerings, increasing strategic partnerships and expanding our reach through platforms like MGH Mg used in affinity products.
Of course high quality count is essential to drive these initiatives and turn our vision into a reality and we exceed our rejuvenated strategy, an independent brand become a load start for that talent, which will further fuel our success.
Leverage over the long term as productivity improves and we realize more efficiencies from increased scale.
Running a successful business is never a straight line.
It's a journey filled with triumph and challenges and we've experienced both over the last 18 months.
On one hand, the operating margin has benefited from our accelerated progress on the transformation program interest income has been higher and our pension related service costs have been more favorable than originally expected.
At the same time macroeconomic conditions have dampened demand for interest rate sensitive businesses, such as M&A and the inflationary environment has put pressure on our operating cost driving up wages and travel and entertainment.
While we've seen some progress in generating margin expansion from RMB. We know there is more to do we remain confident that the right path to delivering margin expansion includes both driving organic revenue growth through our strategic investments and executing on transformation program savings and these efficiency measures.
We're excited to welcome Lucy Clarke as the global leader of risk It broke even in the third quarter of 2024.
Lucy is committed to specialization exceptional client service and data and analytics all directly align with ww's competitive advantages and what we're doing in this space make you heard the right person to accelerate the execution of our strategy.
<unk> focus on talent, we are delighted she is joining our team and I look forward to welcome Lucy to our team in the third quarter of 2024 until then Adam garage will continue to lead the segment and after Lucy's arrival, Adam will become the chairman of risk in Brooklyn.
Now, let me shift gears back to our updated 2024 adjusted EPS target.
The revised target of $15 40, $17 reflects the sizeable pension income headwinds we've discussed on previous calls a modestly higher expected tax rate and a lower adjusted operating margin.
The revised target also reflects a more narrow and precise range than our original figures given that we're halfway through our target period of three years.
He talked about the drivers behind our margins. So let me take a minute to cover the other two items.
The most significant driver influencing our change to our EPS target is a sizable decline in expected pension income since we set our original 2024 target almost two years ago.
We originally expected pension income two to contribute $2 to $2 50 to adjusted EPS.
As we indicated previously.
The increase in interest rates and declining capital market returns have created significant headwinds to pension income dynamics.
Less than half of our original estimate to adjusted EPS in 2024.
The change in expected pension income accounts for approximately $1 65 of the overall change in EPS target.
We continue to expect pension income of $112 million in 2023 and will update you on our 2020 for pension expectations during our fourth quarter call. After the Remeasurement process.
We expect the U K corporate tax rate increase will have a modest impact starting in 2023.
While we continue to evaluate the OECD slash <unk> 'twenty guidance on the pillar two global minimum tax released earlier. This year, we expect the legislative changes may further increase the rate in 2024 and forward.
Now before I hand, it over to Andrew I want to step back for a moment reflect on the progress of Ww since the tumult of 2021.
In 2021 W. TWD $9 billion of revenue and adjusted operating margin of 19, 9% and EPS of $11 60.
And the full impact of the termination of the business combination was not reflected in the company's financial results in that time that occurred in 2022, when organic growth slowed book of business sale activity spiked and we need to make substantial investments in both talent and transformation related activities to finish positioned the company.
For future growth.
Since that time, we have stabilized our business rebuilt our talent base significantly strengthened organic revenue growth optimize capital management returned significant capital to shareholders and are transforming and simplifying our company to drive greater profitability. We are in a far better place from where we started.
We remain committed to our strategic priorities of growth simplify and transform and we are delivering meaningful strategic progress against these initiatives. We can see their contributions to our performance, including organic growth in line with our peers and $277 million of transformation savings.
We remain committed to improving our core operating results to reach our revised 2024 goals and drive long term earnings growth.
I want to thank our colleagues for their dedication and performance. This quarter. We are truly appreciative of their continued dedication to our vision and their relentless focus on our strategic priorities to grow simplify and transport.
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.
Before we delve into the financials I want to provide some additional color on our free cash flow to help paint a clearer picture of our core free cash flow performance and our outlook first I wanted to explain why we are focused on free cash flow margin or free cash flow as a percentage of revenue rather than some of the other potential metrics.
The noncash nature of our pension income can distort various free cash flow conversion calculations, whether you are calculating free cash flow conversion as a percentage of net income adjusted net income or adjusted EBITDA.
We therefore think free cash flow as a percentage of revenue or free cash flow margin is a clear and more meaningful metric to track free cash flow.
Next I'd like to remind you of the nonrecurring items that impacted our 2022 cash flow performance and.
In 2022, our free cash flow margin decreased to 8%, reflecting strong revenue growth and margin expansion, partially offset by some significant nonrecurring items, including delayed cash tax payments for the 2021 gains recorded in connection with the sale of Willis re and the deal termination fee.
