Operator:

Good morning. Welcome to the WTW Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Please refer to the wtwco.com for the press release and supplemental information that were issued earlier today. Today's call will be available for the next three months on the 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 review the forward-looking statement 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 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 will now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Andrew Krasner:

Thanks, Carl. Good morning, and thanks for joining us today. In the second quarter, we delivered organic revenue growth of 6% and drove adjusted operating margin expansion of 240 basis points, resulting in adjusted diluted earnings per share of $2.55, an increase of 24% over the prior year. As Carl mentioned, thanks to our solid results for the past two quarters and our confidence in what we expect to achieve in the second half of the year, we have raised the low end of our 2024 financial targets for adjusted operating margin and adjusted EPS, bringing the target ranges to 23% to 23.5% and $16 to $17, respectively. In addition, we have been able to identify additional transformation savings and are raising our cumulative run rate target from $425 million to $450 million by the end of 2024. The total cost to achieve these savings is now estimated at $1.175 billion. These additions to the transformation program will help us drive further efficiencies as we remain focused on a strong finish to the program. 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 unless specifically stated otherwise. Health, wealth, and career generated revenue growth of 5% compared to the second quarter of last year, in line with our expectations of mid-single-digit organic revenue growth for the segment for 2024. We noted last quarter that we expected health revenue growth to accelerate, and indeed the business-generated revenue growth of 9% for the quarter in comparison to 3% growth in Q1. North America generated strong growth as a result of increased project work. In addition, international and Europe delivered double-digit growth driven by strong client retention, new local appointments, and the continued expansion of our global benefits management client portfolio. Wealth grew 5% in the second quarter, driven by strong growth in our retirement business due to new client acquisitions and increased project work, including pension de-risking work in North America and additional work required in a peak valuation year in Great Britain. We also delivered solid growth in our investments business due to improvements in capital markets and growth from our LifeSight solution. Career delivered 4% revenue growth in the quarter, primarily driven by broad-based compensation assignments in work and rewards in North America and Europe, as well as projects related to communication work and employee experience. We also saw growth in our product revenue with more sales of Embark, our employee experience portal. Our compensation benchmarking participation continues to be elevated over 2023, which should lead to accelerated growth in the second half of 2024. Benefits delivery and outsourcing was flat for the quarter. Solid growth and outsourcing from increased project work more than covered the revenue headwind related to the client we mentioned last quarter who insourced its health and other benefits administration. This growth was offset by a decrease in our Medicare-related business, where we deliberately moderated growth to reflect market developments, maximize profitability, and improve free cash flow outcomes. Said differently, we do not simply chase growth at any cost in this business. HWC's operating margin was 21.9%, an increase of 360 basis points compared to the prior year second quarter, primarily driven by operating leverage and transformation savings. Moving to risk and broking, revenue was up 10% on an organic basis for the second quarter, with no meaningful impact from book of business activity. Interest income was $29 million for the quarter, up $14 million from the second quarter last year. Corporate risk and broking had another exceptionally strong quarter with organic growth of 11%, primarily driven by higher levels of new business, strong client retention, and renewal increases across all geographies. Our specialty lines continue to be major contributors to the strong growth performance, led globally by our facultative, construction, crisis management, and financial solutions teams. Growth across CRB in Europe was led by financial solutions, Facultative, Fenix, and crisis management. North America CRB had solid growth, driven by new business and higher renewal business from crisis management, natural resources, construction, real estate, hospitality and leisure, as well as healthcare and life sciences. Our international region had double-digit organic growth across all sub-regions, led by countries in Central and Eastern Europe, Middle East and Africa, and Latin America. In terms of rates, we see a continued improving landscape with favorable outcomes for clients. We see a stabilizing and softening market in some of our largest lines of business, such as property, caused by the increasing supply of capacity from insurers. The market for financial lines continues to soften, albeit with slower rate reductions in the past quarter. An exception to that is cyber where the market is softening faster. Across those specialty lines, we see a mix, for example, in political risks and trade credit, the market is stable with some small premium rises. The same in casualty where the market remains challenged for primary risks, especially those with North America exposures. Insurance Consulting and Technology revenue was flat compared to prior year due to tempered demand mainly in the consulting business in North America and the UK. However, we have taken corresponding expense actions to protect our margins. We expect ICT to achieve mid-single-digit growth for the full year. RMB's operating margin was 20.6% for the quarter, a 450 basis point increase over the prior year second quarter primarily due to operating leverage driven by solid organic revenue growth in CRB, disciplined expense management, interest income and transformation savings. Now let's turn to the enterprise level results. At the enterprise level, adjusted operating margin for the quarter was 17%, a 240 basis point increase over the prior year, primarily driven by greater operating leverage and the benefits of our transformation program. We had $24 million of incremental annualized transformation savings, bringing the total to $394 million of cumulative savings since the program's inception. The program continues to better position us to drive operating leverage going forward. Our unallocated net was negative $106 million for the second quarter and reflects the inclusion of a $13 million provision for significant litigation. We continue to expect the full year 2024 balance to be relatively consistent with 2023. Foreign exchange was a headwind to adjusted EPS of $0.03 for the quarter. At current spot rates, we expect foreign exchange to be a headwind of approximately $0.10 on adjusted EPS for the year. Our U.S. GAAP tax rate for the quarter was 15.6% versus 19.8% in the prior year. Our adjusted tax rate for the quarter was 22.6% compared to 23.7% for the second quarter of 2023. We continue to expect our adjusted tax rate for the year to be close to our 2023 rate, excluding the onetime items we mentioned at yearend. During the quarter, we returned $290 million to our shareholders via share repurchases of $200 million and dividends of $90 million. We continue to view share repurchases as an attractive use of capital to create long-term shareholder value and be the central focus of balanced capital allocation. We continue to expect share repurchases to total approximately $750 million in 2024, subject to market conditions and other relevant factors. We generated free cash flow of $361 million for the six months ended June 30, an increase of $11 million from prior year, primarily driven by operating margin expansion, partially offset by cash outflows related to transformation and discretionary compensation payments. The free cash flow results for the quarter are in line with our expectation as free cash flow margin was not intended to be linear 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 strong topline and bottom line performance this quarter reflects our ongoing momentum and the exemplary efforts of our colleagues to drive greater productivity and efficiency. We expect this to continue into the second half of the year and are confident in achieving our 2024 targets. With that, let's open it up for Q&A.

Elyse Greenspan:

Thanks. Good morning. My first question, just as we think about the updated '24 guidance, what do you guys think is the biggest swing factor on just being able to exceed the EPS guidance you've outlined for '24.

Elyse Greenspan:

Thanks, and then my second question is on free cash flow. Carl, you mentioned consciously managing BDO growth, right, to optimize free cash flow. When I look at the cash flow for the quarter, and I kind of adjust for transformation spend, which should be winding down, the conversion was at 21% of revenue, a little bit lower for the first half of the year, given that cash usage are higher in Q1. But it seems like you guys are on your way to being above that 16% target. Am I correct in that assessment? And when we get through transformation spend, is kind of the free cash flow conversion is expected to perhaps be greater than what you've outlined to the Street?

Elyse Greenspan:

Thank you.

Gregory Peters:

Good morning, everyone. So for the first question, I'm going to focus on organic revenue growth. And in both your comments, you called out some, I'd call it, good guys that helped boost organic revenue growth in the second quarter, [indiscernible] project for capital markets, bulk lump sum. So I guess my question on organic is how much of the result from the second quarter and through the first half is sustainable versus onetime in nature? Or put it another way, just trying to figure out what type of recurring aspect of the organic results will continue through next year and beyond.

Gregory Peters:

Great, okay. For the second question, I'm going to pivot to the slide on the transformation program savings. And I'm going to -- I'm citing the last bullet point where you said we're focusing on building an infrastructure from which to drive further efficiencies from. So I mean, we're getting to the point where the transformation program is going to sunset. You obviously look like you're in a position to do really well and get your objectives. But I want to look out beyond that in '25 and '26. And I'm curious what you meant by the statement drive further efficiencies because you put it in bold.

Operator:

Thank you. Our next question comes from Rob Cox of Goldman Sachs. Your line is now open.

Andrew Krasner:

I think that's generally -- I would flip that the other way. And don't forget, we're going to have some of that bleed over into 2025 as well in terms of when the cash goes out the door versus when it's incurred from a transformation program perspective.

Andrew Krasner:

Yes, sure. So as we said in our remarks, we deliberately moderated growth in our Medicare-related businesses to reflect market developments, maximize profitability and improve free cash flow outcomes. And we do remain focused on navigating the guardrails between growth, profitability and free cash flow there. We're not chasing growth in this business and are being thoughtful about acquisition costs. At the moment, we're seeing some media buying costs increase, and that's really driven by U.S. election media buying, and it's also causing a bit of consumer distraction. So we wanted to make sure we thoughtfully navigated that. The decrease in our Medicare-related businesses was partially offset by solid growth in outsourcing within that line of business, and that was driven by increased project work, which more than covered the decrease in revenue related to the client we mentioned last quarter, who insourced his health and other benefits administration. But overall, we're still confident in our pipeline in HWC and continue to expect that segment to have mid-single-digit organic revenue growth for the full year.

Paul Newsome:

Good morning. Thanks for the call. I was hoping you could give us some thoughts on the sort of the issue of the day, which is the outlook for the Property, Casualty market environment and the problems we've seen in casualty. Do you think -- it seems like pricing is basically kind of moderating in property and kind of not doing much in casualty. From your advantage point, what do you think is happening? And what do you think might change?

Paul Newsome:

Okay. I wanted to ask one just. I will let others ask questions. Appreciate the help as always.

Operator:

Thank you. One moment for our next question. Our next question comes from Andrew Kligerman of TD Cowen. Your line is now open.

Carl Hess:

Well, I mean, as I've said before, Andrew, right, we do have some positive momentum that results not just from the investments we've made in talent, but what we think is a differentiated strategy that enables that talent to best succeed in the marketplace. We do think that we still have more productivity we can get from the cohorts of talent we've brought on board over the last several years. And we continue to look for talent out in the marketplace who view WTW is the best place they can use to leverage what they can bring to their client base. So we think that there's momentum in those businesses. We think our strategy helps us succeed, and we are optimistic that there is continued progress we can make.

Andrew Krasner:

Yes, sure. ICT comprises about 10% or roughly $400 million of R&B's annualized revenue, and that's split roughly 50-50 between software sales and consulting revenue. Given its size, a few million dollars in either direction can have an impact on the organic growth rate for the period of a couple of sizable contracts have modified timing period-to-period. In the first half of the year, we saw some of those large consulting projects being postponed. However, we recognize that the environment for certain advisory work within ICT, they continue to be challenging. So we've moderated our growth expectation there accordingly along the lines of mid-single digit growth for ICT. So it's really around the timing of some software sales, which can be chunky from time to time as well as some of the discretionary spend related to the consulting side of the business and the timing of those projects.

Mike Ward:

Thanks, good morning. Carl, you mentioned the opportunity to do -- potentially do outperform some of the guidance on the margin. I was wondering if you could quantify potential upside at all to margins.

Mike Ward:

Okay. Thank you. And then for CRB, we've seen a divergence in the pricing environment for large accounts versus middle market or smaller. I was hoping you could talk about what you're seeing in terms of pricing across your customer segments within CRB overall, I guess.

Operator:

Thank you. Our next question comes from Mike Zaremski of BMO. Your line is now open.

Carl Hess:

I mean, retention continues to be in the mid-90s, which is a level we're very pleased with, that business you keep is less business you have to replace. We think that's a result of the excellent client service we deliver as well as the insights we're able to provide our client base with our risk analytics that we feel are unmatched in the industry. So no question that the retention rates we have are ones we'd like to keep more persistent going forward.

Carl Hess:

Yes. I mean we're certainly at levels that are consistent with where we were a number of years ago before some of the disruption we had and the stabilization of the talent base is at the fundamental to that.

Andrew Krasner:

Yes, there was nothing unusual. It was all driven by transformation savings and operating leverage, and of course, focusing on prudent expense management as part of that.

Yaron Kinar:

Thank you. Good morning. I wanted to circle back to the guidance, the updated guidance, specifically the margin guidance. So I think at the midpoint, the new guidance would suggest material slowdown in margin expansion in the second half. Can you maybe talk about that a little bit?

Yaron Kinar:

I was just going to say, with that comment of kind of the continued kind of fruits of the transformational program coming through and the scale, why would we see a meaningful slowdown in margin expansion in the second half of the year -- kind of year-over-year relative to where it's been in the first half.

Yaron Kinar:

Got it. So it's a potential upside to that guidance. And my second question, Andrew, you talked about the Medicare-related business. Can you maybe offer some additional color on what you might from the market developments? And do you still consider this an attractive long-term business? And maybe, I apologize for throwing in a lot here, but also, what's allowed Willis and TRANZACT to succeed where we've seen a growing list of competitors stumble?

Operator:

Thank you. Our next question comes from David Motemaden of Evercore ISI. Your line is now open.

Carl Hess:

So I mean, after a focused effort over the past few years, we think we've replenished our talent base. We've seen the new hires begin to contribute to our organic growth, as I discussed earlier. We've had several waves of hiring over the past few years, and so we still have a bit more to go as these cohorts mature to peak productivity. Currently, our hiring efforts are more opportunistic. They were strategic with a goal of enhancing our ability to achieve sustainable and profitable growth and create value. Our hiring of Lucy Clarke that I talked about during prepared remarks is one example of this sort of strategic hire. We've recently announced a few other strategic hires to support our industry verticals and Verita as well. With respect to our expense rate base, any incremental investments, whether they're in talent or technology are not going to prevent us hitting our 2024 margin targets, and as Andrew has alluded to, we expect to be toward the higher end of our target margin range in 2024 and expect margin expansion in both segments.

Andrew Krasner:

Yes. We're very pleased with the growth that we've seen since launching the platform. It's done better than we had initially expected. However, given the overall size of the R&B business, still relatively small and not necessarily moving the needle from an organic growth perspective at this point in time.

Mark Marcon:

Good morning, and thanks for taking my questions. Andrew, one quick question and then a follow-up for Carl. On the unallocated costs, obviously, they jumped up. You mentioned that there was the legal fee. You did say that for the full year, we should be roughly equal to the level that we saw in 2023. Is that correct?

Mark Marcon:

Great. And then, Carl we take a look at all the various segments. And with the exception of TRANZACT, which you're moderating on purpose, it seems like the momentum is quite solid. Obviously, you've got a differentiated strategy. You've made some talent hires. But I'm also wondering, when you internally monitor engagement within the more than 40,000 professionals that you have within the organization, after several years of change, do you feel like morale engagement has improved significantly. And some of the productivity improvements that we're seeing are basically just due to a widespread increase in terms of confidence and things being more settled?

Operator:

Thank you. Our next question comes from Meyer Shields of Keefe, Bruyette, & Woods. Your line is now open.

Andrew Krasner:

Yes, sure. If we do continue to see that moderation of growth within the Medicare-related businesses, it could temper some growth within the overall HWC segment. However, we continue to focus on the strong pipeline that we do have in the other businesses there. It is a portfolio of businesses and believe that, I think Carl mentioned earlier, for example, the pipeline and survey work that we expect to take hold as well as some of the project-based work in North America within health. So we're really confident about delivering the mid-single digit growth for the TRANZACT segment overall for the year.

Carl Hess:

Lucy's priorities, sorry, you got a little garbled there for a second. I guess I'd look at it this way. I mean we're incredibly excited about Lucy's joined us. She is a perfect fit to accelerate our existing strategy and lead R&B. She's got deep experience in specialization. She's got a proven track record of attracting and developing top-tier talents, and she's got a well-honed ability to execute. Her background is well aligned with our focus on specialization and our investments in talent and technology. I think Lucy's just joined us this week, right? She's surveying the landscape of the R&B business. I expect she'll affirm what's working well, use the benefit of our decades of experience in other organizations to see what else we could be doing to modify our approach. But the reason she's joined us is that she believes in our strategy. And I expect that we're looking at fine-tuning our wholesale approach.

