Willis Towers Watson PLC Q1 FY2023 Earnings Call

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.

Good morning, everyone. Thank you for joining us for WTW’s first quarter 2023 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. Our first quarter results were a great start for the year. The strong 8% organic revenue growth we delivered in the first quarter demonstrated our sustained momentum and intense focus as we continue to execute on our strategic priorities. We're particularly encouraged by the growing impact we're seeing from our recent investments in talent and technology, which has strengthened the value we're able to provide our clients and yielded improved retention and new business growth. Operating leverage on this robust growth and the continued succession of our transformation program drove 140 basis points of adjusted operating margin expansion over the prior year, which translated into adjusted diluted earnings per share of $2.84 for the quarter, an increase of 7% year-over-year. Overall, I'm very pleased with our Q1 results, and with the excellent progress we've made since this time last year. We saw top line growth across all our businesses reflecting the increased value of WTW Solutions in complex economic environments. Amid financial sector turmoil, high inflation, and ongoing geopolitical strife, we continue to see market dynamics that provide opportunities for WTW to respond to our client's needs, to improve outcomes and reduce risk. Now, I'd like to share some additional perspective on the reset of our near and long-term expectations for free cash flow announced this morning. Our previous target for three-year cumulative free cash flow through 2024 reflected our goal of substantially improving our free cash flow margin, this being in addition to achieving our revenue and margin targets. We have made timely and meaningful progress toward our goals for revenue and adjusted operating margins, and we continue to believe that our long-term free cash flow improvement opportunities remain substantial and achievable. These opportunities include optimizing structural and contractual aspects of our business, enhancing our systems and processes, and streamlining our working capital. However, we now believe that the best and most sustainable paths to realizing those opportunities will take us beyond the end of 2024. As a result, over the near term, we expect free cash flow as a percentage of revenue to improve significantly from 2022's base of 8% free cash flow margin. Over the longer term, we still anticipate growth toward peers' free cash flow margins as the benefits from our improvement actions gain more traction and begin to drive a shorter conversion cycle. I want to make it very, very clear that we remain committed to delivering on our core operating results. Our achievements on those fronts so far, including our very solid start to 2023, give us confidence that we will be successful in delivering on those goals. Before turning it over to Andrew, I also want to update you on our grow, simplify and transform initiatives. Our grow initiatives take advantage of the opportunities in both core and fast-growing markets using our analytics capabilities and specialist knowledge to help create a more valuable and differentiated client experience. In Risk and Broking, our specialized approach coupled with the strategic hires we've made over the past year has driven accelerated growth. In Health, Wealth and Career, we've had success cross-selling new solutions and products alongside our core advisory work. Our focus on specialization has driven us to find improvements to existing solutions, new product innovation, and most recently, the identification and successful execution of opportunities for strategic collaboration. For example, we just announced a partnership with Zurich involving digital trading within our broking platform, which leverages data to structure risks to allow for a more competitive placement experience. Another example of our strategic partnerships is our new relationship with Sapiens, a leading global provider of software for the insurance industry. We've partnered with Sapiens to create integrated solutions to help insurers underwrite policies more efficiently. These are both great examples of how our innovations are driving growth by streamlining the very complex business of risk management and modernizing traditional broking while giving our customers a quicker and more efficient experience. A third example is our partnership with Transamerica to oversee administration and record-keeping for our recently launched LifeSight Pooled Employer Plan in the U.S. This new product will allow employers to offer a market-leading defined contribution plan and employee experience with limited demand on their internal resources. Shifting to our simplify initiatives, we believe our improved sales and retention outcomes have resulted in part from our efforts to streamline the backend shared operation of our businesses. This has enabled us to deploy a more cohesive and consistent global model that leverages our scale and provides a smoother client experience from Prospect to Renewal. Finally, our transformation program delivered $75 million of incremental annualized savings during the first quarter, consistent with the expected pacing of $100 million in incremental run-rate savings we expect to generate from the program this year. This brings the total to $224 million in cumulative annualized savings since the program's inception. We continue to search for additional opportunities for savings. Overall, we believe we're making progress toward our long-term organic growth, margin expansion and EPS targets. The continued execution of our strategic initiatives this quarter delivered healthier organic revenue growth, strong adjusted operating margin expansion, and further savings from our transformation program. In closing, I want to thank our colleagues for their performance this quarter and their unwavering dedication. We are truly appreciative of their continued commitment to our vision and a relentless focus on our strategic priorities to grow, simplify, and transform. And with that, I'll turn the call over to Andrew.

