Aon PLC

Good morning and thank you for holding. Welcome to AON's PLC's first quarter 2019 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 first quarter 2019 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. You may now begin.

Thank you, and good morning, everyone. Welcome to our first quarter 2019 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 to help lead our Q&A session with their frontline perspective of Aon United at work. Similar to previous quarters, we posted a detailed financial presentation on our website. As we 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 continue to strengthen the firm and create long-term momentum, reflected through positive performance across our key metrics in the first quarter, including 6% organic revenue growth, reflecting a strong start to the year with an increased rate of growth across all solution lines, substantial operating margin expansion of 190 basis points, 8% operating income growth, and double-digit or 11% growth in EPS, overcoming meaningful FX headwinds. Our strong start to 2019 is 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 increasing our relevance with clients. In 2018, we took major steps to reinforce and amplify this progress through structural changes that broke down barriers and began to make it easier to deliver the best of the total firm to clients. One brand, one leadership team, one P&L to deploy capital against, one operating model under Ann Business Services, and most compelling, a more united global professional services firm, all focused on increasing our relevance and strengthening our ability to serve clients more effectively. We also organized focused teams of leaders. Today, it gave more time to value creation for client-driven solutions that can then be applied more broadly and faster with similar clients or industries. With the formation and the development of our enterprise client group to lead A&E United efforts with our largest clients by identifying superior, team-made solutions that address their specific business objectives. And our new ventures group to accelerate industry-leading innovation and scale our capabilities with greater speed to market. During Q1, we announced our first commitment to develop our innovation portfolio with intellectual property solutions. As businesses recognize a paradigm shift from tangible to intangible assets, IP is more important than ever with the tangible assets now comprised in the majority of assets on the balance sheet. Our clients need to both identify and manage risks surrounding business-critical and proprietary data and develop and execute strategies for maximizing shareholder value from their IP portfolios. Beginning with the acquisition of 601 West in 2018, the IPS team has already developed a set of consulting, valuation, and risk transfer offerings that establishes Aon as the trusted global authority in the intellectual property asset class, an area of opportunity that we believe will be substantial for Aon over the long term. With our strong start to 2019, we are truly in the era of Aon United. The foundation we've been putting in place, combined with our more recent actions, have already demonstrated accelerated revenue growth As you can see from the improved trend of 3% in 2014 and 2015, 4% in 2016 and 2017, 5% in 2018, and now 6% to start the year in our largest quarter. And these actions will continue to be a driving factor reinforcing our goal of mid-single digit organic revenue growth or greater over the long term. This improved growth outlook for the firm is predominantly 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 in both 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. As the world increasingly faces political and regulatory changes or economic pressure, we find our clients needing our advice and core competencies even more as they navigate challenges and uncertainty across the topics of risk, retirement, and health. This view is reinforced by the data and analytics inside of our endpoint team, a team comprised of more than 300 data professionals across three innovation centers globally. Through unique insight into the global commercial PNC market, our team has developed a standardized data set which describes the size and segmentation of commercial lines insurance, unique in the market today. For example, our research, which segments the global market in detail by product, industry, and client size, estimates that global premiums totaled approximately $625 billion in 2013, $730 billion in 2017, and will increase to nearly $900 billion by 2021. reflecting an increase in market growth rate to more than 5% annually. Using this proprietary data, we are identifying unique insights across solutions, industries, and geographies for clients and Aon, as well as prioritizing capital toward these highest growth opportunities. Second, 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 revenue across the portfolio, with that momentum continuing into the first quarter of 2019, drawn from many of the areas where we continue to invest heavily, delivering double-digit growth, including cybersecurity, transaction liability, delegated investment management, and voluntary benefits, to name a few, while other areas of the business are just beginning to emerge, such as intellectual property and data analytics applications. While many think of cyber in a traditional sense of risk transfer premiums, We're working well beyond that with some of the technology industry's leading participants with solutions like SciQ, a software assessment tool critical for implementing cyber resilience across their product portfolios. And third, we're creating new opportunities with clients through our AM United model. With a business partner approach, we're working more effectively across geographies and solution lines to help clients in ways to improve their growth profile, reducing volatility, or strengthening their balance sheet. And while I've already noted colleagues working together through formed groups, like our enterprise client group and our new ventures group, I want to highlight the spirit of Aon United through two colleague examples, both of whom have already won accolades from clients as perennial players on the power broker list. It's not that Aon has more industry-recognized colleagues than anyone else or the accolade itself for their specific industry expertise. It's the underlying behavior they exemplified to solve unique solutions for clients. The first example highlights work within an autonomous vehicle startup, where there was no loss data to model. With no protection, there was no future for this client. Our colleague was able to bring together capability across the firm, encompassing cyber and product liability, resulting in protection, capital, and a future