Good afternoon, everybody. We're going to go ahead and get started. My name is Mark Marcon. I follow human capital technology and solutions for R.W. Baird. Our next presenting company is Michael Burwell , the CFO, as well as Aida Sukys . Anybody who knows Willis Towers Watson knows Aida, who's up here in the front row. Mike, thanks for joining us.
Hi, Mark.
This is Mike's first conference with Baird. Prior to joining Willis, Mike was the CFO over at PricewaterhouseCoopers. He was there for 31 years. Obviously, a ton of professional services experience, CFO over there. We're going to ask a little bit about some of the similarities.
Sure.
The way we're going to do things is we're basically going to go through a short intro for those who don't know Willis Towers Watson, and then we'll go into the Q&A.
Okay. Thanks, Mark. Appreciate it. I’m glad to be here. It’s, as you say, my first conference, it’s always a pleasure to meet with all of you. When I think about Willis Towers Watson, before I do that, I have to make sure you see the statement, I think you’ve all seen it. What is Willis Towers Watson overall? The company, back in 2016, were two $4 billion companies that came together. Willis, and that being principally in brokerage and reinsurance, and Towers Watson, which is in retirement, human capital advisory activities, as well as healthcare administration. It was not a scale merger. These were adjacent companies coming together that really saw the marketplace in terms of advisory, thinking about brokerage, as well as thinking about solutions all around risk management.
Bringing those collective thoughts together said that it makes a lot of sense for these two companies to come together. You really saw that in 2016 and 2017. As you looked at the end of last year, what you really saw is a company that’s $8.2 billion in revenue, as you see on this slide. We had EBITDA of 23%, or Adjusted EBITDA, I should say, of 23.2% of $1.9 billion, roughly 43,000 colleagues, and operating in 140 countries. If you looked at our business, our Human Capital and Benefits is our largest business segment, which is roughly 39%. Our Corporate Risk and Broking at 33%. You can read the slide there. You see 19% Investment, Risk and Reinsurance, and then what we call Benefits Delivery and Administration or our exchanges is roughly 9%.
From a geographic mix standpoint, you saw roughly half of it in North America, Great Britain being the next largest segment, then Western Europe, and then the rest of the world or international, as we refer to it. We see a business that’s continuing to grow. The last three quarters, third quarter of last year, our organic growth has been higher than our competitors. Third quarter, fourth quarter, and first quarter this year. Although we still believe we’re undervalued, and we think there’s several reasons for that. One is that we think the 605/606 controversy is one that’s got people trying to understand what’s the real revenue numbers going forward.
I think we’d like to get into it.
Okay.
later on.
Yeah. I think that's one. Two is our CEO, first time he's had a contract is now. I very much enjoy working for John, but people are thinking about what's the future of the company, and obviously, what's that mean for him. Three is the history with Willis had a lot of expectations that they set that weren't necessarily met over time. Fourth is show us the cash. Let's make sure we're meeting our cash flow numbers. Those are things that we're obviously focused on overall at the company, and we know those are things that we need to, some of them we need to deliver on, some we need to resolve that will see us moving forward, Mark.
That's terrific. Mike, I want to get into each one of those.
Okay.
Areas. Before we do, I'd love to get your perspective with regards to after being at the most senior levels of PwC.
Looking at it from a global perspective, what are the things that attracted you to Willis Towers Watson? Because you obviously had lots of different options, or didn't have to leave at all.
Yeah, didn't have to leave at all. Yeah.
What would cause you to leave such a comfortable spot, and a lucrative one, in order to join Willis?
Yeah. I think I really thought about it in two criteria that I had defined overall. One was did they have the right ethical behaviors and business decision criteria? It was a brokerage business. Frankly, I was a little concerned about it. I did a lot of due diligence on it. I had listened to the last four quarters' analyst calls for the company as well as the competitors. I met with a lot of board members. I did a fair amount of forensic background analysis. My background is I'd spent and run the transaction services practice at PwC, so I still had a lot of contacts about some of the individuals on the management team in terms of background. Who was I hitching my wagon to? How comfortable were they as related to their business decisions? That was a very important element to me.
