Willis Towers Watson Public Limited Company (WLTW) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. Welcome to the Willis Towers Watson First Quarter 2021 Earnings Conference Call. Please refer to willistowerswatson.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 the Willis Towers Watson'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's SEC filings.
John Haley: Thank you, and good morning, everyone and thank you for joining us today on our first quarter 2021 earnings call. Joining me today is Mike Burwell, our Chief Financial Officer. Today we'll review our results for the first quarter of 2021. I'm pleased with our first quarter financial results and the continued momentum in our business. We generated organic revenue growth of 4% and 110 basis point adjusted operating margin improvement. Each of our operating segments contributed to the margin expansion this quarter, driven by new business generation, strong retention rates and increased operating leverage across our core businesses. Through the first quarter of 2021, our colleagues continued their tremendous efforts to serve our clients through these challenging times and delivered a strong financial performance. I'd like to extend my heartfelt thanks to all our colleagues for their dedication, professionalism and support of one another. Thank you for continuing to bring your very best at the table every day. Your solidarity and resilience are truly inspiring. Our accomplishments in quarter one are reflective of our purpose in action. The impact of our work extends to the people in our client organizations to each other and to our communities. For many of us, this greater impact is our why. It's the purpose behind the work we do, creating clarity and confidence today for a more sustainable tomorrow. Grounded in this sense of purpose, we've continued to partner with our clients to help strengthen their resilience and progress towards long-term success. The events of the past year have sharpened our focus. Our clients, our colleagues and our other stakeholders expect us to conduct our business with integrity and in an environmentally and socially responsible manner with high ethical standards. We take these expectations seriously and have embraced principles that are aligned with our business priorities, are consistent with our commitment to ethical and sustainable practices and demonstrate our respect for the communities in which we operate around the globe.
Mike Burwell: Thanks, John, and good morning to everyone. Thanks to all of you for joining us. First, I’d like to extend my appreciation to all our colleagues. We’ve asked a lot of our teams and our colleagues continue to pull together and deliver. I’m proud of all the work they have done to continue supporting our clients, each other and the communities in which we work and live.
John Haley: Thanks very much, Mike. And now we’ll take your questions.
Operator: Your first question will come from Greg Peters with Raymond James. Please proceed with your question.
Greg Peters: Good morning, John, Mike and team. So I'll just ask three questions. And first, I realize you're bound by Irish Takeover law. But I guess it might be professional malpractice if I don't ask you a merger question. Two parts of the merger question, you said in your comments, you're still expecting – expect to close in the first half of 2021 pending regulatory approval. I'm wondering if I'm not mistaken, the Phase 2 extension from the EC goes into July, so that would imply a second half potential regulatory approval. And the second piece on the merger is, I know you haven't commented on it, but the disclosures in the press suggest that you're going to exceed the revenue divestiture cap in the purchase documents. So I was just wondering if you could give us some color on those two items.
John Haley: Yes. Thanks very much, Greg. So, on the – first of all, on the EC, I think their extension goes into July. That doesn't mean it has to run that long. It's still possible to close June 30 and be consistent with that extension, so no particular conflict there. And I'm sorry, what was the second question?
Greg Peters: The second piece is on the divestitures. The leaks to the press given what we're hearing suggests that you might exceed the $1.8 billion revenue divestiture cap that's in the purchase document, and just trying to reconcile that when your perspectives on that to the extent you can comment on it.
John Haley: Yes. Actually, yes, and you won't be surprised to hear that we're really not in a position to speculate on any potential divestitures.
Greg Peters: Yes, I figured. Okay. Well, let's pivot to the producer retention comment that you made regarding CRB and let's expand it. Can you just give us an update? I know from time to time you have comment on employee retention in the past. Can you give us a sense of how the retention has stacked up through the first quarter? We have seen reports in the process of certain teams leaving. Just curious how the Willis franchise exists today versus where it was a year ago?
John Haley: Yes. So a couple things. Let me say, first of all, I think our – when we look at our turnover sale of rolling 12 months today compared to where it was a year ago, and I look at it segment by segment, it's pretty much about the same, maybe slightly improved in general. The one segment that is up is BDA. And that's just a function of some of the expansion I think of TRANZACT and we have a lot of turnover there. But overall, if I look at it segment by segment, our turnover is slightly improved. Now, at the same time, every time a transaction like a big merger or acquisition gets announced, there are some people that decide they don't want to be part of the new organization. And certainly we've seen that in some instances. But when we look at it in terms of the overall impact, it's not necessarily showing up as a big overall impact. But we can certainly point to isolated instances where that's happened. Those are the kinds of things we've seen happen before in this business, and we think we're prepared to deal with them, but it is something we continue to look at.
