Aon PLC

Good morning and thank you for holding. Welcome to AON PLC's third quarter 2023 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 or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our third quarter 2023 results, as well as having been posted on our website. It is now my pleasure to turn the call over to Gray Key, CEO of Aon PLC.

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. As we begin the call today, we'd like to take a moment to reflect on the ongoing conflict in Israel and Gaza. We condemn violence anywhere it occurs in the world and remain highly concerned about all in harm's way. The safety and well-being of our colleagues and their families is always our top priority. And our team is in constant contact with our leaders in Israel to ensure our colleagues, their families, and our clients have our full support. As we reflect on the quarter, we want to start with a huge thank you to our Aon colleagues around the world for all they do every day to support each other and to support our clients. Turning to financial performance, strong results in the quarter that contribute to year-to-date progress against our key financial metrics. Organic revenue growth of 6% in the quarter was highlighted by double-digit growth in reinsurance solutions and health solutions. Year-to-date, 7% organic revenue growth and ongoing operational improvement have contributed to 80 basis points of adjusted operating margin expansion and 10% adjusted operating income growth, a strong performance. In our solution line, Reinsurance Solutions delivered another very strong quarter of 11% organic revenue growth with strong growth across Tree, FAC, and our strategy and technology group. In addition to delivering a strong quarter, our team is already helping clients prepare for the 2024 renewals. Health Solutions also delivered another very strong quarter with 10% organic revenue growth as our team continued to drive strong new and renewal business. we see ongoing focus from clients to address underlying trends impacting their workforce and healthcare costs, such as medical and wage inflation, population health, focus on well-being, and overall talent engagement. Within wealth solutions, organic growth of 4% reflected strength in retirement as our team continues to help clients with pension risk transfer and regulatory change. Finally, commercial risk organic revenue growth of 4% reflected strong renewals in net new business. with strength internationally in EMEA and the Pacific. However, overall organic revenue growth was negatively impacted by the external M&A and IPO markets, as we communicated previously. Today, we're also excited to announce actions to go further, faster on A.N. United, and we will describe our plan and how our restructuring program will accelerate key elements of our strategy. As always, our actions are driven by client need. For our clients, the difficult reality of the current world is evident everywhere. as they face increasing challenges understanding, measuring, and dealing with risk. Our forthcoming global risk management survey details this trend with input from over 3,000 public and private clients of all sizes across geographies and industries. Trade, technology, weather, and workforce stability are central forces in today's risk landscape. And while each of these forces are individually impacting risk exposures, their increasing connectivity is compounding complexity and presenting new challenges to business leaders. Responding to our clients' increasing and evolving demand to help protect and build their business, we are advancing a series of actions to further accelerate our Aon United strategy. These actions, taken over the next three years, will deliver outcomes that directly address client needs and demand. Specifically, we will improve the quality and availability of analytic tools available to clients, substantially improve their service experience, and expand the quality and scope of solutions we bring to them. This work will put our clients in a much stronger position to make better decisions to support their companies. We will accomplish this by delivering on three commitments over the next three years. Internally, we call this the three by three plan. The three commitments include first, leveraging our risk capital and human capital structure and capability to unlock new integrated solutions across our core business, but also address new requirements and client demand. Second, embedding the Aon client leadership model across our enterprise clients in large and middle market segments to further strengthen and expand our client relationships. And third, accelerating the Aon business services plan to set a new standard for service delivery and next generation analytic tools. The benefits of this plan accrue to our colleagues, our clients, and our shareholders. Colleagues win with greater capability to serve clients. Today, our team is exceptional in their client leadership focus and impact, And this work provides them with next generation tools and capability to serve clients and to meet increasing client demand. Clients win with better solutions and better service. This work resets client service to a higher standard and provides analytic tools and solutions required to meet demand. And investors win through our greater client relevance, continuing margin improvement, and sustained double-digit free cash flow growth. And while we could have achieved these benefits over time, We have instead decided to act now and accelerate a proven strategy. Let me describe how our team came to this conclusion. The last 10 plus years have demonstrated that a more connected firm is a more capable firm, and that connecting Aon isn't done in concept. It's accomplished through meaningful structural change, which must be embraced and led by colleagues. It is cultural and only viable as a defining part of our DNA. And even though we remain on the