AON-PLC Earningcall Transcript Of Q2 of 2024
Edmund Reese -- Chief Financial Officer Thank you, Greg, and good morning, everyone. I'm incredibly excited to be here. First, I want to start by thanking my Aon colleagues for their very warm welcome. I've connected with literally hundreds of colleagues over the last month. And it's been great to meet everyone and really experience the energy and the enthusiasm of Aon, and the commitment to deliver on our plans, which is most exciting for me is seeing firsthand the investment in the corresponding growth opportunity for our clients, colleagues and shareholders as we deliver on a 3x3 plan over 2024, '25, and '26. And I have to say that with the 3x3 fully in place in '26 and the building momentum, equally compelling is the significant opportunity that will deliver value creation beyond '26 and over the long term. Finally, the financial model is strong, and the company is performing and well positioned to continue to deliver long-term double-digit free cash flow growth. I also want to add that I'm looking forward to meeting investors and the sell-side in talking through how we will deliver on our guidance and continue to allocate and invest their capital with discipline, focused on high-return investments and capital return, and, of course, reporting our third quarter results and fielding questions at that time. So Greg, back to you. Gregory C. Case -- Chief Executive Officer Thanks, Edmund, and we're very excited to have you here. Before speaking to results in detail, we want to highlight a great example of the power of a united firm to deliver solutions where they're needed greatly. In Ukraine, until last month, there was no functioning low risk insurance market because carriers couldn't get reinsurance coverage due to standing war exclusions. Working with the U.S. and Ukranian governments, we created a solution that provides insurance and reinsurance capital to Ukrainian insurers, which has already brought in $350 million in new capital, encompassing a first-of-its-kind structure that facilitates new investments and economic recovery. This structure enables rebuilding and economic activity during the war and much more rapid investment in reconstruction and resilience longer term. This product couldn't have been created without global connectivity, expertise, data and analytics, on-the-ground relationships, and local market knowledge and our proven ability to match risk and capital across private and public sectors. This innovative structure helps protect and grow the economy and helps the people of Ukraine recover and rebuild. It's a compelling example of the positive impact that our industry can have in addressing major challenges in the global economy. Turning now to current quarter results. In Q2, our team delivered 6% total organic revenue growth with all solution lines at 6% or greater, and both Aon and NFP delivering mid-single-digit organic revenue growth. For clarification and transparency, the 6% organic performance for Aon is 6% without NFP. With this organic growth in addition of NFP, we delivered 18% total revenue growth, 19% adjusted operating income growth and margins of 27.4%, an increase of 10 basis points year-over-year and 60 basis points from our combined 2023 margin baseline, including only two months of NFP. Year-to-date, we delivered 5% organic revenue growth, 11% total revenue growth, and adjusted operating margin expansion, contributing to 12% adjusted operating income growth and 7% growth in earnings per share. Turning to our solution lines. In commercial risk, organic revenue growth of 6% reflects double-digit growth in EMEA and LatAm, with strong growth in North America, driven by net new business growth and strong retention. On average, we saw growth in exposures and generally flat pricing, resulting in moderately positive market impact. And while we're starting to see the turnaround in external capital markets, our M&A services business had a modest positive impact in the quarter, although the available pipeline remains strong and growing. For NFP, growth for the two months was consistent with our North American business. Overall, a strong result. Finally, we're making great progress on priority talent acquisitions with continuing focus in this area and expect these new colleagues to contribute to further growth over time. Turning to reinsurance. 7% organic revenue growth in Q2 reflects strong growth in T&E, with strength internationally in LatAm, EMEA, and APAC. We saw increased capacity in the U.S. property cat space, which provides ongoing opportunity for our clients to increase and optimize their coverage supported by our team's leading expertise, data analytics, and insight. Health solutions delivered 6% organic revenue growth with high single-digit growth globally in core health and benefits and real strength in consumer-facing and executive benefits, driven by new business wins. The market environment reflects an increased healthcare cost trend and positive impact from enrollment levels. NFP's contribution was consistent with Aon's performance, an impressive result in the midst of the closing. And finally, wealth solutions organic revenue growth was 9%, an outstanding result, reflecting ongoing strength in