Aon PLC

Good morning and thank you for holding. Welcome to Aon's TLC's third quarter 2019 earnings conference call. At this time, all parties will be on a listen-only mode until the question and answer session 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 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 third quarter 2019 results. as well as having been posted on our website. Now, it is my pleasure to call over to Greg Case, CEO of ARPLC. Please go ahead.

Thanks very much, and good morning, everyone. Welcome to our third quarter 2019 conference call. Joining me 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, that illustrates the result we're achieving with clients through our Aon United Growth Strategy. Like previous quarters, we posted a detailed financial presentation on our website so that we can focus our time on these quarterly calls to provide you more insight into the longer-term view for the firm. First, let me start by recognizing the remarkable dedication of my Aon colleagues around the world. Their collective efforts continue to strengthen the firm and create long-term momentum reflected through strong performance in the third quarter. We delivered positive results across each of our key financial metrics, including 5% organic revenue growth. And I'd highlight organic revenue growth on the year to date and trailing 12 months basis of 6%, reflecting continued acceleration of our historical trend. Substantial operating margin expansion of 350 basis points and 11% EPS growth, overcoming FX headwinds in the quarter. We're driving the continued progress through this year with momentum headed into the last quarter of 2019. And this is a direct reflection of the strategic investments and actions we continue to take to achieve our potential operating as one united global professional services firm. Last quarter, we touched on valuable insights from our global risk management survey, highlighted how clients face growing volatility and complexity in today's evolving world. Nearly every organization, industry, and economy are confronting greater challenges than ever before. And most of these risks are underserved, if addressed at all, because they're not well understood, with less historical experience and use of available data to predict, measure, or manage these challenges. More concerning is that these challenges are very likely to grow in intensity over the next few years as emerging risks become even more prominent, threatening the ability of our clients to continue driving growth, protecting their assets, and developing talent. Against that backdrop, we are responding with actions that bring the full force of our firm to clients by developing innovative solutions and applying data analytics to better inform and advise them for their future. This approach is at the core of our A&United growth strategy and establishes the commercial foundation upon which we drive innovation, deliver expanded client value, and accelerate the growth of our firm. Beginning in 2017, with the divestiture of our outsourcing business, we've taken a series of important steps designed to remix our portfolio to achieve a faster growing, higher margin set of offerings that better reflect the expanding needs of our clients. This approach is best evidenced by the $4.8 billion disposition of our outsourcing business and the subsequent $1.5 billion reinvestment over the last two years in middle market and back office service innovation. That reinvestment included the creation of Aon Business Services, an important step toward modernizing infrastructure and creating a common technology platform that simplifies repeatable elements of client service and allows colleagues to spend more time on the highest value aspects of their client relationships. while supporting sustainable margin expansions for the firm. In parallel, we took steps to reduce structural barriers that prevented colleagues from delivering the best of the firm to clients, which in 2018 included the shift to a single global brand and the creation of a single global operating committee. We created a forum for and united decision-making that has accelerated growth in our core business. Last year, we also created the New Ventures Group, which is driven by a team of global leaders that command the capital and supporting infrastructure necessary to function as a growth stage development platform. This group is developing a portfolio of cutting-edge client solutions on topics like intellectual property and public sector partnerships, which further accelerate net new innovation on behalf of clients and expands our addressable market. The Aon United actions we have taken at the global level have unified our firm and further strengthened our capabilities. which is proven out by our performance through 2019. With this momentum, we announced the next phase of our A&United growth strategy earlier this month, outlining two key components that translate our progress at the global level into how we go to market locally, allowing us to more effectively bring the full force of our global firm to clients. We describe the first component as delivering A&United because it includes a series of steps that will improve sales effectiveness, strengthen our segmentation strategy, and further increase collaboration across solution lines, all of which means more value creation for clients and further acceleration of organic growth. The second component is about the expansion of our industry-leading Aon Business Services platform. Aon Business Services has already proven that it helps capitalize on the benefits of our global scale to deliver world-class client service and provide colleagues additional capacity to deliver more value to clients. which is why we're expanding our Aon Business Services footprint and establishing client service hubs, leveraging technology platforms and new capabilities to accelerate our ability to deliver the best of the firm to clients while driving further operational excellence in our back and middle office services, which will drive greater productivity in our operations and contribute to sustainable margin expansion. These moves create a common baseline for Aon United and the experience of Aon United in our local geographies, including how the firm articulates our value proposition to clients, delivers repeatable elements of client service, develops our colleagues, and measures return on invested capital. At the end of the day, all of these steps come back to how we can most effectively bring the best of our firm to clients so that we can help them improve their operational performance, reduce volatility, or strengthen their capital position, which is why we will continue to take steps to connect our firm, leverage our global scale, and strategically invest and industry-defining content to amplify the value we can provide on their behalf and increase our relevance in today's evolving landscape. For your reference, I'd like to highlight one example of how our colleagues came together with a real business partner approach to address a client's unique need, to give you an idea of how our A&United efforts translate into value at the front line. A global agricultural firm