journey with plenty of distance to travel and opportunity ahead to improve, We have made progress, and the results have been meaningful for clients in terms of innovation and support, for colleagues in the form of excitement and engagement currently at an all-time high, and for shareholders measured by sustainable value creation, including a 30.8% full-year 2022 operating margin, compound free cash flow growth of 13% a year from 2010 to 2022, and return on invested capital year-end 2022 of 30.6%. However, Two observations give us conviction that going further faster is a requirement. The first is increasing client demand. And the second is our execution competence. Based on our proven track record, the three by three action plan we have defined, and the diligent work already underway. Accelerating our plans requires greater upfront investment. And as announced in our press release, we will execute this through a $900 million restructuring program focused on two areas. First, is on accelerating our Aon Business Services plan by focusing on standardizing operations, integrating operating platforms, and driving product innovation. And the second is on workforce planning to align skills and capability required to deliver on the digital-first opportunity embedded in Aon Business Services, as well as workforce changes to strengthen our client-serving capability and risk capital and human capital. This investment will also drive $350 million of cumulative annual run rate savings by year-end 2026 which Krista will describe in more detail. Overall, our team is very excited about the opportunity to accelerate our plans to strengthen client leadership and fortunate that we have the opportunity and option to take this step as a direct result of the work of our colleagues. We continue to expect to drive mid-single-digit or greater organic revenue growth over the course of 2023 and the long term. We further expect these savings will contribute to ongoing annual margin expansion. While the program will impact cash flow in the near term, Over the long term, we expect to continue to deliver double-digit free cash flow growth driven by operating income and working capital improvements. In summary, our strong year-to-date operational performance, including 7% organic revenue growth, 80 basis points of adjusted operating margin expansion, and 10% adjusted operating income growth, demonstrates strong momentum against our A&United strategy and creates the opportunity for us to double down on our strategic commitments around risk capital, human capital, our client leadership model, and Aon Business Services. These steps will enable us to continue to address evolving client demand, improve colleague outcomes, and continue our track record of long-term shareholder value creation. Now I'd like to turn the call over to Krista for her thoughts on our financial results and long-term outlook. Krista?

Thanks so much, Greg, and good morning, everyone. As Greg highlighted, we delivered strong operating results in the third quarter and year-to-date. Through the first nine months of the year, we translated 7% organic revenue growth into 80 basis points of adjusted margin expansion and 10% adjusted operating income growth. These results position us very well to continue driving results in 2023 and over the long term. We look forward to building on this momentum as we head into the last quarter of the year. As I reflect on our performance year to date, as Greg noted, organic revenue growth was 6% in Q3 and 7% year to date. We continue to expect mid-single digital greater organic revenue growth for the full year 2023 and over the long term. I would also note that reported revenue growth of 10% in Q3 includes a favorable impact from changes in FX of 2%, primarily driven by a weaker U.S. dollar versus most currencies compared to the prior year period. Reported revenue growth of 7% year-to-date includes an unfavorable impact from changes in FX 1%, primarily driven by a stronger US dollar versus most currencies compared to the prior year period. I'd also highlight fiduciary investment income, which is not included in organic revenue growth, with $80 million in Q3 and $196 million year-to-date, or 3% of total revenue in Q3 and 2% of total revenue year-to-date. Moving to operating performance, we delivered strong operational improvement through the first nine months of the year with adjusted operating margins of 30.8%. an increase of 80 basis points driven by revenue growth, efficiency from their own business services, overcoming expense growth, including investment in colleagues and technology to drive long-term growth. We translated double-digit adjusted operating income growth into adjusted EPS growth of 15% in Q3 and 8% year-to-date. As noted in our earnings materials, FX had an unfavorable impact of approximately one cent per share in Q3 and an unfavorable impact of $0.20 per share year-to-date. If currency remains stable at today's rates, we would expect a favorable impact of $0.03 per share in the fourth quarter, totaling an unfavorable impact of $0.17 per share for before the year 2023. I'd also note the change in other non-operating expense had a $0.15 per share or 7% unfavorable impact in Q3 and a $0.59 per share or 6% unfavorable impact year-to-date. This reflects an unfavorable impact from an increase in non-cash net periodic pension expense, as well as balance sheet FX remeasurement in the current period, and a gale on sale of businesses in the prior year period. Turning to free cash flow. Cash flow from operations decreased $3 million year over year, reflecting double-digit operating income growth, offset in part by higher cash tax payments, as we've mentioned previously, and a negative impact to working capital in the third quarter caused by temporary invoicing delays associated with the implementation of a new system. Free cash flow decreased 4% to approximately 2 billion, primarily