Aon PLC

Good morning and thank you for holding. Welcome to AMBLC's fourth quarter and full year 2019 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 and those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full year 2019 results as well as having been posted on our website. Now, it is my pleasure to turn the call over to Craig Case, CEO of Alien PLC. You may begin.

Good morning, everyone, and welcome to our fourth quarter and full year 2019 conference call. I'm joined today in Chicago by our two co-presidents, Eric Anderson and Mike O'Connor, and our CFO, Krista Davies, joins our discussion from London. 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. They're at the core of everything we achieve, and their execution this year was impressive. Their collective efforts continue to strengthen the firm and create long-term momentum reflected through a strong finish to the year with positive performance across each of our four key metrics in the fourth quarter, including 7% organic revenue growth and acceleration from the prior year on top of a strong comparable, highlighted by growth of 5% or greater in four of our five solution lines. Substantial operating margin expansion of 210 basis points and 17% EPS growth overcoming continued FX headwinds in the corner. And a similar performance across our key metrics for the full year, highlighted by organic revenue growth of 6% for the overall portfolio. our strongest level of organic growth in over 15 years, reflecting continued acceleration of our historical trend, double-digit operating income and EPS growth, as well as record operating margin of 27.5%, and 11% growth in free cash flow, delivering on our double-digit annual growth target. Our progress this year continues to reflect meaningful improvement against our objectives, which is a direct result of the strategic investments and actions we've progressively taken to achieve our potential, operating as one united global professional services firm. At this time last year, we looked ahead to 2019 and shared thoughts and aspirations for our firm as we turned the page to truly enter an era of AN United. Now, a year later, our track record, both with clients and demonstrated by our financial performance, reinforces that our AN United growth strategy is not only gaining traction, it's building momentum. We've been on our Aon United journey for over a decade, and along the way, you've heard us describe structural changes we have made to enable firm-wide decisions and to make it easier for colleagues to work together within and across solution lines and geographies to fulfill the potential of our firm. As we look ahead to 2020, we're excited to have formalized a clear roadmap, highlighted on page six of the presentation, that brings renewed focus and urgency to our journey and ensures we bring the best of Aon to our clients. We call this the Aon United Blueprint. It covers four areas. Our Delivering Aon United effort that was announced last quarter translates the trust and conviction built through our decade-long change effort into a frontline client leadership program, making it easier for colleagues to collaborate and better articulate client benefits of Aon United consistently in local markets. Our Aon Business Services organization capitalizes on the benefits of scale to drive operational and client service excellence. Our new Ventures Group accelerates innovation at scale to address unmet client need and expand our addressable market. And our Ann Impact Model defines our colleague mission and the governing behavior and shared values that shape our culture. The full potential of our firm, the idea of Ann United, sits at the intersection of these four components. We are committed to working differently, and the Ann United Blueprint lays out how we are executing on this objective. We know that when we consistently operate as Ann United and bring the full force of our firm to clients, we strengthen our value proposition, which translates into growth through winning more clients, doing more with existing clients, and identifying scalable new ideas to bring to clients. You've already seen the trend of our organic revenue growth consistently improve over the last six years. From 3% in 2014 and 2015 to 4% in 2016 and 2017, 5% in 2018, and now reaching 6% in 2019. The acceleration to date is a proof point that the A&United approach we are taking to better understand and address the unique needs of clients is delivering differentiated insights that help businesses make better decisions, which is why we will continue to double down on investments in industry-defining content and capabilities. These investments allow us to build, buy, and scale capabilities that expand our reach and address increasing demand, which we believe underpins our ability to sustainably deliver mid-single-digit or greater organic revenue growth over the long term. Our outlook is driven by three categories of growth. First is continued growth across our core portfolio as we improve client value creation driven by our Delivering and United program. As a baseline, and as you've heard us highlight previously, Aon operates in global markets across risk, retirement, and health, each with demand characteristics that are increasing in both magnitude and complexity. Clients today face growing volatility and are confronting greater challenges than ever before. Against that backdrop, the unmatched investments we have made in proprietary data and analytics gives us a competitive advantage that differentiates the insights we provide to clients, ultimately allowing them to make better decisions that measurably improve their business or reduce their volatility. And when you combine the power of our analytics with our breadth of expertise and A&United behavior, we are deepening and further developing client relationships as we offer them more integrated solutions, like many of the examples we've used as context during these quarterly discussions. Simply put, we win more, retain more, and do more with clients. A perfect example is the