Aon PLC

Good morning and thank you for holding. Welcome to AonPLC's second quarter 2020 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 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 2012 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.

Thanks very much and good morning, everyone. Welcome to our second quarter conference call. I'm joined virtually by Krista Davies, our CFO, and Eric Anderson, our president. As in previous quarters, we posted a detailed financial presentation on our website. To begin, I want to thank our global team for their extraordinary leadership in responding to the ongoing challenges presented by COVID-19. Even as the vast majority of our workforce continue to work remotely, Their innovation, connectivity, and engagement in support of our clients and each other is truly exceptional. And we see that engagement in college feedback, most recently in the near 90% approval rating of a response to the pandemic. Consistent with that sentiment, college retention is up across the organization. Further, our firm's response to more recent and fundamental issues of social justice and inclusion have been resolute and inspiring. Our global team is committed to structural change that is meaningful and lasting, change that will make us a better and more inclusive firm. We view progress on this front as central to our future and are taking action, fully reflecting this priority. Turning to our second quarter results, for Aon overall, organic revenue declined 1%, an outcome that demonstrates great work by our team and resilience of our business in the face of unprecedented challenges in the global economy. In particular, I'd like to highlight 9% organic revenue growth in reinsurance solutions driven by net new business generation and treating and double digit growth in facultative placements. These results demonstrate the team's seamless transition to the new working environment and their focus on meeting evolving client needs. Within commercial risk, 1% organic revenue growth is driven by strong retention across most major geographies and particular strength in core property and casualty, partially offset by impact in more discretionary areas of the portfolio, such as transactional liability, construction, and project work. Retirement solutions declined 1% in organic revenue, reflecting solid growth in investments, stability in retirement, and pressure in the more discretionary aspects of our business, especially human capital. Two areas of particular challenge for the quarter were health solutions and data analytics services. We expect the short-term headwinds impacting results in both areas will reverse over time. And health solutions, which declined 18% in the quarter, two issues were evident. First, pressure in both core and more discretionary areas of our business, primarily driven by a decline in employment levels related to COVID-19 and the timing of certain revenue. And second, a one-time adjustment representing approximately 5% of the decline, which was identified with the implementation of a new system. This will not repeat in future periods. Overall, our performance in health solutions reflects the pressure of the COVID-19 challenge. but also highlights the long-term importance and priority of this solution line for our clients. In data analytic services, which declined 8%, results were driven primarily by an expected decline in our travel and events practice. We expect this to bounce back strongly when the economy returns to a more normal performance level. In terms of overall organic revenue expectations for Q3 and Q4, the outlook is obviously uncertain. If macroeconomic conditions persist, we expect to see ongoing firm-wide revenues pressures similar to what we observed in Q2. From an operating standpoint, we delivered strong results, including 240 basis points of operating margin expansion, 5% EPS growth, and exceptionally strong free cash flow of $1.1 billion through June, up $875 million from the first half of last year. It's important to highlight that while this performance reinforces confidence in our UN United strategy in any economic environment, We do see ongoing macroeconomic pressures from trends in GDP growth, asset values, and employment, among others. We continue to prepare for a broad range of economic scenarios, but we believe the probabilities of absolute worst-case scenarios assessed in early March have diminished. This reduced probability is what gave us the confidence to restore and repay our temporary salary reductions for colleagues with a bonus on what was held around. In this time of adversity on so many fronts, our colleagues are continuing to find innovative ways to bring A&United solutions to pressing client needs. For example, one client, a facilities management and energy services company, has been facing substantial challenge related to the current economic conditions. Colleagues from commercial risk, data analytics, and human capital came together to collectively help this company navigate short-term headwinds while also strengthening their operational efficiency and overall resilience. One of their biggest challenges was the cost of operating and maintaining their fleet. Our team designed a new solution for risk management and talent assessment designed to reduce fuel and insurance costs while enhancing driver safety, an outcome that solves for our clients' top priorities. The issues faced by clients today demonstrate that our economy is unprepared for complex and interconnected challenges fully demonstrated by the COVID-19 pandemic. Looking forward, there are other long-tail risks on the horizon. As climate changes, population ages, and the wealth gap continues to widen, volatility will increase. Our global risk survey highlights that of the top 10 risks our clients face, only one is fully insured, four are partially insured, and five are not insured at all. The mandate is clear. We must innovate faster to provide answers to these growing areas of client demand. For Aon, our path forward to increase innovation and support clients is clear. Our Ann United Brew Plant provides a proven roadmap, and the combination with Willis Tarr's Watson will substantially accelerate progress. Together, we'll be better for our clients on day one, driven by the complementary nature of our core businesses across solution lines and geographies, and we'll be better in the future, driven by a shared commitment to analytics and increased ability to unlock new sources of value for our clients. We've been saying for some time that the world is becoming more volatile, economically, demographically, geopolitically. And the events of the last hundred days only underscore that reality. They also raise the stakes for an united mission and the goal of bringing the best of our firm to clients. At a time when our clients need us most, the combination with Willis-Starrs Watson further strengthens our client serving capability and puts us in a position to best address their unmet needs. Those that they turn to us for today and the emerging needs best met by the next generation professional services firm that we're bringing together. In summary, We delivered strong operational results in the quarter and remain well positioned to manage through and accelerate out of these challenging times. Despite the pandemic, we're becoming a more capable organization and one that will be further advanced in combination with Willis Towers Watson. With that, I'll turn the call over to Krista for further financial review. