Willis Towers Watson Public Limited Company (WTW) Earnings Call Transcript & Summary

Good morning. We're going to continue on with our schedule. I'm Greg Peters, and I cover a slew of insurance-related stocks and insurance brokerage companies, including our next presenter, Willis Towers Watson. It's an honor, really, to welcome them back to our conference. They've been a long-standing participant either through Willis Towers Watson or the legacy company, Towers Watson. And so we certainly appreciate their participation. Right now, as I look across my coverage list, this is, in the insurance brokerage base, my hot pick for the year from a valuation perspective, from an operating performance perspective and from a growth perspective. And in fact, the entire outlook for the insurance brokerage space is quite positive, due in part to the substantial amounts of recurring revenue, the positive nature of the EBITDA margins and free cash flow, of course. From management today, presenting, we have [ Nathan Han ], who serves in the Investor Relations role for the company and then we have Mike Burwell, who is the Chief Financial Officer. So I'm going to turn the podium over to Mike.

Thanks, Greg. So excited to spend a little bit of time with you today talking about what's going on at Willis Towers Watson and talk about our company. Obviously, the obligatory thoughts I need to put out there. But if I look at it overall, I mean, we've been a business that's been -- that continued to grow at a pretty good clip from an organic growth standpoint. If you look back, Willis Towers Watson, it came together from the formation of Towers Watson and Willis back in 2016, as the business had continued to get its organic growth in order. We got it in order. We continue to see ourselves growing at a consistent rate with where the market has been growing. And in fact, through the end of last year, in fiscal year '19, we had overall organic growth of 5%. And we're pretty happy with that and pretty consistent with what we had seen in the marketplace and overall growth of 9%. And we -- I think we have an organization, as I say, in that first point here, that's continued to move in a very positive direction. I think we have an executive team that's been together, that works well together overall. And obviously, we've been looking to create value and we've seen that happen, reflected in our share price over the last several years. And obviously, a continued focus. We've seen the revenue growth rate. We've seen improvement in margin, and we want to continue to see consistency in the delivery of our free cash flow, which is a continued focal point of the company. And again, roots date back to the 1800s, just in terms of the company's overall profile. Just to put it in perspective, as I was mentioning, so we're about $9 billion in revenue. $1.8 billion of adjusted operating margin or 20.3% that we delivered for fiscal year '19. Roughly about 45,000 colleagues spread out in 141 countries in which we operate. 140, as I said there. And if you look at the mix, you see it really broken down into 4 segments: our Human Capital & Benefits, and we'll dive into these in a little bit more detail, represents roughly 37% of the business; 12% is Benefits Delivery & Administration; 18%, Investment, Risk & Reinsurance; and 33%, Corporate Risk & Broking, or as we refer to it as our CRB business. If you look at from a geographic standpoint, about 51% of it in North America, 22% in GB or Great Britain, 16% in Western Europe and then the remainder in international. We're serving about 91% of the Fortune 1000, 93% of the Global Fortune 500 and 95% of the FTSE 100. Interesting thing about our business is that at the beginning of the year, we roughly know 85% of our revenue. We have multiyear arrangements with our clients, and so I'm not taking anything away from that. We need to obviously service those clients and never take them for granted. But nonetheless, we have a lot of stickiness. So when we think about upturns, downturns or changes in markets, it really positions the business quite well in terms of its ability to continue to perform in up markets and down markets, and we feel very good about that. As I say, we really kind of operate in 4 segments. So just as I said, you've got a snapshot of the overall company. Let's dive into these just in a little bit more detail. So our Human Capital & Benefits business is our largest segment. We are, at least in our assessment, one of the largest actuaries, if not the largest actuary in the world, in our human -- in our retirement business. Now we don't see a lot of new DB plans coming on board, but nonetheless, we're very sticky in terms of how it is that we continue to serve our clients in that sector. We have roughly a 98% retention rate of our clients. And in many ways, we've become their backbone or back-office in terms of supporting them as they think about derisking their plans and continuing to look at various alternatives around those plans. I don't see those plans going away anytime soon, and it continues to be a very good source for us overall. Also, I would say there has been a real growth element in Human Capital & Benefits, as has been our Health and Benefits brokerage activity. So as we continue to deliver Health and Benefits alternatives for our clients, we've seen the growth there being very significant in double-digit type of growth in that particular space. And we don't see that abating anytime soon. We think in the Human Capital & Benefits area, we have industry-leading margins and are very excited about that particular segment. If I move down to our Corporate Risk & Broking, you'd think about that as traditional overall insurance brokering activities that we're doing. But we continue to see that business as opportunity for margin improvement over the next several years. We've continued to see about 130 -- we delivered 130 basis points improvement in