success that we have achieved within our enterprise client group. The enterprise client group dedicates leaders to bring our A&United efforts to life with our largest, most complex clients by identifying and matching our best solutions for their specific business objectives. In 2019, we drove 50% more new business generation into existing relationships with clients in this group as compared to a similar set of clients that we don't yet serve with a concentrated and united approach. And we have more than tripled the number of clients we serve in this way from approximately 50 to over 160 this year. Second, we continue to strengthen our business mix as we evolve our portfolio toward higher growth areas of client demand. We're disproportionately investing organically and inorganically in priority areas that are defined by attractive growth and margin characteristics. A great example is delegating investment management within retirement solutions, which is a $1.8 trillion market expected to grow 10% over the coming years. We have invested both organically and through our acquisition of the Townsend Group, and the combined business has grown assets under management at a 34% compound annual growth rate since launching in 2010. Townsend is just one of the 86 acquisitions we've made in priority areas over the last five years, while the best seat 84 non-core businesses. The result is a positive portfolio mix shift, as organic growth rates across our priority areas are into the high single and double-digit ranges, with significant potential to scale longer term. And the third category is unlocking net new opportunities with innovation at scale. Aon has a strong track record of developing first-to-market solutions. For instance, we have created a $24 billion premium market in U.S. mortgage reinsurance since 2012. We also have created a multi-billion dollar premium market with our fully insured health care exchanges, both examples of connecting capital to previously uninsured risks. Our New Ventures Group is central to our success in this third category of long-term growth potential. The New Ventures Group accelerates net new innovation on behalf of clients and expands Aon's addressable market. The group serves as an incubator to rapidly scale our most significant growth stage opportunities. Let me tell you about our latest addition to the New Ventures Group, CoverWallet, the leading digital insurance platform for small and medium-sized businesses. This unique platform offers customers advice, digital application, quote, comparison, and policy management all online with advisors standing by to lend support. We began our relationship with CoverWallet through a pilot program in the U.S. and Australia. During the pilot, we directed a portion of our net new small business leads to CoverWallet's platform, which resulted in nearly doubling our new business growth through increased conversion, cross-sell, and the sale of ancillary services. Penetration with existing clients increased by an impressive 20%. Recognizing the success, we are thrilled to welcome the CoverWallet team to Aon. CoverWallet is a great example of investment and differentiating capability that will serve as a building block to unlock new opportunities in the fast-growing commercial insurance market for smaller businesses, a $200 billion global premium market with less than 5% served digitally today. In summary, we deliver on the client and execute against our end united growth strategy. The growth profile of the firm continues to improve with further upside longer term as we identify net new opportunities that increase the firm's total addressable market. Our team has greater conviction now than ever that the progress we have made over the last decade have made us a stronger firm, allowing us to operate differently and leading to better outcomes for clients, colleagues, communities, and shareholders. With that overview, I'd like to turn the call over to Krista for her thoughts on our financial progress this year and longer term. Krista, over to you.

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered a strong performance across our key metrics in both the quarter and for the full year as we continue to commercialize our Aon United strategy and demonstrate the growth potential of our firm. In the quarter, we delivered 7% organic revenue growth, with four out of five solution lines delivering 5% or greater. This translated into operating income growth of 12%, an operating margin expansion of 210 basis points. We also delivered an incremental $54 million of restructuring savings in the quarter, and have now completed 100% of the charges related to the program. Our strong growth and operational performance have enabled us to continue to fund the significant investments that Greg described across the firm. to drive improved financial performance longer term. As I reflect on the full year results, first, organic revenue growth accelerated to 6%, demonstrating continued improvement against our historical trend as we deliver on our goal of mid-single digital greater organic revenue growth over the long term. All five solution lines delivered similar or improved organic growth year over year. I would note reported revenue was pressured throughout 2019 by an unfavorable impact from changes in FX, in addition to the impact of the divestitures of certain businesses we completed within the year, most notably within our retirement solutions business, as we continue to shift our portfolio towards our highest growth and return opportunities. Second, we delivered substantial operational improvement with operating income growth of 12%, an operating margin expansion of 250 basis points to a record 27.5% margin. We delivered 169 million or 150 basis points of incremental restructuring savings for the full year, reflecting approximately 100 basis points of core margin improvement. I would note this includes the absorption of significant investments to support long-term growth as we continue to deliver client value in the core, shift the portfolio to higher growth