Yahoo Finance Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q1 2024 Earnings Call Transcript
Willis Towers Watson Public Limited Company (NASDAQ:WTW) Q1 2024 Earnings Call Transcript April 25, 2024
Willis Towers Watson Public Limited Company beats earnings expectations. Reported EPS is $3.29, expectations were $3.21. WTW isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to the WTW First Quarter 2024 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that were issued earlier today. 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. 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 visit the Forward-Looking Statements section of the earnings press release issued this morning, as well as other disclosures in the company’s most recent Form 10-K, and in other filings the company has made with the SEC.
During the call, certain non-GAAP financial measures will be discussed. For reconciliations of the non-GAAP measures, as well as other information regarding these measures, please refer to the earnings press release issued this morning and other materials in the Investor Relations section of the company’s website. I’ll now turn the call over to Carl Hess, WTW’s Chief Executive Officer, please go ahead.
Carl Hess: Good morning, everyone. Thank you for joining us for WTW’s first quarter 2024 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. We had a solid start to the year delivering first quarter results in line with our expectations. Our momentum from last year has carried us into 2024 as we continue to execute on our strategic priorities to grow, simplify and transform. Our exceptional solutions, productivity from new hires and investments in talent and technology continue to play a pivotal role in fueling organic revenue growth of 5%. Simultaneously, our transformation initiatives helped us generate adjusted operating margin expansion of 200 basis points year-over-year, and 16% growth in adjusted diluting earnings per share.
We had $33 million of incremental annualized savings from our transformation program during the first quarter, bringing the total to $370 million in cumulative annualized savings since the program’s inception. We continue to look for more opportunities to optimize the business while leveraging our cost structure to expand our margins. This encouraging start of the year, our robust new business pipeline and our plans for realizing operating efficiencies across the rest of the year give us a high level of confidence that we will deliver on our 2024 commitments. I’m pleased with how our strategic progress has driven this quarter’s results, and more importantly, has positioned us for continued profitable growth. For the first quarter of 2024, we deliver top-line growth underscoring the heightened importance of our services in the current market.
Our distinctive data-driven and industry-specific approach is making us more attuned to specific economic dynamics that allow us to enhance outcomes and mitigate risk for our clients. Our global client model continues to resonate with the market, thanks to our world-class offerings and the unwavering dedication of our colleagues. All this puts us in a strong position to achieve sustainable profitable growth and to enhance long-term shareholder value. Let me give you an update on the progress we’ve made and the opportunities ahead for our segments. Our specialization strategy in Risk & Broking remains a key growth driver for both the segment and the company. R&B had organic revenue growth of 8% for the quarter. Our specialty businesses continue to strongly outpace the rest of the segment’s growth and we also continue to see sustained client retention rates in the mid-90s.
The product of the ongoing value of our data and analytics focus, and the effective insurance solutions that we provide to our clients. We often get questions about WTW’s specialist approach and how it sets us apart. What’s so unique about WTW’s approach is that our entire business, not just the client facing parts, is structured around industry concentrations. This has clear benefits for both our clients and our operations. Clients can tap into both our global and local expertise, which includes unique data and analytical tools that help create a continuous cycle as we tackle industry challenges, aggregate our experience and information, and use that to further improve our solutions to meet specific industry needs. From an operational point of view, these are businesses with national or even global P&Ls and not simply an industry practice group.
Our dedicated industry teams have heightened accountability for end-to-end performance and make informed decisions based on their experience and in-depth knowledge that results in exceptional value delivered to our clients while achieving strong financial results. A client win from this past quarter illustrates the effectiveness of this approach. Members of our global construction line of business based in our Europe and international geographies came together to win a multi-year contract for a rail infrastructure leader by creating a custom solution that fit the client’s unique risk management profile. The global teams were assisted by our local teams of the country, where the railway was being built, enabling us to provide even further specific expertise to the situation.
Our team’s familiarity with the industry-specific risks associated with rail infrastructure combined with our specialized geographic knowledge, ultimately secured us to win amidst fierce competition. In North America, our transition to industry-focused division is complete enhancing our ability to meet client needs and driving innovation and new offerings through our industry verticals. One example of this is Verita, our open market MGU, which has continued to exceed our expectations since its introduction last quarter. The recent edition of workers’ compensation capabilities further solidifies Verita’s proposition within the insurance ecosystem, enhancing its value proposition and expanding its market reach. We continue to expect the investments made in talented technology over the last few years, combined with the reorientation of the R&B business towards specialization will drive higher levels of activity with new and existing clients that is fundamental to our organic revenue growth and margin expansion trajectory this year.