operating margin in that business in fiscal year '19. We still see us having a gap versus the market of 5% or 6%. So that's an area that we're continuing to focus on to close that gap in our CRB business. The other thing is we saw organic growth in that segment in the fourth quarter of 9%. It's been very, very, very strong. We have seen a pricing tailwind a bit in this space. And we've continued to see an expansion of ability of opportunities, whether it be on our cyber risk that people are looking to take advantage of in terms of us brokering solutions for them. One of the interesting pieces of the amount of data that we have to be able to bring solutions to bear. And we continue to see intangibles growing on company's balance sheets and how do they think about managing and dealing with that risk, and we continue to play in that particular space. So we see a market that continues to expand with risks and how it is that they think about solving those risks and it all comes back to data in those conversations, and the market continuing to looking for multiple options. And then that's been a very good business for us. But again, margin opportunity and continue to see growth. If we go to our Investment, Risk & Reinsurance business, on the investment side of the house, as much as on the top side in Human Capital & Benefits, we've been dealing with retirement. The asset side of the balance sheet is we got about $150 billion of assets under management that we're managing on a delegated basis overall. And then our Reinsurance business, as Willis Re has been very strong, as again, if you've seen a bit of a pricing tailwind overall. Our Benefits Delivery & Administration business, I would just highlight to you, is to think about that space as one -- the biggest piece of it is roughly 50 million participants that are there, that are looking for Medicare or Medicare supplement type of support. Of that 50 million, you break about 15 million is employer or municipality-supported participants. So if you take that 15 million and break 7.5 million down, we're dealing with many companies, the IBMs of the world, so to speak, that are having and looking for us to help manage that process for them. And we have a very strong market position there. Equally, in the retirement -- in the municipality space of that 15 million participants, what we see is the state of Ohio is one of our accounts, those are very episodic, but very strong positioning. So of the 50 million that we see growing over the next 10 years to 70 million potential participants in the Medicare or Medicare supplement space, we're very strong in the employer, as I say, municipality space. We bought a business that's direct to consumer back in July of 2019 called TRANZACT that was in the direct-to-consumer space that really deals with the remaining 35 million participants. And the reason it's growing from 50 million to 70 million is there's roughly 10,000 people retiring every single day. So we see that continuing to grow very strongly, and we see very good margins. And that direct-to-consumer space is a space that we see competing with the likes of the eHealths out there of the world. But we see this business has had very good margins for us. And we've said 25% to 30% CAGR growth rate over a 5-year period from when we acquired it. And so we see very strong views here. So well over 2 million people on our exchanges today, and we continue to see this as a continued very strong growth element. And that's what, kind of going back full circle, how we ended up with 9% overall growth for the company, and we ended up at 5% organic growth for the company. And this just gives you a little bit of breakdown of the businesses. As I say, Human Capital & Benefits, you see retirement at 39% and our H&B business at 38%. Our Talent and Rewards at 18% and our TAS business at 5%, or really Technology and Administration Solutions. So just to give you an overall sense of the 3.3% breakdown, that is our largest segment of HCB. If you looked at our Corporate Risk & Broking, roughly, we placed $22 billion of client premiums annually. And again, if you look at the geographic breakdown, what you're seeing here is North America and Western Europe, Great Britain and then followed by international. And we covered those a bit earlier. Maybe just to give you a little bit more color, I touched on reinsurance, and I touched on investment. We have looked at our wholesale business here. We have issued a press release that we are looking at these strategic alternatives. We have hired Goldman to help us evaluate those strategic alternatives. And so we're looking at our wholesale business overall. Why? We're looking at it in terms of how it compares with the retail segment. And we're continuing to evaluate what those alternatives may mean in comparison to that retail segment. We also own a business, Max Matthiessen. It's really in the investment space. And the Underwriting and Capital Management, we're in the process of exiting. So that's why you see it just winding itself down. And we've also then divested ourselves of roughly 10 businesses. We've continued to look at the portfolio. We will continue to look at geographies that make sense for us, and this is just part of our ongoing evaluation of our portfolio, but I thought it would be appropriate to mention those. And then as what I mentioned here, what you see is TRANZACT really having a bigger impact to it. Our Benefits Outsourcing and Group Marketplace continues to be, again, a very, very strong performer for us overall, and very happy and pleased with the margin performance that we're seeing in this space. I think some guiding principles that we put across the company and obviously, it starts in terms of having financial discipline. And so we think about that is very much based in our CEO, John Haley, and that is that not all revenue is created equal. And so that we need profitable revenue growth as