was facing operational losses due to cash flow volatility throughout the year based on seasonal crop yield that could be impacted at any given time by weather-related events or other variables outside their control. We believed we could help this client with insight gained through data analytics that would guide a strategic choice. Our team brought together commercial risk, reinsurance, and data analytics capabilities. Then we analyzed satellite-gathered weather data, applied our proprietary catastrophic impact forecasting model, and overlaid trends with the client's revenues. Our team was able to correlate patterns that enable the design of a parametric trigger solution unique to this client's operational risk. The result was an innovative, tailor-made crop risk management program that pays out automatically once a predetermined trigger is reached. This is a more efficient and timely approach, supporting our clients' competitive advantage in maintaining their prices regardless of harvest quality. They also benefit from cash flow reliability, operational and capital stability, and improve long-term business planning. And that's just one recent success story of how we are responding to unique client demand with action, truly made possible by greater colleague collaboration and through commercializing our proprietary content and data into an opportunity to deliver client value. But the application is happening across the portfolio as we scale our AM United efforts, translated into improved growth profile for the firm, as we drive new business generation and create greater retention and share of existing clients. Our trend of organic growth has already improved from 3% in 2014 and 2015 to 4% in 2016 and 2017 to 5% in 2018. And now in 2019, we delivered 6% year-to-date. Further, we expect strong performance in the fourth quarter, resulting in continued progress for the full year against our goal of mid-single-digit organic revenue growth or greater over the long term. In summary, our clients are demanding that they be better informed and better advised to navigate and address the complex and evolving challenges they face. We continue to build momentum as we strengthen our ability to create value on behalf of clients through investments in industry-defining content and capability combined with greater alignment across our firm, 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 financial progress year-to-date and long-term outlook for extending shareholder value creation. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we continue to take steps to deliver Aon United, which is amplifying our ability to serve clients distinctively and deliver improved financial performance. We delivered positive performance across each of our key metrics for both the quarter and year-to-date. Through the first nine months of the year, strong organic revenue growth and increased operating leverage have contributed to substantial operational improvement, which is translating into double-digit free cash flow growth. We are delivering on restructuring initiatives and funding significant investments across the firm that will deliver improved financial performance long-term. As I further reflect on our performance year-to-date, first, the growth profile of our firm is improving, with 6% organic revenue growth year-to-date and for the trailing 12 months. I would highlight year-to-date organic revenue growth accelerated 200 basis points from 4% in 2018 to 6% in 2019 as we deliver on our goal of mid-single-digit or greater organic revenue growth over the long term. Reported revenue has been pressured throughout 2019 by an unfavorable impact from changes in FX. Our disciplined focus on maximizing return on invested capital continues to help shape the portfolio towards our highest growth and return opportunities, as highlighted by the divestiture of certain businesses and retirement solutions at the end of the second quarter. Second, we continued another quarter of substantial operational improvement, which has contributed to strong year-to-date performance of 12% operating income growth and operating margin expansion of 250 basis points. Both operating income growth and operating margin expansion have improved on a nine-month basis compared to results of six months. while the impact from restructuring savings has remained similar, reflecting increased operating leverage across our portfolio. We are translating strong operational performance into double-digit EPS growth of 10% year-to-date, overcoming continued headwinds from FX translation. FX rates continue to have an unfavorable impact on results in the third quarter, due primarily to a stronger U.S. dollar, resulting in a significant net unfavorable impact of approximately 20 cents year-to-date, or a $58 million impact on operating income. If currency remains stable at today's rates, we anticipate an unfavorable impact of 4 cents or approximately $12 million reduction of operating income in the fourth quarter. We continue to successfully execute against our restructuring initiatives with 32 million incremental savings in the third quarter. 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 operating model. Aon Business Services is helping us modernize our infrastructure and create common technology platforms. When we simplify and standardize repeatable elements of back and middle office processes, we're finding that our colleagues have more time to spend with clients, strengthening our relationships and identifying expanded opportunities for our firm. Looking beyond near-term restructuring savings, We expect to drive sustainable operating 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, net of continued reinvestment in growth opportunities. This is driven by organic growth, portfolio mix shift, and ongoing productivity improvements. Lastly, free cash flow increased by 200 million, or 25%, to 996 million. Substantial growth through the first nine months primarily reflects strong operational performance. I would note both the prior and current periods include impacts that largely offset each other in total for a neutral impact to year-over-year growth. 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 in 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 on slide 26. Declining uses of cash for restructuring, CapEx and pension are expected to free up over $585 million of free cash flow by the end of 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're diligent about maximizing return on capital and make capital allocations decisions through this discipline. Share repurchase remains the highest return on capital investment today, given our free cash flow evaluation and outlook, highlighted by the $1.5 billion of share repurchase year-to-date. In summary, strong top and bottom line performance for both the quarter and year-to-date continue to reinforce our A&R initiatives and strategic decisions, building momentum as we enter the last quarter of the year, but more importantly, strengthen the long-term growth profile for our firm. In addition, our disciplined approach to return on capital, combined with our 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 happy to take your questions.