Aon PLC

Good morning and thank you for holding. Welcome to ANPLC's first quarter 2020 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 any 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 2020 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, Helena, and good morning, everyone. Welcome to our first quarter conference call. I'm joined virtually by Krista Davies, our CFO, and Eric Anderson, our president. Like previous quarters, we posted a detailed financial presentation on our website. At this time of unprecedented humanitarian and economic challenge, I want to start by thanking our 50,000 Aon colleagues around the world for their remarkable dedication, resilience, and impressive response to this crisis. It's inspiring to see our colleagues tirelessly go into extraordinary lengths to support each other and connect the firm, embracing Aon United. Our global team is fully committed to bringing the best of our firm to clients at a time when they need our help more than ever. As we all know, we're experiencing the humanitarian tragedy at a scale that's difficult to comprehend, and the economic consequences are likely to play out for months or even years to come. The global economy is forecast to shrink by 3% in 2020, and unemployment is increasing around the world. Against that backdrop, I'd like to talk about how we're responding as a firm and how we expect to emerge stronger and even more capable. Our colleagues are the firms. and we're committed to their safety and well-being. In response to local government guidelines, we've canceled travel and events, and now have over 98% of our colleagues working remotely. And to ensure our colleagues stay healthy, well, and productive, we made available to all colleagues virtual learning tools to optimize remote work, as well as multiple tools and services around telemedicine and well-being. We've also increased communication and connectivity across the firm, and our leadership teams and our COVID-19 task force accelerate best practice sharing, coordinate our responses, and anticipate future impacts to ensure we can continue to deliver solutions for clients. Further, our Eon Business Services operational platform ensures that we can work remotely with secure access to all applications with no loss of productivity, enabling our team full access to all resources required to meet client needs. And finally, we're committed that no colleague will lose their job as a result of COVID-19. Turning to Q1 results, our team delivered a strong quarter with positive performance across each of our key metrics, despite some early disruption from the impacts of COVID-19 at the end of the quarter. Our results include 5% organic revenue growth, with particular strength from reinsurance solutions and health solutions, substantial operating margin expansion of 200 basis points to 35.7%, and 11% year-over-year earnings per share growth. In the quarter, we also took substantial steps to bring the full force of our firm to help clients respond to the pandemic and resulting economic stress while also delivering on business-as-usual commitments. And we did this while managing the transition to working remotely, which gave us even more opportunity for innovation across the organization. To coordinate our pandemic response for clients, our COVID-19 Task Force brings together experts from across the firm to develop, deliver, and share solutions from around the world both for our own firm and for clients. In one example, as the pandemic quickly escalated in Italy, our commercial risk and health solutions colleagues partnered with carriers to address a need for COVID-19 coverage for our clients' employees. This unique and tailor-made solution provides employees with allowances for hospitalization and recovery expenses in the event they are diagnosed with COVID-19. In addition, the cover provides post-hospitalization assistance, including domestic assistance, childcare, and more. The solution is now available in Italy and Spain, and we're working to scale this further across the globe. A great example of our Aon United team innovating on behalf of clients during a very critical time. In another instance, in New York, our human capital team developed an analytic tool to assess the pandemic risk to a community's workforce in order to help speed recovery. The tool they built uses Department of Labor data and Aon analytics to analyze occupational risk by job and location based on role characteristics like proximity and exposure. The team took that model and layered on medical forecasts from a health solutions team to map potential impacts by geography over time. The resulting tool helps communities plan reopening strategies while minimizing risk and prioritizing antibody tests for the highest risk and most mission-critical workers. Currently, we're using our model in partnership with community groups in New York, but we anticipate rolling it out to clients and communities around the world. And these are just two examples of the many ways in which we're helping clients respond to the new demands of these challenging times. Christo will elaborate more on our financial results and outlook. However, I would highlight that our business is globally diversified and highly resilient, given its largely recurring and non-discretionary business. And we operate in over 120 countries in virtually every sector and business segment. It's also important to reinforce that given our strong historic focus on cash flow, we are fortunate to have an exceptionally strong understanding of revenue, cost, and cash. Within our single P&L, we have the ability to assess cash and other performance by business, by geography, by solution line, and by individual offering. This capability has been in place and been further refined every year for well over a decade. With this embedded capability for our business, we can compare the current economic environment to the recession of 2008-2009. We have considered a number of macroeconomic scenarios and their potential impacts to our business. At this unique point in time, no one can predict the future. However, we will continue to act from a position of strength on areas that we can control and that protect our colleagues and our clients. While we'll always hope for the best, we've taken steps to prepare for virtually any economic scenario. For Q1, we did see some early impacts of COVID-19, especially in more discretionary areas within retirement and data analytics. Overall, the impact we've seen on our revenue and cash flow through April is modest. Moving forward, we're taking