Realized losses on foreign currency hedges and onetime retention executive compensation costs adjusted for these onetime headwinds our 2022 free cash flow margin would have been approximately 14%.
We consider this a normalized baseline for 2022.
Adding the approximately 200 basis point increase and transformation related spend for 2023 gets us to approximately 12% free cash flow margin, which we think is a reasonable guidepost for 2023.
Looking beyond 2023, we expect to see free cash flow margin increase driven by improved cash conversion in our transact business and the abatement of transformation related spend collectively these items are expected to contribute over 400 basis points to our free cash flow margin over the long term.
Herb.
Starting from the 12% free cash flow margin expected for 2023. This expansion in free cash flow margin on top of our expected organic revenue growth should drive strong long term growth and free cash flow. Additionally.
Additionally, we expect incremental upside driven by improved profitability and working capital improvement actions. Thus, we think 16% plus is a reasonable long term guidepost.
I'd like to spend a few minutes expanding on how we expect each of these components to contribute to greater free cash flow and improved working capital over the long term.
Let's start with improved cash conversion that transact about 8% of our revenue comes from transaction.
Which has tripled in size since we acquired it in Q3 2019.
However, the cash conversion dynamics of this business are different than the rest of our businesses.
Q4 is transact largest revenue quarter and net revenue consists of both fees and commissions the.
Emissions, which reflect both our initial placement plus estimated future renewals can take up to five to six years in total for us to collect depending on the product. Meanwhile, we incur significant upfront cash cost to place the policies, creating a working capital headwind as the business grows in 2022.
Growth in transact created an approximately 200 basis point headwind on our free cash flow margin.
Over the last few years of rapid growth in that business. We have generated a long term contract asset which is essentially a large long term receivables we expect to collect this over multiple years as policies are renewed.
As our transact business continues to mature and cash collections from earlier periods outpaced the upfront cash outflows incurred in connection with the continued top line growth. We expect this working capital headwind to subside and over time become a tailwind and begin contributing positively to free cash flow margin.
Our overall individual marketplace strategy combines transact with its strong revenue growth prospects and current lower cash flow generation with a mature business of extend health, which has lower revenue growth with strong cash flow together, the two businesses give us an overall Medicare operation with a strong growth profile.
And positive cash flow as was the case for 2022.
Moving on to the impact of our transformation program.
We made substantial progress on the program in 2022 and have accelerated our progress in 2023 funding.
Funding the transformation program required approximately $200 million in cash outflow in 2022.
Translated to a roughly 230 basis point headwind to our free cash flow margin.
Investment in the transformation program, we will continue to pressure our free cash flow until it is complete at the end of 2024, but beginning in 2025, the abatement of program related spending will drive an increase in free cash flow margin.
The last point I'd like to cover is the upside from greater profitability.
We continue to expect to drive margin expansion from current levels to our target range over the next six quarters as our adjusted operating margin grows so too will our free cash flow margin.
In addition, we expect some of our specific transformation program initiatives to have a positive but more modest impact on free cash flow margin.
Our finance and operational transformation initiatives include a number of tactical working capital improvement opportunities, such as centralizing and standardizing, our billing and collections processes, expanding automation capabilities and capturing long term structural and contractual improvements to the cash aspects of how our businesses operate.
Also the transformation of our real estate footprint should reduce our long term capex needs together all of these actions along with the continued adjusted operating margin expansion beyond 2024 should drive incremental improvements in our free cash flow margin above the roughly 400 basis points we've quantified.
Turning to our results for the quarter, our second quarter revenue was up 7% on an organic basis, excluding book of business activity organic revenue growth at the enterprise level would have been 9% our transformation program delivered $53 million of incremental annualized savings during the second quarter. This brings the total to 100.
28 million in cumulative annualized savings this year far exceeding our original target of $100 million of incremental savings for 2023.
Accordingly, we are raising our guidance on cumulative run rate transformation savings actions by the end of 2000 $23 million to $160 million.
Additional transformation savings we've identified also support an increase to the total annual cost savings. We expect the program to deliver by the end of 2024 from over 360 million to $380 million.
I will now discuss 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 5% on both an organic and constant currency basis compared to the second quarter of last year. This segment had solid organic revenue growth. Despite significant headwinds from book of business activity in the prior year, which negatively impacted organic revenue growth by two percentage points.
We continue to see growth opportunities across the portfolio of businesses and expect that they will continue their growth trajectory for the rest of the year.
Revenue for health increased 4% for the quarter or 9% when excluding the impact of book of business activity in the prior year, primarily due to natural portfolio growth and new client appointments in international in Europe , and higher levels of project work and brokerage income in North America.
