CENTENE Earningcall Transcript Of Q2 of 2024


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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

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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.

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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

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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.

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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

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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

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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

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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

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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

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Questions & Answers:



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