In HWC, we remain focused on our core businesses while fostering smart connections to fuel sustainable organic growth of 4% in the quarter. Clients continue to recognize that the deep expertise we have in each of our HWC businesses enables us to deliver market-leading solutions across our Health, Wealth, Career and benefits delivery and outsourcing businesses and make breakthroughs that matter in a complex and changing environment. For example, with many pension plans being well funded, our retirement teams around the world have helped clients derisk their plans and gain access to surplus assets, not only through traditional means like annuity buy-ins and buyouts, but also through novel approaches like reopening previously closed pension plans.
In addition, we’ve assembled a unique solution involving bulk annuity purchases and our retiree healthcare exchange that enables U.S. organizations to derisk retiree medical obligations. After launching this solution late last year, we’ve already helped clients settle some $430 million in retiree medical liabilities and we expect another $500 million in settlements over the rest of this year. In other breakthroughs, we’re using artificial intelligence and broader digital tools to help clients answer some big questions about their people processes. Specifically, we’ve doubled our digitally-enabled revenue into the Career area, two years running and are focused on doubling again, in 2024. This includes us helping dozens of the world’s largest companies identify the skills their employees need to deliver solid business results and grow in their careers.
We’ve also developed thousands of job profiles and aligned hundreds of jobs to specific career levels with AI, freeing up time for consultants, so that they can spend more of their time advising clients of reward strategy and program design. Our digital solutions extended to the executive pay area with our proprietary performance modeling tool that we’ve deployed to help hundreds of compensation committees make decisions about executive pay and performance targets. Stepping over to healthcare, we see no shortage of opportunities. There’s continued high inflation around the world and the introduction of new specialty solutions is not abating. Clients and prospects are looking for breakthroughs to deliver a value and impact. Evidenced by the more than 2,500 people, who recently attended our flagship U.S. Healthcare Conference.
All of our core businesses are helping organizations respond to new legislation and regulation from the Netherlands pension legislation to the EU pay transparency requirements. An important part of core business growth in HWC is the smart connections that span the segment, which create opportunities to cultivate sustainable sticky relationships. Two examples of this came with wins this past quarter with a telecommunications provider and a global biopharmaceutical company. In both instances, we were able to create a comprehensive bundle of solutions by engaging our teams across work and rewards, employee experience, retirement and benefits delivery administration. In addition to being simply larger, these multi-business relationships are typically more embedded and more profitable as we build connections with varied client stakeholders deliver greater value, utilize our client knowledge and leverage common resources.
Our focus on smart connections continues to gain traction across our segments, demonstrating the complementary nature of our businesses and providing further evidence of the value of our multi-industry expertise. For example, this past quarter, our colleagues in HWC helped tee up a broking opportunity for our CRB team to do a complete review of a health and benefits clients’ P&C insurance strategy and programs. After detailing our approach to industry specialization, our CRB colleagues were chosen for all lineups of coverage over the incumbent. Putting it all together, good market demand, well-positioned core businesses, breakthrough solutions in new areas and smart connections that add value. The outlook for HWC remains strong. In closing, I’m proud of our performance this quarter, which reflects our continued strategic progress.
We’re executing successfully on our priorities and as a result are at a solid position to deliver on our goals for 2024. I’m excited about the opportunities that lie ahead for the rest of the year and beyond, and as always, I extend my gratitude to our colleagues for continuing to stay dedicated and committed to WTW and our clients. And with that, I’ll turn the call over to Andrew.
Andrew Krasner: Thanks, Carl. Good morning and thanks for joining us today. As Carl mentioned, we started the year on a strong note achieving results that were in line with our expectations and position us well to achieve our 2024 targets. We remain focused on driving profitable growth through improving productivity, leveraging our specialization and smart connection strategies, and executing our transformation program. In the quarter, we delivered organic revenue growth of 5% and drove adjusted operating margin expansion of 200 basis points. The result was adjusted diluted earnings per share of $3.29, an increase of 16% over prior year. Next, I’ll spend some time reviewing our 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.
Health, Wealth and Career generated revenue growth of 4%, compared to the first quarter of last year, in line with our expectations of mid-single-digit organic revenue growth for the segment in 2024. Health revenue increased 3% for the quarter, led by high single-digit growth in International and Europe, and driven by the continued expansion of our global benefits management client portfolio. Timing of new business contributed to lower growth in North America, where a business is typically fee-based. We expect that to accelerate significantly throughout the remainder of the year in line with high single-digit growth expectations for the full year. Wealth grew 3% in the first quarter, driven by strong growth in our retirement business due to increased pension derisking work in North America and Europe, along with the modest increase in our investments business due in part to new products.
Career delivered 3% growth in the quarter, primarily driven by increased projects related to communication work and employee experience, and more broad-based reward assignments and work and reward. It is notable that in this point in the year, our compensation benchmarking participation is up double digits over 2023, creating a pipeline for accelerated growth in the latter half of 2024. Benefits delivery and outsourcing generated 6% growth in the quarter. The increase was driven by higher volumes and placements of Medicare Advantage and life policies in our individual marketplace business. Based on the incidents of growth projected by carriers in the Medicare Advantage space, we expect more moderated growth later in the year. Offsetting the BDA growth was low growth in our outsourcing business as we absorbed a revenue headwind due to a large client insourcing its health and other benefits administration.
