Q3 2019 Earnings Call
Good morning, Thank you for holding walk into a and B O C third quarter trends.
This conference call at this time, all purchase it'll be on to listen only mode until the question answer session.
Today's call I would also like to remind all parties that this call is being recorded if anyone has been objection you may disconnect. Your lines at this time. It is important to note that some of the comments in today's call may constitute the church and statements that are forward looking in nature.
Finally, private Securities Reform Act.
95, such statements are subject.
Just curious interest and uncertainties that could cause actual results to differ materially from historical results or those anticipated information concerning risks factors that could cause such differences are describing the press release <unk> third quarter.
As well as having been posted on our website no. It's my pleasure to join the call over to Greg cases field.
Yes.
Please go ahead.
Thanks, very much and good morning, everyone welcome to our third quarter 2019 conference call. Joining me today is our CFO Chris today. These in addition, we ever to co presidents, Eric Anderson or Michael Potter joining discussion help meet our culinary session. What's their front line perspective, a point impact that illustrates the result, we're achieving the clients through our and United gross rather.
Like previous quarters, we posted a detailed financial presentation on our website.
We can focus our time on these quarterly calls to provide you more insight into longer term view for the firm.
First let me start by recognizing the remarkable dedication to my own colleagues around the world.
Our collective efforts continue to strengthen the firm and create long term momentum reflected through strong performance in the third quarter.
We delivered positive results across each of our key financial metrics, including 5% organic revenue growth and as far like organic revenue growth on the year to date and trailing 12 months spaces of 6%, reflecting continued acceleration of our historical trend.
Substantial operating margin expansion of 350 basis points and 11% EPS growth.
Coming FX headwinds in the quarter.
We are driving the continued progress this year with momentum heading into the last quarter 29 team.
And this is a direct reflection of the strategic investments in actions, we continue to take to achieve our potential operating as one United Global professional services firm.
Last quarter, we touched on valuable insights from our global risk management survey highlighted how clients face rolling volatility and complexity in today's evolving world. Nearly every organization industry, an economy are confronting greater challenges than ever before.
And most of these risks are underserved if addressed at all because they're not well understood with less historical experience and use of available data to predict measure or manage these challenges more concerning is that these charges are very likely to grow and intensity over the next few years as emerging risks becomes even more prominent threaten the ability of our class.
Thanks to continue driving growth protecting their assets and developing talent.
Against that backdrop, we're responding with actions that bring a full force of our firm to clients by developing innovative solutions and applying data analytics to better inform and advised them for their future.
This approach is at the core of our and United growth strategy and establishes the commercial foundation upon which we drive innovation deliver expanded client value accelerate the growth of our firm.
Beginning in 2017, what's the divestiture of our outsourcing business. We've taken a series of important steps designed to remix our portfolio to achieve a faster growing higher margin sort of offerings to better reflect expanding needs of our clients.
This approach is best evidenced by the 4.8 billion dollar just disposition of our outsourcing business and the subsequent $1.5 billion reinvestment over the last two years and middle market and back office service innovation.
That reinvestment included the creation of and business services, an important step toward modernizing infrastructure and creating a common technology platform that simplifies repeatable elements of client service and allows colleagues who spend more time on the highest value aspects of their client relationships, while supporting sustainable margin expansion for the firm.
In parallel we took steps to reduce structural barriers that we're going to college from delivering the best of the from the clients, which in 2018 included the shift to a single global brand and the creation of a single Global operating committee.
They did a form four and United since you're making that has accelerated growth in our core business.
Last year, we also created new ventures group.
Which is driven by a team of global leaders the command the capital and supporting infrastructure necessary to function as a growth stage development platform.
This group is developing a portfolio of cutting edge client solutions on topics like intellectual property and public sector partnerships, which further accelerate net new innovation will be up a plants and expands our addressable market.
The on United actions, we've taken at the global level of unified our firm and further strengthen our capabilities, which has proven out by our performance through 2019.
With this momentum we announced the next phase of our and United growth strategy earlier this month.
Not wanting to key components that translate our progress at the global level into how we go to market locally, allowing us to more effectively bring the full force of our global from the clients.
I would describe the first component as delivering and United because it includes a series of steps that will improve sales effectiveness strengthen our segmentation strategy and further increased collaboration across solution lines, all of which means more value creation for clients and further acceleration organic growth.
The second component is about the expansion of our industry, leading Aon business services platform.
And business services has already proven but it helps to capitalize on the benefits of our global scale to deliver world class client service and provide colleagues additional capacity deliver more value to clients.
Which is why we're expanding our and business services footprint and establishing plants service hubs, leveraging technology platforms, and new capabilities to accelerate our ability to deliver the best of the from the clients, while driving further operational excellence and our back and Middle Office services, which will drive greater productivity in our operations and contribute to sustainable margin expansion.
These moves create a common baseline for a on United and the experience of at United in our local geographies, including all the from articulate our value proposition to clients delivers repeatable elements of client service develops or colleagues and measures return on invested capital.
At the end of the day.
All of these steps come back to how we can most effectively bring the best of our firm to clients. So that we can help them improve their operational performance reduced volatility or strengthen their capital position.
Which is why we will continue to take steps to conduct our firm leverage our global scale, and strategically and dust and industry to finding content to amplify the value. We can provide on their behalf and increase our relevance in today's evolving landscape.