Wealth grew 5% in the second quarter. The growth was primarily attributable to higher levels of retirement work in North America and Europe . Our investments business also contributed to organic revenue growth with new client acquisitions and higher fees related to value added services career.
Career delivered 4% growth in the quarter driven by increased demand for reward based advisory services and higher compensation survey participation.
Benefits delivery and outsourcing generated 7% growth in the quarter the increase was.
Was driven by strength in individual marketplace with growth from higher volumes and placements of Medicare advantage in life policies as well as increased project activity in outsourcing.
<unk> operating margin decreased 40 basis points from the prior year second quarter to 18, 3%. This margin decrease was primarily due to the impact of book of business activity, partially offset by transformation savings.
Risks broking revenue was up 6% on an organic basis and on a constant currency basis compared to the prior year second quarter.
Brisket Broking had strong organic revenue growth despite significant book of business headwinds and excluding the impact from book of business settlements Brisket broken grew 10%.
Corporate risk and broking had another strong quarter and continued the positive growth trajectory, we have seen over the last quarters with an organic revenue increase of 7% excuse.
Excluding book of business activity CRB grew at 11% with double digit growth in all geographies. This outstanding result is primarily driven by strong new business continued improvement of our client retention.
Strong contributions of 13% organic growth from our specialty lines like Marine financial solutions in large and complex P&C.
Our specialty lines of business are critical area for us and we are making meaningful investments to position us for long term success and we are growing at a much faster pace in these lines of business.
Furthermore, while rate increases continue to have a positive impact they had a more moderate impact compared to prior year interest income was up $9 million for the quarter due to higher rates.
As noted in our earnings release and as a result of the cessation of the co broking agreement with Gallagher interest income directly associated with risk and broking fiduciary funds will be allocated to the segment beginning in third quarter of 2023.
These amounts were previously allocated to the corporate segment I would just point out that this will be done on a prospective basis only and there is no impact to the Q2 numbers.
North America had a strong quarter due to new business and increased retention Europe also had solid new business performance across most product lines, including P&C Marine Aerospace and financial solutions.
Our national also contributed to organic growth led by Latin America.
And the insurance consulting and technology business revenue was up 3% over the prior year period, driven by increased sales in technology solutions and higher project activity.
<unk> operating margin was 16, 1% for the second quarter compared to 19, 7% in the prior year second quarter margin headwinds reflected the impact of the gain on sale for book of business activity in the prior year, along with the adverse timing impact from prior year incentive credits that have no impact on full year margins, but negatively impacted the quarter.
However, we saw an increase in our comp and Ben run rate due to strategic investment hires. These key hires have begun to contribute to our performance in a meaningful way as exemplified by the strong organic growth for the first half of the year. We continue to expect a ramp up in production, which we anticipate will cover the increase in expenses. We are also.
<unk> expense headwinds due to the increased client activity and inflationary increases on travel entertainment and marketing that we are actively managing with strict cost management actions, which we expect to yield a greater benefit in the second half of the year.
Partially offsetting these margin headwinds were transformation savings that continue to contribute as planned as well as the impact of interest income.
Turning back to enterprise level results. Our adjusted operating margin was 14, 6% a 90 basis point decline over prior year, primarily a result of costs related to employee head count increases and inflation as well as headwinds from the margin impact book of business sales in the prior year.
The decline in margin was partially offset by transformation savings as well as the impact of interest income.
The net result was adjusted diluted earnings per share of 205.
Foreign exchange had a de minimis impact on EPS for the second quarter, assuming today's rates continue for the remainder of the year. We continue to expect a foreign currency headwind on adjusted earnings per share of <unk> <unk> for the year.
Our U S GAAP tax rate for the quarter was 19, 8% versus 10, 5% in the prior year.
Our adjusted tax rate for the quarter was 23, 7% compared to 25% in the prior year, reflecting the nonrecurring nature of discreet tax benefits reflected in the prior year rate.
Our strong balance sheet gives us continued confidence in our ability to execute a disciplined capital allocation strategy that balances capital return to shareholders with internal investments and strategic M&A to deploy our capital in our highest return opportunities during the quarter, we paid $90 million in dividends and repurchased approximately one five.
<unk> shares for $350 million.
Given our confidence in achieving the plan we've laid out we continue to view share repurchases as an attractive use of capital to create long term shareholder value.
We also actively manage our leverage profile by issuing $750 million of do that in May a portion of those proceeds will be used to pay our debt with an upcoming maturity in the third quarter.
We generated free cash flow of $350 million for the second quarter of two in 2023 compared to free cash flow of $198 million in the prior year the.