Mark Hughes:

Thank you. Good morning. Andrew, anything you can say about the trajectory of unallocated into 2025?

Mark Hughes:

And then any specifics on the cash spend on the transformation in the second half? And then how much goes into 2025.

Operator:

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Carl Hess, WTW's Chief Executive Officer.

Operator:

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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 3 months on WTW's website.

Operator:

[Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo.

Andrew Krasner:

Elyse, I think you're thinking about that correctly. We do expect continued expansion throughout the course of the year. We did make some investments in Q1, which did impact the margin expansion and operating leverage within R&B. But for the course of the year, we do expect the margin expansion to continue as well as the operating leverage generation.

Carl A. Hess:

Yes, thanks Elyse. We see this as actually quite manageable for us. We employ non-solicits as part of what we do. And we think that is actually quite a manageable situation for us. So we think that we're still looking through this. And of course, there may be some litigation concerning all that. But our standard restrictive covenants don't prevent our employees from working for our competitors. They are, as I said, non-solicitation, nondisclosure type agreements, and they don't function to prevent someone from taking a job a competitor. We don't think the world tied to that type of restrictive covenant. And so we've managed quite well against these in the past, and we'll manage I think quite well going...

Charles Peters:

Thanks for the comments, specifically, Andrew, around expectations on organic. And I wanted to revisit inside Health Wealth and Career, two comments you made about the health piece and the career piece, both of which you seem to guide to a better organic result as we go through the year. I was wondering if you could give us some color behind why you have the confidence that, that's going to be a better result for the year.

Andrew Krasner:

And just a couple of points of detail on that, especially as it relates to Q1 and going forward. So within health the continued expansion of the global benefits management client portfolio, which Carl alluded to, drove high-single-digit growth, particularly driven by Europe and our international geographies, as we talked about the timing of the new business contributed to lower growth in North America, where our 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.

Andrew Krasner:

Yes, we haven't quantified any of the specific components. But here's how we think about the steps to getting to the 16% plus margin target, right? So we've got greater profitability as a result of driving margin expansion as a contributing factor that's not just from transformation and operating leverage, but also over time, improving our business mix, as we've talked about in the past, so MGAs and MGUs things of that nature.

Operator:

Our next question comes from Rob Cox with Goldman Sachs.

Carl A. Hess:

Sure, Rob. So as we mentioned, right, we have replenished our talent base. And so our investments going forward are more focused on strategic and opportunistic hiring. And we think they put us in a position to achieve sustainable profitable growth. We're not just hiring to fill our bench. We're hiring to take advantage of specific opportunities to create value. Lucy Clarke would be a great example of one of those strategic hires. We are looking forward to we're welcoming her next -- later this year. In addition, we've had some notable strategic hires to support our industry verticals and Verita.

Carl A. Hess:

So the final CMS rules for '25 that address marketing and Medicare Advantage plans in the U.S. was released in early April, right? So not all that long ago. The good news of the final rule was less onerous on the proposed role in a number of ways. And while there's still some uncertainties about all of its provisions are going to be implemented, but it's not causing us to change our outlook for the year. We've been actively engaged with the carriers in this space. They have reiterated the important role that we play in the distribution of Medicare insurance solutions and the valuable services we provide beneficiaries. I guess, I just close that by saying managing regulatory change is a regular part of our business. And I think we've been quite successful in navigating these sort of changes in the past. We will continue to do so in the future.

Michael Ward:

Just on the unallocated expense items. Just wondering if you have any expectations for the rest of the year? And does that kind of depend on interest rate levels?

Michael Ward:

Okay. And then maybe on Global Specialties. I was hoping you could expand on the kind of growth outlook and maybe which lines you're expecting faster or slower growth?

Operator:

Our next question comes from Andrew Kligerman with TD Cowen.

Carl A. Hess:

Let me unpick that a bit, Andrew. So as I -- one of the big focuses for us coming to '22 and '23 was rebuilding our talent base, where the events of '20 and '21 had not been helpful. That rebuild job is over, right? It doesn't mean we're done hiring because we're always going [indiscernible] for great talent. But we're no longer [indiscernible] rebuild, it's a build, right? If I could differentiate it that way.

Carl A. Hess:

Well, I'm not going to go into details of our compensation programs for obvious competitive reasons, Andrew. But I will say that as the world leading compensation consultant, and that includes sales compensation, we have a very good adviser internally on how we structure programs to make sure we maximize the value of the internal crossing.

Mark Hughes:

Carl, you talked about the opportunity in pension derisking, et cetera. The organic in wealth at 3%. Do you anticipate that will pick back up.

Andrew Krasner:

Yes. Sure. So remember, we took on some incremental debt in the first quarter, and we're sitting on the cash related to a large portion of that related to the maturity that we have coming up in June. Again, that's $650 million. We took out $750 million. So you'll see a temporary uptick in interest expense as we're carrying both components of that for a couple of months.

Jian Huang:

My first question is on just a high-level question on growth outlook. First quarter U.S. GDP 1.6%, European Union has been more or less in a weaker spot as well. Given [indiscernible] material business in Europe and U.S., can you maybe talk about what the clients are seeing, what you're expecting for rest of the year, specifically the European business and also at the geopolitical concerns become more complex over time? Curious to hear your view on that.

Andrew Krasner:

Yes. I think we expect for the full year for it to be marginally higher than last year. And we -- from a payment timing perspective, we'll bleed into 2025, right? But the incurrence of all the costs will be in '24. There will be a couple of month lag as payments go out. So we do expect a net headwind there year-over-year for free cash flow margin.

Michael Zaremski:

First question, in regards to the Risk and Broking segment, continued excellent organic growth levels. Curious if Willis has been the beneficiary of like reverse book sales that are aiding growth like meaning you've been book sale buyer? Or would that be netted out within the book sales line item, I think, that you've disclosed?

Michael Zaremski:

Okay. Yes, you guys have been clear about the reinvestment in talent hire. Okay, got it. Lastly, on interest income, and I don't think we have the fiduciary asset levels yet, but it looks like the yield implied is kind of high. Is there anything unusual in there? Or is that the run rate or anything we should be thinking about seasonality wise?

Operator:

Our next question comes from Mark Marcon with Baird.

Carl A. Hess:

So within R&B, as we alluded to earlier, rate has been a nonfactor in our business, and I just don't view sort of -- as Andrew said, right, it's -- our results have been driven by great retention and great new business. And we think with our strategy of specialization, those are sustainable. And we -- and continued focus, you need to continue to do.

Mark Marcon:

Terrific. And then for my follow-up, just on BDO, you did mention that there was one large client that ended up in-sourcing some of the retirement programs. Wondering, do you have a perspective in terms of why that was? And is this kind of a one-off? Or is this anything to be concerned about on a go-forward basis?

Operator:

The Next question comes from Meyer Shields with KBW.

Carl A. Hess:

Yes. So I mean, we are very pleased with the progress these group of hires have made and they are contributing to our success. But we think there is still more room to go, especially for the more recent vintages, right? This effort began in early '22 and continued through '23. The people we hired in '23 still don't have from [indiscernible]. And we've always said 6 to 18 months become fully productive.

Andrew Krasner:

We expect the expenses to be relatively even throughout the year in that regard, and it's really just the pacing of the revenue for project work that we expect to pick up throughout the rest of the year to get to that mid- to high-single-digit growth rate.

Operator:

Our next question comes from David Motemaden with Evercore ISI.

Andrew Krasner:

Yes, it's a good question. Naturally, slower growth within that business, which is a net consumer of cash will foster a quicker move up the curve there on getting to breakeven and if positive on free cash flow. So that would definitely be a tailwind there if it did play out that way based on what we're hearing from some of the carriers at the moment in their expected growth rates.

Carl A. Hess:

Well, I mean, we certainly think there is room for us to grow market share, right. We think we have a differentiated service offering that shows very well for clients who appreciate a calculated approach to a smarter way to risk, right, we call it. And so we continue to see great potential and that is one of the reasons we think our new business results have been so strong as they are. And we think that has certainly the ability to continue forward.

Carl A. Hess:

Thank you. Thank you all again for joining us. I appreciate the hard work of all our WTW colleagues globally who've helped us start the year on such a solid note. I'd like to thank you, our shareholders for your continued support of our efforts. Have a great day.

Operator:

Good morning. Welcome to the WTW Fourth Quarter and Full Year 2023 Earnings Conference Call. Please refer to the 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 review the forward-looking statements section of the earnings press release issued this morning, as well as, other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliation of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website. I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Andrew Krasner:

Thanks Carl. Good morning and thanks for joining us today. As Carl mentioned, we finished the year with strong momentum putting us in a solid position to achieve our 2024 targets. And I'd like to share some further details on our financial results. We delivered organic revenue growth of 6% in the fourth quarter, bringing the full year growth rate to 8%. The ramp up in productivity of our investment hires, our specialization strategy in Risk & Broking and the ongoing demand for our benefits and human capital services in HWC continue to fuel the strong top-line growth. Alongside this robust growth, we also drove margin expansion for both the quarter and full year at the enterprise level and in each of our segments. The result was adjusted diluted earnings per share of $7.44 for the quarter and $14.49 for the 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 unless specifically stated otherwise. Health, Wealth and Career generated revenue growth of 4% compared to the fourth quarter of last year and finished the year with 6% growth. Going into 2024, we feel confident in the outlook and expect another year of similarly positive results for the segment. Revenue for Health increased 6% for the quarter or 5% when excluding the impact of some modest book-of-business activity. We delivered solid growth across all regions driven by increased brokerage income and the continued expansion of our Global Benefits Management client portfolio in Europe and international. Wealth grew 5% in the fourth quarter. Retirement growth was driven by increased project work related to derisking activity in North America as well as additional project work and pension brokerage in Europe. Investments also contributed significantly to growth for the quarter reflecting new client acquisitions and higher fees. Career delivered 6% growth in the quarter driven by increased compensation survey sales, executive compensation and board advisory services and project work related to employee experience. Benefits Delivery and Outsourcing generated 3% growth in the quarter. The increase was driven by higher volumes and placements of Medicare Advantage and life policies in our individual marketplace business and increased project activity and benefits outsourcing. HWC's operating margin increased 150 basis points compared to the prior fourth quarter to 40.5%, primarily driven by transformation savings. For the full year, HWC's operating margin increased 190 basis points over prior year to 28%. Risk & Broking revenue was up an exceptional 12% on an organic basis for the fourth quarter. Interest income was $27 million for the quarter, up $17 million from the fourth quarter last year. Note that beginning with Q1 2024 results, we plan to include the impact of investment income on organic growth at the segment and enterprise levels in our materials. For the full year, Risk & Broking grew 10% organically. We are expecting mid-single digit or better organic revenue growth for the segment in 2024 with continued contributions from our investments in talent and platforms as we identify and pursue opportunities in line with our specialization strategy. Corporate Risk & Broking had another strong quarter, growing 12% and continuing the organic revenue growth trajectory we have seen in the business over the last couple of quarters. Higher levels of new business activity, improved client retention and increased renewal revenue from rate increases drove robust organic revenue growth. Our specialty lines continue to be major contributors to the strong growth performance, led globally by natural resources, facultative, FINEX, financial solutions, crisis management and construction. Strong growth across CRB in Europe was led by P&C, retail, facultative, natural resources and FINEX. North America CRB benefited from strong new business in construction, natural resources, marine, aerospace, real estate and hospitality and leisure, as we saw strong demand in the industries in which we specialize. Our international region also contributed with exceptional organic growth, including strong growth across all sub regions led by Latin America. In the Insurance Consulting & Technology business, revenue was up 8% over the prior year period on top of a strong comparable, driven by increased sales in technology solutions, including strong new business and higher project activity. R&B's operating margin was 32.9% for the fourth quarter, a 460 basis point increase over the prior year fourth quarter. We continue to see our hiring efforts yield strong results and rising productivity, driving greater operating leverage. The margin also benefited from transformation, continued expense discipline and tailwinds from increased interest income, partially offset by some modest foreign exchange activity and investments in people and technology platforms. For the full year, R&B's operating margin increased 60 basis points over prior year to 21.8%. As Carl mentioned, we plan to continue to opportunistically invest in talent and strategic initiatives in the segment in line with our previous announcement. For 2024, we continue to expect margin expansion on a full year basis. Given the business seasonality and uncertain pacing of the investments, please note that the scale of R&B margin expansion may vary from quarter-to-quarter. At the enterprise level, adjusted operating margin for the quarter was 34.2%, a 180 basis point increase over prior year. For the full year, we saw 110 basis points of margin improvement to 22%. The benefits of our transformation program drove a large part of our margin expansion for the year. We had $37 million of incremental annualized transformation savings for the fourth quarter, bringing the total to $337 million since the program's inception. As Carl mentioned, we are raising our transformation savings target to $425 million by the end of 2024. The additional savings will primarily come from technology modernization and process optimization, which we expect to further reduce our cost structure and help unlock additional long-term growth and cost savings opportunities. The total amount of costs to achieve is now estimated at $1.125 billion. Along with their direct return on investment, these additions to the transformation program will serve as the catalyst for additional improvement by creating an infrastructure from which to drive further efficiencies. Our unallocated net was $296 million for the full year of 2023, an increase of $31 million over prior year, primarily due to a headwind from a one-time favorable item reflected in the prior year balance. Foreign exchange was a $0.02 tailwind on adjusted EPS for the quarter and a $0.06 headwind for the year. At current spot rates, we expect foreign exchange to have a $0.02 headwind on adjusted EPS for 2024 with no impact in Q1. We recorded $109 million in pension income for 2023, relatively in line with our expectations. For 2024, we expect $88 million in pension income, with the decrease driven by market performance and interest rate movements. Our U.S. GAAP tax rate for the quarter was 15.7% versus 17.7% in the prior year. Our adjusted tax rate for the quarter was 19.1% compared to 22.2% for the fourth quarter of 2022. Our U.S. GAAP tax rate for the year was 16.8% versus 15.4% in the prior year. And lastly, our adjusted tax rate for the year was 20.9% consistent with prior year. Notably, there were nonrecurring items in Q4, which resulted in one-time tax items in our 2023 adjusted tax rate. Excluding these benefits, our adjusted tax rate would have been 22.4% and our adjusted diluted EPS would have been $14.22. We expect our full year adjusted tax rate in 2024 to be closer to our 2023 adjusted tax rate, excluding these one-time benefits. In 2023, we returned nearly $1.4 billion to our shareholders with share repurchases of 1 billion and dividends of $352 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 expect to continue repurchasing our shares in 2024 under our current share repurchase authority of which approximately 1.3 billion remains. We expect approximately $750 million of share repurchases in 2024 subject to market conditions among other relevant factors. We generated free cash flow of $1.2 billion in 2023, representing a free cash flow margin of 12.6% above our target of 12%. The improvement from the prior year was driven by the non-recurrence of one-time headwinds reflected in the comparable period operating margin expansion and improvement in transacts cash flow. These improvements were partially offset by increased transformation program related costs. Turning to our 2024 financial targets. We continue to expect mid-single digit organic revenue growth as we work towards our revenue goal of $9.9 billion plus. We expect our adjusted operating margin to expand toward the high-end of the 22.5% to 23.5% range. We also expect to deliver on our adjusted diluted earnings per share target of $15.40 to $17. Finally, we expect incremental improvement in our free cash flow margin. Our results for the fourth quarter and full year 2023 are a testament to our continued strategic progress, our operational execution and our colleagues' relentless focus on serving our clients. We are very pleased with our performance and expect our momentum to continue into 2024 as we focus on delivering on our targets. With that, let's open it up for Q&A.