That was probably the prime element saying, where am I going, and what does this mean for my brand, and what company was I hooking up with? That was one. Second was could I make an impact? I wasn't looking to go just kind of be the individual reporting the numbers. I had been the COO and CFO at PwC and had a lot of operational experience, and I wanted to be able to work with a management team that I felt I could make an impact to. John, as the CEO, was very open to that, as well as the rest of the team. Those were the two criteria that led me. What was similar? I would say 80% of the issues that we're dealing with are similar to what I saw at PwC. They're not that different.
The difference was dealing more with you. I had to deal with partners, and it was their money. I talked to them all the time about their money. Listen, I'm talking about your money or your funds or people that you're advising, in terms of dealing with. I take it very seriously and always have.
Aside from dealing with outside investors, what are some of the biggest differences relative to expectations or relative to what you were used to that you've seen at Willis Towers Watson?
I think one of the things we were talking about in some of the meetings a little bit today is I'm used to more proactiveness versus reactiveness, and I would say we tend to still be in a reactive mode today around the company. When I say that, I think about in our consulting businesses, I think about revenue per day. We bill clients by the hour many times or by month or by week, but we know roughly what that's going to be. Our fixed costs are people and real estate, so when you think about those, you know pretty well and who doesn't get their time in on time, you can give some estimate of that. You know basically what your profitability per day is.
If I know my profitability per day, I can manage that and compare that to different time sequences back, forward, versus over time. Why is that important? If I know that insight, I can also look out through my windshield and say, do we trail GDP by six months? I'm seeing signals as to what's happening in the business today, and I'm looking out what's happening in the future, and I'm making management decisions that hopefully are at least equal, if not faster than my competition. I can deploy capital, either human capital or financial capital a bit differently overall. At the end of the month, I've got a view every day as to what that number ought to be. Those financial statements are an affirmation to me as opposed to a reveal. Today, I would say they're more of a reveal.
That's just kind of where we are in our life cycle, but that's not where I was previously. I knew at any point in time I could tell the CEO exactly, within plus 1%, what the number was going to be.
What do you think it'll take in order to get to the point where it becomes an affirmation as opposed to a reveal? It sounds like it also would involve some cultural shift.
Yeah, I think that's right, Mark. Look, I see it. I think we have the talent level to get there. We do have some systems challenges that will help us. We are implementing all cloud systems within the organization, and we're on that journey. I think that will be a catalyst. I think it'll take us a couple of years to get there to the level that I had seen previously. I know exactly where we need to get to, and I think we've got a great team, it's just getting people aligned around that objective.
That's great. you've gotten good buy-in in terms of the team
Yes
in terms of
Yeah. People see the benefits to it. ultimately, human beings like routine, in my view. We all brush our teeth, comb our hair, and shower in the same sequence every day, unless I can make it a better routine for you. I think about that, saying how do I drive that change management is I have to think about our teams and why is that going to be better for them and then better for the people that they're supporting, ultimately for our colleagues and for our customers.
Great. I was wondering if we could go back to some of the issues that you brought up before, because there is some noise out there.
Yeah, I've heard that. I heard it today, actually.
You've heard some of that noise.
Yeah.
Can we just talk a little bit about 605 to 606? When the targets were set for the merger, in terms of getting around $1,010 in terms of earnings, that was based under the 605. You've got two items that are impacting you. It's 605 to 606 also the pension factors. When we think about 605 and 606, can you talk a little bit about the noise impact there? For a lot of companies that I follow, going to 606 has actually been
I think-
beneficial to the optics, it's counterintuitive, I think, to some. Can you go into the specifics in terms of why it's not for you?
Yeah. It's a good question, Mark. The accounting rules, everybody was at a different starting point. In adopting and getting people more and more closer onto the Rule 606 rules, I use the example, we recorded in our BDA segment, our Benefits Delivery and Administration segment, we would normally record revenue, which was U.S. GAAP at the time, ratably over the year. Under the new standard, our competitors would record it all in the fourth quarter. Now we need to move to that adoption and go through that process, which obviously changes the revenue stream and the profitability stream much differently in each of our quarters going forward. The revenue changes really had an impact of us on each of our quarters as well as the adoption. The adoption had two things.