Greg Peters: Got it. I guess the final question would be on free cash flow. I know you called out the Stanford cash payment settlement in the first quarter. If we exclude that and think about the full year, how are you feeling about free cash flow for 2021 after what was a phenomenal result in 2020?
John Haley: Well, I'll maybe just give you a quick reaction for me, which is that I couldn't be happier with our cash performance in the first quarter. I thought we had a tremendous first quarter last year and I think we did significantly better this year. So I was really pleased to see what we have. As Mike mentioned, we did have a couple of trends – things that affected us this year compared to last year, but I see continued progress being made. But Mike, maybe you want to comment on that.
Mike Burwell: Yes, thanks, John, and thanks for the question, Greg. Yes, I mean, we have put a lot of effort and a lot of focus to have repeatable processes. And our colleagues are working very hard, and continuing to deliver, as John said, in terms of delivering that free cash flow. So, although, as you know, Greg, we're not giving any guidance, but nonetheless, we're very pleased with what's happened here for the first quarter. And, as I say, I'm very, very proud and pleased with what the team continues to deliver.
Greg Peters: Got it. Thank you for the answers.
John Haley: Great.
Mike Burwell: Thanks.
Operator: Your next question will come from Elyse Greenspan with Wells Fargo. Please proceed with your question.
Elyse Greenspan: Hi, thanks. Good morning. My first question is going back to, you had mentioned some senior staff departure is right within CRB within Western Europe. And I guess tying that together with your response to Greg's question in the backlog that you said with mergers, right, there's always some type of kind of individuals that will choose to leave. Is that the only area I guess of your business were you noticed a more significant impact from some employees on that might have left the organization?
John Haley: I would have to say, Elyse, I think we've seen – you might see half a dozen people leave here or half a dozen people leave there. And so you see some isolated ones. I think the Western Europe one was probably the most significant one we saw.
Elyse Greenspan: Okay. And then as we think about, you guys mentioned the impacts of the economy due to COVID still having an impact on your business, right? But if we look on an overall basis for Willis Towers Watson, right, you guys have created 4% organic revenue growth, which was an improvement from what we saw in the past three quarters of 2020. So would you expect just based off of the fact that no vaccines are being rolled out, looks like the economy will improve? Should we view the Q1 as kind of the low bar for the year? And it sounds like there should be some tailwind to your organic revenue that the other three quarters of 2021 should be better than what we saw in the first quarter?
John Haley: Yes, I would say – so, first of all, we haven't given a guidance and the reason we haven't given guidance is because this is such a volatile environment and it's hard to predict exactly what's going to happen. But I would say this, we feel better about the rest of the year today than we did when we enter 2021. And we also feel very good about our ability to grow with the market and to compete. So we're somewhat optimistic.
Elyse Greenspan: Okay, that's helpful. And then, John, you were talking through expenses and margins. And it sounds like there was just kind of growth, driving margin improvement, exceed expense management throughout the different segments. It doesn't sound like there was anything one-off within your margins that we perhaps should think about not continuing on. But was there anything COVID related or is it just kind of a good expense management quarter and we could think about that continuing from here?
John Haley: Yes. I think the theme that Mike had touched upon was our colleagues throughout the organization embracing what we needed to do during COVID and responding. And we've seen them do that. And we do, in general, we think these are things that are going to be ongoing.
Elyse Greenspan: Okay, thanks for the color.
Operator: Your next question will come from Phil Stefano with Deutsche Bank. Please proceed with your question.
Phil Stefano: Yes, thanks and good morning. So the growth in transactions continues to be fantastic. It’s outpacing our expectations. And if I’m not mistaken, this is the first segment operating margin that was positive for BDA outside of the fourth quarter, maybe ever. Can you talk about the extent to which TRANZACT is helping to drive that and do you extent to which growth continue to lap the strong growth we saw last year?
John Haley: Mike, do you want to take that?
Mike Burwell: Yes, we are really, really been very pleased with TRANZACT. If you go back when we announced TRANZACT, we are very excited about what they brought to the table in terms of their ability to serve the market. We saw there’s a market that was very, very strong, and we had put out there in terms of organic revenue growth, and as a pretty formidable view over the next several years, in terms of what the CAGR growth rate was going to be, and TRANZACT has exceeded it. So, as you said, and rightly pointed out in terms of where the margin is, in terms of improvement and positive for the first time other than the fourth quarter happening TRANZACT has been a big, big contributor of it. So, I got to tell you, we see it is doing very well, we really like the transaction – TRANZACT team, and what they continue to deliver, and we couldn’t be happier with their performance.