The improvement of 152 million is primarily due to the non recurrence of payments made in the prior year for certain discretionary compensation and taxes for onetime gains recorded in connection with the Willis re sale and the income receipts related to deal termination.
These <unk> were partially offset by increased transformation program related costs.
Overall, while we recognize we have more to do we continue to be encouraged by the meaningful traction we're getting with clients through our strategic initiatives delivering strong organic revenue growth is a prerequisite for sustainably growing margins EPS and free cash flow, we are confident in our market position and in our ability to deliver on the <unk>.
Prudent opportunities, we see today with that let's open it up for Q&A.
Thank you we will now conduct a question and answer session.
May I ask one question and one follow up to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby Wi compile the Q&A roster.
Yeah.
One moment.
Our first question comes from Elyse Greenspan of Wells Fargo. Your line is now open.
Hi, Thanks, good morning.
My first question is on the 2024 guidance Tom Karl Obviously, you know last year you guys pulled.
<unk> lowered guidance for Russia.
There were some changes to free cash flow just trying to get a sense like why is this the last call.
I imagine maybe you guys went through in kind of stress tested all of the components of guidance to put forth something.
But you won't have to revise again.
In January with fourth quarter earnings.
But any thoughts there.
Yes, good morning <unk>. Thanks.
Yes.
Obviously, we'd prefer never to be.
I think it all but we do try and take a measured approach and when we finally think that look there is.
As we've said before no path that we could see towards our guidance, we wanted to be upfront with that.
As we looked into this quarter, we saw on the pension side, we just didn't see a path.
To pension income to be at the levels that we had thought it might be going into 'twenty. Four we thought it was the time to take a look and revised EPS target.
On the margins right the new target really reflects our decision to further invest in talent in this key strategic initiatives that Andrew described especially at our base. Because we think we are in a fabulous position to capitalize on growth opportunities.
We're continuing to advance our specialization strategy and develop innovative products and services to further differentiate our offerings and position ourselves to attract clients and talent that is working we are doubling down on it.
Thanks, and then my follow up Carl would be on the margin comment Mike.
<unk> had success with your savings program, but it doesn't seem like that coming into numbers, even though you will provide the target.
So.
Is that benefiting margins.
More coming later than expected.
I thought that that could have absorbed that helped offset some of the impact of the incremental hiring right that youre attributing.
The lower margin too.
Yes, Hi, Hi, Elyse, it's Andrew.
It is absolutely, helping offset or mitigate some of the continued and then the increased planned investment and I think what youre seeing is.
There is some more pressure on the risk and broking margins.
Well, we're incredibly happy with the progress and the organic growth within that business. We recognize there is more to do on margin expansion. Both in the short term and the long term.
I want to reassure you that we know what the margin drags are and.
Already taking action to address those.
Let me walk you through them.
I'll start with start with the short term so on a year over year basis. The most significant headwind was the book of business sales right and Thats about 270 of the 360 basis point decline within the quarter.
In the second half, we anticipate similar levels of book sales as last year, the quarterly pacing of those may vary.
But second half over second half should should be pretty similar.
The rest is attributable to some short term headwinds, partially offset by savings from transformation.
The short term headwinds from <unk> and our continued investments in talent.
In T&D, we are seeing the effects of inflation as well as the increase in travel post COVID-19.
We're working to manage this by implementing mandates around central travel fare caps things of that nature.
We've already seen some improvement in the <unk> cost from these actions and expect that to accelerate during the second half of the year.
On talent, the short term margin headwinds or just from the gradual and lumpy ramp in productivity for new hires.
Continue to expect a ramp in that production, which we do anticipate is going to cover the investments and yield a greater benefit going forward.
So as a result of all that we see the current margin headwinds as temporary and do continue to expect margin expansion within <unk>.
Brisket broking at the enterprise.
On an annual basis, Yes, let me just sort of leverage it will burn that Andrew I mean first of all our investments and talent have actually been paying off in excess of what we have projected debate not that we're fully there yet but the pace is actually in excess of.
Kind of our original expectations, so that does encourage us.
But as I look at sort of a bit further then.
The rest of this year right.
What we're doing is saying we think we actually have a great opportunity to deepen and broaden what we do we see the talent, we're able to attract.
And that encourages us actually as I said before to double what we're trying to go here.
Most of the investment is in talent, but there's also investment in things like <unk> and Mg use deepening our affinity platform and building out the next level of technology within our ICT business to support the insurance industry, where we see strong demand.
With respect to that talented investment right. It is about high reproductive talent that can best leverage our platform and is highly aligned to our specialization strategy. We do recognize that comes with the usual margin drag.
But typical 12 to 18 month time till we get full productivity out of these people but.
I look forward and say look a.
