Aon PLC

Good morning and thank you for holding. Welcome to Aon PLC's third quarter 2021 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 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 third quarter 2021 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 third quarter conference call. I'm joined by Krista Davies, our CFO, and Eric Anderson, our president. As in previous quarters, for your reference, we posted a detailed financial presentation on our website. We want to begin by thanking our 50,000 colleagues. 2021 continues to be a remarkable year, and as a result of our colleagues' hard work, dedication, and perseverance, we've delivered outstanding results in Q3 and year-to-date. This performance is an extraordinary accomplishment and a direct result of their efforts, working together as one firm to bring the best of Aon to clients. We're also proud to report that our client feedback continues to be outstanding, as net promoter scores are at a five-year high. Additionally, Aon's colleague engagement is at the highest levels we've seen over the past decade, consistent with top quartile employers. This client feedback and college engagement are directly reflected in our firm's sustained momentum and financial performance. In deep appreciation for all that our colleagues do for our clients and our firm, we were excited to establish in Q3 the A&United Growth Ownership Plan. This unique program rewards every colleague for the stock-based award to share in the current and future success of our firm. And we're thrilled to recognize and support our colleagues in this way. Overall, as we reflect on Q3 in the first nine months of 2021, our momentum defined by client delivery, colleague engagement, and financial results is exceptional. Even more promising is what we see in the opportunity ahead. Our conversations with clients reinforce substantial and growing unmet demand to support them in making better decisions to protect and grow their businesses in an increasingly volatile world. This opportunity to create new markets to serve our clients is the catalyst for our innovation agenda and the source of greater momentum in our business. Focusing on financial performance in Q3, our global team delivered outstanding results across each of our key financial metrics, including 12% organic revenue growth, notably our strongest growth in over a decade for two quarters in a row, driven by mid-single-digit or greater organic revenue growth from every solution line, highlighted by particular strength in health and commercial risk at 16% and 13% respectively, and adjusted EPS growth of 14%. Year-to-date, our 9% organic revenue growth reflects mid-single digital greater organic growth from three over four solution lines. Our AM United strategy is delivering significant momentum in every solution line with net new business generation and ongoing strong retention. We also saw double-digit growth for the second consecutive quarter in the more discretionary portions of our business, such as transaction liability, human capital, and project-related work within commercial wealth solutions and health solutions. We continue to expect mid-single-digit or greater organic revenue growth and margin expansion in the full year 2021, 2022, and over the long term, as we continue to win share in our core business and execute to further expand our total addressable market. As we move forward, we continue to be guided by our and United blueprint to ensure we're operating as a fully integrated global team capable of delivering the best of our firm in every local market. Today, we'd like to highlight how the core tenants of our blueprint drive momentum and deliver greater future opportunity. Specifically how delivering and United is enabling core new business generation and fueling stronger retention. How I am business services is building capability for colleagues and translating to better service for clients. Our ongoing focus on innovation at scale is accelerating the development of new solutions to serve unmet demand. And our commitment to inclusive people leadership has resulted in the highest levels of engagement and retention in over a decade. First, executing Ann United is delivering net new business generation and ongoing strong retention by continuing to engage clients across all their needs. with the entirety of our firm. This strategy has been built over many years and enables extraordinary solutions for clients, resulting in Aon winning more, growing our book of business with new and existing clients, and in turn, delivering exceptional results to shareholders. Second, we've invested heavily in Aon Business Services, or ABS, over the past five years, which now represents the core operating platform that spans the entirety of the firm. ABS centers of excellence have and will continue to grow margins by driving efficiencies across all solution lines. Equally important, ABS capability enables us to improve client service delivery and scale innovation globally much faster, driving higher organic growth. The ABS model is redefining what we're capable of delivering to clients and improving the way we work. Third, we continue to accelerate innovation at scale. Aon is delivering innovative solutions to our clients by helping them navigate new forms of volatility, build resilient workforces, access new forms of capital, and address the underserved through digital solutions, all of which substantially grow our total addressable market. This has been demonstrated, for example, in intellectual property-backed financing, a first-of-its-kind option created and enabled by Aon's IT solutions teams. Given