Highlights from the WLTW earnings release and analyst call
Before the market opened this morning, Willis Towers Watson (“WLTW”) reported earnings of $1.33 per share, beating analysts’ revised estimates of $1.29 per share, a 2% increase over the prior year. Total revenue for the quarter was $2.01 billion, a 1% increase compared to $1.99 billion for the same period in 2019. Adjusted operating income of $238 million (11.8% margin) was up slightly (20 basis points) over prior year. Operating cost management and liquidity preservation efforts contributed to WLTW’s operating margin improvement. Finally, free cash flow for the nine months ended 09/30/2020 was $1.0 billion, a 130% increase compared to the prior year’s $445 million, primarily driven by improvements in working capital during 2020.
Human Capital & Benefits (“HCB”). Revenue within the HCB segment was $796 million down 1% from $807 million recorded in third quarter of 2019. Operating margins in the third quarter decreased slightly to 26.3% vs. 26.6% in 2019.
- The majority of the revenue decline in this segment was in the Talent and Rewards business (down 9%) while Health and Benefits delivered moderate 1% growth (both consulting and brokerage services increased).
- Management believes that the Talent and Rewards business, given the material pull back in discretionary spending, has held up reasonably well, especially when compared to WLTW’s experience during the Great Recession.
Corporate Risk & Broking (“CRB”). CRB revenue was essentially flat during the third quarter. Specifically, third quarter 2020 CRB segment revenue was $649 million compared to $651 million. Operation margin within the CRB segment was essentially flat (12.5% vs. 12.4%), driven by revenue growth and cost containment methods put in place as a result of the pandemic.
- A one-time prior period benefit in North America contributed to revenue declines during the current quarter while revenue decreases in the U.K. resulted from a change in WLTW’s financial model; revenues and salary/benefit expenses all decreased with the new reporting method. Absent this change, U.K. results would have shown increased revenue from new business generation.
Investment, Risk & Reinsurance (“IRR”). Within the IRR segment, which includes wholesale and reinsurance brokerage, third quarter 2020 revenue was $331 million. This is a 2% increase over the $325 million reported in the third quarter of 2019. However, IRR operating margins decreased to 8.6% from 9.3% in the same timeframe.
- Organic growth was up in most business lines, with reinsurance benefitting from new business and a hardening rate environment. Increased technology sales and new business wins in the U.K. contributed to segment growth.
- Wholesale business was down 12% due to continuing market pressures resulting from a significant decrease in sports entertainment which has seen a large decrease in event cancellation and events placed on hold.
Business Delivery & Administration (“BDA”). The BDA segment reported revenue of $226 million, a 26% increase over second quarter 2019 revenue of $179 million with organic growth up 6%. This growth is predominantly attributable to the acquisition of TRANZACT (closed on July 31, 2019) which generated revenue of $96 million in the third quarter. Third quarter 2020 operating margin remained negative, however, at -5.3% (vs. a -11.9% for the same period in 2019).
Other takeaways from management’s earnings call are as follows:
- Climate change was a significant part of the non-business segment discussion. WLTW believes that it is well positioned to assist its clients with mitigating climate change risks, including such risks as greater severity in cat-related events, helping public pension funds evaluate climate change investment opportunities, and assisting investment managers immunize their portfolios against unforeseen effects of climate change.
- Management has continued to focus heavily on retaining and building excess cash liquidity during the pandemic. On 9/30/20, WLTW had $1.6 billion in cash on its balance sheet plus an undrawn $1.2 billion credit facility. Resulting debt leverage has decreased from 2.7x EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) at 9/30/19 to 2.3x EBITDA at 9/30/20.
- WLTW has seen an uptick in third quarter salary and benefits expense as a result of a strategic decision to retain quality talent. WLTW believes the need for quality staff with expertise is critical to operating their business.
- The Aon plc/WLTW merger is still on track to be completed during the first half of 2021.
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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.
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