Phil Stefano: Okay, thanks. So, switching gears a bit and just going back to the potential merger with Aon, understood that you don’t want to comment on any potential divestitures. But maybe I’ll comment this from a different angle. If I wanted to take a negative lens to view this at, I could argue that the divestitures in a regulatory approval scenario might be at a forced sale price that will be less than you would get in the market otherwise. And if I layer on top of that incentive comp retention awards, how do you think about these dynamics to get the deal done, versus the fiduciary duty to maximize value for shareholders?
John Haley: I mean, I think we always have in mind fiduciary duty to maximize value for shareholders. And when we’re considering anything, whether it’s acquiring a company, divesting a company, or just running our business, so we – that’s one of our paramount considerations.
Phil Stefano: So, maybe the press on this just a bit and then I’ll let it go. But is there a level of revenues and price that you could get or potential divestitures at which this starts to feel like the deal doesn’t make sense anymore for the Willis Towers shareholders?
John Haley: Well, I mean, again, I don’t want to speculate on things. But let me just address something as a theoretical matter. If you were told you had to give away businesses and couldn’t get anything for them. Of course, that would seem like that would not be a good thing for shareholders. So clearly, there’s some price at which is the curse.
Phil Stefano: Okay, thanks.
Operator: Your next question will come from Suneet Kamat with Citi. Please proceed with your question.
Suneet Kamat: Thanks. I wanted to ask another one on the pending merger. Can you talk about the client reaction to the deal? And obviously, it’s been announced – it’s been out there for a year? Are you seeing any concerns around sort of concentration risk with the combined company from your clients?
John Haley: Quite the contrary, our clients are very excited about the possibilities that the new firm can bring to addressing unmet needs. And you may remember when Greg Case and I first announced this merger, what we talked about was the possibility for innovation, the possibility of the new firm being in a better position to address unmet client needs. Clients have responded quite enthusiastically about this. And I would say, the fact of the matter is, the businesses we’re in across the whole spectrum are all highly competitive businesses, and we don’t see any concentration risk.
Suneet Kamat: Got it. And then on the $400 million retention payment that was part of the deal. Is any of that being paid now, which could be impacting your level of attrition?
John Haley: No.
Suneet Kamat: So that’s all stuff once the deal closes?
John Haley: Any retention payments are at the time the deal closes or after.
Suneet Kamat: Got it? And just one last one for me, is there an element here where the retention payments are effectively being communicated to employees, but not being paid?
John Haley: Oh, yes, of course. Yes. I mean, you wouldn’t have any retention effect if they didn’t really know what they were getting.
Suneet Kamat: Yes. Okay, got it. Thanks.
Operator: Your next question will come from Mark Marcon with Baird. Please proceed with your question.
Mark Marcon: Hey, good morning, John and Michael. John, I just want to start off by saying, we don’t know if we’re going to have a second quarter call this given that this is going to end up closing prior? So first of all, congratulations, going all the way back to the Watson Wyatt days for all the shareholder value that you’ve created over multiple decades it’s just been an incredible run. So, I just wanted to start with that. Can you just talk a little bit about, if there’s – if the client reaction has all been positive, who – what are – what would, what would be the driver behind some of the objections that are out there just broadly theoretically?
John Haley: Yes. So, first of all, Mark, thank you very much for those kind words. It’s been a pleasure to work with you over the years. And I am actually hopeful that this ends up being my last earnings call and that we close June 30 as anticipated. So, I think when regulators look at markets, they go and they talk to clients, they talk to other market participants, they talk to competitors, and they get a wide variety of comments from them. Sometimes that you could hear from a small minority of market participants, and the regulators are still put some emphasis on that. So, there’s lots of different ways that you could look at it, and it reached at least have the potential to ask some questions about it. But our experience, and of course, we’re probably going to hear from the clients that are the most enthusiastic about it, I get that. But our experience has been the clients are quite excited about the prospects of the combination.
Mark Marcon: Great. And then, can you just talk about aggressive law . How big is that now just from a revenue perspective, roughly speaking?
John Haley: Mike, do you have the figure on that, don’t you? Mike, are you on mute?
Mike Burwell: Sorry, John yes, so it’s about, think about it. I don’t know. It’s in the $400 million range, something that range.
Mark Marcon: Okay. And then Willis Re in the U.S.? How do – you wouldn’t happen to have that? Would you Mike?
Mike Burwell: No, I think we really disclose that Mark, and that kind of breakout? Sorry.
Mark Marcon: Would you have an estimation or?
Mike Burwell: No, we just really haven’t sorry Mark, we really haven’t disclosed that.