Gregory Peters:

Good morning, everyone and I'm going to say that it does feel like you finally stabilized the platform last year, so it does -- it should bode well for your future. On the mid-single digit guidance outlook for 2024, inside Risk & Broking, can you give us a sense of how you think the benefit on new business and/or versus rate increases is going to run through the Risk & Broking line? And then on the Health, Wealth and Career, the BD&O line was a little weak in the fourth -- lower in the fourth quarter, can you talk about your outlook there?

Gregory Peters:

Okay. That makes sense. I wanted to pivot to the free cash flow margin expectations, slide 22 of your investor deck. And what I'm focused on is that 16%-plus long-term objective and I -- looking for some more color inside some of those comments that you made in the slide about where you're going to get some positive benefits and some negative benefits and when you think about getting to that 16%, is that like a five-year target a 10-year target or what kind of parameters are you putting on management around that objective?

Operator:

Thank you. Please stand by for our next question. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Andrew Krasner:

Yeah. Thanks for the question, Elyse. So, we remain confident in the EPS target range of $15.40 to $17 for 2024 that we had set out. As we laid out in our supplemental materials, you can see the puts and takes there, a meaningful portion coming from operating income along with the increase in the share repurchase activity that we mentioned about $750 million expected there. The offset there as you mentioned, some of the reduced pension income that's going to be about a $0.14 share headwinds as well as the increase in interest expense and adjusted tax rate. And when we thought through all of those puts and takes, we felt still very confident about landing within the range there.

Andrew Krasner:

Sure. The $750 million, right, is our expectation for the year. That level is lower than at 2023 where we did $1 billion. You have to keep in mind that throughout 2023, we took on some incremental leverage in May and throughout the year capitalized on the opportunity to buy more shares when there was pressure on the stock price. So the $750 million is not necessarily static. We continuously monitor cash levels, market conditions and if the opportunity presents itself to accelerate, share repurchases will take advantage of it just like we did last year. We continue, as you might expect to, evaluate all of our options for capital allocation as we always have, which does include share buybacks, internal investment and carefully considered strategic M&A as part of that to ensure that we're maximizing value creation for our shareholders.

Robert Cox:

Hey, thanks for taking my question. Maybe a similar question to when you've already received on free cash flow in some ways. But if I exclude the $430 million or so cash restructuring charges this year, I get to a free cash flow margin over 17% in 2023, is that correct? And when you think ahead to a future where restructuring spend is zero and the transact free cash flow drag has improved, couldn't there be meaningful upside to the 16% long-term free cash flow margin target. Am I am I thinking about that correctly, or are there any headwinds I'm not considering?

Robert Cox:

Okay. Thanks. And just to follow-up on expenses in the Risk & Broking business. Could you talk about the incremental expense savings in the quarter versus last quarter, some of the things that you started to enact last quarter? And then, just some more color on how sustainable those savings are outside of the transformation program?

Carl Hess:

Yeah. I guess, as we've highlighted in prior quarters we have substantial investment in that business principally in talent. And now that our talent base is back to full strength, right, we're concentrating on strategic opportunistic hires to capitalize on the opportunities we see ahead and the geography that we -- offer the greatest potential for profitable growth, right? So I think it's just a momentum story at this point as opposed to a rebuild story which leads to a smoother pattern of expense growth.

Michael Zaremski:

Great. Good morning. Now back just to the free cash flow and thanks for all the color. I believe you said one of the offsets was cash investments in product development. So, I guess, should we be looking at your historical CapEx ratio divided by revenues and I guess are you alluding to maybe it'd be -- it'll maybe kind of rise to a bit of a higher level than it is currently, is one of the offsets that I want to or am I splitting hairs in terms of some of your commentary?

Michael Zaremski:

Okay. That makes sense. And really good color on the HWC segment. Specifically, it was interesting to hear, retirement, I know Willis has a leading to find benefit retirement solutions segment which I think historically you guys have talked about that being kind of -- not as high of a growth rate or maybe not a lot -- much of a long-term grower, but it sounded like you said in the near term because of the environment, it is a growing business, which is kind of a tailwind to 2024. I just want to make sure I'm understanding those comments correctly.

Operator:

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Hughes with Truist Securities. Your line is open.

Carl Hess:

Well, I guess the way we look at it is, we rerun transact for growth opportunities if they're profitable growth opportunities. And if the spend -- we're seeing that's necessary to generate a policy commission is economically sensible. We just don't do it. So, we manage that business I think balancing growth and profits and we this year found ourselves in a place where we made I think very sensible choice given the conditions we're facing.

Mark Hughes:

Understood. Then, the strategic client engagement, what was the motivation for that and are there any particular verticals that you think are most promising?

Mark Hughes:

Yes, that's right.

Operator:

Thank you. Please stand by for our next question. Our next question comes from the line of David Motemaden with Evercore ISI. Your line is open.

Andrew Krasner:

Yeah. Sure. We had about 60 basis point year-over-year improvement in the free cash flow margin drag from that business. So, quite pleased with the progress that we've made there at that business matures and as we think through the portfolio of products within transact. The drivers of getting to free cash flow positive within that business, the next few years is know more focus on the product portfolio, different products have different cash conversion profiles so we seek to balance that appropriately. As Carl mentioned, we run that business for profitable growth. So, we're always making trade-off decisions there as part of that. And the business will continue to mature. So we think that will be a contributor to getting us to free cash flow positive within that business as well.

Carl Hess:

Yeah. So, I mean, what we classify as our specialized businesses or our global lines amount to about half of the portfolio for the CRB business. And I think we've -- nearly twice the growth rate, the fair way of looking at it, so you can back into the relative math on that.

Andrew Kligerman:

Hey. Good morning. So that R&B growth was an exceptional number at 12%. So I'm kind of curious going forward, looking at new hires, Carl, I think you said that you'd be strategic and opportunistic. How should we think about new hires next year in terms of -- is it going to be flat, up a little down a little? And then just on the strategic client engagement that you just touched on again, I'm still not quite clear on how that helps the he specialty groups. I mean, does it does it slow them down, because now you've got new people involved in the process or -- just want to make sure that -- or understand how that's going to help boost the specialty as opposed to make it a little more complicated?

Andrew Kligerman:

The bias would be slightly up in new hires then -- said how I should take the strategies the opportunistic approach.

Andrew Kligerman:

Right.

Andrew Krasner:

And one of the primary focuses of the strategic client engagement concept is really going to be a focus on the industry verticals, but in particular, think about Fortune 1000 type clients where risk profiles may be more expensive and more complex than other organizations.

Yaron Kinar:

Thank you. Good morning, everybody. I guess my first question actually goes back to Elyse's question earlier in the call. When we see guidance and we see some of the underlying pieces move a bit namely where we're seeing higher expectation of cost-saves from restructuring, and at the same time we see the EPS and margin guidance essentially remain unchanged. I just want to make sure and again going back to Elyse's question, is there a degree of conservatism in there or are you seeing some offsets potentially that are keeping you at kind of the unchanged EPS guidance?

Yaron Kinar:

Okay. And can you maybe elaborate a little bit on kind of what the variables would be that would get you to the upper end versus the lower end of that guidance? What the main variables that you foresee today are?

Operator:

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Marcon with Baird. Your line is open.

Carl Hess:

So part of this is strategic, right? In that we are focusing on these businesses that's where we are continue to invest and we see a return there. We've been a specialist broker for nearly 200 years right? So, I would hurt you that it's not likely to play itself out over the next couple. We've been doing this very successful, a very long time. The differentiator for us remember is that we're actually organizing the business around this as opposed to on the side of someone's desk and that enables us to focus on delivering enhanced value to superior analytics and client engagement that we think has a very attractive proposition. We don't see that abating.

Carl Hess:

So, I mean, we do see the macroeconomic environment and where the funded position of pension plans are as stimulating demand for buy-ins and buyouts as we've talked about that not just necessarily transacting on them with the analysis that goes into them and the preparation so that that we do think that is helpful for us and our clients going into 2024. We…

Carl Hess:

Yeah. And with respect to the client you were alluding to who is -- I guess reopened their defined benefit plan. This is the same where we all come. There's interest out there at least examining this on behalf of other plan sponsors who may be similarly situated. And we're well poised and well positioned to help clients with that evaluation.

Mark Shields:

Great. Thanks. Two quick questions. First, Carl, you talk about having 12 verticals and I was hoping to sort of outline how much of the Fortune 1000 that 12 verticals represent.

Mark Shields:

Okay. No, fair enough. Second and I'm not really sure how to ask this question, but you talked about how Adams brought back the staffing to full levels. Did we see full productivity from that group overall in either the fourth quarter of 2023 -- over the course of 2023 year, is still some momentum for the this newest cadre to expand productivity or expand margin?

Operator:

Thank you. Please stand by for our next question. Our next question comes from the line of Josh Shanker with Bank of America. Your line is open.

Andrew Krasner:

Yeah. I think you're I think you're asking about sequential growth rates, parts of our business are seasonal. And we do have timing things which play out periodically between quarters year-to-year, so that is something to keep in mind and that is why we tend to focus on full year growth rates for our businesses.

Andrew Krasner:

For the most part, I think throughout the year we call out a couple of unusual things. For example, the timing of BD&O between Q4 and Q3 revenue and I think there were a couple of other things throughout the year. And of course, you got to think about the impact of the book sales where we had some swings in some of the quarters where they were larger amounts of those, but expect to be through that largely going forward.

Michael Ward:

Hey, guys. Thanks. Good morning. I was just curious, the margin guide relatively consistent, but you've spoken to some incremental savings. So just wondering if we should think about those savings maybe being offset by some costs? Could that actually benefit 2025 margins?

Michael Ward:

Okay. Thanks. And then you spoke into some of the booking in the quarter. Wondering if you could talk about where attrition is running? If 2024 is kind of a normal year, just curious how much of a headwind we should expect this year for booking?

Carl Hess:

I would just add sort of thinking about attrition the overall level for the company, we are back down to well within the range we've had historically. So, a very manageable situation for us.

Brian Meredith:

Yeah. Thank you fit me. And Carl, I'm just curious, on the 10% organic growth you had for the year in R&B, you mentioned that it was new business and it was retentions. Is a way to kind of parse that out and how much of the kind of growth was client retention? Are you back to kind of your historical client retention levels, or is there more room for that to improve?

Brian Meredith:

Great. Thank you. And then the second question. I'm just curious with your 2024 outlook, what is the baseline assumption with respect to economic growth and inflation as you kind of look out to -- you expect things to continue the way they, are any type of change?

Operator:

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Carl Hess for closing remarks.

Carl Hess:

So, thank you all again for joining us. I appreciate all of our WTW colleagues globally who have worked tirelessly to help us end the year on such a strong note. I am proud of everything we've achieved in 2023. I look forward to us keeping up the momentum for 2024.

Operator:

Good morning. Welcome to the WTW Third Quarter 2023 Earnings Conference Call. Please refer to the wtwco.com for the press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next three months on 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 review the forward-looking statements section of the earnings press release issued this morning, as well as, other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliation of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website. I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Andrew Krasner:

Thanks, Carl. Good morning, everyone. Thanks for joining us today. As Carl mentioned, our third quarter revenue was up 9% on an organic basis, and excluding Book of Business activity, organic revenue growth would have been 10%. This growth reflects the increasing productivity of our new hires and the impact of our strategic focus on specialization in Risk & Broking and increased demand from clients seeking solutions to manage the impact of inflation on healthcare costs, pensions, retirement plans, and human capital in HWC. I'm very pleased with the progress of our transformation program, which delivered $23 million of incremental annualized savings during the third quarter. This brings the total to $151 million in cumulative annualized savings this year. Our progress on the transformation program and our strength and focus on cost management will help us drive continued operating leverage. 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. Health, wealth, and career generated revenue growth of 9% on an organic basis and 8% on a constant currency basis compared to the third quarter of last year. We feel confident in our pipeline and anticipate that the segment will finish off the year with good results and in line with historical trends. Revenue for health increased 7% for the quarter or 8% without considering the impact of book of business activity. We delivered solid growth across all regions driven by the continued expansion of our global benefits management client portfolio, new local clients, expanding consulting work for existing clients and increased brokerage income. Wealth grew 7% in the third quarter. The growth was primarily attributable to strong momentum in retirement, with increased de-risking activity and consulting work in North America. Retirement also grew in Europe as a result of de-risking work, regulatory compliance support, and pension brokerage. Investments grew as a result of new client acquisitions and higher fees, which more than offset headwinds from the negative impact of capital market performance. Career delivered 8% growth in the quarter driven by increased compensation survey sales, executive compensation work, and other work-based advisory services, including pay transparency work and change communication services. Benefits delivery and outsourcing generated 14% growth in the quarter. The increase was driven by strength in outsourcing for new clients and increased compliance and other project activity in the individual marketplace with growth from higher volumes and placements of life and Medicare Advantage policies. As a reminder, we typically generate about 50% of the revenue for our individual marketplace business during the fourth quarter, and we expect the growth next quarter to be relatively in line with historical trends. HWC's operating margin increased 350 basis points from the prior year third quarter to 23.8%. This margin increase was attributable to both improved operating leverage and transformation savings. Operating leverage was driven by a positive spread with revenue outpacing expense growth and some timing between quarters. Risk & Broking revenue was up 10% on both an organic and constant currency basis compared to the prior year of third quarter. Excluding the $10 million year-over-year impact from book of business activity, Risk & Broking grew at an exceptional 12%. As a reminder, there were about 10 million of book of business sales in R&B in the fourth quarter of 2022. We currently expect a similar amount of book of business settlements next quarter, and therefore do not expect a meaningful year-over-year impact from book of business activity in Q4. However, the timing for settlements can be difficult to predict and may drag into the following year. Corporate Risk & Broking had another strong quarter, delivering organic revenue growth of 10% and continuing the positive growth trajectory we have seen over recent quarters. Excluding book of business activity, CRB grew at 12%. This result was primarily driven by strong new business growth and improved client retention. Pricing had a moderate positive impact on the quarter. Interest income was up $19 million for the quarter due to higher rates and the reclassification of interest income previously recorded in corporate. As noted last quarter, due to the cessation of the co-broking agreement with Gallagher, interest income directly associated with Risk & Broking fiduciary funds is now allocated to this segment. The exceptional growth in Q3 was also driven by continued strong return on investment in our specialty lines. Globally, the strongest growth came from our facultative, financial solutions, natural resources, surety and construction lines of business. Europe had the exceptional quarter with double digit growth in a number of countries led by our P&C retail and direct business, as well as construction, aerospace and financial solutions. International also contributed to strong organic growth led by Latin America. North America benefited from strong new business and increased client retention across most lines of business, despite headwinds in our M&A business and from the impact of book of business activity. In the insurance consulting and technology business, revenue is up 9% over the prior year period, driven by increased sales and technology solutions, including strong new business and higher project activity. R&B's operating margin was 15.7% for the third quarter, an increase of 200 basis points compared to the prior year third quarter. The expected ramp up in production from our strategic hiring efforts drew greater operating leverage, while tailwinds from increased interest income were offset by headwinds from gain on sale activity and foreign currency. Increased contribution from transformation, as well as targeted expense management measures we put in place earlier this year, also contributed meaningfully to margin expansion. We are beginning to see our expense management actions deliver results, including coordinated efforts on reducing spend for internal travel and vendor spend. We continue to expect these actions to benefit our margin next quarter. Turning back to enterprise level results, our adjusted operating margin was 16.2%, a 170 basis point increase over prior year. Excluding book of business activity, the margin would have increased 220 basis points year-over-year, benefiting from transformation savings, as well as the impact of interest income. The net result was adjusted diluted earnings per share of $2.24. Foreign exchange had minimal impact on EPS for this third quarter. Assuming today's rates continue for the remainder of the year, we now expect a foreign currency headwind on adjusted earnings for share of $0.07 for the year. Our U.S. GAAP tax rate for the quarter was 15.5% versus 0.7% in the prior year. Our adjusted tax rate for the quarter was 24.3% compared to 16.8% in the prior year, reflecting the non-recurring nature of discrete tax benefits reflected in the prior year rate. We continue to expect the full year adjusted tax rate to be modestly above the prior year. 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 what we believe to be the highest return opportunities. During the quarter, we paid $88 million in dividends and repurchased approximately 1.7 million shares for $350 million. As Carl mentioned, we continue to view share repurchases as an attractive use of capital to create long-term shareholder value. Last month, we raised our repurchase authorization by $1 billion, of which approximately $1.5 billion remains. In the first half of the year, we had about $450 million of share repurchases. We expect a similar amount for the second half of the year, subject to market conditions, among other relevant factors. Additionally, we repaid $250 million of debt that matured during the quarter with a portion of the proceeds from our May debt issuance. Year to date, we have generated free cash flow of $707 million compared to free cash flow of $337 million during the same period in the prior year. The improvement of $370 [ph] million was due to the non-recurrence of prior year headwinds, including realized losses on foreign currency hedges, payments made in the prior year for certain discretionary compensation, and taxes for one-time gains recorded in connection with the Willis resale and the deal termination payment. These tailwinds were partially offset by increased transformation program-related costs. We are very pleased with our improving business performance and expect this momentum to continue for the rest of the year. I am very proud of the leadership team and the resolve of our colleagues in the continued support of our clients. Our investments in talent, innovation, and operational transformation have helped drive organic revenue growth, and we are confident that this will translate into sustained growth in margins, EPS, and free cash flow. And with that, let's open it up for Q&A.