For your reference I'd like to highlight one example, our colleagues came together with a real business partner approach to address a client's unique needs to give you an idea of how are in United efforts translate into value at the front line.
A global agricultural from well spacing operational losses due to cash flow volatility throughout the year based on seasonal crop yield.
It could be impacted at any given time by weather related events or other variables outside our control.
We believed we could help this client with Incyte games to eight on analytics that would guide a strategic choice. Our team brought together commercial risk reinsurance and data analytics capabilities than we analyze satellite gathered whether data applied our proprietary catastrophic impact forecasting model and overlay trends with the clients revenue.
Our team was able to correlate patterns that unable to design the parametric trigger solution unique to this clients operational risk.
The result was an innovative tailor made crop risk management program. The pays out automatically once a predetermined triggers reached this is a more efficient and timely approach supporting our clients competitive advantage in maintaining their prices regardless of harvest quality.
They also benefit from cash flow reliability operational capital stability and improve long term business planning.
And that's just one recent success story of how you are responding to unique client demand with action truly made possible by greater colleague collaboration and through commercializing, our proprietary content and data into an opportunity to deliver client value.
But the application is happening across the portfolio as we scale or in the United efforts translated into improved growth profile for the firm as we drive new business generation and creates greater retention and share of existing clients.
Our trend of organic growth as already improved from 3% in 2014 in 2015% to 4% in 2016 in 2017% to 5% 2018 now at 29 to we delivered 6% year to date further we expect strong performance in the fourth quarter, resulting in continued progress for the full year against our.
Our goal of mid single digit organic revenue growth or greater over the long term.
In summary, our clients are demanding.
That may be better informed and better advice to navigate and address the complex and evolving challenges they face.
We continue to build momentum as we strengthened our ability to create value on behalf of clients through investments in industry defining content and capability combined with greater alignment across our firm. While also achieving strong financial results an increase value to our shareholders without overview I'd like to turn the call over Christopher or thoughts on our financial progress year to date and.
Long term outlook for continued shareholder value creation Christa. Thanks, so much Greg and good morning, everyone. As Greg highlighted we continue to take steps to deliver on United which is amplifying our ability to assess clat distinctively and deliver improved financial performance.
We delivered positive performance across each of our key metrics, both wholesale and year to date.
First nine months the is strong organic revenue growth and increased operating leverage have contributed to substantial operational improvement, which is translating into double digit free cash flow growth.
Delivering on restructuring initiatives and funding significant investments across the <unk> that will deliver improved financial performance long time.
As I've said to reflect that outperformance these days.
The growth for its all about them is improving the 6% organic revenue growth year to date and for the trailing 12 month.
I would highlight year to date organic revenue growth acceleration 200 basis points from 4% in 2018% to 6% in 2019 as we deliver on our goal of mid single digit.
Oh, great organic revenue growth over the long term.
Reported revenues being pressured throughout 2019 by an unfavorable impact from changes in FX.
Our disciplined focus on maximizing return on invested capital continues to help shape the portfolio towards the highest growth and return opportunities as highlighted by the divestiture certain businesses and retirement solutions at the end of the second quarter.
Second we continued another quarter of substantial operational improvement, which has contributed to strong estate full month of 12% operating income growth and operating margin expansion of 250 basis points.
Operating income growth and operating margin expansion have improved on a nine month basis compared to result six months.
While the impact from restructuring savings has remained similar.
Acting increased operating leverage across our portfolio.
We are translating strong operational performance into double digit EPS growth of 10% each day's overcoming continued headwinds FX translation.
FX rates continued to have an unfavorable impact and results in the third bolsa due primarily to a stronger us dollar resulting in a significant net unfavorable impact of approximately 20 cents year to date or 58 million dollar impact on operating income.
If currency to remain stable at today's rates, we anticipate an unfavorable impact of four cents or approximately $12 million reduction of operating income in the fourth quarter.
We continue to successfully execute against our restructuring initiatives with 72 million incremental savings in the third quarter.
Our ongoing restructuring initiatives, the driving expense savings near time, but more importantly, they are enabling growth of the funds, we unlock additional operating leverage and business services operating model.
This is services is helping us modernize our construction and create common technology platform, we simplify and standardize repeatable elements is back on middle office processes.
Finding that our colleagues have more times than with clients strengthening our relationships and identifying expanded opportunities rafa.
Looking beyond near term restructuring savings, we expect to drive sustainable operating performance and longtime coal margin expansion annually. Nevertheless, the 70 to 80 basis points operating margin improvement achieved annually over the last decades net of continued reinvestment in growth opportunities.
This is driven by organic growth.
Malia mix shift and ongoing productivity improvements.
Lastly, free cash flow increased by 200 million 25%.
996 million.
We'll go through the first nine months, primarily reflects strong operational performance.
Good night, both the prior and current periods include impacts that largely offset each other in total for a neutral impact year over year growth.
As we think about cash flow generation going forward with focused on maximizing the translation of accelerating revenue growth, it's the highest level of free cash flow.
Yes.
In three years in three ways.
Operating income growth continued progress on working capital initiatives and structural use of cash winding down.
2018 peak year cash usage as shown in our presentation on slide 26.