A year ago, we were all about filling gaps rebuilding teams after a period, where we had been suffering heightened attrition.
New business disruption.
Looking forward right. It is far more opportunistic and looking for talent, that's going to drive the most profitable and fastest growing parts of our business, especially the global lines that Andrew referred to earlier.
I wanted to be Crystal clear right. This is about going on the defensive.
Going on the offensive we are not about back filling gaps in the bench anymore. This is about offense not defense.
Okay.
Thank you.
Our next question comes from Gregory Peters.
One moment as we bring them to the states.
Good morning.
Thank you for the increased disclosure around the free cash flow.
And I wanted my first question I wanted to focus on that I guess, it's slide 15, where you talk about your longer term free cash flow target of 16%.
It feels like the transformation program spend that's going to be a layup because thats going to come to an end.
The improved profitability seems realistic I guess.
Yes.
When I look at those three buckets. The one I'm concerned about would be the transact cash conversion in that business.
For others has been problematic in terms of translating into free cash flow and also in this free cash flow slide you didn't mentioned dsos and that used to be a lever for the company for improving free cash flow. So maybe you could give us some additional comments are on this slide.
Yeah sure boarding Greg, it's Andrew I'll start with the with the DSO component there so.
We do expect incremental benefit from tax.
Tactical working capital.
Actions focused on opportunities that we see.
And that sort of gets reflected in the long term view on page 15 in the in the plus symbol there if you will.
Some of the other actions of course do lead to improved working capital management as well.
So that is absolutely factored into our our plans over the longer term for improved free cash flow margin.
Specifically with regard to transact.
When we bought that business, we did expect it to be a high growth business and we have far exceeded our initial expectations in that regard and I think thats a testament to the compelling offering that the company provides to its customers and the dedication of its team members in that business.
As mentioned in the prepared remarks, the business creates a working capital headwind as it grows.
And since we were required to incur significant upfront cash cost at.
It takes about five to six years, depending on the product to eventually collect all the cash for for sale or a substantial portion of the cash for a sale.
But we were fully aware of the cash flow dynamics right at the time, we acquired it and it has evolved as expected we continue to see improvement in that area as the business grows and matures.
We do have that long term receivable, which we can continue.
To focus on.
And we will collect over time.
We expect the business to become cash positive some time in the next few years.
And in the meantime, we do expect that drag to decline.
Okay.
Fair enough I guess.
My follow up question, we'll pivot back to the margin piece and I know you talked about it in your prepared remarks, you just answered the leases questions.
Regarding it.
Spoke about book sales and recruiting.
I guess from from from a margin improvement standpoint, I guess I was a little disappointed with the second quarter results.
Expected some for you guys to report some benefits so.
When you said in your answer book sales is there going to be more drag from book sales in the second half of this year and on recruiting is there more margin drag on recruiting in the second half of this year versus where we were in the first half thanks for the follow up.
Yeah.
Yeah sure let me start with the with the book sale question. So.
We do expect some level of flux sale activity in the second half of the year. However, we do expect it to be roughly on par with the book sale activity in the second half of last year.
Quarterly pacing of that May vary.
But in aggregate over the second half should be pretty pretty comparable okay with regard to recruiting Greg.
Just one thing I'd note is sort of open positions as the company or a tap the level they were a year ago.
And so that should give you an idea of sort of overall.
Sure.
We're trying to do with recruitment however, I want to point out that I think we're at a point in time.
And Lucy Clarke survival I think is a testament to this were the choice we've made very deliberately to specialize within RMB is at.
The foundation of our growth.
And it is significantly attractive too.
Two people, who can actually help us generate revenue.
We think that this is the time to capitalize on that and so we do think that.
Targeted investments in our global lines and our industry strategy.
This is a this is exactly the right time for those to be paying off so we're going to be looking to actively find that talent.
Sure.
That's great. Thank you one moment as I prepare the next question.
Our next question comes from Paul Newsome of Piper Sandler Your line is yours.
Good morning, and thank you all I had.
Another sort of book.
Question.
If we're looking at the profit margin of the businesses Youre looking youre, losing to book sales nurses.
Rest of the business.
Are those books sales businesses have similar margins or is that another.
Sourcing.
Margin compression.
The company is.
Businesses.
Our soldiers.
Yes, the books that we're selling.
Generally have the same economic profile and margin profile as the.
The broader the broader business. So there is nothing specific about about the margins of the <unk> businesses are books that we're selling.
Okay.
Great.
That makes margin model easier.
Okay second question.
A lot of what your peers have done with respect to margin improvement overtime team to.
And very careful divestitures.
Mrs.
See every quarter from them.
How does that fit into your strategy as well if at all.
