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

Okay. Thank you, everybody. Good morning. Thanks for joining us on this session for the conference on a Friday afternoon. We're finding more of the and where you are. I'm Mike Phillips, Morgan Stanley's Equity Research Analyst for Property and Casualty Insurance. A pleasure to have with us today Carl Hess. He's the President and incoming CEO of Willis Towers Watson. So thank you, Carl, for joining us. It's nice to see you.

My pleasure. Good day all.

Thanks. So guys, we have about -- we have 30 minutes. So we'll save some time at the end, you guys in the crowd are allowed to ask questions, which I'll get through e-mail. We'll save a little bit of time at the end for that. And we have about 30 minutes to chat with Carl about things that are happening in brokerage land and Willis Towers Watson specifically. Before we get into it, let me get the disclosure out of the way. So for important disclosures, please see the Morgan Stanley research disclosure at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

With that out of the way, let's get into it, Carl. Again, thanks to you look comfortable there. Jealous, looks pretty cozy where you're calling us -- thank you.

You should try one. Yes.

That's perfect. Look, I got some questions for you. Let's start with, I guess, just kind of -- because you're background. You've been at Towers Watson for a long time. And your background actually comes from the other side, the consulting side before the mega merger back 5 or 6 years ago. So I guess I'm curious because we hear a lot about this from clients, they ask the questions all the time about just cultural differences between the 2 sides of the fence. And since you've been there so long and you come from consulting side. I'm curious, any thoughts you have about what you see there, specifically at Willis Towers Watson on maybe any differences in the culture between the 2 sides, if that's important or not? How that works in terms of -- if it's any different do you think they might be from some of your peers, if you can even comment on that?

Yes. So I mean, we're 6 years in. And hopefully, the sort of idea of 2 sides has gone away, and we focus a lot more about our culture of inclusion and collaboration, and there is significant collaboration across the organization. We have come a tremendous way since Willis Towers Watson came together in 2016. We acknowledge we've learned a lot from each other. There is a unique blend of talent in the organization. And I think that was reflected in our Investor Day back in September when Adam Gerard, who's the Head of our broking business, was outlining our vision and as we described the Broking segment as say, let me see I get this right, data, technology, analytics, consulting and solutions business rather than a traditional transactional broker. And look, We have full vision at Willis Towers Watson. And that's to be the best company we can be, and that's for the benefit of all our stakeholders. That includes our colleagues. The key element to that vision is being a magnet for talent. And to accomplish this, we do need that inclusion and the inclusive culture I've talked about, where everyone's heard, everyone's respected, everyone's valued. Because when we all bring that perspective to work regardless of whether a broker or consultant and yes, the consultant is still in big, right? We're able to bring that together and produce better outcomes for clients and for each other, and that gets us to our full potential.

Okay. Obviously, no -- you mentioned in your answer there, no secret there. Some of the headwinds you faced in the past year or maybe a little bit longer have been just from attrition given that the Aon deal that that's gone now. I guess is the worst of that pass -- I mean, regionally, we've seen some news you guys actually grabbing some people and adding to staff. So is it worse that behind us and now it's kind of going forward with hiring? Or where do you think we are with that?

No, I think you're right on that, Mike. I mean we've -- real question that during 2021, we had elevated levels of attrition. There was a lot of uncertainty around the business combination. At the enterprise level, right, our overall attrition rates remain pretty stable. So this was really mostly focused on our Corporate Risk and Broking business. In response to that, because we didn't just sit back, right, we provided clarity in our direction, and now it's a strategy right, here's where the firm is going. And we also did put some financial incentives in place to retain key client-facing colleagues. Having lifted constraints of the disruption caused by the deal and the cancellation of the deal, I am really happy that talent attraction and retention has improved, and you've noted that, thank you very much. Hiring rates are up dramatically in our Corporate Risk & Broking business and attrition stats are improving as well. As we mentioned on our earnings call on a net basis, core CRB head count was down about 100 colleagues -- 100 colleagues that's just under 1% compared to the third quarter of the prior year. So we think the worst is behind us. We can keep the high momentum going that you've noted in the press. And at this point, we're focused on retaining and expanding our talent base, and we're actually really excited about the future of this business is what we can achieve together.