Declining uses of cash restructuring Capex and pension continue are expected to free up over a 585 million to free cash flow by the end of 2020 .
We continue to have significant upside to a base of more than 1.5 billion to free cash flow in 2018 prior to any operating income growth working capital improvements.
Together these inputs give us confidence in our ability to deliver on our goals double digit growth in free cash flow over the long term.
Further we have the opportunity the incremental debt, while maintaining current investment grade ratings as EBITDA grows restructuring costs wind down and pension liability improved providing significant financial flexibility over the next few years to further invest in value creation return of capital shareholders.
With diligent about maximizing return on capital and make capital allocations decisions through this discipline.
Share repurchase remains the highest return on capital investment today, given our free cash flow evaluation and outlook highlighted by the $1.5 billion share repurchase these days.
In summary, strong top and bottom line performance, both quarterly and year to date continues to reinforce our and United initiatives and strategic decisions.
Building momentum as we entered the law schools of the yet, but more importantly, strengthen the long term growth profile for us.
In addition, our disciplined approach to return on capital combined with our expected significant free cash flow growth and increased as opportunity over the next few years provides financial flexibility to unlock significant shareholder value creation over the long time.
With that ill turn the call back over to the operator, and we'd be happy to take your questions.
Thank you we will now begin the question and answer session. If you will like to ask your question. Please press star followed by the number one on your phone on mute your phone and record your name and company clearly when prompted.
Your name is required to introduce your question you guys have your request Crestar falls bid and number two one moment please for incoming questions.
We have nine questions in queue.
No for Q Whitney our first question comes from David Scheible.
Hi, Jefferies. Your line is now open.
David as you there.
Operator, when we go to the next question will take David up Okay, sorry.
Okay, Oh, one moment speakers.
Sorry for that David sorry that is a Mike is there any credit Suisse. Your line is now open.
Great. Thanks, good morning.
First question on the.
The commercial insurance pricing environment, a number of large corporations have been talking about a fairly significant increases in pricing and our changes in capacity.
Starting and.
April may and persisting.
For Q.
Maybe you can comment on what what are you guys are seeing and if it's helping drive a revenues and margins for Alan.
Yes, Mike from our standpoint, we've talked about this on the call.
Frequently so I really appreciate the question again for us remember pricing really translates into market. In fact, so thats encompassing both rate and insured values and as we've highlighted market impact for us would say down modestly positive impact to our results.
Maybe three observations when you think about an overall something around half of our world is operates completely independent and any insurance pricing cycle and even within our risk business a third of it.
As fee based and when you think about our overall approach and what we do.
Our world is really centered around using data analytics capability to really help clients at an individual levels focus on their circumstances and together they get the best results. So you'll see us modify programs individual covers based on market conditions. They will fundamentally will we will help them change behavior based on market reaction or more market position so for.
US overall modestly positive impact results and our view is.
Highly client centric approach is one of the reasons we've got.
New business generation of retention levels at an all time high.
And a follow up to that is just the is for the one sorry thats fee basis, historically us that's grown that add up low single digit pace or how should investors think about how the the fee based business.
Revenues.
Sensitivity.
So Mike we don't break out literally sort of growth at that level. Our view as we come back there's really not a differences as about how we add value to clients.
Any and consistent with what we described by a on United behavior. This is how we bring global capability to our clients in our backyard and when we do it how we described the values. So literally the work. We're doing includes how we described the buyer to clients if we create value.
We should we should we should get paid for the value. If we don't would you highlight that as well. So we're incredibly transparent and our view is we're increasing our capability to both deliver value articulate value and get paid for value.
Okay, Great and lastly up probably.
Yes.
No interest rates have declined fairly measure please.
Year to date and stock market in the U.S. has done well.
Any early views on if.
If things don't change much from from here will.
The pension expenses or free cash flows be.
Materially impacted for for next year.
Yeah, I mean, it's a great question, Mike what I would say is as as we think about our pension unfunded liability. We do a an annual measurement at 12 31, each year the balance sheet in terms of out in front of pension liability Q3 doesn't reflect changes in interest rates all asset valuations.
We've certainly done little with an eye pensions over the last 10 years to freeze the plans and close them and de risked them to massively reduce volatility. So our results in pension cash contributions in 2020, you can see as shown on the chart on page 26 shows decreasing.
Substantially and we feel really good about that outlook.
The other impacts interest rates out debt is big.
And so we don't see material impacts from interest rate.
Thank you.
Thank you already next question comes from David stable from Jefferies. Your line is now open.
Hi, There can you guys gave me this time, we had begun David welcome back whats under good like them all again okay.
I'll give maybe I again, Mike and Erika chance to chime in on this but I'm curious as you guys are going to market with your clients.
And then it sounds like you're increasingly doing more customized solutions to help them with their specific set of risks.
I'd imagine that probably takes more effort human capital resources, and so forth I'm wondering to what extent or how do you get compensated for that does that wind up being a higher margin sell for you guys. Ultimately because you are providing a customized solution set for that client that they could maybe not otherwise find in the market. Maybe just what does that look like going through the sales cycle.
When you step back dividends think about sort of what really happens when we bring to best of our from an essence, we've got the beauty of this is we have the capability. We have the capacity our colleagues have the expertise and our clients have increase you need. The question is how do you connect the dots and actually make that happens and so we have more and more accounts situations where we're.