Looking at sort of divesting or you're looking at divesting.
As it might have lower margins.
Yeah, we won't comment on any specific M&A actions, but as you can imagine.
Portfolio management is always front and center for US and of course, we do look across the.
The broad base of our businesses.
Two.
It makes strategic decisions about that portfolio and I doubt, if we use that for our acquisition strategy as well for looking for businesses, where we can be a better owner than the current owner.
Thanks, <unk> you always appreciate your help.
Great. Thanks, Bob.
Sure.
Thank you one moment as I prepare the next question.
Our next question comes from David Martin Maiden from Evercore. Your line is now yours.
Hi, Thanks, good morning.
I just had a question just on the new margin range for next year, the 2002 and a half.
<unk> to 'twenty, three and a half could you just help me understand and think through some of the.
Pluses and minuses that would help you be at the high end versus the low end of that outlook.
Yes sure.
I think.
Part of it will be Karl.
Carl mentioned.
Continued investment in talent.
As well as some platform. So I think it'll be the payback periods from from those investments.
There.
The determining factor would be the the pace at which some of the operating leverage.
It becomes visible.
Through the.
The transformation program.
And some incremental savings from the transformation program as well so the timing of that sort of is what feeds into the the bounds of that range and then I will just add demand across various parts of our business right. So well I think we've got a very diversified portfolio and that has enabled us to weather storms, we do try to take advantage of <unk>.
As we find them.
As it relates sort of demand across the portfolio as you can see from the segment numbers growth remains strong there and we're looking to make.
Make sure we stay focused on the areas, where we see the strongest demand in the marketplace, whether that's in the specialty lines within RMB or <unk>.
And the benefits business.
And focus within our career business places, where PC demand, which sort of coping with new ways of working in the new normal.
Okay.
I'd also add there is upside in our wealth business, especially in the capital markets day, and the fact that we're collecting percentage of asset fees across a large chunk of our investments business.
Yep got it that makes sense and then.
I guess I was just on some of the hiring that you've made up to this point.
Maybe you can help me understand just how far along you are in the ramp of production.
Of those hires.
Are we sort of hitting.
Like a peak in terms of how those hires you've made in the past can contribute and as that is.
Is that partially why you're sort of.
Making additional strategic investments.
Or maybe you could just help me understand where we are in terms of the ramp up of the hires you've made up to this point.
Sure sure sure so as I alluded to a little while ago, we're actually very happy with the progress where R 22.
Janet cohort of hires right they've actually performed.
In excess of where we thought we would be at this point in time, but no. They are not up to full productivity yet because we've said thats 12 months to 18 months and sort of on average worried about 12 months that the 2023 hires which is a smaller number it's only been half of the year right are performing in line with expectations, but.
It's of course early days.
What im saying with respect to sort of looking forward diet is we actually see significant strong demand for our specialty approach.
And we think that there is talent, we can attract under the way we have focused this company, which is different than the way others approach it.
To able to actually double down on that strategy and pushed that ahead. So it's yes.
Yes, I think what we've seen from the 22 and 'twenty three hires is encouraging but thats not necessarily just saying okay. More of the same we think that it's actually confirmation of our strategy and how it's resonating with clients.
That wants us to move ahead.
Thank you one moment as I prepare our next question.
Our question comes from the line of.
Meyer Shields from Keefe, Bruyette <unk> woods.
It is now yours.
Good morning, guys. This is Jamie.
For EMEA.
Just had a question on <unk>.
So given how well.
Organic growth has been playing out.
Do you guys see any changes in your investment.
Any changes I'm, sorry, any changes in the investment given the organic growth.
Yes.
No I think as Carl just alluded to we do see continued opportunity for <unk>.
Talent.
The market so.
We're not sort of filling gaps at this point as we had been historically.
This is more about leaning forward and being on the offensive with regard to our talent investment strategy, where we continue to see really strong opportunity for talent that aligns with our specialization strategy.
Got it thank you Mike.
The free.
Cash flow guidance.
I know you guys gave.
The long term guidance of 16% just wanted to.
That does it.
<unk>, 12% guidance of this year.
Floor <unk>.
Kevin.
Sales on that.
I'm sorry can you repeat the question please.
Oh.
So for the free cash flow guidance.
Just wondering can you add some details on the 2024 or do you see just improve the muni.
2015%, yes.
Yes, we do expect continuous improvement, but we haven't given any specific free cash flow margin guidance for 2024.
Okay.
Okay. Thank you okay. Thank you.
Okay.
Thank you.
One moment please.
Our next question comes from the line of Mark Mark calm on Board. The line is now yours.
Hey, good morning, Thanks for taking my questions.
With regards to.
With regards to the.
To the margin change.
