Aon PLC

Good morning and thank you for holding. Welcome to AONPLC's fourth quarter and full year 2018 earnings conference call. At this time, all parties will be in a listen-only mode until the question and answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has an objection, you may disconnect your line at this time. It is important to note that some of the comments in today's call may constitute certain statements that are forward-looking in nature, as defined by the Private Securities Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2018 results, as well as having been posted on our website. Now it is my pleasure to turn the call over to Greg Case, CEO of ANPLC.

Thanks very much and good morning, everyone. Welcome to our fourth quarter and full year 2018 conference call. Joining me here today is our CFO, Krista Davies. In addition, we have our two co-presidents, Eric Anderson and Mike O'Connor, joining the discussion again this quarter to help lead our Q&A session with their frontline perspective of Aon United at work. Like last quarter, we posted a detailed financial presentation on our website as we increasingly focus our time on these quarterly calls to provide you more insight into the longer-term view for the firm. I'd like to start today by acknowledging the tremendous work of my Aon colleagues around the world. Their collective efforts drove a strong Q4 and finish of the year with positive performance across each of our key metrics in the fourth quarter, including 6% organic revenue growth, despite a strong comparable in the prior year quarter, substantial margin expansion of 280 basis points, 16% operating income growth, and 19% growth in EPS, and a similar performance across key metrics for the full year, highlighted by organic revenue growth of 5% for the overall portfolio, our strongest level of organic growth since 2006, and EPS of 816 for the year, delivering on our near-term target to exceed 797 in earnings per share, a target set nearly two years ago with the divestiture of our outsourcing business and the acceleration of our AndUnited journey. Our strong results in 2018 are a direct reflection of initial success from the strategic actions we've progressively taken to drive Aon United. As we've discussed previously, we've been laying the foundation for Aon United for over a decade, evolving our portfolio, investing in new content and capability, and addressing client demand, all focused on increasing our relevance and strengthening our ability to serve clients more effectively. In 2018, we took additional major steps to reinforce and amplify this progress through structural changes that break down barriers and make it easier to deliver the best of the total firm to clients. A single leadership team, a single P&L, a single brand, a single operating model, and most compelling, a more united global professional services firm. We also organized focused teams of leaders to dedicate more time to value creation with the formation of our new ventures group, to accelerate industry-leading innovation and identify ways to better scale internal capabilities with greater speed to market. And our enterprise client group to lead and unite efforts with our largest clients to identify superior, tailor-made solutions that address their specific business objectives, both of which are unlocking significant value for clients and creating new solutions that can be applied more broadly and faster with similar clients or across industries. As we now look ahead to 2019, we truly enter the era of Aon United. These actions, taken together, have already translated into accelerated revenue growth to date. As you can see from the improved trend of 3% in 2014 and 2015 to 4% in 2016 and 2017, and now 5% in 2018. And it will continue to be a driving factor toward our goal of mid-single-digit organic revenue growth or greater over the long term. We're excited about the improved growth outlook for the firm, which is really driven by three key areas. First, as a baseline, we operate in core markets with attractive long-term growth globally. Risk continues to increase around the world, both in magnitude and complexity. Healthcare has significant cost inflation in most geographies with deteriorating wellness. And many of the world's pension plans are underfunded with employees unprepared for retirement. Our core businesses across these areas are characterized by high recurring revenue of approximately 85% in primarily non-discretionary markets, with strong client retention rates of approximately 95% on average across the portfolio. And as the world increasingly faces political and regulatory changes or economic pressure, we find our clients need our advice and core competencies even more as they navigate challenges and uncertainty across the topics of risk, retirement, and health. Second, We continue to strengthen our business mix. Our strategic focus was reinforced by the divestiture of our outsourcing business in 2017 with proceeds from the transaction directed toward high-growth areas of client need. In 2018, we delivered a record level of organic growth across the portfolio. In fact, we generated approximately $500 million of organic-related revenue drawn from many areas where we continue to invest heavily, delivering double-digit growth, including cybersecurity, transaction liability, delegated investment management, and voluntary benefits, just to name a few, while other areas of the business are just beginning to emerge, such as intangible assets and data analytics applications. And third, we are creating new opportunities with clients under ANUnited. With a business partner approach, we're working more effectively across geographies and solution lines to help clients in ways that improve their growth profile, reduce volatility, or strengthen their balance sheet. One example of this work in 2018 was when our data analytics team joined forces with our reinsurance and commercial risk colleagues to develop a new solution for an existing client. Having already worked with Fannie Mae and Freddie Mac to develop the U.S. mortgage market for single-family homes, which created $10 billion in new capacity and now accounts for 20% of the single-family mortgage market, our Aon United team brought their shared capabilities into the multifamily home market. This is a truly great example of colleagues coming together to create new solutions for clients and create new markets for Aon. And here's how this unique solution was developed. Our reinsurance team worked with our data analytics colleagues to develop proprietary analytics that that translate the complex multifamily exposures into risk that the reinsurance market could price, effectively creating a standard and making a new market. Our commercial risk team then made the transaction possible by creating a financial vehicle that translated the reinsurance capacity into a primary insurance