Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's second quarter 2019 earnings conference call. At this time, all parties will be in 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 second 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 Aon PLC.

Thank you, and good morning, everyone. Welcome to our second 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 client impact and Aon United at work. Like 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 strong operational results in the second quarter, including 6% organic revenue growth. I would highlight this is the fourth consecutive quarter of achieving 6% organic revenue growth, reflecting continued acceleration of our historical trend. Substantial operating margin expansion of 240 basis points, 13% operational income growth, and 9% EPS growth, overcoming further FX headwinds in the quarter. Our results reflect continued progress this year on our indirect reflection of the strategic actions we've progressively taken to drive Aon United and achieve our potential, operating as one United global professional services firm. As we've previously discussed, we've been laying the foundation for Aon United for over a decade, evolving our portfolio, investing in new content and capability, and breaking down internal barriers. all focused on increasing our relevance and strengthening our ability to serve clients. Helping a client improve operational performance, reduce volatility, or strengthen their capital position is at the core of our mission. In today's evolving world, nearly every organization, industry, and economy are confronting greater challenges than ever before, while at the same time, many organizations report that they are less prepared than ever before. This is what we're hearing from CEOs and other business leaders across the globe. and it was validated in the global survey Aon conducts every two years. The latest report released in April was informed by the largest number of respondents to ever participate, reflecting insights from more than 2,600 clients across 33 industries spanning small, medium, and large organizations from 60 countries around the world. One critical insight is that organizations must be more prepared for a broad range of traditional risks, such as a slowing economy, damage to brands, volatile global trade conditions as well as emerging risks such as cyber attacks intellectual property and business interruption from non-physical risks that threaten their ability to continue driving growth protecting their assets and developing talent further a list of the top 15 ranked challenges within the survey reveals another insight most of these risks are underserved if at all today because they're not well understood due to less historical experience and data available to predict, measure, or manage these challenges. As a result, risk readiness has declined to its lowest level in 12 years. Only 20% of those responding to the survey reported that they used risk modeling, and a mere 24% said they could quantify their top 10 risks. The complexity of the situation our clients face today is substantial. Perhaps more concerning is that these challenges are very likely to grow in intensity over the next few years. New risks will become even more prominent, including the dynamics of an aging workforce, the impact of climate change, the growing prevalence of cyber risks, and the emergence of disruptive technologies. Reflecting on the implications for Aon, client demand is higher than ever before, and clients are pushing us to find new ways to address their growing needs. As we said previously, we must innovate faster than our clients on all these topics to stay relevant and create value on their behalf. The steps we have taken around Aon United combined with significant investment and focus on content and capability, all reinforce and amplify our ability to increase our relevance with clients. At Aon, we're responding. We're focused on bringing the full force of our firm to our clients by developing innovative solutions and applying data analytics to better inform and prepare them for their future. I'd like to highlight one example that demonstrates how Aon United led to an innovative solution addressing a common challenge. that organizations of all sizes continue to face, managing their ever-increasing healthcare costs while not impacting their ability to attract and retain key talent. I'd also note that the failure to attract and retain top talent was ranked among the top 15 risks identified by the client survey. In response to broad client demand, our team came together with actuaries, data scientists, user design experts, software developers, and subject matter experts across solution lines and in combination with the IT capability of Aon Business Services, to deliver a data-driven cloud-based tool called Aon Architect. Aon Architect uses machine learning science to help clients design optimal health benefit packages that balance employer financial objectives and employee satisfaction. This innovative tool is a customizable interactive model that identifies the most cost-effective and relevant combinations across thousands of different benefit program options. based on an employer's actual population demographics and Aon's proprietary employee perception data. Aon Architect, launched in 2018, has already been used with nearly 100 clients so far in 2019. And that's just one example of how we're responding to broad client demand with innovation. We've also organized focused teams of leaders to dedicate more time to value creation for client-driven solutions that can be applied more broadly and faster with similar clients or industries. Our enterprise client group was formed to lead AM United efforts with targeted clients by identifying superior, tailor-made solutions that address their specific business objectives. And we established our new ventures group to accelerate industry-leading innovation, scale our capabilities with greater speed to market, and expand our relevance with clients. Last quarter, we announced that the new ventures group would formally sponsor our intellectual property solutions business. This quarter, the group announced the formation of the Public Sector Partnership, which will enhance our position to serve governments and leading social sector organizations as clients. Obviously, these institutions play a very significant and active role in the global economy. Building innovation at scale to support the mission of these groups at the national, regional, and local levels represents a significant long-term growth opportunity. For example, we're investing in capabilities to help governments more effectively manage natural disaster risk, deliver housing stability, and create more resilient public balance sheets. In addition, the work we recently completed for the World Bank is a powerful illustration of potential impact. Bringing together Chile, Mexico, Peru, and Colombia, we placed the largest ever sovereign risk transaction in the history of the insurance market using parametric triggers to protect