HWC’s operating margin was 25.1%, an increase of 110 basis points, compared to the prior year first quarter, primarily driven by transformation savings. Risk & Broking revenue was up 8% on an organic basis for the first quarter. There was a $5 million unfavorable year-over-year impact from book of business activity. Interest income was $28 million for the quarter, up $16 million from the first quarter last year. Corporate Risk & Broking had another strong quarter growing 9% or 10%, excluding the impact of book of business activity, primarily driven by strong client retention across all geographies and higher level of new business activity. Our specialty lines continued to be major contributors to the strong growth performance, led globally by financial solutions and natural resources.
Growth across CRB in Europe was led by financial solutions, aerospace, natural resources, marine and P&C. North America’s CRB had solid growth driven by new business across several lines, including construction, natural resources and real estate, hospitality and leisure, as well as contributions from our new Verita business. Our international region also contributed strong organic growth across all sub-regions, led by countries in Central and Eastern Europe, Middle East and Africa. Looking at the insurance industry more broadly, in terms of rates, the market remains a bit mixed with some flattening and even softening in specific insurance lines such as D&O and cyber. However, the current risk environment is marked by increased frequency in natural disasters, social inflation and geopolitical conflicts.
And as a result of that, we see rate increases across various lines such as casualty, especially in North America and globally, in political violence and terrorism. Insurance Consulting and Technology revenue was flat with prior year due to the timing of consulting and technology revenue between quarters. We expect ICT to achieve mid-to-high single-digit growth for the full year and in line with our overall expectations for Risk & Broking. R&B’s operating margin was 20.8% for the quarter, a 90-basis point increase over the prior year first quarter, primarily due to interest income, transformation savings and solid organic revenue growth in CRB. R&B also faced margin headwinds this quarter from the impact of book of business activity, as well as foreign exchange.
In addition, as we mentioned at year end, now that our talent base in R&B is back to full strength, we are focused on strategic and opportunistic talent investments with industry expertise, as well as investments in technology that will eventually yield more revenue than what is currently in the mix. These investments impacted R&B’s margins this quarter. However, they will enhance our presence and capabilities in the lines of business and geographies that we believe offer the greatest growth and profitability potential. We continue to expect margin expansion on a full-year basis and as we mentioned last quarter, given the business’s seasonality and uncertain pacing of our investments, the scale of R&B margin expansion may vary from quarter to quarter, but should improve over the course of the year.
Now, let’s turn to the enterprise level results. At the enterprise level, adjusted operating margin for the quarter was 20.6%, a 200-basis point increase over prior year. The benefits of our transformation program drove a large part of our margin expansion for the quarter alongside improved operating leverage. We had $33 million of incremental annualized transformation savings for the quarter, bringing the total to $370 million since the program’s inception. The benefits this program provides will better position us to drive sustainable operating leverage going forward. Our unallocated net was negative $56 million for the first quarter. We continue to expect the full year 2024 balance to be relatively consistent with 2023. Foreign exchange did not have a meaningful impact on adjusted EPS for the quarter.
At current spot rates, we expect foreign exchange to have a headwind of approximately $0.05 on adjusted EPS for the year. Our U.S. GAAP tax rate for the quarter was 19.9% versus 19.5% in the prior year. Our adjusted tax rate for the quarter was 22.4%, compared to 20.5% for the first quarter of 2023. We continue to expect our adjusted tax rate for the year to be close to our 2023 rate, excluding the one-time tax items we mentioned last quarter. During the quarter, we returned $187 million to our shareholders with share repurchases of $101 million and dividends of $86 million. We continue to execute a disciplined capital allocation strategy and currently view share repurchases as an attractive use of capital to create long-term shareholder value.
We continue to expect approximately $750 million of share repurchases in 2024 subject to market conditions and other relevant factors. Our interest expense for the quarter was $64 million versus $54 million in the first quarter of 2023. We actively managed our leverage profile by issuing $750 million of new debt in March. A portion of those proceeds will be used to pay our upcoming $650 million debt maturity in June. We generated free cash flow of negative $9 million for the first quarter, a decline of $101 million from the prior year, primarily driven by increased cash outflows related to transformation and discretionary compensation payments partially offset by higher inflows from collections. The free cash flow results for the quarter are in line with what we planned as free cash flow margin was not intended to be a linear path for the year.
We continue to be confident in our expectations of year-over-year improvement in our full-year free cash flow margin. Our results this quarter were a solid start to 2024 and reflect a continuation of the significant progress we have been making on our strategy and operational performance. We expect our momentum to continue throughout the rest of the year and are confident in achieving our 2024 targets. With that, let’s open it up for Q&A.
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