I guess on -- just a follow-up on that, Carl, what are some of the things you're saying to employees to keep folks there? You must have town hall meetings that you talk to them and give them the plan for the next 3 or 4 years and the long-term plan to get them excited about. What are the communications you're giving to employees to keep them inside?

You're right. I mean I've done dozens and dozens of town halls over the last 3 months. And it is about the vision, right? We are trying to be the best, not the biggest, right? We have a great value proposition for clients. We have a great, great value proposition for colleagues. We are working together, 46,000 brands working as one to actually produce superior results. Other people talk that, we walk it. And the idea that if you can help bringing the best of Willis Towers Watson to everybody else, you just succeed, we will all succeed. That actually resonates, right? The people who are with us are here because they wanted to be with us. Think what we did to them, right? Put them through a pandemic, put them through a merger and they're still with us, and they're still prepped, right? It's incredible. I'm so proud of them.

Yes, very been through quite a bit. I guess if we could talk about some of the things you laid out in your Investor Day. First off, maybe we can talk about the plan to be by 2024, I guess, the $10 billion revenue company. Maybe can you talk about, I guess, first off, what are the biggest challenges to get to that number, you think, over the next 3 years?

Well, I mean, we're confident in our ability to hit that $10 billion revenue target by 2024. We took a bottoms-up approach to figuring out the opportunities and the objectives for all the goals we communicated, including the revenue target. So to achieve that revenue target, it's about smart investment, right? Looking for the places in our portfolio that offer the greatest potential, figuring out what the portfolio effect is. So leveraging the places that our businesses intersect that enable us to differentiate and enjoy premium pricing and to take market share. Let me give you an example of that. Our retirement and our investment businesses together came up with something called LifeSight, which is the leading master trust in the U.K. We've taken that from nothing to over GBP 14 billion of AUM. And this is a market that's projected to grow in double digits over the next decade for a year, right? And we're the leading player now. So by finding those intersections, we actually can add significant value. So we will look to be disciplined about innovation. I stood up in innovation and acceleration function that's about growing fast, blossom fast and if you have to fail fast. So we come up with great ideas in the organization. It's actually properly commercializing them. And on the flip side of that, we've established a sales and client management function. That's about putting one sales process to go so we can actually get that best of Willis Towers Watson to every client where it makes sense. Now we're going to look to inorganic opportunities, but not just for growth's sake, we'll do it to fill in gaps or take advantage of scale effects in our portfolio. So the deal we announced in Israel, right? With Leaderim, a in great firm, great people, great analytics. So actually helps us with our geographic footprint. We were doing business before via correspondent, great developing economy, some real growth industries that we have specialist expertise and makes perfect sense for the portfolio. So that's sort of how we develop that confidence. And I think if you combine that focus on growth with the measures we've taken to simplify our structure, going from 4 segments to 2, which helps with that intersection effect, less barriers to the organization, 4 geographies down to 3, fewer barriers to getting to the right clients everywhere. That will make it quicker and easier to do business with us. And thus, kind of we remain highly confident in our ability to get to that $10 billion.

It sounds like part of that and part of your answer there is simplicity. Getting rid of the complexity that was maybe built into the past and streamlining some things that might make things more efficient. I'm not sure if that's part of your -- the way you think about it or not, but that's...

Now it's part our strategy. 3-part strategy like grow, simplify and transform, right? So simplifies right there in the middle. And I've got to say that's been really well received. We have great people. They want to feel empowered. And if we can actually not just make them feel empowered, but empower them so they can bring the best of the company to their clients, we will win.

Okay. If we think about your organic growth assumptions built into your plan, do you have any specific assumptions underneath that to think about what GDP needs to be to get to those organic growth and even the 3-year plan for overall revenue?