pension derisking, and core retirement. NFP also delivered strong growth, driven by asset inflows and market performance. Overall, we're pleased with both the top and bottom line growth in the quarter as we continue to deliver against our 3x3 plan on all fronts. Further, after only two months of NFP, early progress is fully on track, are ahead of expectations. Four key growth and value creation opportunities highlight this strong start. First, on independent and connected, outlining how we're bringing NFP into Aon. Our teams are coming together with a shared vision and client-first mindset, and they're building connectivity across Aon and NFP. Our early close is increasing momentum as we work together to deliver wins and bring the best from Aon and NFP to our clients. Second, top line growth. We're seeing strong organic revenue growth from NFP. And though early, we're on track to deliver our revenue synergy commitments, noting that we modeled zero net impact in 2024, NFP's strong client and colleague retention. Third, NFP's M&A engine is operating exceptionally well and the pipeline remains very strong. We've completed 14 deals so far in 2024 at attractive multiples weighted toward commercial risk and health. And we're finding that our independent and connected value proposition is distinctive and highly attractive. And fourth, bottom line growth. We're on track to fully deliver in line with guidance on all aspects of the combination through efficiencies, cost synergies, and free cash flow impact leveraging operational best practices from Aon business services. In summary, our Q2 and year-to-date results demonstrate progress against our financial guidance and our 3x3 plan, which will deliver superior content and capability across risk capital and human capital through Aon client leadership, ensuring we bring relevant client solutions all the time, all enabled through Aon business services. This performance will deliver compelling long-term value creation for clients, colleagues, and shareholders. Before I turn to Christa for one final time, I want to take a moment to thank her again for a great partnership, leadership and friendship, and for our inspiring and invaluable commitment to building our firm. Christa, over to you for your thoughts on our financial results and long-term outlook. Christa Davies -- Executive Vice President, Global Finance and Chief Financial Officer Thank you so much, Greg, and thank you so much for the partnership. My time at Aon was and will continue to be the highlight of my career. I remain incredibly excited about the value creation potential we have ahead of us through the 3x3 plan. I'm thrilled to welcome Edmund, and I look forward to serving as an advisor to the team to support and ensure a smooth transition. Turning now to the quarter. As Greg highlighted, we delivered exceptional results in the second quarter, with 6% organic revenue growth highlighted by 7% in wealth and 7% in -- sorry, 9% in wealth and 7% in reinsurance. Our overall organic revenue growth does not include the impact -- does include the impact of NFP, beginning from April '25 when we closed the acquisition. So we only had two months performance. NFP's Q2 performance was in line with the business case as it delivered mid-single-digit organic revenue growth. NFP also contributed to the 18% total revenue growth in the quarter, which translated into a 19% adjusted operating income growth, margins of 27.4% and 6% adjusted per share earnings-per-share growth. These results position us well to drive progress against all elements of the 3x3 plan, driving results in 2024 and over the long term. As I reflect on our performance for the first half of the year, as Greg noted, organic revenue growth was 6% in Q2, driven by net new business generation and ongoing strong retention. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2024 and over the long term. As Greg described, we're making excellent progress with NFP. We continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. While it's early, we're on track to achieve deal synergies with no net impact in 2024 from cost and revenue synergies and positive impact in 2025 and 2026. This is exactly in line with the guidance we gave when we announced the deal. It's also worth noting that voluntary colleague attrition at NFP is down year-over-year. Moving to operating performance. We delivered strong operational improvement with adjusted operating margins of 33.8% in the first half, an increase of 20 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon business services and restructuring savings, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. If we consider the combined historic margin profile of Aon and NFP, including two-thirds of NFP's results from the second quarter of 2023, adjusted operating margins expanded 60 basis points in Q2 and 80 basis points year-to-date, which is how we think about ongoing margin expansion. We're making meaningful progress on our Aon business services strategy, including through our restructuring program, which helps to accelerate our 3x3 plan and contributes to margin expansion through net savings. We continue to streamline and improve operational processes, moving work to the best locations, and enhancing colleague