Unidentified Analyst:

Hi, good morning. How are you? Quick question on the -- so the full-year R&B margin expansion for the full year. So if we do the math, that kind of implies over 300 bps expansion in the Q4. And assuming the math is correct on that, like what is going to be the biggest driver of that in terms of, is it coming from organic revenue growth? Is it lower growth and expenses? And for that full-year margin expansion, is that inclusive of the higher interest income?

Unidentified Analyst:

Makes sense. And then for my second question, there's been talk about Willis looking to get back into the reinsurance broking business. Can you comment on this or provide any color or whether or not you would consider re-entering the business?

Operator:

Thank you. Our next question or comment comes from the line. Again, we'll try Mr. Gregory Peters from Raymond James. Mr. Peters, your line is open. Mr. Peters, you may need to unmute your phone. Okay. Our next question or comment comes from the line of Mr. Rob Cox from Goldman Sachs. Mr. Cox, your line is now open. Mr. Cox, you may need to unmute your line.

Operator:

Yes, sir.

Carl Hess:

Well, I mean, we're quite pleased with our progress and the growth we've shown this year. We see potential upside and we feel optimistic about the paths to achieve that upside to our originally stated objectives. We're looking to capitalize on momentum and there are a number of ways we're trying to do that. Our strategic focus on specialization R&B continues to drive growth in our specialty lines that substantially outpace R&B as a whole. We are seeing stronger growth in HWC, which is supported by increasing demand in a complex macro environment. For example, healthcare cost inflation and the changing ways of working are fueling demand for what we offer in terms of smart advice, creative solutions, better data and analytics. And in our wealth business, right, the investments portion of these capital markets remained relatively stable. We should see some improvement there as well.

Rob Cox:

Got it. Appreciate all the color. And then maybe just on buybacks, I think you had previously guided to a similar level of buybacks in the back half of the year, but you're running well ahead of that, sort of thus far. Can you talk about how you view share buybacks from here and kind of your updated outlook on buybacks in Q4 and beyond?

Operator:

Thank you. Our next question or comment comes from the line of Mark Hughes from Truist Securities. Mr. Hughes, your line is open.

Carl Hess:

Thanks. Yes, I mean, market conditions have been reasonable, especially with respect to bulk lump sum activity, and with pension funds in general still better funded than they were in prior years. We are seeing -- people looking at annuity purchase and buyout options as well. Part of our strong results in BD&O during the quarter were the result of preparation with bulk lump sum programs. And while those conditions may be more temporal, we do think that plan sponsors have more options and will consider their options. And we are fortunate that they use us to consider those options.

Carl Hess:

It's early days yet. We think we have a very good proposition. For Verita, we are launching it at a controllable size across a number of industry verticals. If the reception is as we hope, we will expand that to additional industries and additional geographies over time.

Michael Zaremski:

Hey, good morning. I guess back to the commentary about reinsurance. Clearly, we all appreciate that that's a great business. You guys did a great job in that business in the past. So it makes sense what you're saying. I guess my question is, given that reinsurance has a great margin profile, it's seen -- by some investors it seen as being an expensive proposition to get into -- to grow into over time. So, if that was the path Willis took, is it -- could it be done within the context of guidance, for the 2024 guidance? Or is that sacred? Or is this a board level conversation where you might be willing to change that guidance if the decision was to make this a big commitment?

Michael Zaremski:

Okay. That's helpful. And I guess, switching gears a bit, there's a lot of -- we can clearly see that margins improved more than expected with this quarter, which is great to see. And you had a lot of commentary about strengthened discipline on costs, but you've also had this expense program in place for a while. Is just kind of – did something change recently that you've put, they're just more hitting the bottom line, or is it really just the operating leverage and the strategic hires and that dynamic really taking fold?

Operator:

Thank you. Our next question or comment comes from the line of Shlomo Rosenbaum from Stefil. Mr. Rosenbaum, your line is open.

Andrew Krasner:

Yes, sure. Why don't I take you through the pieces of HWC's organic growth? There was 9% for the quarter. Across the segment there was strong demand driven by the complex macro environment, our strategic focus on cross-selling and data and analytics. We feel very confident about the pipeline that we'll be able to finish off the year with good results in line with recent historical trends for Q4 growth. Within BD&O, which had 14%, there was organic growth driven by new clients and increased compliance and other project activity and outsourcing and growth from higher volumes and placements of life and Medicare Advantage in individual marketplace. In wealth, 7% was generated from higher levels of retirement work in North America and Europe, along with new client acquisitions and higher fees and investments. Health, which was 7% or 8% excluding the book of business headwinds. There was organic growth driven by continued expansion of our global benefits management client portfolio, new local clients, expanded consulting work for existing clients and increased brokerage income. Career, which was 8%, had organic growth driven by increased compensation survey sales, executive compensation, and other reward-based advisory services, including trade pay transparency and some change communication services. Within BD&O, which had the 14% growth, I think it's important to point out what was driving that and what we might expect going forward. So that was driven, like I said, by both project work and outsourcing, as well as TRANZACT. TRANZACT’s growth for the quarter is also timing related, and given that this is one of their lowest revenue quarters of the year-over-year impact becomes magnified. So, and again, the best way to think about TRANZACT's growth is on a full-year basis, and we expect that to be substantially similar to the full year 2022.

Shlomo Rosenbaum:

What about the expense items, though? That's part of, like, the question. I see a lot of some of this you're discussing the revenue, but where there's some expense items, it seems like we're moving back. Timing of some of them, can you just discuss what exactly that meant?

Shlomo Rosenbaum:

Okay. Thank you.

Operator:

Thank you. Our next question or comment comes from the line of David Motemaden from Evercore ISI. Mr. Motemaden, your line is now open.

Andrew Krasner:

Yes. So, we're not going to get into these specific contributions of recent hires. But to your latter point, we're 12 to 18 months in if you think about for the first cohort of folks that we had hired. And those are at or near expected production levels. However we did hire after that first round of hiring as well, it's been a continuous process. So we do expect increasing contributions from enhanced productivity from those hires as time progresses. So we do think there's more room to run there.

Andrew Krasner:

The hiring process was a bit more continuous than that. So there's not just one big lump of people. All hired in the same quarter. It was a more gradual build-up. I think you may be sort of the way you're phrasing it. So I think we still and as we said, in terms of or re-productivity from the group as a whole.

Andrew Krasner:

Yes. I think two things there. One, it is relatively small contributor in that quarter overall. The second thing I'd say is, one of our key focus areas has been to work to improve the free cash flow dynamics around TRANZACT, and that includes balancing our Medicare Advantage portfolio with the mix of products that have different or better free cash flow conversion profiles, things like life insurance policies. So we are reorienting the portfolio a bit has helped enhance that profile of that business, and that's one of the steps that we're taking to get that business to be free cash flow positive over the next few years.

Yaron Kinar:

Thank you. Good morning. Follow-up question on one of the comments you made on maybe curtailing T&E expenses and vendor spend. How do you – obviously, one of the challenges you have as managers is balancing between organic growth margin improvement and free cash flows. Ultimately pushing that lever I would think could impact organic growth to some extent. So how do you think about the two and the impact you would have on organic?

Yaron Kinar:

That makes sense. Thank you. And then going back to the appetite for the reinsurance business or getting back into that business, I think one of the challenges that we've looked at from the outside is just scalability and also the absence of any very large assets that you could pursue inorganically. So assuming that it is something that you'd want to pursue, ultimately does that have an impact on the business over the next few years? Or is it really going to be in build-out mode for a very long time before we actually see more substantial results?

Operator:

Thank you. Our next question or comment comes from the line of Michael Ward from Citi. Mr. Ward, your line is now open.

Andrew Krasner:

Would you start the question, Michael?

Carl Hess:

Yes. So, if you look at our global lines there. In general we're having great success in the marketplace, probably the biggest differentiator is what's happening in rate. And I think it's pretty well known that D&O market particularly has seen significant rate reductions which does have an effect on our overall revenue in the area. So, good results despite a headwind from rate in that particular line. We are seeing very good success across all our global lines. And I think it's -- what we say is, where we specialize we win and that's a good testament to that. Probably the other area I call out is facing a headwind has been in our M&A business where simply there's been much less M&A activity. And so as a result our revenues in the area along with everybody else have been under pressure. Of course this is a very interest rate sensitive business, so we've seen some benefit on the interest income side of the balance sheet that mitigates that.

Michael Ward:

Awesome. Thanks. And then maybe the cash flow improvement in the quarter. It was up over $200 million. I think with $75 from working capital. Just wondering any actions you can call out, and if you could quantify the transformation in cash flow impact?

Operator:

Thank you our next question or comment comes from the line of Mark Marcon from R.W. Baird. Mr. Marcon, your line is now open.

Carl Hess:

We are trying to become a more disciplined organization. I think I've been saying that since we first announced the grow, simplify, and transform program in late 2021. We are – I'm very proud of the efforts that our colleagues have made to produce these results. And not me and Andrew, that is 46,000 plus of us all pointing in the right direction. And it's nice when the stars align. But no, there's nothing in terms of underlying change in compensation programs, et cetera, that's driving this. It's 46,000 people's part.

Carl Hess:

Yes. I think it's still way too early in enrollment season to make any predictions about trend, et cetera. We've been at this a while and I think it's a bit of a mug scheme. With respect to how we think demand is within the businesses. I think we alluded to that at a reasonably detailed level earlier in the call. There is some activity that we enjoyed during the summer, especially with respect to benefit redesign and de-risking that just -- we don't expect to be as big a force in Q4. And the, BDO will do what BDO does in enrollment season.

Mark Shields:

Great. Good morning. Can you hear me?

Mark Shields:

Okay. Sorry. My phone's been a little bit lumpy today. I guess first question, with respect to TRANZACT, I understand that it's still sort of generating negative cash flows. Do we have line of sight in terms of when the annual negative cash flows don't get worse on a year-over-year basis?

Mark Shields:

Right. In other words, I'm looking at two hurdles. One is, ultimately, cash flow positive. But before that, I would imagine that it generates negative cash flow, but not as much as the prior year?

Mark Shields:

Okay. And I just want to clarify something, because I may be misinterpreting it. On the last quarter call, I think, when you talked about some of the non-transformational expense efforts, the expectation was that would be clearer in the fourth quarter than in the third. I just want to see whether that's still the case or whether it proved out faster than expected?

Operator:

Thank you. Our next question or comment comes from the line of Brian Meredith from UBS. Mr. Meredith, your line is now open.

Carl Hess:

Yes. As a company, we are well-positioned to weather macroeconomic uncertainty. And I think if you're asking a prediction for me on GDP, I think it's uncertain, but there's a range of actions that I think we're actually in pretty good shape to handle. Both WTW and our predecessor companies have been able to grow revenue during recessions. Our clients are facing many uncertainties in this macro environment. Some of our clients have to navigate rising, sustained rising commercial insurance rates that the industry has been enduring amidst the current conditions. Insurers are still pushing for premium increases, and that causes even greater challenges for our clients as they try and navigate complex risks. But our customized tools, our specialist approach in R&B ensures that the clients get the best return for their premium dollars across the entire portfolio of risk. And I think that helps us position very well. On the HWC side, these same economic issues can cause our clients to have a more intense need for sound advice and risk management solutions, whether it's pension de-risking or coping with healthcare inflation. So our clients look for help in navigating these issues, and that creates opportunities that drives demand for our services around benefits, pensions, and workforce management.

Andrew Krasner:

We don't speculate about potential transactions, and I would consider wholesale a transaction, not an extension of what we're doing.

Joshua Shanker:

Yes. Thank you very much. I was wondering if you can give any color, I mean, you're a bunch of different businesses on the broking side. How are things looking in the middle market here in the United States? How are things looking in your, I guess, I would call them international businesses in some of your places where you're dominant in Francophone countries and whatnot? Can you give us a little color on the geographical differences in performance? I know you say it's broad-based, but I mean, not everything's moving at the exact same gearing, I assume.

Joshua Shanker:

And just a quick modeling question, should we assume in 2024 that the book of business sales have basically run their course?

Operator:

Thank you. Our next question or comment is a follow-up from Mr. Shlomo Rosenbaum from Stiefel. Mr. Rosenbaum, your line is now open.

Andrew Krasner:

Yes. So first on the pension side, as we've mentioned before, the increase in interest rates and decline in capital market return did create a significant headwind to some of the pension income dynamics. We continue to expect pension income of about $112 million in 2023, and for 2024, we'll update our expectations there in our fourth quarter call after the annual remeasurement process. However, based on current market conditions, we don't expect the pension headwinds to subside. And on your question related to the other income line item, the big component that you're seeing there is a gain on the sale of our Saville Assessment business.

Carl Hess:

Thank you all, again, for joining us today. We do appreciate the continued support of all of our stakeholders. I especially want to reiterate my thanks to all of WTW's colleagues around the globe for their continued hard work and dedication. The results of which are evident in this third quarter performance. I am proud of their results, and I look forward to working together to keep the momentum going as we finish the year strong. Have a great day.