a starting point. And then obviously, we want to see that evidenced by the collection of cash. We obviously strive to maximize the potential of capital in terms of how we deploy it. At the moment, we -- since we did TRANZACT, we have only been buying back shares to the tune of roughly 100 million to 150 million to make sure we're not dilutive as it relates to our employee benefit programs. But we anticipate continued paydown of debt and then being in a position to reevaluate looking at share buybacks as we obviously view that as an appropriate opportunity for us to think about our capital allocation. We're very committed to delivering on results. That is across the board. And as a result of it, we have not been 100% happy with our free cash flow commitment, and therefore, we have changed or are in the process of changing our bonus programs to make sure they're even more focused on making sure on things that we say are important to the company in terms of delivering against those objectives. This is the guidance we've put out for fiscal year '20. So what we've said is overall growth of 6% to 7%. We said 4% to 5% organic revenue growth overall. And as I said, we delivered 5% in fiscal year '19. Our adjusted operating margin, we're targeting at 20.5%. We delivered 20.3% for fiscal year '19. But I would tell you that we acquired TRANZACT in July. TRANZACT actually has -- we roughly had 5 months of revenue and 5 months of expense. So when you normalize that margin, that would be more in the 30 basis points that was in there as well as FX. So I would call it roughly a 50 point -- basis point improvement between '19 and '20 in terms of how we're thinking about it. And we tend to target ourselves in that 50 to 70 basis point improvement on an annual basis in terms of what we can do from a margin standpoint. Our adjusted guidance on EPS is $11.80 to $12.10. We delivered $10.96 for fiscal year '19. We're targeting around $1 billion of free cash flow, which includes the settlement of Stanford, which is roughly -- we're anticipating that will indeed get settled in this current year at $120 million. And so that will be $1.120 billion. If you look, it grossed up versus that $1 billion target that we have to be in place. And we're estimating around $0.10 of adjusted EPS. The other thing I would say is that we delivered for fiscal year '19 $830 million of free cash flow. So that was a little below what we had said and targeted. Why? One, is that we did see deals actually getting moved more to the December time frame in terms of them getting concluded with the pricing increases coming in the marketplace. So as you were getting a significant price increase on your Property & Casualty insurance, you were thinking about what alternatives might you think about, whether how much deductibles you wanted? How much risk are you willing to take? How are you thinking about it in your own captives? Those types of decisions really moved themselves into December versus what we had seen in the prior year. Second, we -- the great news with TRANZACT is that we had seen its growth but we did definitely saw more cash usage to get that growth in terms of bringing on call centers, licensed agents and our investment that we needed to do in that particular business. Third, we saw higher cash tax rate for ourselves in terms of going through some of the tax legislative changes. So we end up paying a bit more in cash taxes in fiscal year '19 than we had originally anticipated. So those were the main drivers overall. So what are we doing about it to make sure we hit this $1 billion free cash flow is, one, that, like I said, more direct alignment from the operating committee, the leadership of the organization, roughly 20% of our bonus is driven off in delivering free cash flow and the same with the top 500 people in the company. Not that we didn't have it before, but this is very direct in terms of its alignment overall. Second, we are launching and have selected a contract management system that will soon to be in place. So it'll give us greater visibility centrally, not that we don't have standards and it was getting managed and through our organization, but we have a contract management system that we will be able -- that we'll see effects starting to see more impacts, I think, over the second half of the year. And third, I've taken some people out of their roles organizationally from contract to cash, to total focus on the process and every process breakdown that we can do to enhance it. So we're very focused, as I said, around how we continue to drive this overall, and those are the actions that we're indeed taking. So what I want you to take away in terms of takeaways, I would say, I think we have a strong foundation to continue to capture market share growth. We -- the organization, we feel very good in terms of where it's positioned and how people feel. And why do I say this? When we saw one of our competitors have a merger in the marketplace, not uncommon that you would see resumes come to you, but we've continued to see a flurry of resumes come to us, and even before that, and we think that's because of the culture of the company and that people feel that it's a great place to be. Second, we're very focused on operational enhancements to that margin expansion. I talked about that 50 to 70 basis point improvement is really what we're focused on. We obviously have a diverse portfolio, as I touched on it, 85% in terms of commitment that we know at the beginning of the year in terms of cash revenue. We have a good insight to what that's going to look like throughout the year as well as margin. And I would leave you that we are very focused in terms of flexibility, but obviously maximizing shareholder value is a key focus of ours overall in terms of delivering to our shareholders. And that's top of mind for all of us. So that's the things. I'm glad to respond to questions anybody may have or --