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg mentioned, we delivered a solid operational performance in both the quarter and year-to-date. Despite significant macroeconomic challenges, demonstrating the resiliency of our business and the strength of our Aon United strategy in any economic environment. The steps we've taken to proactively and conservatively manage discretionary expenses and liquidity have enabled us to maintain financial stability and flexibility. This conservatism makes us resilient through these challenging times and positions us to come out stronger. We remain committed to deliver significant shareholder value over the long term, which we believe will be accelerated by our combination with Willis Towers Watson. As I discuss our results today, I would note that while we manage our business on a full year basis and typically focus on year-to-date numbers, my commentary today is somewhat more focused on the quarter, especially given differences in the external environment in Q1 and Q2 and how that impacted our decisions, results, and outlook. Our second quarter results reflect a strong performance in challenging economic conditions. Organic revenue declined by 1%. with 9% organic revenue growth in reinsurance and 1% organic revenue growth in commercial risk solutions. As I described last quarter, our business has strong fundamentals, with roughly 80% BIN core and 20% relatively more discretionary. As expected, we did see larger and more immediate impacts on the more discretionary portions of our business, which contributed to organic revenue declines in retirement solutions, health solutions, and data analytics services. I would also note that reported revenue was pressured by FX as well as lower fiduciary investment income as a result of lower interest rates globally. As I look towards the rest of the year, as Greg mentioned, we remain confident in the underlying resilience of our business. However, given continued macroeconomic uncertainty, we are not providing specific financial guidance at this time. In terms of organic revenue expectations for Q3 and Q4, the outlook is obviously uncertain. If current macroeconomic conditions persist, we would expect to see ongoing firm-wide revenue pressures similar to what we observed in Q2. Moving to operational performance. For the first half of 2020, we delivered solid operating improvements with 7% OI growth, operating margin expansion of 230 basis points, and EPS growth of 9%. I would note that while operational improvement in the first quarter includes strong organic revenue growth, improvement in the second quarter includes the temporary reduction of discretionary expenses, including reduced travel and events, which does not reflect sustainable core operating margin expansion. As Greg mentioned, we're still preparing for a broad range of outcomes. However, we do see a decreased likelihood of worst-case scenarios. While operating margins have improved 230 basis points for the first half of the year, due in part to the preemptive and temporary expense actions we took to decrease underlying expenses as compared to the prior year, we expect operating expenses for the second half of 2020 to be more consistent with underlying expenses in the second half of 2019, excluding restructuring charges. This represents a difference from Q2. as we return to more normalized levels of spend in the face of reduced likelihood of worst-case macroeconomic scenarios. We expect that the second half of the year will include very targeted investment in priority areas while maintaining strong operational discipline. Finally, as noted in our earnings material, FX was an unfavorable impact of approximately one cent in the second quarter and five cents year-to-date. At today's rates, we'd expect a $0.02 per share unfavorable impact in each of Q3 and Q4. Overall, we're confident the investments we've made in our Aon Business Services operating platform enable us to continue to manage costs in the near term and to unlock significant operational leverage over the long term. Aon Business Services enables our ability to distribute content and capabilities across the firm to drive long-term growth and free cash flows. Turning to cash and capital allocation, free cash flow increased $875 million to $1.1 billion, driven by strong operational improvement, the impact of temporary salary reductions, near-term actions we've taken to improve working capital, and a decrease in restructuring cash outlays. I would note that the impact of temporary salary reductions were reflected in the income statement in Q2, but the withheld amount will be paid and impact cash flow in Q3. As the world moved to working remotely, our ability to centrally manage invoicing, cash collections, and vendor payments has been essential, and this environment has served to accelerate the transition to digital, which helps ensure we're able to focus on driving free cash flow growth. We remain very confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. We further improved liquidity in the second quarter, issuing a billion dollars of debt of which $600 million was used to pay down term debt coming due in September 2020. We ended Q2 with $100 million lower total debt compared to the end of Q1. Historically, we've looked to increase debt as EBITDA grows while maintaining leverage ratios. However, due to current macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future. We are diligent about maximizing return on invested capital, and make capital allocation decisions through this framework. While we pause certain discretionary uses of cash in the first quarter, we are considering resuming limited share buyback in the second half of the year, subject to macroeconomic conditions, business performance, and the timing restrictions related to our combination with Willis Towers Watson. We are likely to maintain higher than normal levels of cash for the near future, given macroeconomic uncertainty. As we've said before, we are committed to maintaining our investment-grade credit ratings following the combination with Willis Towers Watson and continue to make progress against our key milestones. We filed our joint definitive proxy earlier this month and look forward to the vote for both companies' shareholders on August 26th. We expect the deal to close in the first half of 2021, as we've previously communicated. In summary, our business is stable and resilient in the face of macroeconomic challenges. The historic steps we've taken to drive our Aon United strategy, and especially our Aon Business Services operational platform, are more important now than ever. Our disciplined approach to return on invested capital 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.