Basically at the mid point, you've you've reduced the margin guide by about 50 bps.
Is that sufficient in terms of.
Is that enough of a cushion to really.
Improved.
The talent pipeline and then.
Thinking about the morale and retention with regard regards to your long term associates.
Do you think thats going to be fairly meaningful in terms of.
Driving further engagement.
And driving further productivity.
So I think with regard to the 50 basis points that we do think that that gives us the flexibility. We're looking for we can structure.
Compensation, which for US of course is highly variable, especially in question.
To be able to manage the impact of recruitment.
With respect to morale.
One of the biggest screens. We use is are they going to fit well with the team alright.
And.
That's been our approach historically, we anticipate that will very much be part of our approach going forward.
It's beautifully with our specialization strategy because you are not looking for a lone wolf selling right. It's about insights based approach to helping clients manage risk.
Fueled by data and analytics and that ends up with someone who is quite committed to that net by its very nature makes it more of a team based approach.
So I think there is a sort of a virtuous cycle we get.
With respect to our approach that actually makes team building easier and minimizes morale disruption that might.
Okay.
That's great and then whats the tax rate that youre, assuming for the 24 EPS targets.
Yes, we havent, specifically given that information, but if you think about the current year adjusted tax rate.
Sure.
It is modestly higher.
As of now year to date and we.
We expect something modestly higher on a full year basis year over year.
Okay.
Yes.
Thank you one moment as I prepare her next question.
Our next question comes from the line of Michael <unk> from BMO. Your line is now yours.
Okay great.
Sure.
Free cash flow thanks for the added color.
I just wanted to confirm that the pension.
Income levels or or or.
The pension changes in terms of the <unk>.
<unk> our EPS.
It doesn't flow through to cash flow right.
Correct the pension income is noncash.
Okay, Okay got it.
Okay switching gears to you.
The segments, you've talked a lot about and you have been for a number of quarters investing in talent opportunistically.
Is this also happening in the health wealth and career segment a bit.
Asked because margins were a little light there as well versus expectations.
So we do see talent as flat.
Flocking to the flag right in each WC as well, although I think it is.
Bit different position really than it is with.
As opposed to RMB and that we've got a very very successful leading.
Wealth business.
And.
Yes.
Already I think a very good market position.
We don't you wouldn't typically see large scale recruiting going on in that business.
The recruiting is more focused on health and benefits.
We do see the opportunity to gain market share and we're just we think our positioning broking globally is one where we can continue to capitalize.
Thank you one moment as I prepare to next question.
Our next question comes from Iran. Qunar from Jefferies. Your line is now yours.
Thank you.
Good morning, everybody.
I guess my first question, Carl just listening to the explanations behind the lower.
Hello, I have guidance for 2004.
It almost sounds to me like excluding the pension element that interests and inflationary trends or a net negative.
I guess that if.
If I may if I heard that correctly, it's all counterintuitive to what I would have thought the net impact on broker would be so we'd love to hear a little more on that.
Oh, so I when I was talking about interest rates being negative with respect to the pension right. It wasn't respected the fact, we do receive more interest income.
You had also talked about the pressure from higher interest rate environment on the M&A activity and on.
Operator right.
Alright, sorry, yes.
Alright.
Okay.
No we haven't.
I think the puts and takes are a little hard to work out right, but we do have a large scale as do others right M&A focused brokerage business and the <unk>.
The freeze in that marketplace, obviously quite unhelpful.
On that side so.
That said, it's a bit more complex.
Yes, I guess, if we take a step back and again, excluding the pension element.
The higher interest rate and higher inflation environment be a net positive.
<unk>.
Not necessarily I think it depends on.
With the <unk>.
Impact of inflation on different components of the income statement. So obviously theres been a lot of wage inflation.
The.
The last two years and Thats that is not just related to new hardware is right that does impact our existing.
Wage base.
There is inflation, we talked about.
The cost of travel has gone up meaningfully things of that nature.
That is.
Mitigated right by the impact of fiduciary income, but as Carl mentioned, we do have some interest rate sensitive businesses right that.
Get impacted by that as well like M&A related products.
I guess.
I would not call it a huge negative but it's not nearly the positive you might take it from looking at some components alone.
Okay I appreciate that and then.
If we flip to the pension components specifically if.
If I'm doing the math correctly at the midpoint of the new guidance.
You are talking about roughly $80 million worth of pension income in 'twenty, four and I understand that we'll get another update at year end.
But if that math is roughly correct.
Correct.
Could you maybe explain why we'd see another call it 30% reduction in pension income year over year.
When capital markets are actually up year to date.
I think the level of interest rate increases has.
<unk> moderated a bit.
Yes, so if you look at our pension plans for the asset mixes.