that intellectual property represents 80 plus percent of the value of the S&P 500, we believe the entire IP category has the potential to be a hundred billion market over time. Other categories that represent new addressable markets in the tens of billions include cyber, climate, supply chain, and digital client solutions, led by our exceptional team at Coverall. Fundamentally, this opportunity to serve substantial new addressable markets is driven by client demand. At Aon, we relentlessly focus on the voice of the client, and we're hearing consistent client feedback about the need to make better decisions around long-tail risks. For example, we're currently getting this guidance from the almost 3,500 clients that are currently participating in our regional Aon Insight Series. And it's also being reinforced by two pieces of proprietary research that we recently released. Every two years, Aon conducts our global risk management survey. And the latest report released three days ago was informed by insights from more than 2,300 clients across 16 industries spanning public and private organizations from 60 countries around the world. With more emphasis and reliance on technology, cyber risk topped the list as the number one current and predicted future risk globally, its highest rank since the inception of the survey. The top 10 risks also reflect the impact COVID has had on organizations as they needed to navigate volatility with better and faster decisions. We're seeing organizations shift focus from event-based to impact-based risk assessments, reflecting the shift in mindset following the systemic impact of the pandemic. Aon also recently released results of a survey focused on 800 C-suite leaders and senior executives in the US, EU, UK, and Canada to understand how organizations are preparing for and responding to the current environment. We found that today senior leaders are more astutely risk aware than ever before, but remain confident to take on calculated risks and investments that build resiliency of their companies. As we stated before, the approach to risk strategy has shifted from being generally defensive and risk averse to more opportunistic, taking a holistic, integrated view that they seek solutions to address these challenges. There is great respect for the need to defend their businesses, but that's accompanied by a desire to find solutions that help them win, as the IP financing example highlights. In this environment, we're uniquely positioned to deliver data-driven insights to help our clients make better decisions that grow their businesses. Fourth and finally, we continue to see tremendous impact of our commitment to inclusive people leadership. Voluntary attrition is down substantially versus our 2019 baseline, and our quarterly pulse of colleagues shows that we continue to enjoy all-time high engagement levels. Many examples highlight our talent, focus, and priority, including our commitment to Aon apprenticeship programs and a $30 million investment to create 10,000 new roles in the apprenticeship community. Our investment in talent development, as over 14,000 Aon colleagues around the world have participated in training programs in the last nine months alone, and the announcement of the Aon United Growth Ownership Plan. In summary, our global AOM team delivered the best third quarter results in over a decade. Our AOM United Blueprint, powered by our capability in AOM Business Services, combined with significant investment in new and growing categories for addressable client demand, reinforces the momentum we have today and offer even greater potential over the next few years. The result is clients that are better informed, better advised, and equipped to make better decisions. Now I'd like to turn the call over to Krista for her thoughts on our financial results and our long-term outlook for continued shareholder value creation. Christa?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered continued progress for both the quarter and year-to-date. Through the first nine months of the year, we translated strong organic revenue growth into double-digit adjusted operating income and adjusted earnings per share growth, building on our momentum as we head into the last quarter of the year. As I further reflect on our performance year to date, as Greg noted, organic revenue growth was 12% in the third quarter and 9% year to date, our strongest organic revenue growth in over a decade. We saw strong global macroeconomic conditions in the quarter, though we continue to assess three factors, as we have since the beginning of the pandemic. Those factors are the virus and vaccine rollout, including the potential impacts of new variants, government stimulus, and overall GDP growth. These macroeconomic conditions do impact our clients and various areas of our business. Considering the current outlook for these factors, we continue to expect mid-simple digital greater organic revenue growth for the full year 2021, 2022, and over the long term. I would also note that total reported revenue was up 13% in Q3 and 12% year-to-date, including the favorable impact from changes in FX rates driven by a weaker U.S. dollar versus most currencies. Moving to operating performance. First, I want to speak to the impact of our previously communicated repassioning of expenses as compared to COVID impacted expense in 2020, which I'll describe before any 2021 growth. As we've described, the timing of expenses is changing year over year, such that $65 million of expenses moved into Q3 from Q4. This impact is due to the actions we took and highlighted in 2020 as we reduced