One, $45 million got recorded into retained earnings, and also you think about expenses that you're now estimating into the future almost get double counted in the future on state. That $45 million for us in the first quarter coming into next year will be a rollout, so it'll be a benefit coming into the first quarter of fiscal year 2019. We had this acquisition, as a result of this acquisition, very difficult purchase accounting, not great records. Equally, we have two large IT consulting contracts or businesses, had lots of contracts in them, and going back and restating that was virtually impossible. Or at least the cost benefit just didn't make sense. The SEC allowed us to report Rule 605 and Rule 606 as it contrasted with two of our competitors who were able to restate those numbers back.
You really won't get comparability until the first quarter of 2019 when you'll have 2019 versus 2018 numbers, you'll have all companies, at least in the brokerage space or in our space, I guess, in a more comparable view going forward. Right now it's a lot of noise around it. Equally, in our first quarter call, we felt very good about our results. We had seen, again, first quarter organic growth rates at 6%. We were very happy with what we had seen in our results. That was on a tough comparable in the prior year. We got a lot of questions about, "Hey, tell us about why you're not meeting your margins." Look, we take some responsibility for that. We have to work with the sell-side analyst and really help and educate them.
Their models were therefore right, and therefore we were different than their models. We've been
Not all the models.
Not all of the models. Yeah. Not the Baird models, of course. You're right, actually.
No, I mean, it was more than just Baird. You've got
No, we had.
There are some people who've been following you for a while.
That knew us.
Yeah.
Yeah. No, it was a broad statement, and I appreciate your clarification of that. No, seriously, there was some, what I would just call a noise around that view. Aida and I and the team were working really hard to try to help further educate that. What we've been trying to do is get people to really think about 605 as really the basis to measure us on, and then really kind of to track that going forward, and then think about 606 in the first quarter of 2019.
Well, since the targets were actually formulated when Rule 605 was the rule, it would make sense that people would benchmark you against those. If we take a look at that, based on the first quarter, it would seem that you're well on track towards getting towards the 25% EBITDA margins and the original targets that you set. Is that not correct?
No, that is correct, and thanks for the comment.
You've got a complete bailout because you're new. You're coming from PwC.
Yeah, I inherited them.
Exactly
It's kind of an adopted goals. We're feeling pretty good about what's happening. We saw a 250 basis point improvement in Adjusted EBITDA in the first quarter under the Rule 605 revenue recognition basis. We feel that we can see that goal in terms of attainability of Adjusted EBITDA by 25% as an exit rate in looking at the rest of the year. It's not easy. There's a lot of continued work that we need to do inside the organization, and we're very focused on it.
When you had the analyst day, it sounded like you ended up taking up the merger cost savings, integration savings. There are a number of things that if we take a look at it actually looks like you've got a lot of work to do, but you're well on your way. Is that incorrect?
No, I think it's a fair statement, Mark. Yeah, no. One of the things has been real estate in particular. We continue to look at the flexibility. Our biggest costs are people costs and real estate. Looking at the real estate costs, we have sensors in the seats and how often people are actually in the seats. We've continued to refine the model every single day. We had a lot of real estate between the two organizations that we've been able to rationalize, particularly in some of our larger markets. We think there's continued opportunity there as we see leases come and due and to continue to consolidate that overall. That's been a big element of cost savings for us.
Great. I want to just go back to one of the other elements of noise that you raised, which is John's contract. What can you say about that?
Not much. As John said on the call, thank you for asking it. Look, we are one of the largest, if not the largest HR consulting firm in the world. As you might imagine, we consult with the board on succession planning. My personal hope is John's with us for a couple more years. He is 68 years old, and he said he isn't going to be wheeled out of the company. He's built it, and he's a great guy to work for, and he's on top of the details, and I don't see any less energy level in him. Look, succession planning is with him and the board, and I would say they're very much thinking through that and, as I say, well prepared in thinking about alternatives.
