Highlights from the WLTW earnings release and analyst call
Willis Towers Watson Public Limited (“WLTW”) reported adjusted diluted Earnings Per Share (EPS) of $1.80, beating the consensus estimate of $1.66 per share as reported by S&P Global Market Intelligence. Highlights are as follows:
- Total revenue for the quarter was $2.11 billion, a 3% increase over second quarter 2019 revenue of $2.05 billion. Organic growth was flat during the second quarter, while the first six months of 2020 showed 2% organic growth. Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the second quarter of 2020 was $441 million, or 20.9% of revenue, an increase from adjusted EBITDA of $425 million, or 20.8% of revenue, for the prior-year second quarter.
- WLTW management caution that COVID-19 could have a continued negative effect on operations:
“We continue to expect that the COVID-19 pandemic will negatively impact our revenue and operating results for the remainder of 2020, and potentially beyond. During the second quarter of 2020, the COVID-19 pandemic had a negative impact on revenue growth, particularly in our businesses that are discretionary in nature, but otherwise it generally had no material impact on our overall results.”
- Revenue within the Human Capital & Benefits (HCB) segment was down as Talent & Rewards revenue was negatively affected by slowdowns from COVID-19. Talent & Rewards’ clients generally declined discretionary projects to conserve cash during the pandemic. During the earnings call, WLTW management forecast that the downturn in this segment is likely to persist during 3Q20 and 4Q20 and then pick up in 2021. Future growth may come from addressing (a) issues of diversity and inclusion in the workplace, and (b) anticipated changes in the workplace. Management suggested that the workplace going forward is neither likely to be the pre-pandemic workplace nor a totally remote one. WLTW management indicated that a work-from-home environment, while likely to be more prevalent than pre-pandemic, could be a function of real estate availability and specific location issues.
- The Corporate Risk & Broking (CRB) segment continued to demonstrate growth during the pandemic. Organic growth within the CRB segment increased 4%, with North America leading this segment, followed by International and Western Europe, thanks to a combination of strong renewals of existing business and new business generation. Operating margin within the CRB segment was 19.2% vs. 15.2%, driven by revenue growth and cost containment methods put in place as a result of the pandemic. Increasing insurance rates (largely driven by account specific loss history) and retention (year-over-year increase) also contributed to these results.
- Within the Investment, Risk & Reinsurance (IRR) segment (includes wholesale and reinsurance brokerage), second quarter 2020 revenue was $413 million, a 1% increase over the $409 million reported in the second quarter of 2019. Growth within reinsurance and wholesale brokerage was driven by new business wins and favorable renewals of existing accounts due to the combination of new business and renewals. Management also disclosed that its Max Matthiessen business is being sold.
- The Business Delivery & Administration (BDA) segment reported revenue growth as a result of its acquisition of TRANZACT in the prior year. Organic growth was down 3% due mostly from a shift in timing partially offset by an increased in the client base within the Benefits Outsourcing sector.
Other WLTW management observations from the earnings call include:
- WLTW’s announced merger with Aon is progressing as expected with management still anticipating closing the transaction in 2021. Management is more convinced of the wisdom of the merger as “more creative solutions’ to clients’ insurance issues can be better addressed under a larger overall corporate umbrella.
- Liquidity remains strong as the company has an undrawn credit facility of $1.25 billion and free cash flow for the first six months of 2020 was $550 million, driven by managing discretionary spend.
- Management’s “worse-case scenario” from the prior quarter of double-digit reductions in revenue for 2020 did not materialize in 2Q as WLTW’s business has proven resilient. Management, while remaining cautious, conceded that this worst-case scenario is less likely than originally thought, absent any renewed economic lockdowns.
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