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 the 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 an 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 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 several 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 to 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 of 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 increase 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 generation. 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 from 2022's base of 8% free cash flow margin, and in the longer term, making continual progress toward 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 on 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.

Thank you. We will now begin the question and answer session. Our first question comes from C. Gregory Peters of Raymond James. Mr. 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?

Sure, Greg. Thanks, and good morning. We're very pleased with the progress we've made in accelerating revenue in risk and broking. Although we are experiencing some rate pressure, particularly in financial lines and our M&A business due to a decline in economic activity related to merchant acquisition, we are still pleased with the momentum across our portfolio. We are seeing growth, especially in our global lines, and this trend is consistent across all regions. The hiring we've undertaken since the latter part of 2021 into 2022 is contributing positively, and we anticipate that this will continue to enhance our revenue and bottom line for the remainder of the year. Additionally, the performance in insurance consulting and technology, particularly from software sales, is promising. This recurring revenue establishes a solid foundation that continues to perform well for us. The market for our services looks optimistic, and we are well-positioned to assist clients with their risk management and mitigation strategies in varying economic conditions. We will keep seeking good talent in the business, as we have consistently done. I believe we have successfully filled any major gaps in our offerings, which has contributed to our strong results.

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.

I would like to follow up on the margin challenges. It seems that we shouldn't continue experiencing these challenges as the year progresses. Is there a point when you expect hiring to normalize, and for that normalized hiring to be reflected in the margin results? It's clear that the impact from Russia is done following the first quarter. I'm trying to understand your perspective on the margin progression this year.

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 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 come through, and we expect that momentum to continue. So that combined with the efficiencies created from transformation, we have confidence in the continued acceleration of margin improvement in that business over time.

I would like to shift to the revision of free cash flow as part of your 2024 guidance. I noticed you mentioned EPS in Russia and other challenges, including pensions. Regarding free cash flow, could you explain how the update might influence your capacity to repurchase stock in the future? Additionally, could you provide an updated perspective on that?

Yes, sure. We think about share repurchase as one 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.

And just a point on the free cash flow guidance. Is there any unusual headwinds outside of restructuring that might hit 23 that weren't in '22?

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

Our next question comes from Paul Newsome from Piper Sandler.

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 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?

It's Andrew. We previously thought there were challenges to overcome, but we also had various options available to meet our free cash flow target by the end. Different past circumstances can lead to varied cash flow outcomes. Since February, we've revised our understanding of the surrounding factors influencing free cash flow, including the progress of our improvement efforts, updated economic conditions, currency fluctuations, specific business dynamics, and anticipated transformation spending. Given these assessments, we believe the likelihood of achieving our previous target by the end of 2024 has decreased. As a result, we adjusted our future free cash flow target to reflect our perspective that while we expect ongoing progress in improving cash flow conversion, it will likely take longer than the end of 2024 to fully realize the opportunities ahead. We've made significant strides in stabilizing the business, rebuilding our talent pool, enhancing organic revenue growth, and advancing our transformation program to boost profitability. We remain dedicated to achieving similar success with free cash flow generation. Although we would have preferred to see more progress thus far, the timeline is extending longer than some of our other financial targets.

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?

Yes. So we'll not know our expectations for pension income for 2024 until the end of 2023 when we perform our valuation and expect to provide relevant updates at that time. We're calling out the challenge presented by the pension income dynamics, and it's something we've talked about before, and which has continued its pension income remains pressured through 2023. If that dynamic continues in 2024, it will be meaningfully harder to reach our existing target and if pension income rebounded to where it had been in the past. Having said that, we remain focused on driving the organic growth, operating leverage, and cost savings to achieve our long-term EPS target to help offset that headwind.

Our next question comes from Elyse Greenspan from Wells Fargo.

My first question since you guys are calling out the pension income and then obviously, we have the free cash flow update. Does that mean that you took another look, I guess, at the '24 guidance? And that you have confidence in the other components of the financial plan, your revenue target and margin goals? And so the only, I guess, component that there's concern about is pension income?