Great. One other element of noise that frequently comes up is regulations and judgments by various regulatory agencies. What can you tell us about some of the various pieces there?
Yeah, so-
If we take a look at aviation as an example.
In the aviation, we call investigation and then market reviews, we do make the distinction, at least from our standpoint. In the aviation scenario, in our case, the FCA told us that there's nothing further that they see that they need to do in terms of enforcement actions or anything related to Willis Towers Watson. Also, the EU is involved, and the EU is looking at the situation. We like to believe that they will reference what the FCA's conclusion is, but there's no commitment on their part to do that. They can do whatever they want. If Matt Furman, our General Counsel, was here, he probably wouldn't let me say that. That's kind of the situation. The market reviews on the other two, they're continuing to be ongoing. There's no timetable specifically for them.
We continue to cooperate and provide them with information that they're looking for, we're not hearing anything adverse at this stage. Nonetheless, we're continuing to closely monitor them.
Okay.
Yeah.
The one other outstanding element, it's settled as far as you're concerned, is the $1.1 billion-$1.3 billion in terms of free cash flow with the distinction between those basically being the Stanford settlement, right?
Yes. We look at litigation for the company in comparison to where we were at the merger date. There have been several cases that, what I would call larger cases. Somebody could have done something yesterday that I'm not aware of, Mark, I don't believe that to be the case. We settled the City of Houston case for $40 million. The Stanford case has, never say never until it's done and paid, we believe that's kind of where it is. I put those caveats appropriately on that. Hopefully that will be resolved and taken care of, which is $120 million, which is the difference between the $1.1 and the $1.3 billion. Equally, we settled a shareholder litigation that happened in the third quarter of last year for $233 million associated with the merger as well.
Those were the more significant litigation that the company had. If you compared the Willis Towers Watson three years ago to where it sits today, we feel better about that, but you never know.
Well, especially in terms of having some point of view that this is going to be in the rearview mirror fairly soon.
Yes.
Same with 606 and 605 and getting that. Let's get to business fundamentals then.
Okay.
When we looked at the first quarter, you were actually growing organically faster than what was projected, particularly nice growth in several segments. When we think about beyond this year, so I think there's some people who've come to the conclusion that, at least from a revenue perspective, the targets that are out there for the remainder of the year seem conservative.
What would be some of the things that would slow down the organic revenue growth in some of the sectors over the next few quarters so that they wouldn't be conservative?
Well, I think as we've continued to exceed our competitors' organic growth rates, they don't take kindly to that. What I mean by that is that these are well-capitalized competitors, and they've got good management teams. What they're going to look to do is try to come after our talent. So when you look, that's reality of what we see happening. We continue to look at parts of the world in which we operate, that we hope there's no sanctions that are in place, and those wouldn't hurt us, but could hurt our competitors as well. We operate in 140 countries, and we operate in a world that's pretty diverse, and we've been very strong versus in our Great Britain operations as well as our international businesses, and in particular in Russia.
We've seen that to be very positive for us, given our footprint in the construction industry. Those are things that I think could be a couple of headwinds that are out there that we're watching. The litigation stuff, our market reviews, they could come up with something that would be adverse against us. We're not aware of that. We're not anticipating that, but that could come into play.
Got it. Then with regards to if we go through each segment, when we think about, for example, Human Capital and Benefits, when we think about those solutions, it sounds like we're looking at mid-single digit growth on a go-forward basis beyond this year. Can you talk about some of the key segments that are driving the strongest growth?
Yeah. When we look at the retirement, I want to make sure I respond to your question. When we look at retirement in that segment, people say, "Well, it's really not going to be There's not a lot of new defined benefit programs that are coming into play." We're still seeing revenue growth. We had 2% growth in the quarter. As we see regulatory changes, those create opportunities for us to help people de-risk and think about that overall. The growth, to your question, in HCB, I think will come from Talent & Rewards as well as our health and benefits consulting businesses in the 6%-8% type of growth range. You've got to, I'll call it 1%-3% kind of growth in the retirement business, and you're seeing 6%-8% in the other parts of the Talent & Rewards business overall.