Operator:

Good morning. Welcome to the WTW Second Quarter 2023 Earnings Conference Call. Please refer to the wtwco.com for the press release and supplemental information that is issued earlier today. Today's call is being recorded and will be available for the next 3 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 review the forward-looking statements section of the earnings press release issued this morning, as well as, other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliation of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website. I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Andrew Krasner:

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 want 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're 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 clearer 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. 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 and 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 in 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 TRANZACT 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. 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 in free cash flow. 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 at TRANZACT. About 8% of our revenue comes from TRANZACT, 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 TRANZACT's largest revenue quarter, and that revenue consists of both fees and commissions. The commissions, which reflect both our initial placement plus estimated future renewals can take up to 5 to 6 years in total for us to collect depending on the product. Meanwhile, we incur significant upfront cash costs to place the policies, creating a working capital headwind as the business grows. In 2022, growth in TRANZACT 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 receivable. We expect to collect this over multiple years as policies are renewed. As our TRANZACT 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 TRANZACT with its strong revenue growth prospects and current lower cash flow generation with a mature business of Extend Health, which has lower revenue growth, but strong cash flow. Together, the 2 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 that progress in 2023. Funding the Transformation Program required approximately $200 million in cash outflow in 2022, which translated to a roughly 230 basis point headwind to our free cash flow margin. Investment in the Transformation Program 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 6 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 $128 million in cumulative annualized savings this year, far exceeding our original target of $100 million of incremental savings for 2023. Accordingly, we're raising our guidance on cumulative run rate transformation savings actioned by the end of 2023 to $160 million. The 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. The 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 2 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 and Europe and higher levels of project work at 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 delivered 4% growth in the quarter, driven by increased demand for reward-based advisory services and higher compensation survey participation. Benefits Delivery & Outsourcing generated 7% growth in the quarter. The increase was driven by strength in individual marketplace with growth from higher volumes and placements of Medicare Advantage and Life policies as well as increased project activity in outsourcing. HWC's 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. Risk & Broking revenue was up 6% on an organic basis and on a constant currency basis compared to the prior year second quarter. Risk & Broking had strong organic revenue growth despite significant book of business headwinds and excluding the impact from book of business settlements, Risk & Broking grew 10%. Corporate Risk & 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%. 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 and strong contributions of 13% organic growth from our specialty lines like Marine, Financial Solutions and large and complex P&C. Our specialty lines of business are a 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 & 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. International also contributed to organic growth led by Latin America. In 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. R&B's 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 from 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 facing 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 headcount 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 $2.05. 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 $0.05 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 20.5% in the prior year reflecting the nonrecurring nature of discrete 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 the highest return opportunities. During the quarter, we paid $90 million in dividends and repurchased approximately 1.5 million 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 new debt in May, and 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 2023, compared to free cash flow of $198 million in the prior year. 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 receipt related to deal termination. These tailwinds 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 are 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 improvement opportunities we see today. With that, let's open it up for Q&A.

Elyse Greenspan:

My first question is on the 2024 guidance. Carl, obviously, last year, you guys pulled lowered guidance for Russia, there were some changes to free cash flow. Just trying to get a sense like why is this the last cut? I mean I imagine maybe you guys went through and kind of stress tested all the components of guidance to put forth something that you won't have to revise again in January with fourth quarter earnings. But any thoughts there?

Elyse Greenspan:

And then my follow-up, Carl, would be on the margin comment, right? So like you guys have had success with your savings program, but it doesn't seem like that's coming into numbers even though you provided up the target. So is that benefiting margins? Is it more coming later than expected? I just would have thought that, that could have absorbed and helped offset some of the impact of the incremental hiring, right, that you're attributing the lower margin, too.

Carl Hess:

Yes. Let me just sort of leverage a little bit on that, Andrew. I mean, first of all, our investments in the talent have actually been paying off in excess of what we had projected, to date, 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 sort of a bit further than the rest of this year, right? I mean -- 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 on what we're trying to go here. Most of the investment is in talent, but there's also investment in things like MGAs and MGUs 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 talent investment, right, it is about high reproductive talent that can best leverage our platform. It is highly aligned to our specialization strategy. We do recognize that comes with the usual margin drag. This is a typical 12- to 18-month time until we get full productivity out of these people. But I look forward and say, look, a year ago, we were all about filling gaps rebuilding teams after a period where we had been suffering heightened attrition due to 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 want to be crystal clear, right? This is about going on the defensive -- going on the offensive, we are not about backfilling gaps in the bench anymore. This is about offense, not defense.

Charles Peters:

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 that's going to come to an end. The improved profitability seems realistic, I guess. I guess when I look at the 3 buckets, the one I'm concerned about would be the TRANZACT cash conversion. 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 mention 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 around this slide?

Charles Peters:

Okay. Fair enough. I guess my follow-up question will pivot back to the margin piece and I know you've talked about it in your prepared remarks, you just answered Elyse's questions regarding it. You spoke about book sales and recruiting. I guess -- from a margin improvement standpoint, I guess I was a little disappointed with the second quarter results. I would have 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?

Carl Hess:

Okay. With regard to recruiting, Greg, I guess one thing I'd note is sort of open positions of the company are at half the level they were a year ago. And so that should give you an idea of sort of overall where we're trying to do with recruitment. However, I want to point out that I think we're at a point in time, and yes, Lucy Clarke's arrival, I think, is a testament to this where the choice we've made very deliberately to specialize within R&B is it's the foundation of our growth, and it is significantly attractive to 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 exactly the right time for those to be paying off. So we're going to be looking to actively find that talent.

Jon Newsome:

I had another sort of book of sale question. If we're looking at the profit margin of the businesses, you're looking -- you're using through book sales versus the rest of the business, are those book sales businesses have similar margins? Or is that another sort of source of margin compression for the company as these businesses are sold away?

Jon Newsome:

That makes more modeling easier. Second question, a lot of what your peers have done with respect to margin improvement over time came to some very careful divestitures of businesses that you'll see every quarter from them. How does that fit into your strategy as well, if at all? Looking at sort of divesting? Are you looking at divesting some of these businesses that might have lower margins as well?

Carl Hess:

And I'd add, we use that for our acquisition strategy as well. We're looking for businesses where we can be a better owner than the current owner.

David Motemaden:

I just had a question just on the new margin range for next year, the 22.5% to 23.5%. 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?

Carl Hess:

And then I'll just add demand across various parts of our business, right? So while I think we've got a very diversified portfolio and that has enabled us to what storms, we do try to take advantage of conditions as we find them, like sort of demand across the portfolio, as you can see from the segment numbers, the growth remains strong there, and we're looking to 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 R&B, our Health and Benefits Business, and focus within our Career business in a place where we see demand, which is sort of coping with new ways of working in the new normal. I'd also add, there's upside in our wealth business, especially in the -- if capital markets stay up and in fact that we're collecting percent of asset fees across a large chunk of our investments business.

Carl Hess:

Sure, sure, sure. So as I alluded to a little while ago, we're actually very happy with the progress for our '22 [indiscernible] cohort of hires, right? They've actually performed in excess of where we think they thought we would be at this point in time. But no, they're not up to full productivity yet. As we've said, that's 12 to 18 months and sort of on average, we're about 12 months on that. The 2023 hires, which is a smaller number. It's only been half a year, right, are performing in line with expectations, but that's, of course, early days. I think what I'm saying with respect to sort of looking forward, right, 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 push that ahead. So it's -- yes, I think what we've seen from the '22 and '23 hires is encouraging, but that's not necessarily just saying, okay, more of the same. We think that it's actually a confirmation of our strategy and how it's resonating with clients that want us to move ahead.

Unidentified Analyst:

This is on for Meyer. I just have a question on [indiscernible] length. So given how well the organic growth has been playing out, do you guys see any changes in your investment?

Unidentified Analyst:

Yes, yes, yes.

Unidentified Analyst:

Got it. My second question is on the free cash flow guidance. I know you guys gave the long-term guidance of 16%, just wonder improved 12% guidance of this year through to 2024 linearly? Or how does -- can you add some details on that?

Unidentified Analyst:

So for the free cash flow guidance, just wondering can you add some details on 2024? Or do you see it just improve linearly to the 15%?

Operator:

Our next question comes from the line of Mark Marcon from Baird.

Carl Hess:

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 client engaging 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, right? And that's been our approach historically. We anticipate that will very much be part of our approach going forward. It fits beautifully with a specialization strategy, because you're 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's quite committed to that and that by its very nature, makes it more of a team-based approach. So I think there's a sort of a virtuous cycle, we guess, with respect to our approach that actually makes team building easier and minimizes morale disruption that might take.

Andrew Krasner:

Yes. We haven't specifically given that information but if you think about the current year adjusted tax rate it is modestly higher, as of now, year-to-date, and we expect something modestly higher on a full year basis year-over-year.

Michael Zaremski:

Okay. Great. And on the free cash flow, thanks for the added color. I just want to confirm that the pension income levels or the pension changes in terms of the impacting your EPS that doesn't flow through to cash flow, right?

Michael Zaremski:

Okay. Got it. Okay. Switching gears to the segments. You've talked a lot about and you have been for a number of quarters by investing in talent opportunistically, is this also happening in the Health, Wealth and Career segment a bit? I just asked because margins were a little light there as well versus expectations.

Operator:

Our next question comes from Yaron Kinar from Jefferies.

Carl Hess:

So when I was talking about interest rates being negative, it with respect to the pension, right? It wasn't in respect of the fact that we do receive more interest income.

Carl Hess:

No. I mean, we -- 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 brokering business and the freeze in that marketplace is obviously quite unhelpful on that side. So it's as I said, it's a bit more complex.

Andrew Krasner:

Not necessarily. I think it depends on the impact of inflation on different components of the income statement. So obviously, there's been a lot of wage inflation over the last 2 years, and that's not just related to new hirers, 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.

Yaron Kinar:

Okay. I appreciate that. And then if we flip to the pension component specifically, if I'm doing the math correctly. The midpoint of the new guidance, you're talking about roughly $80 million worth of pension income in '24. And I understand we'll get another update at year-end. But if that math is roughly correct, can 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 and I think the level of interest rate increases has moderated a bit?

Operator:

Our next question comes from Mike Ward from Citi.

Carl Hess:

So I mean if you look at the rate on the commercial risk side, I mean, overall, we're seeing flatter single-digit increases or even small decreases depending on local market conditions. Rate increases across many lines are moderating, but there are definitely some lines that aren't seeing any abatement at present U.S. property, probably being the most predominant one. Remember, we are a very global firm with respect to our mix. And that -- so you can't necessarily take our book as typical for others. But it's certainly in cat-exposed property rate increases are still coming through. Casualty is a bit of a different story. There's more stability in the global portfolio with relatively small rating increases being written.

Carl Hess:

Yes. Well, I mean, with sort of pension funding levels being at a pretty hefty rate -- sorry, compared historically, right, the pension funds are pretty well funded. So the opportunity for pension risk transfer activity remains elevated, and we have a market-leading position that in the major markets. And then the other phenomenon just referring to is we've got an investment business that is a substantial part of that is compensated basis points. And with asset levels up, that's helpful for that business.

Brian Meredith:

Two questions here. Carl, I'm just curious, in the 2024 guidance, what is embedded with respect to the economic outlook? What would happen if nominal GDP goes, let's call it, 2%, 3%, would it be challenging to make your kind of guidance targets? And then what else are you embedded in that with respect to the commercial lines pricing environment?

Brian Meredith:

Got you. So a recession or something should matter?

Brian Meredith:

Makes sense. And then my second question, I'm just curious, Carl, can you talk a little bit about just employee retention and efforts and what you're doing to keep people. I mean I look at your stock down 12% and all the other brokers are up mid-teens. And I can tell you just from any company work out, you're always looking at that stock price. What are you doing to kind of help keep people? And what does retention look like right now?

Operator:

Our next question comes from the line of Mark Hughes from Truist Securities.

Andrew Krasner:

Yes. We continue to expect healthy growth from that business. There's more to that business than just the Medicare Advantage market where we do sell other products and those products have different financial profiles and cash collection profiles with them as well. So we do make sure that we look to create a balanced portfolio across that business.

Operator:

Our last question comes from the line of Rob Cox from Goldman Sachs. It appears that we do not have Mr. Cox, so we will go on that as our last question. I'll give one moment to see if anyone else would like to ask questions.

Operator:

Good morning. Welcome to the WTW First Quarter 2023 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that was issued earlier today. Today’s call is being recorded and will be available for the next three months on 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 more details discussed of these and other risk factors investors should review the forward-looking statements section in the earnings press release issued this morning, as well as other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company’s website. I’ll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Andrew Krasner:

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. Our clients continue to face a host of economic challenges including rising commercial insurance rates. However, pricing increases appear to be moderating as our fourth quarter 2022 commercial lines insurance pricing survey showed an aggregate increase of just below 5%. Data for nearly all lines continue to indicate price increases with the exception of workers' compensation and directors and officers' liability. The largest price increases came in commercial auto, followed by commercial property. We continue to focus on helping our clients with our specialized knowledge in risk and broking capabilities, so they can make more informed decisions about how to best manage their risk in the current environment. As Carl mentioned, we had a strong start to the year with first quarter revenue up 8% on an organic basis and solid growth across our portfolio of businesses. Our adjusted operating margin was 18.6%, a 140 basis point improvement over prior year, reflecting our growth and expense discipline along with the benefits of our transformation program. The net result was adjusted diluted earnings per share of $2.84, a 7% increase over the prior year. Let's turn to our detailed segment results. Note that to provide comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis unless specifically stated otherwise. The Health, Wealth and Care segment generated revenue growth of 6% on both in organic and constant currency basis compared to the first quarter of last year. Revenue for health increased 8% for the quarter, primarily due to increased project work in North America related to helping clients implement, legislative changes and managed plan costs, as well as from strong growth in international with new client appointments supplemented by healthcare inflation and increases in clients covered populations. Wealth grew 4% in the first quarter. The growth was primarily attributable to higher levels of retirement work in Europe and North America including compliance and de risking projects along with new client acquisitions. This growth was partially offset by a nominal decrease in our investments business, which continued to be pressured by the declines in capital markets that occurred in the second half of 2022. Career experienced 4% growth in the quarter, driven by increased demand for advisory services and increases in data and software license sales. Benefits Delivery and Outsourcing generated 7% growth in the quarter. The increase was driven by new outsourcing clients and compliance projects plus strength in our individual marketplace with growth from higher volumes and placements of Medicare Advantage and life policies. HWC's operating margin was 24% this quarter compared to 20.7% in the same prior year period. This strong margin growth was primarily due to higher operating leverage. Risk and Broking revenue was up 10% on an organic basis and 5% on the constant currency basis compared to the prior year first quarter. Corporate Risk and Broking had an outstanding quarter with an organic revenue increase of 10% driven by growth across all regions in most lines of business, primarily from new business and improved retention. As we've indicated, book-of-business settlement activity has slowed after the uptick over the last two years, with only a one percentage point impact on organic growth for the quarter. Investment income was $12 million for the quarter due to higher rates and impacted organic growth for the quarter by one percentage point. North America had a strong quarter due to new and renewal business and increased retention. A result of the strategic investments and initiatives that Carl highlighted earlier. Europe also had solid new business performance across a number of product lines including aerospace, financial solutions and natural resources as our focus on building and strengthening our industry and product specializations continues to deliver robust growth. International also contributed to organic growth with double digit growth in all regions. In the insurance consulting and technology business, revenue was up 7% over the prior year period, primarily driven by increased sales and retention in technology solutions. R&B's operating margin was 19.9% for the first quarter compared to 21.6% in the prior year first quarter. Margin headwinds reflect the inclusion of profits up until the date of deconsolidation from our now divested Russia business in the comparable period. Absent this headwind, margins improved as a result of organic revenue growth in CRB, transformation savings, gain on sale and interest income, and partially offset by the run rate impacts of 2022 strategic investment hires. As we expected, last year's key hires have begun to contribute our performance in a meaningful way as exemplified by the solid organic growth this quarter and we continue to expect a ramp up in production this year. Now let's turn to the enterprise level results. We generated profitable growth this quarter with our adjusted operating margin increasing 140 basis points to 18.6% from 17.2% in the prior year. This improvement reflects the benefits of higher operating leverage from the increased top line growth and transformation related savings, which we expect to continue to be a key contributor to our ongoing margin expansion and the attainment of our 2024 margin goals. Please note that the margin tailwind created by interest income and book-of-business settlement activity was offset by the margin headwind from the divestiture of our highly profitable Russia business, whose results were included in the prior year up until the day to deconsolidation. Foreign currency was a headwind on adjusted EPS of $0.06 for the first quarter, largely due to the strength of the U. S. Dollar. Assuming today's rates continue for the remainder of the year, we'd expect a foreign currency headwind on adjusted earnings per share of $0.05. Our U.S. GAAP tax rate for the quarter was 19.5% versus 27.5% in the prior year. Our adjusted tax rate for the quarter was 20.5% compared to 21.1% in the prior year. The current quarter adjusted tax rate is lower primarily due to the favorable impact of discrete items in the current year. The adjusted tax rate for the full year may increased moderately as a result of the UK corporate tax rate increase, which became effective on April 1. 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 the highest return opportunities. During the quarter, we paid $87 million in dividends and repurchased approximately 432,000 shares for $104 million. We continue to view share repurchases as an attractive use of capital. We generated free cash flow of $92 million for the first quarter of 2023 compared to free cash flow of negative $10 million in the prior year. The $102 million year-over-year improvement in free cash flow was primarily driven by more favorable working capital improvements resulting mostly from higher cash collections and lower discretionary compensation payments made in the current year quarter as compared to the prior year quarter. Our Q1 results are reflective of the progress we've made since the beginning of 2022. We've come a long way, stabilizing the business, rebuilding our talent base, strengthening our organic revenue growth and accelerating the transformation program to drive greater profitability in the future. We're committed to delivering the same success with free cash flow generating. Though our actions on free cash flow have not yet yielded results within the timeframe we expected, we remain focused in the near term on driving meaningful improvement in our free cash flow margin for 2022's base of 8% free cash flow margin and in the longer term, making continual progress and moving more towards peer levels. As free cash flow generation remains a high priority, we've made enhancements to our original improvement plans to strengthen our organizational focus on cash flow. As you may have seen in our proxy statement, we have added free cash flow as a KPI for annual incentives in the executive compensation program and are working on implementing cash flow linked KPIs for others in the organization to drive broader accountability across the company. In addition, we are focused on pursuing long-term structural and contractual improvements to the cash aspects of how our businesses operate. As you might expect, this is the area where we have the largest class of opportunities to improve, but those opportunities are the most time consuming to realize. As a reminder, full year 2023 pension income is expected to be about $112 million. If this level of pension income remains consistent in 2024, it would pose a significant headwind to our 2024 adjusted EPS target. Pension income, which is sensitive to macroeconomic conditions is remeasured at year end. Accordingly, we will provide additional guidance on our 2024 pension income expectations and the resulting impact to the adjusted EPS target when we release Q4 2023 earnings results. Overall, we are excited by the strong start to 2023, with business performance ramping up as expected and the benefits of our investments in talent and technology starting to meaningfully contribute to results. In addition, our successful transformation efforts and operating leverage have allowed us to continue to drive margin expansion. We have made consistent progress in our commitments for organic revenue growth and increased operating margins in EPS. With that, let's open it up for Q&A.