We have about 10 minutes for questions, and then we'll go to breakout.

Okay.

Yes, go ahead. [indiscernible] the question.

Yes, I'll repeat the question. So [indiscernible] yes.

Just a question on organic growth. You've done a good job [indiscernible] organic growth. I believe it picked up over time. [indiscernible] do you see that as pretty good line of sight, the organic growth that's [indiscernible] how should we think about that? And what is the [indiscernible]

So the question I heard was, as you look at organic growth and you've seen an improvement and a trajectory there, how should we -- how should you be thinking about organic growth into the future based on what's actually happening in the business. Did I capture that question right?

Yes.

Yes. So what we've seen is we have seen a bit of a tailwind as it relates to price. I would tell you, it's -- in our mind, it's around 1%. 1% to 1.5%, depending on the business line itself. So that's what we've seen. We obviously saw TRANZACT adding to our overall growth, and it should add to the growth story. Obviously, it won't be on same-store sales until July or to the end of the year in terms of what that will mean for us. So I think really in that 4% to 5% range is really what we think about. The business itself, could it go a bit higher? It's possible, and I think that would really be the right view in terms of how to think about it. So thank you for that question. Other questions?

Can you talk about market share for the various businesses?

Yes. The question is, can I talk about market share for the various businesses. I can give you some indications of it. When we look at our HCB business, we feel we're really the dominant player in the retirement space. Some of our competitors take the retirement business and mirror it with their Investment business. We break it out separately, so you see retirements sit in our HCB segment and you see retirement business sitting in our IRR segment overall. But we think we're in a very strong market position, maybe leading market position in the retirement space overall. Health and Benefits, we -- again, I would tell us, I think we're in the top couple in Health and Benefits brokering in our mind in terms of where we're positioned. As you think about the Talent and Rewards businesses, a much wider market space, although we've been playing very high -- at the high end in terms of executive compensation as people think about executive compensation. So it depends on how you parse that market share up. We have not gone into a lot of the online stuff that's been there that we have looked at more commodity-based, and we frankly don't see it disrupting many of the businesses and activities that we're doing. If I go to our CRB business, it really depends on where you are in the world. The business itself, the legacy Willis business started in Europe. And so it had a very strong market position of FTSE 100. It had acquired the HRH business and then moved in the middle market space in the United States. So I'd say, if you look at us in Europe, we're in the top 3. In certain markets, we're #1, for example, in France, but I'd equally tell you, in the United States, we're in the top 5. It just depends on where you sit. We have very strong competitors in the U.S. marketplace overall, but obviously, a global network. If you go to our Reinsurance business, I mean, there's principally 3. So we're 1 of 3. I would argue, maybe we're third in that category if you just look at in terms of scale. Our Investment business, we're at $150 billion of assets under management, but our 2 direct competitors have about $100 billion more, but there's a good reason for that. Because we were dominant in the retirement space and moving to the asset management side, it was very difficult, almost, some might say, conflicting, to be in a situation to recommend that you go to a delegated asset manager when you're the adviser. So we were a bit behind, given our market position in the retirement side moving to the asset side of the balance sheet, although we've continued to grow very strongly there, but there was a reason to how we got to that level of position. The Max Matthiessen business is in a very strong market position on where it sits in Sweden. And in the wholesale business, again, I would tell you in the top 5 wholesalers that are out there in terms of market position. And then in the BDA segment, I think we're the dominant player, frankly, in that space. Dominant's probably the wrong word, but top market share and where we sit in the BDA space. So hopefully, that was responsive to your thinking question. A question, yes?