policy that could be purchased. And that's the power of AN United. creating new solutions for clients brought together by collaboration of colleagues from across Aon, all driven by the insight from industry-leading data analytics capabilities. In summary, 2018 was another year of delivering on our commitments and meaningful progress. We took several substantial steps to strengthen our firm, all while delivering strong financial results and increased value to our clients. As we begin 2019, our team is excited about the future outlook for our firm which is amplified by the considerable momentum we have built together. With that, I'd like to turn the call over to Krista for her thoughts on our progress this year and long-term outlook for continued shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered a strong operational and financial performance in Q4 to finish the year. Q4 results were highlighted by strong organic revenue growth that translated into substantial operational improvements. Core operational performance contributed 10% of the 16% operating income growth and 100 basis points of the 280 basis point increase in operating margin. Turning to the full year, I'd like to start by discussing the achievement of our near-term EPS target of exceeding 797 per share for the full year. I'm pleased to report that we delivered 816 of EPS for the year, far exceeding the 797 threshold. As Greg noted, We set expectations two years ago at the time we announced the divestiture of our outsourcing business to hold shareholders neutral from a dilution standpoint. Over the course of the last two years, we've had some items move in our favor, noting a positive impact from FX translation and a tax rate a bit better than when we set the target, and some items move against us, noting unfavorable impacts from FX balance sheet revaluation and the implementation of new revenue recognition standards. Strong organic revenue growth, core operational improvement, successful execution against our restructuring initiatives, and effective capital management have enabled us to exceed the target while also enabling a significant amount of investment to position the firm for future growth. As I reflect further on full-year results, organic revenue growth accelerated to 5%, continued improvement compared to our historical trend, as we deliver on our goal of mid-single-digit or greater organic revenue growth over the long term. In addition to accelerating organic growth, M&A is continuing to contribute, both improving the mix and driving total revenue growth of 8% for the full year. We delivered substantial operational improvement with operating income growth of 18% and operating margin expansion of 220 basis points. Core operational improvement contributed 10% or more than half of the operating income growth year-over-year and 60 basis points of operating margin expansion, noting that this includes the absorption of near-term investments to support the long-term growth initiatives that Greg mentioned. We also continued to successfully execute against our restructuring initiatives that not only drive expense savings through a three-year program, but more importantly, create greater scalability, productivity, and operating leverage beyond 2019. I would highlight that we provided an update to the restructuring program this quarter, as we are now in the final year of the program. Total estimated savings increased by $50 million to $500 million in 2019, with a $150 million increase in cash spend, and an additional $50 million increase in non-cash charges. We do not expect any further adjustments to the total estimated program costs or annualized savings through the remainder of the program, which will be completed in Q4 of 2019. Looking beyond 2019, ongoing productivity improvements combined with accelerating revenue growth and a portfolio mix shift to higher margin businesses are expected to drive continued long-term core margin expansion. we have delivered 70 to 80 basis points of operating margin improvement on average per year over the last decade. Reported free cash flow increased substantially year-over-year to $1.45 billion, reminding you that the prior year included cash tax payments related to the divestiture. Strong operational improvement combined with working capital improvements in both receivables and payables contributed to year-over-year growth. partially offset by 80 million of discretionary pension contributions and certain costs related to our restructuring program. I would note that 2018 was the peak year of restructuring-related cash usage. As we think about cash generation going forward, we are focused on maximizing the translation of accelerating revenue growth into the highest level of free cash flow through three ways, operating income growth, continued progress on working capital initiatives, and structural uses of cash winding down. As I noted previously, 2018 was the peak year for cash usage, as showed in our presentation slides, as it was the peak year for restructuring cash outlays and certain discretionary pension contributions. The declining uses of cash for restructuring, capex, and pensions collectively are expected to free up roughly $620 million of free cash flow by the end of 2020. This adds significant upside to a base of $1.45 billion of free cash flow in 2018, resulting in $2.1 billion of free cash flow prior to any operational income growth or working capital improvements. Together, these three inputs give us confidence in our ability to deliver on our goal of double digits annual growth in free cash flow over the long term. We have opportunity for substantial incremental debt as restructuring expenses wind down and pension liability improves, providing significant financial flexibility over the coming years to further invest in value creation or return capital to shareholders. We are diligent about maximizing return on invested capital and make all capital allocation decisions on this basis. This is highlighted by the $1.4 billion of share repurchase in 2018, which remains the highest return on capital investment given our free cash flow valuation. I would highlight return on invested capital continues to improve as we shape the portfolio, with a 380 basis point increase year over year to 21.6% in 2018, driven by operating income growth and a reduction in capital. In summary, we delivered on our full-year commitments to shareholders while making significant investments to strengthen the outlook of our firm going forward and returning over $1.4 billion, $1.8 billion directly to shareholders through share repurchase and dividends in 2018. The success we achieved this year provides momentum as we head into 2019 and supports our expectation to continue to unlock significant shareholder value creation over the long term. With that, I'll turn the call back over to the operator and we'd be happy to take your questions.