C. Gregory Peters:

Good morning, Carl and Andrew. I guess let's kick off the Q&A with the organic and risk and broking seems to be accelerating. And looking over your comments in the slide deck, at the same time we're seeing some compression on operating margin. So I guess, as I think about that, maybe comment on where we are in the hiring super – the hiring cycle or reinvestment cycle of talent? And how you think about organic. I know you don't really like to guide quarterly, but it seems like there's quarterly sequential improvement. How are you thinking about it for the balance of the year?

Andrew Krasner:

Greg, it's Andrew. I think just one other thing to think about as it relates to organic growth in Risk & Broking and across the enterprise as well as that of last year, there were $45 million of book sales. So we just want to be thoughtful about that going forward as it relates to organic growth. And I think you also had a question around margin. as well within the segment for the quarter. So Risk and Broking had a margin decrease of 170 basis points. And excluding interest income of $12 million and bookings of $7 million, the margin decrease was about 310 basis points. However, interest income and book gains were more than offset by a $37 million operating income headwind from the deconsolidation of the Russia business, which happened in the first quarter of last year, and that component equated to a 340 basis point margin headwind. So absent that, some growth there and margin.

Andrew Krasner:

Yes. As you know, we don't give margin guidance by segment. But with regard to the full year, we're excited about the trajectory for margin growth within Risk and Broking. As you know, we ensure to ensure we maximize our future growth potential, and as Carl mentioned, right, started making some meaningful investments in the revenue-producing talent and we're now beginning to see those results from those investments to come through, and we expect that momentum to continue. So that, combined with the efficiencies created for transformation, we have confidence in the continued acceleration of margin improvement in that business over time.

Andrew Krasner:

Yes, sure. We think about share repurchase as 1 of the investment opportunities that we have, utilizing free cash flow. So of course, we balance the share repurchase activity across other organic and inorganic investments. And we monitor that continuously along with the rest of the capital structure. So we feel pretty good about our ability to continue to reinvest in share repurchases, if that's the right reinvestment decision from the free cash flow.

Andrew Krasner:

Outside of transformation nothing that we're currently anticipating or aware of.

Paul Newsome :

I'm sorry, I want to beat on the free cash flow change. Could you really just kind of hone in a little bit more on what changed in the last 3 months that changed the your thoughts. It just wasn't clear to me. I apologize if it's just me exactly what changed in the environment that changed your view on it?

Paul Newsome :

Similarly to the EPS goal, I mean, I would have thought that the best estimate of 2024 pension revenue would be this year's revenue. And I think consensus is reflecting some view that, that goal is going to be difficult to achieve. Why not just sort of with the band-aid off and lower than expectations [indiscernible].

Operator:

Our next question comes from Elyse Greenspan from Wells Fargo.

Carl Hess :

Elyse, I think we're making great progress on our revenue goals and our margin goals. And things that we can control, we are driving through the organization and driving hard, and we're very happy with the progress we've made to date. The reason we call out the pensions is that's driven by external interest rates and capital market returns. And despite having a market-leading investment business, those aren't things we can control.

Andrew Krasner:

Elyse, and your math there is spot on. as I said earlier, we don't guide on segment margins. but we do expect that the margin trajectory to continue on a path, but it will be could be choppy quarter-to-quarter, and we do have the potential headwind from the book sales from last year, weighing on margin in Q2, for example. But over the long term, we're still very confident about the margin acceleration in that business.

Andrew Kligerman :

Maybe thinking about the organic revenue growth. You target mid-single digit following this quarter. And it strikes me that there could be materially more upside. I mean I think your net hiring risk and brokerage just by our calculation was up 7% year-over-year, maybe even more HealthWealth and Career's 4.5%. And I guess that you have a book of business headwind of $45 million in the second quarter. But you also had 1.5 point benefit this quarter from interest income and that should persist through the year. You've got inflation, which is helping drive up organic revenues, we saw a big number from a competitor of yours. So the question is, is that mid-single-digit guidance around organic revenue growth? Is the bias for potential on the upside to that? Or what should we be thinking about?

Andrew Kligerman :

Got it. And then second question, just moving back to the free cash flow in the quarter of $92 million. But by our expectation, we were thinking maybe you come in somewhere between $300 million and $400 million. And just kind of hoping you could unpack what those pieces were that kind of came off course because last quarter, despite a pressured free cash flow number, you seemed optimistic that you could still get into that 3-year figure of 4.3% to 5.3%. You figured there were ways to kind of maneuver to that. And now we're looking at $92 million this quarter. And I'm wondering a, how did it get this low? What were the key pieces? And two, how do you get -- now that you've kind of tossed the 4.3% to 5.3%. And what seemed like a good -- forget the margins, it seems like you could just get to 1.6%, 1.7% a year. Is that something we could think about in 2025? Is that a real goal? And I'll stop there.

Andrew Kligerman :

Okay. So that kind of 4.3% to 5.3%, if you kind of annualize it by '25, do you think you can be in that kind of peer zone with that kind of annualized experience? Or is it still too early?

Operator:

Our next question comes from Michael Zaremski from BMO.

Carl Hess :

Our pension design is actually pretty immune. The open plan of the U.S., right, is the one where you design changes might do anything. And that's one where we've actually made design changes over prior years to reduce a lot of the volatility associated with a traditional defined benefit design. Our big plan in the U.K. is basically doesn't have accruals for people anymore. So design changes wouldn't do anything there. And the investment strategy we run against these plans is designed to largely preserve the funded status of the plan. despite capital market interest rate fluctuations. And actually, if you look at the pension footnote, you'll see that those strategies did exactly what they were supposed to do during last year. So we're pretty happy with how we manage the plans for stability.

Carl Hess :

Yes. We'll speak to the peers, but I think the team has done a great job over the years of positioning us for growth under all sorts of different conditions. And I do think that the relevance of the services we offer is as high as it's ever been, right? I mean there is demand in our wealth business for pension risk management solutions that are indeed a bit more feasible under current economic conditions for pension plan sponsors. There has been strong demand for our health business, project activity due to legislative changes in North America and our continued expansion of our client base and helping our clients deal with health care inflation and the effect on their costs. And in our career business, where over the years, we've taken strong steps to make sure that -- there's less of an emphasis on discretionary project work and more on software recurring revenue continues to grow and our -- the software licensing that we're doing in that business has been a substantial part of that. So yes, we're quite happy. And I guess I'd point out, generally, employers are still struggling with the new ways of working and the advice we can help to help them cope with sort of the new normal in terms and sort of the fact that despite any potential recessionary as employment levels still remain very high. I do remain optimistic about the demand for our services in that area.

David Motemaden :

So I wanted to just ask on the free cash flow and I just wanted to get a better sense of some milestones that we can track from the 8% margin in 2022. In the disclosure, you said that -- or you mentioned the absence of onetime headwinds that will help you improve free cash flow meaningfully this year. And that's obviously offset by the cost to achieve for the transformation program. But these onetime headwinds that you're saying should help you improve or the absence of these onetime headwinds that should help you improve free cash flow. Could you size those for us?

David Motemaden :

Got it. That's helpful. Thanks for laying those out for me. I somehow missed that. So -- and I guess, and then the timing of the transformation program, I think there's still overall $536 million of cost to achieve that will happen over the next couple of years. Is it safe to assume that pretty equal spreading that out over the next couple of years?

Operator:

Thank you very much for your question. Our next question comes from Yaron Kinar with Jefferies. Your line is open. Mr. Kinar? All right. Well, we can move on to our next question, which comes from Mark Marcon. Mr. Marcon is with Baird. Your line is open.

Andrew Krasner:

Yes, it's Andrew. Thanks for the questions. On the first part, regarding HWC's margin progress, I think there's really 2 components that you see there. One is the operating leverage just inherent in the business and two, the impact of transformation savings more visible in the bottom line.

Mark Marcon:

That's great. And then obviously, there's been all sorts of questions about the free cash flow target moving a little bit. And you mentioned specifically changing the KPIs to emphasize from a behavioral perspective, addressing some of the things that could accelerate free cash flow conversion. How long do you think it would take to get there? Everybody's been asking, does this mean '25 or '26 when we get to peer levels. While we've got the public call going, is there a way to just say here are the specific things that we're doing and here's when we think would be a reasonable time period to accomplish that. Or a conservative time period to accomplish it?

Operator:

Our next question comes from Yaron Kinar with Jefferies. Your line is open.

Andrew Krasner:

You do have to think about the transformation spend as part of that. But we do expect to continue to make progress on that metric over time. There may be some volatility inherent in that. But over the longer term, we do expect continual progress on that metric.

Carl Hess :

The initial guidance looked at a variety of different economic scenarios. So I don't think it was any one particular scenario for what was going on with the...

Operator:

Our next question comes from Charlie Lederer of Citi. Your line is open.

Carl Hess :

We're very happy with the progress across all global lines. I did call out Phenex where we've got particular challenges, not particular to us. But I think looking at anyone who's got a similar footprint, you're going to find the same thing as the combination of rate and sector activity in M&A. But the results are actually quite strong across the portfolio. I'm not going to dive into particular concentrated areas, right, such as aerospace, but we're very happy with the performance of our teams, and I think we have great momentum going forward.

Carl Hess :

So we're quite happy with TRANZACT performance for the quarter, and we see -- we expect continued growth for TRANZACT this year. We do view the issuance of the recent CMS regulations as a manageable event.

Meyer Shields :

Thanks. I was hoping -- pardon me, to get some color on where you see the needs for hiring now? Is it maintenance? Are there still some of the gaps that we saw in the aftermath of elevated attrition, I was hoping you could talk through that?

Carl Hess :

I think we're back now, operator. So the -- we have -- I think I'd put it this way, right? We don't have major gaps anymore, Meyer, the way we did in late 2021, 222. The teams have done a great job of bringing in talent across the organization. And that shows up and improved retention rates in the portfolio and some of the revenue acceleration we've seen in new business. So we're quite happy with where we are. As I said earlier, right, we'll always be on the lookout for good talent. So this is a people business and good talent is how you continue to grow this business. But we're happy with our human capital situation right now.

Andrew Krasner:

It's Andrew. I think we're very comfortable with our capital position and the capital structure and the embedded financial flexibility that we have there to be able to take advantage of opportunities that come our way. So no concern from our perspective there whatsoever.

Mark Hughes :

Yes. Thanks. Good morning. On the wealth business, if we do see interest rates decline in coming quarters, how does that impact the pension project work? Maybe refresh me on that?

Mark Hughes :

Thank you.

Operator:

Good morning. Welcome to the WTW Fourth Quarter 2022 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that was issued earlier today. Today’s call is being recorded and will be available for the next three months on 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 in the company and the company undertakes no obligation to update these statements. One moment. Thank you. 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 in today’s company and undertakes no obligation to update these statements unless required by law. For more details discussed of these and other risk factors investors should review the forward-looking statements section in the earnings press release issued this morning as well as other disclosures in most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company’s website. I’ll now turn the call over to Carl Hess, WTW Chief Executive Officer. Please go ahead.