One of your peers [indiscernible]

So the question was, one of our competitors' highlights, data analytics is a very important piece and an important element to their growth. And how do I think about it as it relates to Willis Towers Watson. I think data analytics is a very key ingredient. Data is at the essence of the process. And as brokers, we have a plethora of data, and how do we monetize that data is an important element, first, for our clients and then obviously, for us, as part of that. Historically, we have a group called ICT, the Insurance Consulting and Technology that sits in our IRR segment. We've been consulting with insurance carriers for many, many years and developing new products and offerings for them. I would call it data analytics to be there. And just -- we're doing a variety of different things in that space, but let me use an example. One of the things we're doing, particularly in the shipping industry is working to make sure there's an IoT device that's sitting on a container. That, that IoT device on that container, we know where that container sits on a ship, where it's sitting and floating on the water, where it's sitting on a truck or a train or sitting on the dock, and based on that additional information, we can take that insight, working with that client to those carriers and understanding what that risk is and how it is that we help place that. But that's just one element that we have of many clients, obviously, with the right permissions and protections that we're able to bring that insight overall. But it all emulated, started with our ICT segment. And I would tell you, we don't believe any of our competitors have anything like it. So although we don't call it data analytics and have it as a separate segment and highlight it that way, it's very much a core to everything that we do. And I would tell you also in our CRB businesses, as much as important of all the decisions that we didn't put into it and why we didn't make those decisions that helps our clients and our future clients because of the data and the decisions that we made. So thank you for the question. Other questions?

I'm going to give you a lay-up question because [indiscernible] But if you look at Marsh and you look at Aon, which are your 2 principal competitors and you look at their results over the last couple of years, they've announced these massive restructuring charges. So they skewed everything out and [indiscernible] quality of earnings. And my view is good quality of earnings because the gap between the reported earnings and your adjusted earnings was narrower than some of your peers. [indiscernible] 50 to 70 basis points of margin improvement. Are we going to see a restructuring program on [indiscernible] diminish the quality of earnings?

So thank you, Greg. So back to the question is, are we going to take a restructuring program? If you looked at our competitors, maybe they have looked at some of those things. If you looked at our gap between reported, our adjusted numbers and our reported numbers, that has been narrowing overall and so should you expect any kind of restructuring actions out of Willis Towers Watson? Look, never say never. You know what I mean? I think it would be inappropriate for me to say, "look, we're not doing it." But there's been a conscious decision around financial discipline that we've had in the company. So I joined the company 2.5 years ago and I'm not saying I was the savior, I just -- part of a great management team. But we really strive to stop, what I call EBS, earnings bad stuff. We had way too many types of adjustments that way that were put in there, but we really wanted to make sure to reduce that gap between any adjustments, which right now is principally amortization. And our reported earnings, for that very reason, to give our investors comfort of what it is that we are doing in the company and delivering against it. But to restructure any professional services organization, those -- or the only way you do it is constantly thinking about those things. But right now, that's not in our mindset. Our mindset is about delivering against operations, being consistent about delivering organic revenue growth, margin improvement at the 50 to 70 basis points that I discussed and delivering the bottom line as well as free cash flow. So -- and I wouldn't have said that in order. Right now, there's a lot of focus on free cash flow. So thanks, Greg.

We have time for one more question.

[indiscernible] free cash flow for the last year [indiscernible]

So the question was what should we be thinking about if you exclude the 3 items that I mentioned on free cash flow? What should we think about free cash flow into the future? And which of the businesses really are driving that overall free cash flow? I would tell you that we're comfortable, I'll start with the second question, that all the businesses are there in terms of doing it. The BDA segment as we continue to roll TRANZACT, we'll see more usage of cash than generating cash. And I would say, HCB, you'll see more generation of cash overall. We're not giving any further long-term guidance at this stage. Frankly, I want to make sure we deliver on fiscal year '20, and then we'll reassess anything going forward from that. So thank you for the question.

All right. So with that, just so we have time [indiscernible], we'll just resume in the breakout. Thank you.

Thank you.