steps in three areas. Our top priority is to proactively support colleagues, followed by our priorities to manage expenses and conserve liquidity. First, we're reducing non-compensation expenses through an effort which began in early March. Second, we've paused share buyback and M&A, although we're committed to maintaining our dividend. And third, we've committed that no colleague will lose their job as a result of COVID-19. In order to protect all 50,000 colleagues, we're asking them to support the firm with a temporary compensation reduction. and we're planning for roughly 70% of colleagues to take a reduction of up to 20% of salary, which will be implemented in accordance with local practices, while the remaining roughly 30% of our firm will see no reduction. This step is intended to protect 50,000 colleagues and ensures that we are able to continue to deliver a full capability of Aon at a time when clients need us most. Taking these preemptive steps now from a position of strength ensures we're able to continue to invest in increasing our relevance to clients as we continue to look to address their unmet needs. One outcome of the current trauma is that we're seeing is a heightened interest by clients in understanding where other areas of major potential risk might exist. Specifically, we see concern in areas like cyber, climate change, and the health wealth gap, which may create future debilitating events. Up to now, these risks have only been addressed in a very limited way. For example, for one client, COVID-19 highlighted that when catastrophes happen, Whether epidemics or natural catastrophes, a very key aspect of successful recovery is access to liquidity and capital to match exposures available immediately. To create the cover and fulfill the required speed of resolution, our team designed an innovative parametric insurance solution to address earthquake exposure. The program quickly provides our client with a liquidity infusion in the event of a quake and gives them broad discretion on how to use these funds. This product covers our client and the exposure to their employees who may require financial assistance, ensuring the resilience and responsiveness in a future crisis. Driving faster innovation for clients is a key outcome of our strategy and one that we can accelerate through our plan combination with Willis Towers Watson. As our world becomes more complex, clients need the unique capabilities that this combination will create. Our two firms have been on similar paths, focused on bringing the best solutions from across their respective organizations to clients. As a combined firm, we'll be able to accelerate progress and become even more relevant to our clients with faster innovation and better solutions. In summary, our global team has been truly remarkable in their response to the COVID-19 crisis, supporting each other and our clients. In addition, they delivered a strong first quarter of progress, even as the early effects of the crisis were being experienced. We believe our Ann United Growth Strategy is positioned as very well to emerge from the current crisis an even stronger firm positioned for long-term growth. With that overview, I'd like to turn the call over to Krista for her thoughts on our financial results and outlook. Krista?

Thanks so much, Greg, and good morning, everyone. As I talk about our results, I'll also provide some thoughts on how the macroeconomic environment impacts our outlook and the steps we're taking to proactively and conservatively manage our business and our balance sheet to ensure we retain stability and flexibility and position our firm to continue to deliver shareholder value over the long term. Our business has strong fundamentals. Our revenue base is diversified across industry, geography, and solution line. Roughly 80% is non-discretionary and has a significant portion that renews every year with 95% retention rates on average. However, given uncertainty around duration and magnitude of COVID-19 and the resulting economic downturn and its impact to our clients and our firm, for the near term, we're withdrawing our financial guidance of mid-single digital greater organic revenue growth and double-digit free cash flow growth. We are also taking prudent steps to preemptively reduce expenses and discretionary uses of cash in order to maintain the strength of our balance sheet and optimize financial flexibility in the event of any future declines in revenue. We are taking these actions from a position of strength and know they will position us to continue to protect our colleagues, execute our Air United strategy, and focus on our key financial metrics in the short and long term. In Q1, we delivered strong operational and financial performance to start the year. We achieved 5% organic revenue growth that translated into solid operational improvement, overcoming an unfavorable near-term impact from foreign currency translation. As I reflect on each of our key financial metrics, first, we delivered organic revenue growth of 5% with strength in reinsurance solutions and health solutions, offset by some early disruption from the impacts of COVID-19 in our retirement and data analytics businesses. I would also note that reported revenue was pressured by FX and the ongoing impact of divestitures from efforts we've described in prior quarters to reshape our portfolio to higher growth and higher margin areas. Second, we delivered solid operational improvement with operating income growth of 8%, operating margin expansion of 200 basis points, and 11% earnings per share growth, driven by strong organic revenue growth and ongoing productivity improvements. and expense discipline from Aon Business Services. As we noted in our earnings material, FX was an unfavorable impact of approximately 3 cents in the quarter. At today's rates, we would expect a 3 cent per share unfavorable impact in Q2, 4 cent per share unfavorable impact in Q3, and 6 cent per share unfavorable impact in Q4. Third, free cash flow was $279 million in the quarter, And I would note Q1 is our seasonally smallest quarter for cash flow, due primarily to incentive compensation payments. The $279 million this year is an increase from last year's $17 million, which was negatively impacted by approximately $85 million of net cash payments related to legacy litigation. The increase in free cash flow was driven by operating income growth, as well as near-term actions we've taken to delay certain expenses. we did see an increase in receivables, primarily driven by the strong 9% organic revenue growth in reinsurance