Andrew Krasner:

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. As Carl mentioned, we finished the year on a high note and our outlook for 2023 is positive. Now I’d like to share some further details on our financial results. The fourth quarter was in line with our expectations, with revenue up 5% on an organic basis. For the year, organic revenue growth was 4%, and we had solid growth across our portfolio of businesses. For the quarter, adjusted diluted earnings per share were $6.33, an increase of 12% over the prior year. For the year, adjusted diluted earnings per share were $13.41, representing 16% growth over the prior year. Now on to our detailed segment results. Note that to provide comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. The health, wealth and career or HWC segment generated revenue growth of 5% on an organic and constant currency basis compared to the fourth quarter of last year. Excluding the year-over-year headwind from book of business settlement activity, HWC’s organic revenue grew 6%. Revenue for health was flat for the fourth quarter primarily due to a strong comparative arising from book gains in the prior year. Excluding this activity, health revenue grew 6%, primarily driven by portfolio growth and new client appointments in Europe and international as well as increased project work in North America related to helping clients manage increasing costs and implementing legislative changes. Wealth grew 5% in the fourth quarter. The growth was primarily attributable to higher levels of project work, actuarial valuation activity and new administration clients in North America and a combination of regulatory and settlement work in Great Britain. This growth was partially offset by a nominal decrease in our Investments business, which was pressured by declines in capital markets, an expected headwind we mentioned during our third quarter earnings call. The Wealth business finished the year with a strong fourth quarter, offsetting declines experienced earlier in 2022. Career experienced 9% growth in the fourth quarter. This growth was largely driven by strong client demand for talent and compensation products, including compensation benchmarking surveys and advisory work, as well as employee engagement offerings, which we expect to continue this year. Benefits Delivery and Outsourcing generated 6% revenue growth in the fourth quarter. The increase was largely driven by individual marketplace, with strong growth from higher volumes and placements in Medicare Advantage policies. As expected, TRANZACT delivered double-digit growth in its seasonally strongest quarter and for the full year, driven by a supportive macro environment and our focus on profitably growing the business. Technology and Administrative Solutions revenue also increased primarily due to new client appointments and increased project activity. We continue to see growth opportunities for these businesses and expect that they will continue their growth trajectory into 2023. HWC’s operating margin was 39% for this quarter compared to 38.2% in the prior year fourth quarter. Excluding the impact of book of business activity, HWC’s operating margin was 39% compared to 37.6% in the prior year fourth quarter. For the full year, HWC’s operating margin was 26.1% compared to 25.6% in the prior year. The 50 basis point improvement was due to improved operating leverage and transformation-related savings. Risk and Broking revenue was up 5% on an organic basis and 3% on a constant currency basis compared to the prior year fourth quarter. Excluding the headwind from book of business settlement activity, R&B’s organic revenue increased 6%. Corporate Risk & Broking or CRB, organic revenue increased 3%. Excluding book of business settlement activity, CRB’s organic revenue growth was 5%. The business generated growth across all regions, driven by new business wins in construction, natural resources and aerospace. Excluding headwinds from prior year book of business settlements, North America revenue increased with notable growth in construction. Europe and international also made strong contributions to CRB’s growth with new business in construction and aerospace. In the Insurance Consulting and Technology business, revenue was up 17% over the prior year fourth quarter, benefiting from the timing of software sales, which had originally been expected earlier in the year as well as increased advisory work. For the year, ICT delivered strong growth of 9%, in line with our long-term expectations for this business. R&B’s operating margin was 28.3% for the quarter compared to 30.1% in the prior year fourth quarter. Excluding the impact of book of business activity, R&B’s operating margin was 27.6% for the quarter compared to 28.3% in the prior year fourth quarter. For the full year, R&B’s operating margin was 21.2% compared to 23.4% in the prior year. The decline in margin was due to our significant investments in talent. We expect these investments to continue to gain momentum in 2023 as the contributions of these hires become more meaningful. Now let’s turn to the enterprise level results. Adjusted operating income was $882 million for the quarter with 32% of revenue, a 20 basis point improvement over the prior year. For the year, adjusted operating margin was 20.9%, a 100 basis point improvement over the prior year. Our improved adjusted operating margins primarily reflect the benefits of strategic portfolio management which were realized at the corporate level, alongside transformation program savings, which were realized at the segment level, but in some of our businesses were more than offset by our increased investments in talent during the period. As Carl mentioned, during the fourth quarter, we realized $49 million of incremental annualized savings. Transformation savings will continue to be a key aspect of our ongoing margin expansion efforts as we’re encouraged by the results this year, which exceeded both our original $30 million target for 2022 and our most recent forecast of $110 million for the year. To date, our transformation savings have outpaced our original expectations from a timing perspective, driven primarily by accelerated workforce savings, technology savings from migrating operations to the cloud and reductions in our overall real estate footprint. For 2023, we expect our transformation program to deliver approximately $100 million in incremental run rate savings by the end of the year with continued contributions from real estate, technology and process optimization. Foreign currency was a headwind on adjusted EPS of $0.25 for the year, largely due to the strength of the U.S. dollar. Assuming exchange rates remain at current levels, we expect foreign currency to be a $0.06 headwind in Q1 of 2023, but only a $0.01 headwind for the full year. We generated free cash flow of $674 million for 2022 compared to free cash flow of $1.9 billion in 2021. This decrease was primarily due to the receipt of the $1 billion termination fee in the comparable period and the absence of cash generation from the divested treaty-reinsurance business. Looking ahead, growing earnings and generating healthy free cash flow remain our priorities. Our U.S. GAAP tax rate for the fourth quarter was 17.7% versus 20.8% in the prior year. Our adjusted tax rate for the quarter was 22.2% versus 21.1% in the prior year, with the difference primarily due to the geographic distribution of profits. For the year, our U.S. GAAP tax rate was 15.4% versus 19.9% in the prior year. Our adjusted tax rate for the full year was 20.9%, more in line with the 20.7% rate in the prior year. In 2022, we returned a significant amount of capital to our shareholders, paying $369 million in dividends and repurchasing 15.7 million shares for $3.5 billion. We will continue to pursue a disciplined capital allocation strategy that balances capital return with internal investments and strategic M&A to deploy our capital in the highest return opportunities. While we expect share repurchases to remain the primary avenue for capital deployment, we continue to evaluate all our options to create value for shareholders. Turning to our 2023 guidance. Based on current market conditions, we expect to deliver mid-single-digit organic revenue growth alongside adjusted operating margin expansion despite continued investments in long-term growth. We also expect an improvement in free cash flow now that onetime cash outflows primarily related to our divested treaty-reinsurance business are behind us. As I mentioned earlier, we expect to see $100 million in incremental annualized transformation program savings. With respect to non-cash pension income, we expect to see a decline due to market volatility and interest rate movements. For 2023, we expect about $112 million in pension income as compared to $271 million in 2022. I’d like to note that despite this dynamic, the funded position of our plans has improved. We remain focused on our long-term targets and recognize that to achieve them, we will need to build on prior momentum and continue to accelerate revenue, margin and cash flow growth. Each of these areas remains the subject of significant management attention. Overall, it was a strong quarter and year for WTW with performance that aligned with our expectations. Our results reflect a lot of hard work, which included vigorous hiring efforts, investments in technology, successful transformation initiatives and the unwavering dedication of our colleagues. We ended the year in a solid position, and I’m confident that we will continue to build momentum in 2023 as we work to achieve our long-term targets. With that, let’s open it up for Q&A.

Elyse Greenspan:

Hi, Thanks. Good morning. My first question. Can you guys just give us the impact of the book gains and the fiduciary investment income on both your revenue and margins for the fourth quarter as well as for the full year?

Elyse Greenspan:

Okay. Thank you. And then my second question is on free cash flow, right? Given where you guys were for 2022, I mean you’re still – you’re running short of that three-year target that you guys have laid out. And so – could you just get – is there a line of sight to getting into that free cash flow target? And can you just talk through some of the ways you’re looking to improve your free cash flow in 2023 and 2024?

Elyse Greenspan:

And then just one more quick one. So you did revise your 2024 EPS target last quarter. But then this quarter, right, you gave us the pension income guide, which is lower pension income for 2023. Is that embedded within the guide, the $17.50 to $20.50, right? That pension income will be lower, you would have a lower base in 2023 and still be able to get to that 24% EPS target?

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Gregory Peters with Raymond James. Your line is open.

Carl Hess:

Yes, Greg. So with regard to talent, I mean, we’re really pleased with the progress we’ve made on our higher efforts during the year. Net hiring for the year is positive. Our headcount is up by almost 2,500 to 46,600 employees, which is kind of back to 2019 levels, and that’s despite the divestitures we’ve made since then. We do expect the contribution to the improvement in our talent base fee become more meaningful into 2023, and we’ve already seen positive trends as we progress through 2022. I think that’s reflected in the revenue growth numbers from quarter-to-quarter. We’re continuing to hire opportunistically in the number of open positions and base position, of course, are going to vary at any given time based on our needs. But we’re really encouraged by the progress we’ve made, and we’re going to continue to focus on expanding our talent base as necessary to achieve our growth targets. You’ll probably see some further detail on our higher efforts in goals in our 10-K, which will be filed later in the month.

Carl Hess:

Well, we are continuing to hire opportunistically, as I said, Greg. And yes, there’s always going to be some areas in a firm that is the span of services we do where you look and say, okay, we need to kind of advance what we’re doing more substantially than others. But I think we’re opportunistically is key, right? Whereas coming into 2022. As we talked about in earlier calls, we had more pronounced needs across the organization.

Andrew Krasner:

Yes. Thanks for that. We remain confident in our ability to get to the mid-single-digit growth in 2023 and beyond. That’s demonstrated by the organic revenue growth that we achieved this year, reflecting all of the momentum in our businesses. The continued growth from clients seeking our solutions coupled with our robust pipeline and investments that we’re making in our talent strengthens our conviction in our ability to achieve that mid-single-digit organic revenue growth in the future. Our focus remains on enterprise level, long-time organic – long-term organic revenue growth target in the mid-single digits and specifically regarding thoughts around the growth profiles of each of our businesses. Probably best to refer you back to our Investor Day materials from September of 21, where we did set some of that out business by business of what we expect long-term for each one of those components.

Andrew Krasner:

Thanks, Greg.

David Motemaden:

Hi, thanks. Good morning. I was just wondering if you could size the benefit that the favorable ICT timing had an organic revenue growth in R&B in the quarter? And maybe just talk about how much of a headwind that would be in the first quarter of 2023?

David Motemaden:

Yes. That’s right.

David Motemaden:

Okay. Got it. That’s helpful. And then just looking at the R&B organic growth, I think it was 6% excluding the book of business drag and I’m calculating around a 2-point also a 2-point benefit from fiduciary income. So I’m getting to around 4% organic if I take out book of business impacts and fiduciary impacts, which is about the same as it was last quarter. So I guess I’m wondering why we didn’t see that – or I guess, first, is that right? And if so, why we really didn’t see that growth accelerate versus the third quarter?

David Motemaden:

Okay. Great. Thanks. I missed that. Thanks for that.

David Motemaden:

And I guess maybe just one more I’ll sneak one in. Could you just size the adverse impact that the divested reinsurance business in Russia had on free cash flow this year? Because it does feel like a pretty big ramp to get to the low end of the free cash flow target over the next couple of years. So maybe just help us get a sense for what a more normalized free cash flow number would look like if we didn’t have those items would be helpful?

Carl Hess:

Yes, just for clarity, that was our insurance broking business, not reinsurance broking which we – any of that would have already been divested with the Willis Re divestiture.

Michael Zaremski:

Hey, good morning. I promise to just hold it to one question and a follow-up. First question, I just wanted to – I heard the answer to Elyse’s question about the pension income being factored into your long-term guide and it can be volatile. But I just want to be clear, it’s a meaningful headwind in 2023. And so are there other levers that you’re pulling more so than you had kind of previously expected in 2023 to be able to show margin improvement?

Michael Zaremski:

Okay. And my follow-up, just curious, some of your peers have publicly talked about looking for ways to bring employees more back to the office and to better collaborate. I believe Willis has always kind of been collaborative and a more virtual environment. And you’ve been clear that a lot of the cost – some of the cost saves will come from less real estate. But any changes in kind of in your view on the meaningfully lower real estate footprint and kind of just the overall firm’s view of remote work? Thanks.

Michael Zaremski:

Thank you.

Paul Newsome:

Good morning. Thanks for the call. I wanted to revisit the gain of the book sales impact. And if you could just give us a little bit more, maybe just walk us through, again, what the comparisons will likely be prospectively if we continue to have negative comparisons. And one thing I’m not sure if I have it in my mind and maybe some others are not quite getting is I think there’s two impacts. One is the actual comparison of having a gain a year ago versus not having today. But is that there also an impact of not having that book any more prospectively over the next year versus a year ago. And so how should we think about sort of those two pieces? And how long we will be talking about book gain comparisons.

Paul Newsome:

So does that mean that we’re essentially normalized into 2023 or we still going to be talking about this in the next couple of quarters?

Andrew Krasner:

So there may be some quarterly headwinds as that normalization continues throughout 2023. And we’ll – as we have been provide detail on what that looks like.

Carl Hess:

Thanks, Paul.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Kligerman with Credit Suisse. Your line is open. Andrew just to see if you’re on mute.

Andrew Krasner:

Yes. I think that is right, Andrew. I mean we bring people on. We don’t expect them to be fully productive from day one. It’s typically about 12, 18 months before they’re fully productive. And so someone we brought on during the summer kind of – we expect to be hitting their stride in Q3, Q4, the following year in full, right? Do take those – because of the timing of renewals, right, they – and bunching around the end of the year, right? So that’s where you might get some variation in that – how many months as opposed to the efficacy of the particular individual, right? But you’re absolutely right that someone we brought on who’s a great front office talent in 2022, we’ll be hitting their stride in 2023 and beyond.

Andrew Krasner:

Yes. Sure. It’s Andrew. So we’re not going to get into the specific margins of specific products, but we are pleased with the level of profitability that we are seeing in that product and that business overall as it is a portfolio of different products, of course, primarily MA, but there is a nice balanced portfolio there as well.

Andrew Kligerman:

Excellent. Thanks a lot.

Andrew Krasner:

Thank you, Andrew.

Rob Cox:

Hey, thanks. Just on the wealth segment, you talked about a number of tailwinds and noted that some of these projects could last years. So I’m curious if you could talk about how long you expect to benefit from sort of the stronger PRT levels and then really the regulatory-driven work?

Rob Cox:

Got it. Thank you. And maybe just switching over to the transformation program. Any chance you could give us an update on kind of more finally, where these transformation savings are benefiting the margin between corporate and the two segments so far in the program?

Rob Cox:

Thanks. Appreciate the answers.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Joshua Shanker with Bank of America. Your line is open.

Carl Hess:

So there’s – there are all of the above, right, does play into how we grow, right? We’ve talked on prior calls about how various parts of how we price are in place in sensitive, whether it’s rates in our consulting business or asset values that underlie insurance and thus, the commissions we receive. We have also talked about how the fact that we’re back in the marketplace, right? During the period where we were involved with Aon, we stopped receiving RFPs, and that came back to us beginning with the fourth quarter of 2022, we’ve enjoyed the success winning new clients. And over the course of emerging from that experience, our retention rates of existing clients have also improved. And that’s a credit to the hard work of all our colleagues, making sure that our well-earned reputations are superior client services maintained.

Carl Hess:

Yes. So I mean, it’s a mix of all of the above I think. We have a lot of clients, and so you’re going to have a lot of examples on the direction. If you look at various parts of our business, some of it just much more naturally sticky than others, right? We’ve got a client of BDO, who’s in an outsourced benefits relationship with us, typically with a three, five, seven-year contract. That business was extremely resilient during all of this and has looked resilient going forward, but we continue to add new clients in the mix as well. Our CRB business is where we saw the most volatility in the client mix, and that’s one where I think our colleagues did a great job retaining clients, but it was under pressure. Now that we have a clear course and destiny. We’ve seen client retention and client attraction both up as well as new expansion of existing client relationships. So there’s a lot in the hood. We have a lot of variation in the businesses, but the direction, I think is encouraging across the…

Carl Hess:

Thank you.

Brian Meredith:

Yes. Thank you. Andrew, just a quick question here on fiduciary income. You probably some nice disclosure in your Q last quarter on the tailwind from every 25 basis points. If I take a look at that, it would look like it’s probably a 50, call it, basis point tailwind to organic growth in 2023, just given where short-term rates are and maybe a little more meaningful for margins. Do I have that right?

Brian Meredith:

Great. That’s helpful. And then my second question – go ahead, sorry.

Brian Meredith:

Right, right, right. I got that. I got that. The second question would be a number of your, call it, peer companies or competitor companies highlighted the headwind from transactional business this quarter and maybe in the first quarter. Do you have a big transactional business? Was that a headwind at all this quarter to organic revenue growth and potentially first quarter?

Brian Meredith:

Great. Thank you.

Mark Hughes:

Yes. Thank you. Good morning. Just a small question, in the transact business, anything that you saw around expected lifetime value seems like the enrollment season, people were more productive about new business. Did that have an impact on the persistency of the – of your customers there?

Mark Hughes:

And you say persistency has improved?

Mark Hughes:

Yes. Okay. Thank you very much.

Derek Han:

Good morning. Thanks. How do you think about buybacks to current valuations and just the way you think about buying back stock versus reinvestments for this year?

Derek Han:

Got it. That’s helpful. And then my second question is more on a high level. At your last Investor Day, you talked about kind of moving upstream to larger accounts. Can you just give us an update on how that’s progressing? And how that’s contemplated in your mid-single digit organic growth guidance for this year?

Derek Han:

Okay. Thank you.