Spending time with the client understanding broad based needs our colleagues have greater awareness are they on and what they're trying to get accomplished.
And what we're trying to get accomplished and so they actually then bring these other colleagues and now they address these issues in ways, we haven't addressed before and the beauty of this is it not only that creates new areas, but it also very much sort of.
Dresses retention on existing business and what we're doing from an existing clients standpoint. So the approach, we're taking very much sort of leverage as assets and capabilities that we've got.
Clients respond very very positively to it.
Dave It's Mike maybe I'd give you. An example of how we help decrease the perception of volatility climate change there was impacting our clients for real estate portfolio. It's a really really I find very interesting example of how we're growing in expanding relationships with clients. So in this situation in a large real estate client who is an investor.
Sure.
The team is doing a terrific job around commercial risk, but the team in this case just step back and said what is the real issue challenging this clients business and one of the issues. They were facing was an overhang of how climate change and other catastrophic risk over the long term would impact the real estate portfolio and our team would have done this in the past.
They brought together colleagues around the world. They brought together colleagues in commercial risk reinsurance, our data and analytics team and said could we actually come together with the experiences the capabilities. We have the data analytics and could we actually put together a risk portfolio diagnostic to basically identifying quantified the impact that climate change in others.
This would have on this portfolio real estate over the long term.
We were able to share that insight with the client they were able to take it back to their investors and actually show faxon scenarios and thereby reduce the perception of risk.
And for US this was a whole new relationship with the client it grew our relationship with us with them and also solidified us as a real partner to help their business for the long term. So that's just an example for us that we get really excited about in terms of what we can do for clients like maybe David's Eric maybe I'll just pick up on another wouldn't because you asked about how we bring the team.
Together.
We use an integrated client planning process that maybe I'll just use. Another example to run through we had a financial institution clients that had been a long term clients, but during that process uncovered that they were dissatisfied with the product that they were selling through their own distribution agents.
And we're looking to find ways to either revamp either the pricing the underwriting the distribution the claims process the whole sort of process of offering the product.
I asked us for our thoughts and we were able to bring our insurance consulting capability, our data and analytics as well as our experience and knowledge of the marketplace. They also asked some other advisory firms for their opinion.
Our ability to tie all of it together sort of enabled us to proceed with the client ultimately for the client is the outcomes.
It is straightforward right they end up with a revamped the process that drives more revenue for them reduces the volatility of the product itself, but for us that actually gives us a much deeper insight into the client it was already a great client so.
Really it was bringing the new capability into an existing market as opposed to going out to cyber or government de risking or other areas that we've talked about this is about expanding capabilities within an existing relationship using that integrated client planning process that I.
I referred to earlier today, we won real important point here too. This is your point your question about the sales cycle. This is an elongated sales cycle at all in fact is very different than that we're bringing existing capability and matching a decline. Indeed, we're in fact, we're creating new sales cycles. So it's the same sales cycle in the traditional products, our traditional areas and a new sales cycle.
So that we serve another clients, but not backlog. So the example, Eric described sort of was literally an expansion so that the sales cycle in what we expanded into was no longer than ever before before and it just creates frankly tremendous effort, even if the clients as in the end I don't really think we need you on it we've engaged in a conversation which changes there per se.
Section of who we are and how we think about them not actually impacts retention in our core. We're currently doing them. In addition to sort of open up new this as a new opportunities.
Got it thanks for the color on that two quick questions for Christa heard your FX comments about the fourth quarter I'm wondering can you provide us some perspectives to help out with modeling for how the FX looks to impact the PLM 2020, and then free cash flow, obviously rebounded really nicely up 25% year to date was there anything unusual in the third quarter that helps provide.
Maybe a onetime benefit or pull forward and then looking to the fourth quarter, you expect free cash flow to be up year over year are there any other factors, there timing or whatnot that might cause it to.
To decline.
Great. Okay. So on FX I guess, what I would say is we.
We didn't give guidance for Q4 that it's minus full sense, it's really drew to a stronger us dollar.
In general, we prefer or we get U.S. dollar across add level portfolio, which translating local revenue in local expenses into U.S. fellows.
If the struggling U.S. dollar continues.
We would expect some FX headwind in 2020, but we haven't given data.
Oh, and then on your FX on your free cash flow question sorry.
Free cash flow, it's very strong muses 825 cents.
Year to date over last year, we have given guidance on free cash of the we expect double digits for the foreseeable future.
So we would expect very strong free cash flow growth for the full year 2019 that what was.
Restructuring.
Cash charges that time data Q3 into Q4, if you think about the whole program will finish.
Restructuring in.
2019, and so you'll see those cash charges come through in the fourth quarter, but we're really excited about free cash flow for the full year.
2019, and most excited about free cash lets 2020 intends a double digit free cash flow growth plus the declining use of cash.
Uh huh.
Yes, thanks much.
Thank you very much and our next question comes from at least Greenspan Wells Fargo. Your line is now open.
Good morning.
First question earlier. This week, you guys announced on Allegion on shirt group initiative.
Just trying to get a little bit of additional color. There just in terms of how you what kind of size your business in that region, all kind of space today and.
Long term growth aspiration is there and is that is expanding on that type of regional size account offering.