solutions. As I look towards the rest of the year, we have confidence in the underlying resilience of our business. And while much of our business is non-discretionary, it is impacted by long-term macroeconomic factors like GDP growth, employment, and property values, amongst other things. While we are not providing revenue guidance, I wanted to provide a bit more insight into our business that may be helpful in understanding how we may be impacted in various economic scenarios. We have a very stable revenue base with 80% of our revenues in core, highly recurring businesses with retention rates of 95% on average. In terms of our business, 80% of our business is core. Core revenues tend to be highly recurring and non-discretionary, and include things like property and casualty or directors and officers insurance placements, cyber remediation, treaty reinsurance, required actuarial work on pension programs, and health and benefits brokerage. Many of these services are regulated, required, or necessary cost of doing business. 20% of our business is relatively more discretionary. These more discretionary revenues include project work like risk consulting, transaction liability, human capital consulting, travel and event cover, and health and benefits consulting. Much of this book also recurs and renews every year, though some of it is likely to be deferred or not renewed. In an economic downturn, we expect to see a larger and more immediate impact in the more discretionary portion of our book. We've already started to see some early impacts of COVID-19 in Q1, as I mentioned, and given the overall global economic environment, we expect this could be more negatively impacted going forward. Within our solution lines, commercial risk, reinsurance, and health include the largest core components, while retirement solutions and data analytics services have the largest components that are more discretionary. More positively, as Greg mentioned, we see significant opportunities in areas of our business around innovative solutions to address the current crisis, for instance, in balance sheet and liquidity solutions for clients. Overall, we're confident in our strong fundamental business. We did not see material impacts to revenue or collections in Q1 or in April. However, given global economic uncertainty, we're taking steps to manage costs prudently and defer some spend and investment in order to proactively get in front of any negative impacts. Our business is highly resilient, and our historic investment in Aon Business Services gives us the ability to make quicker, smarter decisions across the firm to manage expenses. The steps we've taken with our Aon Business Services platform to drive operational efficiency, not only help us manage costs and improve margins, but also help us continue to manage cash flow and working capital, which further ensures our stability and flexibility. For instance, in Q1, 82% of our outside services spend was managed centrally, allowing us to manage purchase decisions, ensure we derive maximum supplier value, and optimize working capital. This allows us to take steps now to defer preemptively and reduce costs. I would note that these expense reductions will contribute to near-term margin improvement. However, some, like travel and entertainment, do not reflect sustainable core operating margin expansion. Overall, our Aon Business Services operating platform enables us to operate effectively while we continue to run the firm on cash and prudently manage our cash and liquidity position. In the past, we have consistently focused and delivered on key financial metrics of organic revenue growth, operating margins, free cash flow, and return on invested capital. In today's economic environment, the context is different, but our strategy and tactics to drive performance of our firm remain the same. Our historic focus on maximizing the translation of revenue into the highest level of free cash flow serves us well in this environment, as we are focused on preserving capital to enable future growth. These steps and others we've taken to drive operating income growth make progress on working capital, and reduce structural uses of cash are perhaps more essential now in this economic environment than ever before. For instance, we have daily cash flow forecasting across the lines of the cash flow statement. Because we've run the firm based on free cash flow for well over 10 years now, this gives us the ability to compare our free cash flow to previous years, and in particular to the financial crisis of 2008-9. This gives us the ability to analyze and take steps to address any challenges by country, by business, by line of the cash flow statement, and to look out for early markers or trends, for instance, from areas that may have been more hard hit by COVID-19. I'd also highlight that structural uses of cash from pension, restructuring, and CapEx collectively are expected to free up approximately $300 million of cash in 2020 compared to 2019. While we are maintaining our dividend, we have paused our discretionary uses of cash for share buyback and M&A. We're very confident in the strength of our balance sheet and how we manage liquidity. We do not take underwriting risk and we're committed to our investment-grade credit ratings. We manage liquidity risk through a well-laddered debt maturity profile with no more than $750 million of term debt coming due in any given year. We have $1.65 billion in committed credit from our $900 million credit facility due in 2022 and our $750 million credit facility due in 2023. We have not had a need to draw on our committed credit, despite our seasonally lowest period of cash flow. We also continue to access commercial paper markets for working capital needs in the US and Europe. We know this prudence makes us resilient now and prepares us to come out stronger. As Greg mentioned, we are committed and excited about our combination with Willis Tiles Watson, and we expect to file our joint preliminary proxy in the coming weeks followed by a joint definitive proxy and shareholder vote, which we expect in Q3. In summary, our colleagues, business, Aon United Strategy, and our Aon Business Services operational platform are strong and equip us well to react to challenging times. The steps we've taken to drive our key financial priorities are more relevant than ever as we manage flexibility and stability in these challenging times. Our disciplined approach to free cash flow and return on invested capital provides stability and 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.