for the client. My second example highlights the work of a colleague on an M&A transaction for a client. The seller was unwilling to identify specific major tax liabilities identified by the buyer. No solution, no deal. Working with colleagues across the firm to understand the risk, our colleague was able to bring 13 carriers together in one of the largest tax insurance programs ever placed, ultimately enabling the deal to get completed. Quite simply, this is the power of our colleagues and our Air United approach. Our clients are driving this, and our colleagues are responding. In summary, our results reflect increasing strength from our Inner United initiatives as highlighted by increasing growth. We continue to strengthen our firm through investments in industry-defining content and capability while delivering strong financial results and increased value to our shareholders. Our team is excited about the future outlook for our firm, which is amplified by the considerable momentum we have built together. With that overview, I'd like to turn the call over to Krista for her thoughts on our progress and long-term outlook for continued shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. We delivered a strong operational and financial performance in Q1 to start the year. Q1 results were highlighted by strong organic revenue growth that translated into solid operational improvement while funding significant investment across the firm and overcoming an unfavorable near-term impact from FX translation. As I further reflect on the quarter, First, organic revenue growth accelerated to 6%, continued improvement compared to our historic trend as we deliver on our goal of mid-single digital greater organic revenue growth over the long term. In addition to accelerating organic revenue growth, discipline around capital allocation continues to shape the portfolio towards our highest growth and return opportunities, as highlighted by the divestiture of certain businesses in our talent practice after the close of the quarter. While financials were not disclosed, the divestiture of these businesses provides AM with capital that can be reinvested while enabling the buyer to create value for clients. Second, we delivered solid operational performance with total operating income growth of 8%, operating margin expansion of 190 basis points, and double-digit earnings growth. As we noted in the earnings material, FX was modestly worse than previously anticipated due to a stronger U.S. dollar. resulting in a significant net unfavorable impact of approximately 13 cents in the quarter or a $38 million impact on operating income. Looking beyond 2019 and our restructuring initiatives, organic revenue growth portfolio mix and ongoing productivity improvements are expected to drive continued operational performance and long-term core margin expansion annually, similar to the 70 to 80 basis points of operating margin improvement achieved annually over the last decade. We continue to successfully execute our restructuring initiatives with $45 million of incremental savings in the quarter before reinvestment, placing us well on track to deliver on our total cumulative savings of $500 million in 2019. These initiatives are driving expense savings near term, but more importantly, they're enabling growth of the firm as we unlock additional operating leverage through our Aon Business Services single operating model. In addition to core restructuring activities, another Aon United initiative I'd like to highlight is sales process standardization. As a firm that was initially built through acquisitions and then organized around multiple businesses and segments, our colleagues routinely found it challenging and time consuming to understand who our clients were and how best to serve them across Aon. With Aon United and a single operating model under ABS, our colleagues spent the last year standardizing our client-facing sales process. With global agreement from colleagues to cover every sales process across the firm, we undertook an in-depth process to dissect and reassemble very disparate sales data into one instance. We began with 1.3 million accounts, and through mastering account data and cleanup, we eliminated more than 800,000 accounts, reducing the total to 500,000 client accounts in a standardized approach and process. Our client-facing colleagues are now more productive with increased time for clients. as well as greater operating leverage through simplification of our sales process. A great example of our colleagues working together across the firm to drive long-term growth and operational leverage. Lastly, free cash flow is $17 million for the quarter. Q1 is our seasonally smallest quarter from a cash flow standpoint, due primarily to incentive compensation payments, with results further impacted by approximately $85 million of net cash payments related to legacy litigation. As we think about cash flow generation going forward, we're focused on maximizing translation of accelerating revenue growth into the highest level of free cash flow through three ways. Operating income growth, continued progress in working capital initiatives, and structural uses of cash winding down. 2018 was the peak year for cash usage, as shown in our presentation slide 24. It was the peak year for restructuring cash outlays and certain discretionary pension contributions. Declining uses of cash for restructuring, capex, and pension 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 more than $1.45 billion of free cash flow in 2018 prior to any operating income growth or working capital improvements. Together, these three inputs give us confidence in our ability to deliver on our goal of double-digit annual growth in free cash flow over the long term. Further, we have the opportunity for substantial incremental debt as EBITDA grows. Restructuring costs wind down and pension liability improves, providing significant financial flexibility over the next few years to further invest in value creation or return of capital to shareholders. We are diligent about maximizing return on capital and make all capital allocation decisions through this discipline. Share repurchase remains the highest return on capital investment today, given our free cash flow valuation and outlook. In summary, our Aon United initiatives continue to increase momentum, as highlighted by our strong top and bottom line performance in the quarter, including significant investments to strengthen the long-term growth profile for our firms. Our disciplined approach to return on invested capital combined with significant free cash flow growth and increased debt opportunity over the next few years provides financial flexibility 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 delighted to take your questions.