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. Despite having a market-leading investment business, those aren't things we can control.

And then my second question goes back to the R&D margin. And I know you did call out some book of business gains last Q2, but you also get the benefit, right, that the investment income, higher investment income that can come through this Q2. But I just want to understand the comments. So it sounds like if we neutralize for Russia, produce our investment income and book gains, right? Maybe you would have got a little bit of margin improvement within RMB. So if that's the case, I think it's around 30 basis points, would you expect to at least see that 30 basis points of improvement from here? I'm just particularly concerned with the leverage within RMB, especially if you're able to continue to report high single-digit organic revenue growth in the segment?

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 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.

Our next question comes from Andrew Kligerman of Credit Suisse.

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 Health Wealth 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 a 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?

Yes, Andrew, we are quite pleased with our progress this quarter and we anticipate healthy growth for the remainder of the year. There is significant economic uncertainty; however, we continue to see strong demand for our services across our portfolio. It's still early in the year, so we are not changing our mid-single-digit organic growth expectations at this moment. You are correct that the momentum in the business appears favorable. This is one reason we maintain confidence in our long-term goals, including closing the revenue gap with our peers and reaching our long-term targets. The strategic hiring we have undertaken and the initiatives we discussed at the start of the call are contributing to the revenue momentum in our portfolio.

Got it. For my second question, I want to focus on the free cash flow for the quarter, which was $92 million. We initially expected it to be in the range of $300 million to $400 million. Can you explain what factors contributed to this discrepancy? Last quarter, despite a challenging free cash flow situation, you sounded optimistic about reaching your three-year target of 4.3% to 5.3%. You mentioned potential strategies to achieve that. Now, with the current figure at $92 million, I'm curious about how it dropped to this level and what the key influences were. Additionally, you've moved away from the 4.3% to 5.3% target. Considering what seems achievable, could we aim for 1.6% or 1.7% annually? Is that a realistic goal for 2025? I'll stop there.

Yes, sure. So let me take that in two parts. So I think, first, just on the quarter free cash flow, I think this is the first time in a number of years where the free cash flow in the first quarter has been a positive number. It is typically a negative number just given it is when discretionary compensation payments are made. So we feel very good about the free cash flow number for the first quarter of $92 million. For the sort of long-term sort of view, which I think is what you were getting at around free cash flow generation, we think we've provided sort of a balanced view, right, a very short and longer-term guidance. We recognize that we have work to do in pursuit of our long-term free cash flow margin goal. And we're confident that the areas we identified will help us make sustainable improvements. Over the long term, we do expect to see continual improvement in free cash flow margin towards peer levels.

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?

I think it's a bit early, but where we're focused on is continual improvement from where we are today and making sure that we work our way towards peer averages over the long term.

Our next question comes from Michael Zaremski from BMO.

So pension income, any thoughts about the potential to close out some of the pension plans? Is that a possibility to take advantage of higher rates? Some of your peers have taken some structural actions and charges over the last many years to minimize that volatility? Or does that just not make sense from an economic perspective?

Our pension design is actually pretty immune. The open plan of the U.S. is the one where 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. basically doesn't have accruals for people anymore, so design changes wouldn't do anything there. 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. 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.

Okay. That's clear. Okay. Last question. Just very good results in Health, Wealth and Career. Just curious, with a 1% GDP backdrop in Q1, were results surprising to you? One of your peers recently said on their earnings call that they feel that some of the services they provide are currently deemed to be a little less discretionary than they've been in prior decades in kind of as the company sort out this post-pandemic world. Any thoughts there?

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. 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 in helping our clients deal with healthcare inflation and the effect on their costs. 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 software licensing that we're doing in that business has been a substantial part of that. So yes, we're quite happy. 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 of the fact that despite any potential recession, employment levels still remain very high. I do remain optimistic about the demand for our services in that area.

Thank you very much. Our next call comes from Robert Cox with Goldman Sachs. Your line is open. We seem to have lost Mr. Cox. All right. We seem to have lost Mr. Cox. We’ll move on to our next question. Our next question comes from David Motemaden from Evercore ISI. Your line is open.