discretionary expenses to be prepared for the impacts of COVID-19 and potential macroeconomic distress. In Q3, this repatterning negatively impacted margins by approximately 240 basis points, resulting in Q3 operating margin contraction of 30 basis points. Excluding this impact, margins would have expanded by 210 basis points in Q3 and 240 basis points year to date. A second key factor impacting adjusted margins has been the relative speed of revenue growth and investment. In Q3, excluding the impact of the repatterning, our strong organic revenue growth significantly outpaced expense growth, similar to Q2. We continue to evaluate investments using our return on invested capital framework in the areas of talent, AOM business services, and innovation to enable long-term growth. we expect that these areas of investment will continue to ramp up significantly during Q4. In addition, we anticipate continued resumption of T&E and modest increases in real estate as more colleagues return to the office. Collectively, the headwind from expensory patterning and tailwind from slower investment as compared to revenue growth are the main factors driving 30 basis points of margin contraction in Q3 and 20 basis points of margin expansion year to date. Looking forward, as we've said historically, we expect to deliver four-year margin expansion for 2021 and over the long term. Turning back to the results in the quarter, we translated strong adjusted operating income growth into adjusted EPS growth of 14% in Q3 and 16% year-to-date. As noted in our earnings materials, FX translation was a favorable impact of approximately $0.02 per share in Q3 and $0.24 per share year-to-date. If currency to remain stable at today's rates, we would expect an instant impact in Q4. Excluding the costs associated with the termination of the combination with Willis-Tiles-Watson of related costs, our performance and outlook for free cash flow in 2021 and going forward remains strong. Free cash flow decreased 40% year-to-date to $1.1 billion, as strong revenue growth was offset by the billion-dollar termination fee payment and other related costs. Of the total $1.363 billion of termination fee and other related costs, a pre-tax amount, the billion-dollar termination fee was paid in Q3, and approximately two-thirds of the remaining charges were paid in 2021, with the majority of the balance paid in 2022. We continue to expect to drive free cash flow over the long term, building on our long-term track record of 14% CAGR over the last 10 years, based on operating income growth, working capital improvements, and reduced structural uses of cash enabled by Aon Business Services. As Greg highlighted, Aon Business Services not only drives efficiencies, but also enables revenue opportunities and innovation at scale. As an example, through our integrated vendor management system in the US last year, we were able to ensure that 5% of addressable vendor spend was with diverse suppliers, which is two times higher than the Fortune 500 average. In addition to being a key initiative for Aon as part of our overall ESG strategy, this is also a way we can have an even bigger impact on what we deliver for clients in an Aon United way. In the third quarter, we had an opportunity to engage with a biopharmaceutical client looking to establish a supplier diversity program as part of their broader inclusion and diversity strategy. Given our demonstrated supplier diversity expertise, our global spend management team and human capital colleagues came together to forge a new innovative solution based on this client's emerging need, which included establishing government structure and conducting research on peer and industry norms. Given our outlook for long-term free cash flow growth, we expect share of purchase to continue to remain our highest return on capital opportunity for capital allocation. In the third quarter, we repurchased approximately 4.4 million shares for approximately 1.3 billion. We also expect to continue to invest organically and inorganically in innovative content and capabilities to address unmet client needs. Our M&A pipeline, centered around the four areas that Greg described, is focused on bringing innovative solutions to our clients' biggest challenges, delivered by the connectivity of Aon United. I would also note that on October 1st, we closed the previously announced sale of our Atari Exchange business to Alight. In 2020, the retiree exchange generated 176 million of revenue and it is a predominantly Q4 business. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile. In Q3, we issued a billion dollars of senior notes as we return closer to historical leverage ratios while maintaining our current investment grade credit ratings. Interest expense in the fourth quarter is expected to be approximately 85 million, reflecting our increased debt levels. Over the long term, we expect to return to our past practice of growing debt as EBITDA grows. Further, I'd note that fourth quarter is our seasonally strongest quarter for free cash flow generation, and we intend to allocate this cash to our highest and best uses, based on return on capital, which remains share repurchase. In summary, strong top and bottom line performance for both the quarter and year to date reflect continued progress and momentum as we enter the last quarter of the year. We believe our disciplined approach to return on invested capital combined with expected long term free cash flow growth will unlock substantial shareholder value creation over the long term. With that, I'll turn the call back over to the operator and would be happy to take your question.