That's how we come back to that mid-single digit growth. Historically, we've had margins that have been higher in that segment than our competitors. We feel very good about that business.
It sounds like that's an area where you could also continue to end up experiencing more and more margin expansion, because it also seems like that's an area that would lend itself, in certain cases, to more automation.
I think it's a great comment, Mark. Look, at the end of the day, we're trying to make some talented people more productive, but the reality is we're going to need less of them. That doesn't mean we're not going to continue to grow, but it doesn't mean we're not going to continue to add people. We're just not going to add at the same rates that we historically have done.
You can get more leverage.
That's right.
That's great. CRB, basically, if you take a look at the last few quarters, particularly last quarter, really nice growth there. It looks like we're actually really starting to get some traction there.
Yeah. Thank you for saying that. We were happy with the CRB results in terms of overall growth. We saw brokerage growth at 5%. It was greater than what we saw in our competitors overall, and we saw North America grow at 7%. Thinking about the brokerage business, we think the market was really looking for, and has been looking for, a third option. At $4 billion in historical financial results, it wasn't positioned such that it was a third option. I think, at $8 billion and where we sit in terms of scale, we've seen 17% growth in the first quarter of new business happen in CRB and in North America. We're feeling pretty good about what's happening in the CRB and their success rate.
Great. Can you talk a little bit about pricing? Because it seems like we're getting mixed signals depending on who you talk to.
Yeah.
What are you seeing?
Yeah, what we're seeing is really the stop of the decline. We saw price reductions. I would say it's really seeing it more flat. Are we getting some price? Yeah. 0%-1%, something like that. It's nothing great in that CRB business, but it's not different than me being the CFO of Willis Towers Watson, where maybe I need something new called cyber. But at the other side of it, I'm looking at what do I put in my captive? What else do I do in terms of deductibles, et cetera? How much am I willing to manage that cost line when I've got to drive my 3% productivity? I've got to be very thoughtful about how I address that risk.
That's great. You laid out at the Analyst Day a long-term growth plan for double-digit earnings growth. Can you just talk about some of the key components in terms of driving that?
Yeah. Sure, Mark. What we looked at is we look at the market growing organically at 3%-4%. We look at inorganic growth at 2%-3%, we look at 3% productivity. That 3% productivity comes from two components. One is me reviewing literally with each of the functional leaders. Let's talk about how you're going to drive. Here's inflation, how are you going to drive more with less in terms of productivity? The second piece is when you look at those acquisitions, how do we drive operating leverage? We're working very hard to make sure we've got a back office that we can drive operating leverage on, so that we add those acquisitions, we're able to really take advantage of it.
What we'd look to do, that drives roughly a 10% bottom line, we're looking to pay dividends of 20%-25% of our stock price, which is really a point and a half. Really look at a total shareholder return on that 10%-12% range, drive free cash flow at 75%-80% of Adjusted EBITDA over the next three to five years. That's where we look to get to.
For level setting, it's like we're operating off of a base of 25% EBITDA margins.
That's correct.
In terms of the deployment of that free cash flow, obviously the dividends you mentioned, you've also been very active in terms of buybacks. Can you talk a little bit more about that and how we should think about that over the long term?
Right now, we still believe we're undervalued for those four reasons that we touched on upfront versus our competitors. Any transaction that we're looking at, we've got to evaluate acquisitions against buybacks.
Right.
We'll continue to do that unless it's the right strategic fit. We feel good about our footprint, but it's got to be something that makes absolute sense versus looking at buybacks. As we look to the longer term, and generating that level of free cash flow, obviously we're looking at acquisitions that would make sense, tuck-ins, et cetera. We look at footprints like Germany and South America that we'd like to have bigger footprints than we have. Not that we're missing any assets, but we'd just like to have bigger footprints.
That's terrific. Unfortunately, we've run out of time.
Thank you, Mark.
Please join me in thanking Michael for a terrific presentation.