Mark Marcon:

Good morning, and thanks for taking my question. I’ve got two. One, when we take a look at Health, Wealth and Careers, most of the business is cyclically insensitive and across the Board. But you do have some cyclically sensitive elements within that business. I’m wondering what you’re seeing just in terms of client behavior buyer intentions in that area? And then I have a follow-up with regards to cost synergies.

Mark Marcon:

That’s terrific. And then with regards to the incremental cost synergies that you ended up achieving. Did that come primarily from real estate or personnel or a combination thereof? And what’s going to drive the $100 million of additional cost reductions next year and any change to the 2024 run rate savings targets.

Mark Marcon:

And that’s the expectation for the $100 million as well in terms of this coming year?

Mark Marcon:

Great. Thank you.

Andrew Krasner:

Thank you.

Operator:

Good morning, and welcome to the WTW Third Quarter 2022 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next three months on 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 more detailed discussions 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 the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For a reconciliation of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the Company's website. I will now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead, sir.

Andrew Krasner:

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. As Carl mentioned, our clients are grappling with a host of macroeconomic and geopolitical challenges. Unfortunately, they have also continued to grapple with rising commercial insurance rates. While price increases appear to be moderating, WTW's Q2 commercial lines insurance pricing survey showed an aggregated increase of just below 6%. Data for nearly all lines continue to indicate significant price increases with the exception of works compensation and D&O liability. The largest price increase came from cyber followed by professional liability. In light of these additional pressure points, we continue to focus on helping clients evaluate their options so they can make better informed decisions about how to best manage their risk portfolios. Turning to our financial results. The third quarter was in line with our expectations. On an organic basis, revenue was up 6%, reflecting accelerating growth across all of our businesses. Adjusted operating income was $284 million or 14.5% of revenue for the quarter, up 110 basis points from $264 million or 13.4% of revenue in the same period last year as our growth and expense discipline combined to enhance our profitability. The net result was adjusted diluted earnings per share of $2.20, representing 27% growth over the prior year. Let's turn to our detailed segment results. Note that to provide comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. The Health, Wealth and Career or HWC segment generated revenue growth of 4% are both in organic and constant currency basis compared to the third quarter of last year. Health which is comprised of our Health and Benefits broking and consulting business delivered growth of 6%, primarily driven by increased demand for products and advisory work in North America spurred by clients focus on mitigating likely 2023 cost increases and by U.S. legislative changes. Revenue also grew outside of North America as a result of new client appointments and increases in healthcare premiums. Wealth, which consists of our retirement and investment businesses grew 3% in the quarter. The growth was primarily attributable to higher levels of regulatory and project work in Europe as well as increased consulting work in North America. The growth was partially offset by a nominal decrease in our delegated investment solutions business, which was pressured by declines in capital markets. While we expect the headwind from the decline to persist into the fourth quarter, we see momentum building in the rest of the Wealth business during the remainder of the year, driven by new client acquisition and strong demand for specialist work in response to market volatility and legislative changes. Career, which includes our Work & Rewards and Employee Experience businesses also contributed to revenue growth for the segment, increasing 6% in the quarter. This growth was largely driven by strong client demand for talent and compensation products, including compensation benchmarking surveys, hiring assessments and employee engagement offerings, which we see continuing. Benefits Delivery and Outsourcing, which encompasses our Benefits Delivery and Administration and our Technology and Administrative Solutions businesses generated 2% revenue growth over the third quarter of 2021. The increase was largely driven by individual marketplace and reflected growth in Medicare Advantage revenue in our direct-to-consumer business. Outsourcing revenue also increased due to new client appointments and growth across the existing client base. We continue to see an environment that supports growth opportunities for this business for the remainder of 2022 and beyond. HWC's operating margin was 20.3% this quarter compared to 20.6% in the prior period. The margin declined primarily to investments in resourcing and technology to support future revenue growth. As economic uncertainty looms and market volatility persists, companies are dealing with high inflation rates, workplace stress caused by labor shortages as well as cost and risk management concerns related to pensions and health benefits. Against this challenging backdrop, HWC is helping companies better address employees' needs while managing business realities. Our near and long-term outlook for HWC remains positive as we expect its market-leading solutions and the ongoing demand drivers in its core businesses to continue to support organic growth. Risk and Broking revenue was up 6% on an organic basis and 3% on a constant currency basis compared to the prior year third quarter. Corporate Risk and Broking or CRB, revenue increased 6%. The business generated growth across all regions, primarily from new business with double-digit growth across most of our global lines of business. Book of business settlement activity was due to senior colleague departures in 2021 and is consistent with the levels seen in the prior year period. Thus, it did not affect CRB's year-over-year organic growth rate. Both Europe and International led CRB's growth with improved client retention and notably strong new business in natural resources, construction and aerospace. Solid growth in North America was driven by strong contributions from both construction and M&A solutions. In the Insurance Consulting and Technology business, revenue was up 2% on top of a tough comparable of 18% growth in the prior year third quarter, primarily driven by increased Technology Solutions sales. On a year-to-date basis, ICT has delivered strong growth, as trajectory continues to point towards a strong finish in the fourth quarter. R&B's operating margin was 13.7% for the third quarter compared to 17.5% in the prior year third quarter. Margin headwinds were driven by our significant investments in new revenue-producing and client service talent. Throughout this year, R&B welcomed new leaders and senior contributors across all geographies at both the regional and country level. Leveraging their industry expertise, these key hires have begun to contribute to our performance and we expect these contributions will become more meaningful going forward. The steady improvement in our talent base and client pipeline has strengthened our conviction that the work we have done to rebuild our talent base is gaining traction and will yield strong results. Now let's turn to the enterprise level results. In Q3, we generated profitable growth with adjusted operating margin increasing 110 basis points to 14.5% from 13.4% in the prior year, primarily reflecting the benefits of strategic portfolio management which was realized at the corporate level, alongside transformation program savings, which were realized at the segment level, but were more than offset by our increased investment in talent during the period. We continue to expect margin improvement each year as we work to deliver on our 2024 margin goal. As Carl mentioned, our transformation initiatives will be a key contributor to this ongoing margin expansion, and we are encouraged by the success of our early efforts. By accelerating shared services and our workforce centralization efforts, in addition to identifying incremental opportunities to drive collaboration through real estate portfolio optimization, we have far surpassed our original $30 million annualized run rate savings goal for the year. As a result, we raised both our near and long-term targets and now expect to deliver approximately $110 million in cumulative run rate savings by the end of 2022 and $360 million by the end of 2024. Foreign currency was a headwind on adjusted EPS of $0.20 through the first nine months of the year, largely due to the strength of the U.S. dollar. Assuming today's rates continue for the remainder of the year, we've updated our guidance related to our expected foreign currency headwind on adjusted earnings per share from a range of $0.20 to $0.25 to a range of approximately $0.25 to $0.30. We generated free cash flow of $337 million for the first nine months of 2022 compared to free cash flow of $1.8 billion in the prior year. This decrease was primarily due to the receipt of the $1 billion termination fee in the comparable period, the absence of cash generation from the now divested Willis Re business and additional tax payments made this year on both the Willis Re, gain on sale and the termination fee. Our U.S. GAAP tax rate for the third quarter was 0.7% versus 22.5% in the prior year. Our adjusted tax rate for the third quarter was 16.8% versus 23.2% in the prior year. The current year adjusted tax rate is lower primarily due to lower U.S. fee expense and excess tax benefit on share-based compensation. We expect the full-year 2022 adjusted tax rate to be relatively consistent with our historical rates. We continue to pursue a disciplined capital allocation strategy that balances capital return to shareholders with internal investments and strategic M&A to deploy our capital on the highest return opportunities. During the third quarter of 2022, we paid $91 million in dividends and repurchased 1.8 million shares for $369 million. We are pleased by our progress with business performance ramping as we expected. For the remainder of the year, we see macroeconomic environment that is creating demand for our services and opportunities to help clients with our unique combination of solutions. We feel positive about the investments we have made in talent, innovation and operational transformation and are confident these investments will continue to drive organic revenue growth and margin expansion. With that, let's open it up for Q&A.

Charles Peters:

Yes. Good morning, everyone. The first question will be on revenue, both the organic and the change in your fiscal 2024 targets. Just curious, Carl, in your comments, you talked about macroeconomic issues, particularly there seem to be some challenges in Europe, et cetera. And I'm curious how you're thinking organic is going to perform, especially with some of your businesses overseas in light of these economic conditions. And then if I think about the fiscal 2024 target, the revised target, it implies a compound annual growth rate of 5% or a little bit higher. And that's not something that's happened very often in the history of Willis Towers Watson. So just trying to bridge the gap between what's going on in the macro environment and what you're suggesting is potential for the company.

Charles Peters:

So just a point of clarification, you ran through a lot of information, I appreciate that. When I think about talent rewards, I used to have a lot of economic sensitivity to it. How does that bake into your thought process as you had your fiscal year 2024 revenue targets?

Charles Peters:

Thanks for that clarification. My second question is just on the other parts of the fiscal 2024 on the revised targets. The margin is lower, the free cash flow numbers are lower. And I was wondering if you could spend a minute and talk to us about the gives and takes on those – the revisions to those parts of your estimates.

Charles Peters:

Got it. Thanks for the detail.

Operator:

Thank you. [Operator Instructions] And our next question is coming from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Andrew Krasner:

Yes. I think – Elyse, it's Andrew. I think some of the disconnect there, maybe just when the timing of the saves – the incremental saves are coming online. But the change in margin has really been driven purely by the impact of the Russia divestiture.

Andrew Krasner:

Yes. Our margin expansion in the quarter was driven by the benefits of our transformation program savings and also some strategic portfolio management actions which were more than offset by some of the increased investments in talent team at the segment level. We had corporate savings as well, but just not necessarily the same level of reinvestment that you would have seen within the segments. There is also the impact of some of these businesses that we decided to exit coming out of the deal termination, which are not allocated to the new segments as well as the effective management of the stranded costs from the Willis Re divestiture.

Andrew Krasner:

I'd say they're being effectively managed given that we are still in the midst of a transition services agreement with Gallagher.

Operator:

Thank you. [Operator Instructions] And our next question is coming from the line of Paul Newsome with Piper Sandler. Your line is open.

Andrew Krasner:

Yes. No problem, Paul. I was referring to the incremental $60 million that we announced on top of the initial $300 million. So it was really about the pacing of the incremental $60 million.

Carl Hess:

I think that's the right way to think about it. It will be more weighted towards the back end of the program rather than during the current period or near-term.

Paul Newsome:

No, that makes sense. I think we're still struggling a little bit with the math because of the – it looked like there was quite a bit more than the Russian loss in the event, which is high, but it also looked like there was sort of less of an impact from the cost cutting. So I guess I'm still – I apologize again for my confusion, but it just doesn't seem like the numbers are adding quite the same like maybe there's something else in there that we or just missing and apologize for my confusion.

Paul Newsome:

Okay. I'll do that. Thank you very much. Appreciate the help.

Andrew Krasner:

Thanks, Paul.

David Motemaden:

Hi. Thanks, good morning. I just wanted to go back to the margin target reduction, the one point reduction. Maybe we could just put some numbers around Russia, some specific numbers because I'm sort of calculating it being a 30 basis point to 40 basis point adverse impact on the margin, so there's a bit more, at least, that I'm thinking is in there, so maybe if you could just clarify that. And then secondly, on the fiduciary income, I think that is something that is going to be a tailwind. Maybe could you just talk about how much of a benefit that, that had this quarter? And also, is that – I think that's going to increase going forward that's going to help the margin. I'm assuming that's baked into the guide as well, but if you could just clarify that as well.

Carl Hess:

Yes. I mean, back to Russia for just one second. I mean you've got to recognize, as you think about our Russian business. We have been operating there for over 40 years, right? We had a very strong position in the country. The nature of the business was largely project-based work, one-off and starts with a pretty high profit margin, but it was a minimal local presence required to service business. And we're able to leverage our existing global operating infrastructure on the global platform. And thus, able to do this in the country in a very cost-effective manner.

Carl Hess:

So I'll start on M&A, and maybe Andrew can comment a bit about buybacks. As we laid out at last years Investor Day, intentional portfolio management to optimize value is fundamental to our Simplify initiatives, and we're still looking across our options to create value for shareholders, and that includes divestitures as well as opportunistic M&A opportunities. And now that the market is finally tilting in favor of buyers a bit, that should strengthen our – look for opportunities to strengthen our capabilities in key functional areas and important geographies. But we're continuing to employ a disciplined capital allocation strategy that balances capital return with internal investments and strategic M&A to look for the highest return possibilities.

David Motemaden:

Got it. So I guess – yes, so the cash target balance is kind of $1.5 billion sort of where it ended the quarter is kind of the cash level that you guys think is necessary to run at?

David Motemaden:

Thank you.

Operator:

Thank you. [Operator Instructions] And our next question is coming from the line of Andrew Kligerman with Credit Suisse. Your line is open.

Carl Hess:

So let me start with staffing. And we don't do headcount on a quarterly basis. We will discuss headcount detail in our 10-K. So hiring has been strong, and the hiring activity in Q3 matched that in the first half and it's fortified by the fact that we see the benefit of our retention efforts. Voluntary attrition has remained consistent with the macro environment and the external benchmarks we use to measure this. So our year-to-date hiring has exceeded voluntary terminations. Our headcount continues to increase. And sort of getting to the revenue aspect of your question, we anticipate that the contributions from the equipment in our talent base to become more meaningful going forward.

Andrew Kligerman:

Got it. And not to belabor too much, the issue EBIT revenue target change. Carl, you seem somewhat optimistic last quarter that you had some puts and takes where you really wouldn't have to worry about pressures. You seem confident that you could meet those 2022 targets for 2024. So now as you've made a change due to Russia, what I'd like to know is what would give us confidence that we're not going to see another change for the weaker? And if there is another change, what might be some of the risks that are kind of prominent in your mind right now?

Andrew Kligerman:

So bottom line, you feel very confident in 2024. And then with that, that extra $60 million of expense saves, would that get you back in $25 million for that operating margin target of 24% to 25%?

Andrew Kligerman:

Okay. And maybe if I could just sneak one last in. And you did – Carl, you mentioned at the beginning, attractive opportunities for M&A. Could you give us a sense of what areas maybe that have kind of prompted you to see some practice, what pockets of your businesses might be compelling?

Andrew Kligerman:

Okay. Thank you.

Mark Hughes:

Yes. Okay. Thank you. Good morning. In the Benefits Delivery and Outsourcing, some of your competitors have had to adjust their assumptions around customer longevity and here I'm talking about TRANZACT. I'm just sort of curious, your current view about your assumptions there. And then also curious your view of the competitive environment as we kind of get into enrollment season, how the competition looks in terms of the push for leads and advertising, that sort of thing?

Mark Hughes:

Appreciate it. Thank you.

Mark Marcon:

Hey. Good morning. It's Mark Marcon from Baird. You mentioned that headcount is actually up on a sequential basis relative to Q2. Salaries and Benefits are down by 2.4% year-over-year, 2.7% sequentially. Is the primary reason why Salaries and Benefits are down on a dollar basis because of FX? And a small element of Russia, you mentioned that the presence on the ground was fairly minimal. So I'm just trying to understand that element and to – what do you attribute to the decline to?

Carl Hess:

I would add that part of – our transformation program involves workforce relocation as we simplify where we do work. And so – not front office, but a significant part of our mid and back office hiring has occurred in our international businesses, where we tend to enjoy a lower wage structures.

Mark Marcon:

Yes. And I would imagine you're also optimizing different roles and the expenses of various roles in order to optimize things from a long-term perspective. To what extent could those trends continue, when we think about it just as it relates to that, if the headcount continues to go up?

Andrew Krasner:

And that's not just necessarily a location, right, that can be automation.