and client experience with powerful new tools such as our property, casualty, D&O, cyber, and health risk analyzers. Restructuring savings in the second quarter were $25 million, resulting in $45 million of restructuring savings year-to-date and 60 basis points of contribution to adjusted operating margin year-to-date. Restructuring actions completed so far are expected to generate $95 million of savings in 2024. We expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to accelerate our plans for Aon business services and our business. As we think about adjusted operating margins moving forward, we continue to expect to drive adjusted operating margin expansion over the full year on a combined firm basis, and the long term through ongoing revenue growth, portfolio mix shift to higher revenue growth, higher margin areas of the portfolio, and efficiencies from Aon business services. As we previously communicated, we think that the right baseline from which to measure 2025 adjusted operating margin growth is 30.6%. Calculated is 31.6% from 2023, less 100-basis-point drag from NFP for the period from the April '25 close through the end of 2024. We also expect fiduciary investment income to be relatively flat year-over-year based on current interest rate expectations. So we expect the tailwind we've seen in the first half of the year will be reduced in the back half. So we remain committed to driving full year adjusted operating margin expansion in 2024 and over the long term against this adjusted baseline of 30.6%. Turning to EPS. Adjusted EPS grew 6% in Q2 and 7% year-to-date, reflecting double-digit adjusted operating income growth and ongoing share buyback, partially offset by higher interest expense, the issuance of 19 million shares to fund the acquisition of NFP and a higher tax rate. Turning now to free cash flow. We generated $721 million of free cash flow year-to-date, reflecting strong operating income growth and lower capex, offset by payments related to NFP transaction and integration charges, legal settlement expense, restructuring, and higher cash tax payments as we've previously communicated. As we look forward, our free cash flow outlook remains strong based on our strong expected operating income growth and a $500 million long-term opportunity in working capital. We've communicated that in the near term, free cash flow will be impacted by restructuring, higher interest expense, and NFP deal and integration costs. In 2025 and 2026, NFP is expected to add $300 million and $600 million of incremental free cash flow, respectively, contributing to our overall expectation of long-term double-digit free cash flow growth. We allocate capital based on ROIC and long-term value creation, which we've done through time through core business investment, share buyback, and M&A. As we look historically, we have a successful track record of balancing organic investment, acquisitions, divestitures, and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. Given the very strong long-term free cash flow outlook for the firm, we expect share repurchase will remain our highest ROIC opportunity. We completed $500 million of buyback in the first half and continue to expect share buyback to be substantial at $1 billion or more in 2024 based on our current M&A expectations for the rest of the year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Regarding M&A. Our M&A pipeline continues to be focused on our high priority areas, including the mid-market and attractive geographies that will bring scalable solutions to our clients' growing and evolving challenges. Known that we closed an acquisition in France this quarter, bringing new specialist capabilities and health and benefits into Aon. We are also continuing to see success from NFP's impressive M&A engine. Since the beginning of 2024, NFP has completed 14 acquisitions at attractive multiples weighted toward commercial risk and health, representing $36 million in annualized revenue. As we previously communicated, we expect NFP to do M&A comprised of $45 million to $60 million of EBITDA per year, and they are on track for the full year 2024. We look forward to building on their established track record and executing against this strong pipeline to drive future growth in the space and value creation within our ROIC framework. Going forward, we'll continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis, contemplating buyback, M&A, and delevering. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we expect our credit ratios to be elevated over the next 12 to 18 months, as we bring our leverage ratios back in line with levels consistent with our credit profile, driven by substantial free cash flow generation, and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within our current ratings. In summary, our strong financial results in the quarter and year-to-date position us well to continue driving progress against all elements of our 3x3 plan and driving results in 2024 and over the long term. We look forward to building on this momentum. With that, I'll turn the call back over to the operator, and Greg, Eric and I'd be delighted to take your questions. Operator Questions & Answers: |
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