Pendant upon on any M&A activity within the U.S.
This is just another example is we look across sort of the.
Global portfolio and its back to kind of as we connect the dots on opportunities. We saw this is a great opportunity to to help a sector that we know very very well.
And it really isn't about the size, it's really about what we can bring to the table. So if you think about walking into this client and helping them with there a lot of the things on protecting our balance sheet, which we know very very well think about how we can help them on retirement on cells on the broader based sort of things to.
Candidly, helping improve their operating performance strengthen the balance sheet reduce volatility we bring all all aon to bear on that mission, we just love that approach in that sector and frankly, we've seen it happened around the world. This is another example of we've seen the movie before how do we translate what we've seen sort of into client impacted and effective way and this is just another example.
That we're very excited about it our leaders are rallied around the world. The do it and it really is a set of leaders across solution mines were going to.
During the full force a day on to this to this sector and we're real excited about it.
Okay. Thanks, and then my.
Second question just in terms of margin. So I'm glad you then 50 basis points on this quarter odd you still get around on 210 or so if we.
Kind of adjust for the savings in the quarter I guess, what I'm trying to get a sense.
John what's kind of the sustainable.
The level of margin improvement here and I know you guys kind of continuously point to that 70 to 80 that you've historically seen but it seems that what you're doing with and business services should lead to greater operating leverage. So should we think about a third quarter level being more sustainable relative to the margin point you've seen in the past.
It's a great question Kelly and what we would say is year to date margin expansion is 250 basis points of which 110 basis points is coal margin expansion. If you take out the restructuring savings Youre, absolutely right that Aon business services is providing us with incremental operating leverage is driving sustained productivity improvements well beyond the race.
Texturing savings into 2020 and beyond.
One simple example of that is the fact that we've actually automated over 500000 hours.
This year.
Through automation, which drives ongoing productivity. So you can kind of see the improved operating leverage will fall out we reinvest in additional growth opportunities. We do think that the right guidance going forward in terms of margin expansion is the 70 to 80 basis points.
That is in line with that Ted near historical average so we feel really good about.
Okay. Thanks, and then my last question in terms of reinsurance.
Well, it's still pretty good what we did see a little bit of a slow down sequentially was there anything in terms of maybe that didnt new business flow I guess did you see any kind of change in trend within your reinsurance, but the bottom the second to that third quarter in either new business or retention.
I might have impacted on the sequential slowdown inorganic.
This is Eric maybe I'll take a stab at it.
No we have not seen a slowdown on the composition of the book is different in the second half of the year. The first half is pretty heavily loaded towards the treaty business. The second half as much more facultative and and capital markets and yes that business is a little bit.
Little lumpy based on how and when the clients need the cover.
And so I would say we are continuing to be pretty strong in that space. It's a double digit growth business for us, especially the fact business.
We continue to see that going forward and like everything at least we look at these things year over year. When you think about year to date progress against your day last year continue momentum and building the business absolutely fantastic, 9% year to date, So continued progress in momentum.
Okay. Thank you.
Thank you. Our next question comes from Paul Newsome of Sandler O'neill. Your line is now open.
No I was.
Let the divestitures doing.
We should think about.
The impact on revenue and margins Perspectively fourth quarter, maybe 2020 from the divestiture piece.
You do.
Yes, it's a great question pull on what I would say is as we think about managing the portfolio by doing it on return on capital basis and maximizing.
Our investment in high revenue growth high margin businesses, and then obviously divesting law revenue growth low margin businesses.
As we think about modeling going forward.
You should see a similar impact in retirement due to the divestiture of that business in Q2 for the next three courses so that'll sort of flow through over the course of the year similar to what you saw over time it this quarter.
Great. That's all you. Thank you very much.
Thank you already next question comes from Chad aggregate outside of it.
I think equities your line is now open.
Thanks, a couple of questions if I could firstly on the takes from analytics Division.
It looks a little bit lipid revenues the organic revenue growth decelerating over the past four quarters I was wondering if we should read a lot faster whether it's just about has much more of a skew towards Q4 and not started to come through again this year.
Yes ill step back John as you think about sort of growth overall I just lesson for all the solution lines really it really isn't about any single quarter or even in solution and we really look at growth across the board. So we're really looking at sort of Aon results overall.
And the perspective, how that progresses year to year. So the lots of things happened within individual solutions lines and if you sort of look at that perspective that bucket together, you see really tremendous progress, 5%, an 86% year to date in 2019 by the way Thats versus 4% year to date in 2018 to up 200 basis points and really across the portfolio all solution.
Lines, including data analytics are sort of up.
Year to date, including data analytics I may say, when you think about year to date. So for US we wouldnt focus on any one particular quarter or the other it really is about a year to date progress our year over year progress, we feel very good about where we are against that.
Okay. Thanks, and then just on the divested revenues following up on Paul's question, just it looks slightly.
Amount until the revenue divestments I Fiveish has just on the $100 million.
From a cash flow generated from divestments. It looks like it's only about $43 million. What do we can you give him what can you tell them what those businesses world on what sort of margin, though generating.
Yeah, I mean, what we can say John is that all revenue growth low margin business. So it fits with our focus on improving.