driven by a $77 million increase in CapEx. CapEx was elevated in the first nine months of the year compared to the prior year period, as we executed a number of technology projects to drive long-term growth. I'd note CapEx could be lumpy quarter to quarter, And we expect CapEx to moderate in the fourth quarter for total CapEx investment of 220 to 250 million in 2023. As we've said before, we manage CapEx like all of our investments on a disciplined ROIC basis. And we expect it to grow as a business going forward. Now let me share more details about our Accelerating Aon United program. As Greg highlighted, we are doubling down on three strategic commitments. including accelerating Aon Business Services, which in turn enables us to unlock advances in risk capital and human capital, and our Aon client leadership strategy. Together, these commitments will drive more value for clients, colleagues, and shareholders. The investment to accelerate our three-year Aon Business Services operating model focuses on the same three areas we've mentioned previously. We see proven benefit and will now accelerate. Number one, standardized operations. Number two, integrating operating platforms. And number three, increasing product innovation and development. We've already made considerable progress in standardizing our operations, but we see significant opportunity, both within and across our solution lines. The work we're doing to standardize operations will drive integrated service delivery platforms, which provides additional opportunities to standardize how we do business. And standard operations combined with integrated platforms enables more effective new product development and innovation at scale. By accelerating standardization across the portfolio and establishing fewer more integrated platforms, we'll be able to deliver more analytical tools to colleagues and clients across the entire portfolio. With this underlying infrastructure in place, we'll be able to leverage advances in AI and machine learning to further accelerate the product development cycle and unlock new efficiencies across the portfolio. Let me provide a bit more financial detail about the strategic investments. We expect total annual in-year savings of $350 million to be achieved in 2026, contributing to ongoing sustainable long-term margin expansion. I'd note we expect savings to ramp over time, with annual in-year savings expected to be $100 million in 2024, $250 million in 2025, and $350 million in 2026. We do not expect material savings or impacts to cash flow in 2023. Cash restructuring charges of $900 million reflect a savings ratio of 2.6 times and are largely for technology costs and workforce optimizations. I'd note you can think of the $900 million cash restructuring charge as less than 10% of underlying free cash flow over the next three years, and the $350 million of savings as a 4% cost takeout relative to our cost base of approximately $9 billion. We also expect an additional $100 million of non-cash charges largely related to asset and lease impairments. We do not expect significant incremental capex associated with the program. We expect capex will grow in line with the business in the future from our guidance of $220 to $250 million in 2023. In the third quarter of 2023, we incurred $6 million of restructuring charges and will communicate charges and savings going forward each quarter. Contemplating the program, as we look forward, we continue to expect mid-single-digit or greater organic revenue growth for the full year 2023 and over the long term. We expect program savings will contribute to ongoing sustainable long-term margin expansion and expect to deliver margin expansion in 2023, 2024, and over the long term. As we've noted previously, over the last 12 years, we've delivered 1,120 basis points of margin expansion, or about 90 basis points a year on average. Our outlook for free cash flow remains strong. We expect to deliver high single-digit free cash flow in 2023, I'd note this guidance contemplates the impact from restructuring on free cash flow in Q4, though we do not expect restructuring to have a material impact on cash flow this year. While free cash flow will be reduced in the near term by restructuring, we expect to return to our trajectory of double-digit free cash flow growth over the long term, driven by operating income growth and ongoing working capital improvements. As we've said previously, as we look at the opportunity in our business services and across our client-facing capability, We know that delivering this strategy will result in long-term progress against our key financial metrics, organic revenue growth, margin expansion, and free cash flow growth. Now turning to capital allocation. Given our strong outlook for free cash flow, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation. We believe we're significantly undervalued in the market today, highlighted by nearly 2 billion of share repurchase year-to-date. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Our M&A pipeline continues to be focused on our global priority areas that will bring scalable solutions to clients' growing and evolving challenges. We'll continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis. Heading 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 and expect to add incremental debt as EBITDA grows over the long term while maintaining a strong investment-grade credit profile. In summary, our strong financial results in the quarter and year-to-date reflect strong operational performance driven by our Aon United strategy and our Aon Business Services platform. We see an opportunity to accelerate the next stage of our Aon United strategy and expect this investment will contribute to sustainable long-term top and bottom line growth and ongoing shareholder value creation. With that, I'll turn the call back over to the operator, and we'd be delighted to take your questions.