Yes. I mean, we've got a portfolio of businesses, right? You started there, right? Consulting and Broking and under the hood, right, lots of subdivisions within those. And most of our businesses are relatively noncyclical, right? We've got clients that are spread across different industries. We've got a global footprint. About 80% of our revenue base is recurring and it's built on solutions and services that are required by regulators, either explicitly like our pension valuation work. It's a $1 billion business for us. We're implicit, right, the insurance coverage levels, no one does not buy insurance. right. It's a question of how much. For that reason, GDP is not a really reliable guide in terms of forecasting our revenues. And let me give you an example, right? In 2020, U.S. GDP down by 2%, company organic growth of plus 2%. And that was even during the added disruption caused by the pending acquisition. Similarly, if you look at our predecessor company, Willis, their results from the '08, '09 economic downturn, they continue to grow revenue in the cycle during those years as well. So most of our businesses, right, do remain stable across economic cycles. That being said, right, we do have some businesses where the work we do is discretionary in nature. So a portion of our Talent and Rewards business has project work, and there are a few areas where we provide consulting services and health and benefits or insurance consulting and technology business and to a small extent in our investments business. So collectively, across the company, discretionary work is probably about 20% of our revenue base, that's discretionary work, right? And so we model -- we do our internal modeling, we do consider GDP, but it's on a case-by-case across the business portfolio as deemed applicable, right? That investment business, right, it's far more dependent on what equity markets are going to do because we have performance-based fees and asset-based fees.

No, that's perfect. In fact, you already answered my next question about economic recessions and how that will play in. I think your 20% is what I was thinking, so that's good. I guess switch over to the margin assumptions that came out of Investor Day. Some lofty goals there of how you can expand your margins. I guess, first off on that, it's around 500 basis points of improvement, call it from, say, 2020 over the next 3 years. So I guess, first off, in that margin expansion, are you assuming any type of just insurance pricing that needs to be built in, in the bigger environment to help you get to that margin expansion?

No, we forecast that we -- it's a loves game to try and look 3 years out and figure out what you're going to be on rate, right? So the margin expansion is really based on our shorter-term view, right? We -- and we have a marketplace realities report. Most recent one issued in November. You can find that on our website. So that will give you our view on that. It comes out twice a year. And it does sort of inform our view on rate. Generally speaking, we think that pricing increases are going to moderate over the near term. But we are not sort of just looking at sort of what rate is going to do when we sort of project out our broking business as growth.

Okay. One of the pushbacks or questions we often get as well with you guys. This is something that you've turned the corner quite a bit on recently is just free cash flow and how that's compared to your peers? I guess, first off, what -- if you look back over the past couple of years, what have you learned that maybe you said, "Oh, we kind of got that wrong, and we got that fixed today to allow us to have more tailwind from that going forward and get back in line with where our peers are?"

Yes. Well, thank you for the compliment like because we have worked really hard on that. And you're absolutely right that I think you rolled the clock back a number of years. It just wasn't the focus for the organization that it should have been. So our CFO, Andrew Krasner, in his prior role actually led a significant effort to instill far more operational discipline around the organization with respect to the processes that will help us generate a more consistent free cash flow. So we look at things like contract management, better visibility with regard to billing and collections and managing capital within the organization, right? Simple funding of our bank accounts, making sure we're sweeping more frequently. And we are going to sustain those working capital improvements and look at incremental opportunities in our upcoming transformation program. But the real thrust on free cash flow growth is underlying margin and profit expansion, right, ignoring that the short-term outlays we're going to make for the transformation program. So we think the increased operational efficiency within there, plus better operating leverage should enable us to continue to improve our free cash flow results from where they are today, which is now a place I don't have to be embarrassed about, which is a good start.

Okay. That's fair. Part of your plan too and you talked a lot about this in the past couple of weeks and since your Investor Day, is what you're doing with cash flow and what you're doing with share repurchase and how much you're kind of front-loading that. But I guess at a higher level, how do you think about allocating between, I guess, M&A and share repurchase and where you should put their money? I think, again, you've talked about how early on, you'll front-load some of the share repurchase. But beyond that, if you look at -- you mentioned one of the first questions, you mentioned filling holes for M&A. So just how you evaluate that at a broader level of where to allocate funds?