That improving margin and focus on return on capital, we havent given specifics on the amounts of cash receipts, we feel really good about the overall management of the portfolio, including those of you just bear in mind as you think about sort of where we are this is probably one it's not even year over year. It really is over multiple years as you think about where we are thinking about our ACA.
They should investors strategy over the last number of years, we are absolutely maniacal, we focused on improving return on invested capital. So it's not surprising the cash flow characteristics of the business, we divest aren't nearly as good as the ones we have.
The ones, we buy and so we're going to be lumpy year over year as we think about the right acquisitions, we're going to bring in content and capability we can scale.
That will drive topline growth overtime.
But it really in this case is even more over a period of years that will drive topline growth as you've seen over the last decade. So hopefully that's helpful. We'll continue to think about the divestitures. When they are helpful to the our IC in the overall portfolio and we'll continue to make acquisitions with great capacity to do so when they make sense as well.
Okay. Thanks.
Thank you. Our next question comes from Yaron Kinar of Goldman Sachs. Your line is now open.
Morning.
First question just following up on leases margin question. So just over 200 basis points of core margin improvement in the quarter hundred or so basis points of improvement year to date.
It's the above run rate improvement also a function of timing and magnitude of investments in the platform.
It's really about the operating leverage we're getting through Aon business services, which is accelerating.
Overall margin expansion year to date, if you look at the nine month operating margin expansion versus the six months, we've accelerated and the restructuring savings has remained about the same.
Portion of that and the coal launch an expansion has expanded and so we're getting real operating leverage in the platform Robin growth.
From a yes from a leverage in ABS.
We expect that to continue through calendar year 2019 and into 2021. The other things I'd say is is operating leverage is allowing us to.
Greater investment in some whole new markets and capacity, Greg you might want to talk about that flows.
As Christa described very very well. This is you think about our margin expanding margin our capability to do so you've seen us over a 10 year period due to 780 basis points has been described already you ask yourself. The question. What's the probability we can continue to do that we would we would suggest that this quarter and this year to date performance as that probability is.
No not going down and that's because of the operational leverage Christa described in addition to that it's really important for us to convey how much we are investing in future growth for our business.
This is a number of areas you thinking about what we've done.
In intellectual property, what we've done.
The entire area of kind of public partnerships, what we've done in small client what we've done.
Tyerman business in the health business.
All these things are sort of net new things we've never done before you seen examples we talked about the world Bank cap on last time.
There's a whole series of things we've done a great net new truly not just expanding share what's already out there, but net new things that have never been looked out before seem in cyber. So theres a level of investment that is quite high we're very excited about in terms of future long term growth.
But we're also very committed to making sure we can continue to improve margins.
Year over year, and as Christa described and business services as a way to do that.
But it also has lots of different attributes in terms of what we're doing the muscle is really really powerful and we're going to keep working on it.
Greg maybe I'd share, it's Mike maybe that churn example.
How and business services change in what we do and use our health care Center of excellence, that's do it that's delivering better outcomes as well as getting efficiency and productivity gains and the short description of this is we've basically moved our 600 actuaries into a center of excellence model, we're leveraging best practices, we're bringing common tools to there.
And we're driving productivity gains and we mentioned the past, we built and analytical suite of tools and architect and this group of actuaries is using that as well we talked about how our colleagues in the fuel are using our actuaries are using as well, where we're going from manual calculations using assumptions do AI driven suite of tools, where we can do hundred.
Simultaneously and generate a half a million scenarios for our clients. So we can actually worked with decline to pick the best outcome.
In addition, you bring the group together and center of Excellence and we've improved pure reviews through automated workflows. So we get all the productivity gains you expect in a center of excellence. We're most excited about the impact we're having with clients really appreciate that example bike. So you can run rate as we entered its sort of here. This is you took a step back to your question fundamentally our ability.
To improve margin. The reason, we're so excited about and business services is it creates operating leverage operating leverage in the business, it's meaningful in real but no kidding, Mike said 600, actuaries, we had them all around the firm we now bringing them together they are doing things, we didnt hadn't done before instead of giving the client three or four options on the outside were given him a continuum of 500 sort of iterations.
500000, I'm sorry to be corrective on my colleagues 500000 iterations of what we can do all better than three by the way.
And and and it changes fundamentally our ability to serve clients. So.
Builds operating leverage and improves service and that's that's the that's the equation we're pulling together when we described the on United Thats, One big aspect of it.
Thats very helpful. I appreciate that.
My second question around intellectual property, so Greg you've talked about perhaps even just mentioned it now that.
Theres, an underserved potential for or underserved client needs that that have create significant potential for for the market.
Can you the team maybe help us trying to size this market opportunity and IP and then also discuss the specific actions, particularly year to date that hey on has taken to position itself to capitalize on this opportunity.
To start with literally the fundamental opportunity that potential demand and it's no anyway, you look at it is incredibly compelling.
Just step back pick you asked about 20080, how much of the value. The S&P 500 was attributable to intangible assets and you know, it's 80% to 85% think about if that means 20 trillion blood is amazingly huge numbers sort of a trivial intangible assets. There was probably in the low twentys in the seventies. It's now 80 is mid Eightys since we essentially.
That's where the value is coming from this is back to the idea of net new what are we doing that makes a difference for clients net new that doesn't exist and the protection of intellectual property is something we've never done before.