However, heavy effect here.
Our biggest plant the UK plan.
Actually it doesn't have a lot of equity exposure at all in it and has a fairly tight asset liability match.
The quite sensitive both interest rates and inflation levels because of the indexation of UK pension liabilities. The U S. Plan is more is invested for Kinder way U S plan would be invested with a mix of both bonds and other assets, but even within the return seeking assets.
A large part of alternative assets and other sort of diversifying strategy, which wont necessarily move in line with the public equity markets.
That protects us on the downside, but it does give us some upside and strong equity markets.
Okay.
That's great. Thank you one moment that prepare the next question.
Our next question comes from Mike Ward from Citi. Your line is now yours.
Thanks, guys good morning.
More stability in the global portfolio with relatively small rating increases being written.
Got it. Thank you and then I think <unk> potential upsides and the wealth business any update on the outlook for that one and the second half with markets being where they are.
Yeah, well, I mean with with sort of pension funding levels being at a pretty hefty right sorry.
Compared historically rights pension pension funds are pretty well funded so the opportunity for pension risk transfer activity.
Remains elevated and we have a market leading position that the major markets and then the other phenomena is referring to is.
We've got a investments business that is a substantial part of that is compensated in basis points and with acid levels up that's helpful for that business.
Thank you one moment in time preparing this question.
Our next question comes from the line of Bryan Meredith of UBS line is now yours.
Hey, Thanks for putting me in two questions here Karl I'm, just curious in the 2024 guidance what is embedded with respect to the economic outlook you know what would happen if nominal G. D. P goes let's call it 2%, 3% would it be.
Challenging they make your your your kind of guidance targets and then we'd also you embedded in that with respect to the commercial lines pricing environment.
So.
So with respect to right I mean, we're young we in brokerage aren't necessarily a sensitive to rate is the carriers and that and I think I've made this point of prior calls right when when rate Skyrockets, our clients will just simply retained more risk to try and manage their budgets. So we don't see rate is having a major effect.
On our prospects.
Four 424, I think with respect to sort of general economic conditions as long as they're generally manageable. We've got a portfolio of businesses that is shown resilience and sort of good times and bad.
And so providing clients so paralyzed by volatility.
And to make decisions.
We tend to do okay.
Mhm.
Gotcha, so so ah recession or something it shouldn't matter.
A sharp and sudden recession, where client sort of have to swerve in their plans.
It is unexpectedly right is not necessarily helpful. Although even then write that may drive demand for consulting projects that help to manage the changing conditions.
It makes sense and then my second question I'm, just curious how can you talk a little bit about just employee retention efforts and what you're doing to to keep you know keep people with me I'd look at your stock down 12% and all the other brokers are up.
Mid teens and I can tell you just from.
Any company workout, you're always looking at that stock price.
What do you what are you doing to kind of help keep people and what is retention looked like right now.
So I mean, the most retention has been actually quite good and attrition. This year has been lower than our expectations and in line with industry in our industry in general So we're quite happy with how that's been playing out engagement is a huge part of employee retention right and that's off.
And.
We do research on this right within our current business right and engagement goes far beyond compensation.
Actually there's a number of factors that drive it and we do eat our own cooking and try and take the advice of our career consultants to create a workplace that people actually want to be participate in because they think they are making a difference.
Own career.
Their colleagues for their clients and for side of society at large that's not to say.
Competition doesn't planet, but it's by no means to determine if matter and I I I think we are doing wallet app that the attrition.
Numbers are reflecting our efforts in that regard.
That's great. Thank you.
One moment as I prepare our next question.
Our next question comes from the line of Mark Hughes.
<unk> Securities. The line is now yours.
Yeah. Thank you how are you approaching transactions here it seems like the environment with a little more productive last year do you think this will be another strong growth your for transient.
Yeah, we can we continue to expect healthy growth from that business.
You know there's more.
More to that business, then just the the Medicare advantage market, where we do sell other products and those products have different financial profile of some cash collection profiles with them as well. So we do make sure that we look to create a balanced portfolio across that business and and you know as we said in.
Prior calls right. We do think that CMS rings came out are manageable for us and we have taken steps to adapt the business to them. So we don't see them as in acting transaction potential too.
Right.
Thank you.
That's great. Thank you one moment as I prepare the next question.
Our last question comes from the line of Rob Cops from Goldman Sachs. The line is now yours.
Uh-huh.
Rob line is now yours.
It seems that we do not have Mister Cox, who will go on that.
Ah last question [noise].
I'll give one moment to see if anyone else would like to ask a question.
As I am showing no further questions at this time.
And we have no closing remarks that concludes our session. Thank you for participating in today's meeting.
[music].