Yes. So I mean to recap, right, for those who didn't memorize our Investor Day discussion, we communicated we'd have about $4 billion of near-term share repurchase activity. We completed the first $1 billion already, and we are doing repurchases for the remaining component of the $4 billion in '21 and expect to conclude that during '22. And obviously, with the proceeds of the Willis resale in pocket, we have a high degree of conviction, we'll be able to pull that off. We also communicated we expect to generate about $10 billion to $11 billion in cash through 2024 and about $5 billion or $6 billion of that for free cash flow generation during that time. So that includes the first $4 billion I was talking about. Our primary use of free cash flow is expected to be share buybacks and less investment opportunities with superior return potential arises. We think that is a really good organizational discipline for us to have. As far as M&A is concerned, we will pursue opportunistic small tuck-ins, like I talked about with this rail bolt-on M&A to strengthen capabilities. We see opportunities there, and continue to survey them. So I expect we will be doing some of that. But we do not expect any big transformational acquisitions, right? It will be about reinforcing our capabilities and expanding that geographic footprint where it makes sense.

That's helpful. It's kind of just broader questions now without too many numbers around these. But I guess would it -- how would you define the key differences between the company today versus Aon, [ a month ] back? What do you -- What do you have to offer that these guys don't? To be honest, we get that question a lot. How do you differentiate? You can probably talk about this for hours. Let's not do that. But your differences in what you can offer clients versus what they do?

Yes. So I mean, obviously, there's a lot of similarity between the businesses. So -- but there are a few differentiators I can highlight. One is our business is a bit different, right? We have more consulting and less brokerage as a result than the big competitors. Our geographic footprint is different across businesses. Part of that's heritage, right? Our London wholesale base and our London investment base and insurance consulting base just sort of means we have a bit more of U.K. accent that others might have. None of our competitors have the equivalent of our Benefits Delivery and Administration segment. And that's a big growth engine for us as a company. It is a differentiator. I know for European investors, the U.S. Medicare market can be a bit mystifying in bits. But it's an area which -- because we still age, right, like we're -- it's called the population subject, so it is growing, and we think we have a great niche in it. And lastly, our approach to how we do broking, our global lines of business and overall approach to risk management that I talked about earlier, Adam's comments, I think differentiates us from standard insurance broking. And we see that as the way of the future, right? Clients demanding risk management, not insurance.

I just want to add one thing that we've heard a lot about is clients are more concerned about just overall risk given the pandemic and given cyber and these different things are kind of hitting us in every direction. Do you feel that you've got -- I guess, first off, do you feel that from clients that that's actually the case, they're more worried about risk in general, so they're needing more help from folks like you, one. And if so, anything else besides pandemic risk and cyber that come to mind that you think of that clients are asking about today that they weren't asking about before?

Yes. So I mean, climate is a great example of an area which was largely off people's radar screens despite various comps, right? Just it didn't affect the corporate world the way it does now and now it's on everyone's radar screen. So we think climate change across our clients, both Human Capital and Risk Capital portfolios is something where we have led, right? Our client resilience hub has generated intellectual capital that has actually translated into tangible business results for us, and we will continue to lead in that area. There are some interesting opportunities for us in the emerging and evolving markets. I talked about our LifeSight product before, right? Defined contribution is on the growth virtually everywhere in the world. And this is an offering where -- it's a pan-employer scheme where we have consolidation opportunities. Our individual marketplace business that sells Medicare, right? I talked about that, right? These are all places where there's tremendous interest and areas where we can grow. But I mean, just the real area where kind of the opportunities are is just broking, right? And the pandemic, there's nothing like a good crisis to focus the mind wonderfully. I think I'm botching the phrase, but I think I've got it about right. I mean -- so the bounce back effect there after we've taken our bruises kind of moving forward, it means that we've got just tremendous potential there, right? Risks are much more complex. They are broader in scope as so much of corporate America has moved -- corporate the world in general, right, it's moved from tangible to intangible assets that sort of need to sort of figure out how do you create resilience with respect to that? It's a tremendous opportunity for the entire industry, not just Willis Towers Watson. We plan on leveraging our competitive advantages to take advantage of that.

Let me ask specific question, one of your specific divisions? That's the that too long to the TRANZACT business. There's -- can you talk about, I guess, just the different distribution channels use for that? And then a couple of follow-ups from that, but that acquisition seems to be done quite well for you, but maybe just have the distribution channels on that and how that's split for TRANZACT?