That's why again, we brought in a tremendous amount of capability.
Some with strong freebird and fix so one west tremendous capability, which we've added to overtime and we've got a 100 plus colleagues who were too focused on how you think about value and intellectual property now you provide cover on and how you protect clients from from.
The liabilities that come with it or IP Seth.
You ask yourself, how big could that market be candidly distribute this is a market that should be much bigger than cyber. This is this is $100 billion plus market over time, if we help clients understand how to address and protect intellectual property trade secrets, all the things that come with that our view as this is a this is a tremendous opportunity for the industry and candidly.
A tremendous opportunity for our clients and the other piece and started to get off on a go offline the IP, but I can't help but.
Wondering about IP that so so cool is a lot of what we do is protecting the house in essence cyber something bad happens how do you protect.
Okay.
Something happens in a plant or equipment or something outside of portfolio on the.
On the retirement side these are protecting downside.
Total property is about creating upside you can actually help clients create new value that they already have but didnt really know it when you can actually up a client value of portfolio by the way devaluation comes from the fact that the insurance markets actually basket. So that creates the implicit value, although sudden you're creating opportunity. So we're pretty bullish on those as you can tell.
And really.
In terms of sort of.
Net new high margin high margin because its high value to clients.
I'm just kind of value to clients were doing things that no. One else has been able to do and the opportunity. We think is substantial and you'll see us investing heavily behind it back to the question around maintaining 70 to 80 80 basis point improvement and investing this heavily how do you do it again, the 100 plus colleagues how do you do it you do with and business services and other means and sort of create operating leverage in the business and that's.
The equation.
Thank you for the comprehensive answers.
Thank you. Our next question comes from Meyer Shields of Keith Bright and what's your line is now open.
Great. Thanks, good morning.
Greg I was hoping you can walk us through is the opportunities and challenges of Lloyds blueprint one on.
Revenues and margins there.
Yeah listen.
Spent a lot of time.
With with our our partner.
It's John deal and Bruce and team.
Trying to offer thoughts and views and perspectives, we are absolutely.
Focused on and delighted to be supportive no we can't because it's important to our clients.
And our guidance is largely been around sort of the following types of things up whatever blueprint.
Comes out to be whatever incarnation comes out to be you ask yourself. The question has it helps our clients.
Hasn't done things for our clients that they don't get elsewhere in the world is there more innovation.
In a way that sort of benefits our clients. So for us it's all about that and that that's the test of relevance for all of us.
It's a tested relevance for work for Lloyds as well and so everything we've done around that is sort of how do we how do we help them see what has to be true from the add value in a distinctive way and we come back to if you're adding value to distinctive way that as real beneficial aspects for margin, if you're adding value in a way that's much more commoditized than its.
It should have much less attractive margin characteristics so for us.
We don't this isn't about us, it's really about our clients and how we can how we can help lloyds understand sort of what has to be true to help our clients and we're very hopeful John and Bruce and team have worked very hard to sort of.
To take some steps to sort of really drive this market forward and.
We're excited about the possibilities and want to support anywhere we can to support our clients.
Okay. That's very helpful in there.
Any validity to the idea that this could be sort of a revenue headwind, but improve the bottom line based mark.
No I don't think there really is into the day, we haven't really thought about it in that way at all really this is lloyds as a source of.
Of capital and capability for our clients, we want to apply anywhere we can.
John and Bruce are very well aware there are other options out there as well and we have access to all of them. So we're in essence, essentially saying, we still always come back prior to the question is what's the client need and how are we supported in Serbia. If we do that distinctively our margins and growth take care of themselves.
We love that nice edge by the way that means we have to continue to improve.
And if we don't we suffer the consequences asked as everyone else. Our view is the opportunities great Theres lots of capital choices out there to support our clients to the extent that's helpful unnecessary and that's how we're going to pursue it. So we don't really see we're really not sort of seen in sort of any any short term long term sort of implications that would be be driven by the by those by the Lloyds blueprint.
Okay Fantastic and then one small question for Christa the press release notes that.
Geographic distribution of earnings impacted the tax rate does FX itself at the tax rate.
No it doesn't.
Okay no it doesn't.
No it doesn't mind.
Okay, great. Thank so much.
Thank you. Our next question comes from Brian Meredith obvious your line is now open.
Yes, thanks, mostly answered but this is just one here Greg I noticed in your surveyed the number one challenge that I think corporation to talk about as economic slowdown slashed slow recovery.
Could you give us some insights or kind of what's you're seeing right. Now. It also is that it all the concern for you guys as far as your organic revenue growth going forward here, if we do get some.
Economic slowdown.
Yes, Brian first I would say I appreciate your rough referencing the risk survey we.
We find a lot of insight into that as its as we're asking plants around the world. What's most important new what's on your mind, most most salient, which is when you look at sort of the top 10 RIS. Most of them are don't actually have insurance related answer.
C. Five have none of you have partial and then if you have have something so our view is that some massive opportunity to sort of help clients and to the extent slowdown becomes number one how do we all clients do that by the way Eric and Mike. Both gave examples that would sort of lead into the headwinds of what would be a recession as it relates to add on.