John Haley: Yes, I think Mark, it’s not that Mike doesn’t know, it’s that we just haven’t disclosed that.
Mark Marcon: Yes. I understand, this is a public forum. And obviously, it’s – I mean it’s fairly obvious what I’m trying to get at, just because it does seem like we’ve there are some press reports that we’re going to be, above the merger cap, and there are some that are, that would suggest that maybe we’re going to be below. And so I was just trying to triangulate on some of the pieces. Is there any comment that you can make this with regards to what seems realistic? Or what’s the next step? You know, we’re – you’ve obviously got a long-term track record of success, you think about all of the possibilities. You didn’t just – you’re obviously super sophisticated and all of your advisors are as well. So just it’s hard to imagine that you haven’t conceived of some of the possibilities that could come up or and some of the next steps to address those. So just trying to think through like, I mean, even if we, if we’re slightly above the merger cap, I mean, there would be a relatively easy reconciliation on that winter.
John Haley: Yes, I mean I think, Mark. So first of all, I think you’re right, as we think about any of these things with our partners, that Aon about whether we might, whether there might be some remedies that we offer to regulatory authorities. As I said to an earlier question, we always have the best interest of the shareholders at mind and doing something that that makes sense. But we’ve – we really, we’re not in a position right now, where we can just comment about any potential, and certainly not about press reports, which are out there and, sometimes have some elements of truth, but a lot of times are wildly inaccurate.
Mark Marcon: Got it. Just, I mean, from a purely regulatory strategy perspective, does it make sense to think okay, the EC was the first priority. Next up is the DOJ. And then after that, we go to some of the smaller countries. And if the DOJ and the EC are both on board, it’s going to be hard to imagine that some of the smaller countries would end up, proving to be decisive. Is that a reasonable way of think about it?
John Haley: Yes, well I would say that, certainly the vast bulk of our business is in the EC, including the UK in that, and, the U.S., on the other hand, we have been meeting with and addressing regulators in jurisdictions throughout the world. And we are – we’re committed to working with all of them, we’re committed to making sure they understand the transaction and why this is good for the competitive – competition in the industry. And we’re not emphasizing necessarily one over the other, but it is true that the bulk of our businesses in those two jurisdictions.
Mark Marcon: Okay, and then, I mean, I imagine that TRANZACT is going better than, anybody anticipated, say nine, 12 months ago, when we take a look at the growth that we’re seeing here, and the possibilities going forward. I mean, what inning do you think we’re in with regards to TRANZACT and how powerful that could end up being?
John Haley: Yes, so, I think we had, and Gene Wickes and Mike Burwell and I, when we were first looking at this. And Gene and Mike are the ones who really led the charge on TRANZACT had lost the expectations and TRANZACT has performed way above our lofty expectations. So, we couldn’t be more pleased with how that is worked out. This is a very dynamic market. There’s lots of I think, growth opportunities, there’s lots of potential changes, which could redound to the benefit of organizations like TRANZACT. So, we think, we’re in the early innings second, third. I mean, this is – there’s a lot left to play out here yet. I think, Mark.
Mark Marcon: Right. Congratulations to you, John, and also to Gene if he’s listening and Mike and everybody else on the team so congrats. Thanks.
John Haley: Thanks very much Mark.
Mike Burwell: Thanks, Mark.
Operator: Your final question in queue will come from Meyer Shields with KBW. Please proceed with your question.
Meyer Shields: Thanks. Two really brief questions I think. One John, can you quantify the impact on CRB and its organic growth from that transfer of wholesale business?
John Haley: Mike, you have that number, don’t you?
Mike Burwell: It’s really a material. Meyer.
Meyer Shields: Yes.
John Haley: I think we talked about that on the last quarter. We said it was, it was material for the wholesale business but in material for CRB.
Meyer Shields: Yes. No, I just want to see whether that held up in the first quarter. Second question – okay perfect. Can you sort of lay out the timeline for when the Western European stuff left and when the associated revenues kind of disappeared with that at the same time? Is there a lag?
John Haley: It was the middle of last year, some time, I think middle to late middle that the folks left. But the revenue impact tends to be noticed a little more in the first quarter, when you have a lot of the renewals.
Meyer Shields: Okay, that’s perfect. Thanks so much.
Operator: And we have reached the end of our question-and-answer session. I would now like to turn the call back over to John Haley for closing remarks.
John Haley: Great. Well, thanks very much, everybody. This is the time when I traditionally say we look forward to updating you on our second quarter earnings in later this year. I’m actually hoping the transaction is closed and we don’t have that call, but if not, we do look forward to updating you then. Have a good day.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