Yes. So you can't really talk about the split by lead channel at any given point in time because we have this really agile model for TRANZACT, and the split varies across all these different lead sources. So again, I'll back up a step just to make sure people understand. In the U.S., right, you turn 65, you come eligible for a socialized medicine from the government, Medicare. And you'll typically do 1 or 2 things as a retiree, either you'll buy a supplement because Medicare has got some big gaps in it or you'll convert your government to provide Medicare to something called Medicare Advantage, where you're getting your insurance instead from a private insurance company and they'll typically offer extra benefits. We help retirees with both, right? And so we are sourcing our -- sources of retirees from various different channels like Internet or TV or mail to identify opportunities. And the costs for those various different channels are going to fluctuate. The cost of TV ads may go up and down, right, depending on the time of year or what's being shown. And so we adjust our plans accordingly. TRANZACT has exceeded our original expectations by a goodly margin. Our outlook remains really positive. This is a direct-to-consumer business, and there are some real differentiators we have there, right? One is we have a long history using internal agent workforce. So this is insurance, you need agents to sell it. And we've got a proven way of going about doing that. We also have an incredibly close partnership with our carrier clients and that gets us better quality enrollment and drives down the cost of sale. So for example, we own branded domains for on behalf of Humana, Mutual Omaha, John Hancock, Aetna, MassMutual, Aflac, et cetera. So this sort of channel where people are dealing with a brand they know and trust means that the cost of sale gets driven down. And we've also taken steps to diversify our lead channels. So for instance, we've got one targeting Spanish speakers and looking at partner campaign that gives us more targeted and thus more efficient marketing environments. So the diversification there effect for us is really strong and I think relatively hard to match.

I guess one of the things we've seen from other businesses that rely on kind of direct-to-consumer models and searches from Google, if you will, or Facebook searches is there's been quite an inflationary pressure there. Again, that business, I was curious how you've seen that for TRANZACT?

Well, that was the reason we've got about diversity is actually we can mitigate that and diffuse it, right? Because otherwise, you end up -- you end up highly vulnerable to some of these individual factors. And we just shift, right? That's the way we manage that. So it helps contain our costs.

I'm going to take a peak for questions from I get them from an e-mail, and let me take a look and see it. I said earlier, I doubt it, but I want to make sure because we're getting close. I do not see any, which was what we expected, so that's fine. Why don't we do a couple more. I guess, as you sit back and think about the role you're inheriting soon and taken over, and big plans for the next 3 years that you laid on Investor Day. I guess, what are some of the things that keep you up at night that are you most concerned about that affects your plan, that effects the business? What are you most worried about, Carl?

So I've been busy during the day. So nothing much keeps me up at night, but my wife will tell you that. But look, organizationally, historically, Willis Towers Watson does not have a great track record with pulling off operational programs. So I don't underestimate the challenge. We have spent the last bunch of months making sure that all 46,000 people are aligned and recognize that it's not being done to them. It's being done for them, and it's going to be done by them. And that mitigates the risk of sort of death by friendly fire here, which otherwise would have been my concern right? This is going to demand a lot of time and attention in an organization that because of the attrition we talked about earlier, right, we -- it feels a little bit thread there in places. And so asking even more of our people is an ask, I realize that. But there's a reason I've been doing all these dozens of town halls. There's a reason that we have our focus on engagement is because we're a people business, right? It's just like the cliche, right? The assets of the business walk out the door every day. I want them excited to walk back in and going to do my best, and the management team will do their best to make sure they stay that excited. We have a lot to ask them, but they have a lot to offer.

Okay. I mean I didn't hear in there, which is good. I mean what I heard you answer was it's more of the employees and -- because they are the engine that drives where you're headed, but I didn't hear anything from like external things that might come at you that you have to worry about at night, even though you're seeing...

Look, there is no quote losing sleep or whether the Federal Reserve is going to -- or Biden administration can do something stupid, right? Because these big exogenous threats, you can do a little bit of scenario planning about you actually can't control them. I can react to them and we can plan for them and we do, right? But you spend your time thinking about things you can actually act on. I think that's the right way to go about it. And I will continue to keep us focused on what we can do.

Okay. Perfect Well, I'll wrap it up there, Carl, thank you very much. We're at the top or the bottom of the hour anyway. So thank you. It's been fun talking to you and stay busy and see. Nice talking to you, and we'll be in touch soon. I'm sure. Thanks very much for nothing else from the field. So we'll wrap it up there. Thank you so much.

Thanks, Mike.

Okay. You bet. Talk to you soon.