I wanted to ask about the free cash flow and better understand some milestones we can watch for regarding the 8% margin in 2022. In your disclosure, you mentioned that the absence of one-time headwinds should help improve free cash flow significantly this year. However, this is counterbalanced by the costs associated with the transformation program. Could you provide more details on how significant those one-time headwinds are that you believe will aid in improving free cash flow?

Yes. I believe this is some of the information that we previously shared, so we can certainly revisit that and provide further insight. There were approximately $200 million in headwinds from related derivative payments, around $200 million in headwinds from tax-related timing payments, and about $100 million in additional one-time discretionary compensation payments that we had discussed.

Got it. That's helpful. Thanks for laying those out for me. Regarding the timing of the transformation program, I believe there is still a total of $536 million in costs to achieve, which will occur over the next couple of years. Can we assume that this will be spread out relatively equally over that time period?

Yes, I think that's fair. It does fluctuate from quarter to quarter and year to year. I was considering when it appears on the cash flow statement. But yes, I believe that is a safe assumption for now.

Thank you very much for your question. Our next question comes from Yaron Kinar with Jefferies. Your line is open. Mr. Kinar?

Thanks for giving a second opportunity here. So I'll just start with continuing, I guess, to have the line of questions on free cash flow. So I think you mentioned that you expect near-term meaningful improvement from 2022's margin of 8%. Do you also expect near-term improvement to 2022 free cash flow margin if we were to adjust back the one-time drags?

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.

Okay. And then with regards to the pension income and the potential drag to 2024 EPS guidance. Can you maybe tell us what pension income levels or range were contemplated when the initial guidance was offered?

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...

And I think what's changed was just the rapid, right, the pace of the movement in rates and capital returns that factored into that; but it was originally set back in 2021. If you go back over the average of 7 years or so of investment of pension income, it was well north of $250 million. I think just the macro environment changed which drove sort of the big change in the pension income.

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

Just looking at some of the drivers of strength in global lines over the last year or so, can you unpack if there are or unpack if there are any particular lines that you're more excited about going forward? And I guess in aerospace, specifically, can you talk about whether you're gaining share or more benefiting from a favorable environment?

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.

Okay. And then I guess, can you provide any color on TRANZACT performance in the quarter? And then wondering if you have a view on CMS' new Medicare marketing rules and whether that could have an impact going forward.

We are pleased with TRANZACT's performance for the quarter and anticipate continued growth for TRANZACT this year. We consider the recent CMS regulations to be a manageable event.

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

Thanks. I was hoping to get some insight on where you see the current hiring needs. Is it in maintenance, or are there still gaps remaining from the elevated attrition we experienced? I would appreciate it if you could elaborate on that.

I believe we are back now. We no longer have significant gaps like we did in late 2021 and 2022. The teams have effectively brought in talent across the organization, which is evident in improved retention rates in our portfolio and the revenue growth we've experienced in new business. We are quite satisfied with our current situation. As I mentioned earlier, we will always be looking for good talent. This is a people-driven business, and acquiring capable individuals is essential for continuing our growth. Overall, we are pleased with our human capital at this moment.

Okay. Perfect. That's helpful. Second question, does the revised free cash flow outlook impact your M&A potential strategy?

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.

Thank you very much. And our next question comes from Mark Hughes with Truist Securities. Mr. Hughes, your line is open.

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?

So the wealth business has two components, right? We've got our retirement consulting business which is largely recurring work, right? Valuations are pension plans, etc. And then we have project work of various sorts, including pension risk transfer. The market right now for pension risk transfer with funded status approved in pro pension plans across most major economies is a good one. Should rates decline, depending on whether equity markets rise in response to a rate decline, you probably wouldn't see deterioration in funded positions, which leaves pension risk transfer opportunities just as attractive for plan sponsors. A lot of what we do is not just the actual transaction itself, but helping people monitor these conditions and determine whether other activities such as bulk home sums might be attractive. We anticipate continued demand in this particular area. I would point out that if you saw less demand for pension risk transfer, that's less assets leaving our investments business. So we've got a bit of a hedge in the portfolio there.

Thank you.

Thank you, Mr. Hughes. And thank you, everyone, for your participation in today's conference. This does conclude our program, and you may now disconnect. Have a wonderful day.