and higher margin areas, and innovate at scale to unlock net new markets. And we expect to continue to invest heavily in 2020, in some of our most attractive opportunities. We translated strong operational performance into double-digit EPS growth of 12%, overcoming a headwind from FX translation and a higher effective tax rate within the year compared to the prior year period. FX rates continued to have an unfavorable impact on results in the fourth quarter, due primarily to a stronger U.S. dollar. which has cumulatively resulted in a significant net unfavorable impact of approximately 23 cents for the full year 2019, or a $68 million unfavorable impact on operating income. If currency were to remain stable at today's rates, we would expect an unfavorable impact of approximately 6 cents per share for the full year 2020, with 5 cents of unfavorable impact, or approximately 15 million of operating income, expected in the first quarter of 2020 due to a stronger US dollar versus the euro. Regarding our restructuring program, I'm pleased to report that all charges related to the program have been incurred and the program is now closed. We delivered 529 million of annualized savings in 2019 and now expect to deliver 580 million of annualized savings in 2020, reflecting an increase of 45 million from our last estimate of 535 million. I would note that incremental savings expected in 2020 will be spread throughout the year and reported as part of overall operational improvement. The total program reflects a cash investment of $1,485 million and is expected to deliver a return on investment of 39% before any reinvestment. There are approximately $200 million of remaining cash outlays related to the program, of which $180 million are expected to be incurred in 2020. before declining substantially thereafter. Beyond the formal restructuring program, we will continue to identify efficiencies, drive improved productivity, and enable growth of the firm as we unlock additional operating leverage through our Aon Business Services single operating model. Aon Business Services, our platform to deliver operations, technology, and vendor management across the firm, capitalizes on the benefits of scale and drives operational and client service excellence. As an example, earlier this year, I provided insight into our efforts within Aon Business Services to move to a single CRM platform called Aon Connect, which standardizes our client-facing sales process and creates a more holistic view of how to best serve clients across our firm. The platform also provides Aon colleagues with a more comprehensive view of each client's account, including information on existing relationships and insights in the client discovery process. which allows us to improve our pipeline and jeopardy processes. As we've ramped up usage of AonConnect throughout 2019, our sales pipeline values have increased materially. In some businesses, our pipeline increased 30% year-over-year in Q4. Having a robust sales platform integrated into the business is contributing to increased win rates and penetration across solution lines with existing clients. In 2019, usage of the platform was directly correlated to record new business wins in the US. This is an example of how a business platform within Aon Business Services, combining technology with best practices, is supporting our Aon United growth strategy through enabling long-term growth and improved operating leverage. Looking to 2020 and beyond, ongoing productivity improvements, accelerating revenue growth, and a portfolio mix shift to higher margin businesses are expected to drive continued long-term margin expansion, noting that we've delivered 70 to 80 basis points of operating margin improvement on average per year over the last decade. Lastly, free cash flow increased by $164 million, or 11%, to $1.61 billion, primarily reflecting strong operational performance. We achieved our target double-digit annual growth despite approximately $130 million of net cash outflows related to certain litigation settlements that will create a tailwind for 2020. 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 significantly in 2020 and 2021. Declining uses of cash for restructuring CapEx and pension collectively are expected to free up over $455 million of free cash flow by the end of 2021, as shown on page 24 of our presentation. This adds significant upside to our base of approximately $1.61 billion of free cash flow in 2019, prior to any operating income growth or working capital improvements. Together, these inputs give us confidence in our ability to deliver double-digit annual growth in free cash flow over the long term. We have the opportunity for substantial incremental debt capacity while maintaining our current leverage ratios as restructuring expenses are now complete and pension liability continues to improve. This provides significant financial flexibility over the coming years to further invest in value creation or return capital to shareholders. We're diligent about maximizing ROIC and make all capital allocation decisions on this basis. This is highlighted by the $2 billion of share purchase in 2019, which remains our 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 190 basis point increase year over year to 23.5%, driven by operating income growth and a reduction in capital. I would note that 23.5% ROIC is the highest the firm has had in its history. In summary, full-year results reflect strong performance on all four key metrics, driven by our A&United strategy. We continue to accelerate organic growth, delivered record operating margin, and achieved double-digit EPS and free cash flow, all while making significant investments to improve the growth profile of the firm. We returned nearly 2.4 billion shareholders through share of purchase and dividends in 2019. This success provides momentum as we head into 2020 and supports our expectation of continued long-term shareholder value creation. With that, I'll turn the call over to the operator and we'd be delighted to take your questions.