Just say, we feel fairly fortunate if you think about sort of whats happened to us and go back to the the recession of eight and nine and what happened in essence. The story well. We were we were largely flat in terms of sort of where that was which you've seen us do in the first nine months of this year as everyone has talked about sort of issues and concerns is grow 6% year to date versus 4%.
Last year, so were up 200 basis points versus year to date versus last year.
Incredibly positive remember a lot of the revenue is non discretionary so 85% is renewed business.
And retention rates, 90% plus on average and so it's a very unique kind of demand characteristics by the way that demand characteristics is true in commercial risk. It's true in reinsurance it's true in retirement, it's true and health incredibly powerful in terms of where we are and then if you think about where we were in eight nine which is basically flat to the world and improve.
Margins at the same time during the last recession.
We're very very different and stronger from now than we were then.
Now you actually have all the things that we had back then plus all the net new so we didnt have IP, we didnt have cyber we didnt have some of the health advancements that Mike talked about some of those things we've done on the retirement side. So it's a much stronger from in which we're creating new addressable demand the didnt exist before and in a minute.
Respects, we hope, creating markets in which and will benefit and certainly others will to competitors everyone. Well, we open up 100 billion dollar IP market that'll benefit everyone same on cyber. We all know cyber is is anemic small as compared to what it should be on behalf of clients huge opportunity against that so for us.
We're always going to be vigilant, but we feel very good about our ability to support clients and in many respects.
The demand grows.
In times of volatility or in times of stress for them and to the extent, we help them improve performance or strengthen our balance sheet or reduce volatility not in of itself is actually going to create an interesting play in the final thing I would say is sort of in recession, there say a bit of a flight to quality in terms of sort of making sure you can deliver on behalf of clients and and we would we believe we've done.
If it's Matt.
Great and then one other quick one once but just looking at the survey responses once political risk and I think you may have commented about this a couple of quarters ago, but just maybe remind us.
If indeed, we do see Medicare for all.
I didn't impact would that have on your health solutions business.
Well as we described by the way.
This is again, you're going to kind of going to conduct a fundamental what we're talking about here on sort of the health world overall.
This is an incredibly.
Dysfunctional part of the global economy, as we all know and.
The.
Population around the world, becoming less healthy and per unit costs healthcare is going up so net net we think there's going to be massive demand in the context of this remember if you look at how for health business in the us half outside the us and not outside the US is actually more akin to the single payer world and we've done exceptionally well we're growing faster at margins are going up Theres a lot.
Opportunity on just beyond the core but also on what you do from an elective standpoint on top of this as we look at economies around the world.
We would say the demand is real our ability to address it is real and we like we like that opportunity.
Finally, I would say is without any political commentary on whether that's a good solution or not let's assume you actually want to that solution. The transition to that solution, we create huge turmoil with our clients and our ability to sort of support them and the transition would also be a source of opportunity, but net net long term, we love the health space.
Theres tremendous opportunity up clients in what is it really stressful world and one other things you look about it it's not just the health side as health and retirement, because our clients employees or overspending on health on average and Underspending on retirement and imagine Brian if we could actually help them tweaks that one or 2% for their employees, who are companies that have done a huge services.
The families.
The employees, who work for them. So we're pretty we're pretty bullish on sort of what's out there in the stresses for our clients or ability to address it great. Thank you.
Thank you our last question comes from Josh Shanker often.
Yes bank.
Your line is now open.
Good morning.
Just a couple numbers questions for the first one and Dave Styblo kind of asked some questions about but I'm wondering if you can talk to a little bit what the odd.
Normalized free cash flow would've been in the first nine months of 2018 or maybe how you're thinking about what does the normalized growth that you've enjoyed a here in the first time with the 2009 here maybe the first I know you're talking about 2020, we talk about where normalized free cash flow growth has gone over the past 12 months.
So the way we think about it Josh is really our free cash flow guys. So first nine months the year, 25%.
We are on track both strong free cash flow growth for full year 2019, we've given long term guidance of double digit free cash flow growth for the foreseeable future. We feel like we are on track for that.
And were particularly excited about 2020, where we'll have underlying free cash flow growth in double digits, plus I declining use of cash as you see on page 26 materials grew decreased cash usage on pension capex and restructuring.
But you can't say normalizing for restructuring spend and whatnot, what's the 2019 2018 free cash flow trend has been.
I mean, you can see the restructuring cash yourself, but were getting double digit free cash like ours.
Normalized.
And Thats normalized.
Dave just I mean, what we would say is we feel like we have double digit free cash flow growth year to date and loans that.
Okay, Okay and the other question also numbers based in the healthcare solutions sector can you talk about the dollar value of non recurring.
Headwinds you had in the quarter on revenues and how much.
Revenue has been moved from Threeq into Fourq.
And what we'd say on on health solutions, we feel really good about where we are in terms of health solutions, we've delivered 5% growth year to date, it accelerated 4% growth year to date in 2018.
And we have all lines contributing solution like contributing to the mid single digit growth greater for the full year 2019, and where we're looking forward to a strong people.
And there is no there's no guidance around those two items you cited in the press release.
Hi.
Okay. Thank you very much.
Thanks, Josh.
Thank you I was now like to turning the call back over to crack case for closing remarks, just want to say to everyone. Thank you very much for joining and we look forward to the conversation next quarter. Thanks, so much.
That concludes today's conference. Thank you for your participation you may now disconnect.