against earthquake risk. Our AonUnited efforts put in place over the last decade are translating into accelerated revenue growth. As you can see from the upward trend of 3% organic growth in 2014 and 2015, 4% in 2016 and 2017, 5% in 2018, and now 6% year-to-date in 2019, as well as 6% for the trailing 12-month period. We are confident that 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. In summary, our clients are demanding better insight, advice, and solutions to navigate and address the complex and evolving challenges they face. We continue to strengthen our ability to create value on behalf of clients through investments and not just industry leading, but in many examples, industry defining content and capability, while also achieving strong financial results and increased value to our shareholders. With that overview, I'd like to turn the call over to Krista for her thoughts on our progress in the first half of the year and long-term outlook for continued shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, the steps we're taking to drive Aon United in response to increasing client demand combined with significant investment in content and capability is amplifying our ability to serve clients and our ability to deliver improved operational and financial performance. We've delivered continued progress for both the quarter and year-to-date. For the first half of the year, we've translated strong organic revenue growth into double-digit operating income and earnings per share growth, while also delivering on restructuring initiatives and funding significant investments across the firm that will drive future growth. As I reflect on our performance through the first half of the year, first, as Greg noted previously, organic revenue growth both year-to-date and for the trailing 12 months was 6% overall, reflecting 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. As mentioned previously, in addition to strong performance across our core portfolio from net new business generation and improved retention, our disciplined focus on maximizing return on invested capital continues to shape the portfolio towards our highest growth and return opportunities, as highlighted by the divestiture of certain businesses and retirement solutions in the second quarter. Second, we delivered strong operational improvement with double-digit operating income growth of 10%, operating margin expansion of 210 basis points, and doubled the GDPS growth of 11% through the first half of the year. As we noted in the earnings material, FX rate continued to have an unfavorable impact on results in the second quarter, due primarily to a stronger U.S. dollar, resulting in significant net unfavorable impact of approximately 18 cents year-to-date, or a $53 million impact on operating income. I would also note that the second quarter included $5 million of additional interest expense, resulting from the $750 million increase of 3.75% senior notes issued on May 2, 2019. Going forward, we expect approximately $81 million of interest expense per quarter, reflecting both the issuance of additional term debt and higher average debt balances compared to the second quarter. Additionally, we continue to successfully execute against our restructuring initiatives with $38 million of incremental savings in the second quarter. I would highlight that we provided an update to the restructuring program this quarter as we are now two quarters away from the end of the program and have better clarity into projects and program initiatives. We now expect to deliver $510 million of annualized savings in 2019 and $535 million of annualized savings in 2020, reflecting an increase of $35 million in total expected savings. Total cash investment is expected to increase $100 million, reflecting $125 million in cash restructuring charges offset by a $25 million decrease in CapEx associated with the restructuring program. All restructuring charges will be complete by Q4 of 2019. Our ongoing restructuring 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. For example, We're driving digitization within our Centers of Excellence as part of our Aon Business Services organization. Our Centers of Excellence were created to focus on automation of common services across Aon, with the goal of increasing process efficiency and reducing manual error-prone activities. More specifically, we're automating the manual aggregation of insurance data from carriers to improve data quality and accuracy, reducing turnaround times for clients and enhancing the overall client experience. We can apply similar automation to a variety of common services across our businesses to reduce lead time, improve quality and accuracy, as well as free up time for our client-facing colleagues to be more productive. We anticipate automating approximately 500,000 hours in 2019. Looking beyond 2019 and our restructuring initiatives, organic growth, portfolio mix, and ongoing productivity improvements are expected to drive continued operational performance and long-term core operating margin expansion annually, similar to the 70 to 80 basis points of operating margin improvement achieved annually over the last decade. Lastly, free cash flow declined $47 million to $255 million. Strong operational performance through the first half of the year and a decline in restructuring cash outflows was more than offset by approximately $85 million of net cash payments made in the first quarter related to legacy litigation. As we think about cash flow generation going forward, we're 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. 2018 was the peak year for cash usage, as shown in our presentation slide 27. Declining uses of cash for restructuring CapEx and pensions collectively are expected to free up $585 million of free cash flow by the end of 2020. With the update to restructuring estimates this quarter, we now expect modestly higher cash outflows related to the program in 2020, primarily offset by a $35 million increase in annualized savings. resulting in a neutral impact to our strong free cash flow growth outlook from 2018 to 2020. We continue to have 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 inputs give us confidence in our ability to deliver on our goal of double-digit growth in free cash flow over the long term. Further, we have the opportunity for incremental debt while maintaining current investment-grade ratings. 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 capital allocation decisions through this discipline. Share repurchase remains the highest return on capital activity today, given our free cash flow evaluation and outlook. highlighted by the $1.15 billion of share repurchase year-to-date. In summary, our Aon United initiatives continue to create momentum as highlighted by our strong top and bottom line performance through the first half of the year, including significant investments to strengthen the long-term growth profile for our firm. Our disciplined approach to return on invested capital, combined with expected 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.