Q2 2020 Aon PLC Earnings Call

Good morning, Thank you for holding welcome to you on plc second quarter 2020 conference call.

At this time all parties will be in listen only mode until the question and answer portion of today's call I.

I would also like to bring.

Parties that this call is being recorded.

If anyone has an objection you may disconnect. Your line at this time.

It is important to note that some of the comments in today's call may constitute certain statements that are forward looking in nature as defined by the private Securities Reform Act of 1995.

Such statements are subject to certain risks and uncertainties <unk> actual results to differ materially from historical results or those anticipated.

Information concerning risk factors that could cause such differences are described in the press release, covering our second quarter 2000, <unk> as well as having been posted on our website now it is my pleasure to turn the call over to Greg case CEO of E. on plc.

Thanks, very much and good morning, everyone welcome to our second quarter Conference call I'm joined Fortunately My Christy Davies, our CFO, Eric Anderson, our president as in previous quarters, we posted a detailed sinatra presentation on our website.

To begin I.

I want to thank our global team for their extraordinary leadership and responding to the ongoing challenges presented by call. It 90.

Even as the vast majority of our workforce continue to work remotely their innovation conductivity and engagement and supporting our clients and each other it's truly exceptional and we see that engagement in college feedback most recently in the near 90% approval rating on our response to the pandemic consistent without sentiment calling attention.

Up across the organization.

Further our firm's response to more recent its fundamental issues or social justice, an inclusion I've been resolute and inspiring.

Our global team is committed to structural change that is meaningful and lasting.

Change that will make us a better and more inclusive firm.

We do progress on this front a central to our future and are taking action for reflecting this priority.

Turning to our second quarter results prey on overall organic revenue declined 1% and I'll come to demonstrates great work by our team.

Resilience of our business in the face of unprecedented challenges and the global economy.

Particular.

I'd like to highlight 9% organic revenue growth in reinsurance solutions, driven by net new business generation in treating and double digit growth in facultative placements.

These results demonstrate the team seamless transition to the new working environment and their focus I'm eating evolving client needs.

Within commercial risk, 1% organic revenue growth was driven by strong retention across most major geography, and particular strength in core property and casualty, partially offset by impact more discretionary areas of the portfolio. So just transaction liability construction project work.

Retirement solutions declined 1% organic revenue, reflecting solid growth in investments stability in retirement and pressure in the more discretionary aspects of our business, especially human capital.

Two areas particular challenge for the quarter, well solutions and data analytics services, we expect a short term headwinds impacting results in both areas will reverse overtime.

And I'll solutions, which declined 18% in the quarter two issues were evident first pressure in both core and more discretionary areas of our business, primarily driven by a decline in employment levels related to called the 19 and the timing of certain revenue.

And second.

A onetime adjustment representing approximately 5% of the decline which was identified with the implementation of a new system. This will not repeat in future periods.

Overall, our performance in health solutions, just watched the pressure of the coal the Nike challenge, but also highlights the long term importance and priority I just wish my for our clients.

And then analytic services, which declined 8% results were driven primarily by an expected decline in our travel and events practice, we expect us to bounced back strongly when the economy returns for a more normal performance level.

In terms of overall organic revenue expectations for Q3 in Q4. The outlook is obviously uncertain macroeconomic conditions persist, we expect to see ongoing slim wide revenues pressures similar to what we observed in Q2.

From an operating standpoint, we delivered strong results, including 240 basis points of operating margin expansion.

5% you'd be escrow, an exceptionally strong free cash flow of 1.1 billion through June.

875 million from the first half of last year.

It's important to highlight the while this performance reinforces covenants and around you know that strategy in any economic environment, we do see ongoing macroeconomic pressures from trends in GDP growth.

Asset values unemployment among others.

We continue to prepare for a broad range of economic scenarios. We believe the probabilities of absolute worst case scenarios assessed in early March have diminished.

This reduced probability is what gave us the confidence to restore and repay our temporary saw reductions for colleagues.

With a bonus on with all the route.

And this time of the diversity on so many fronts. Our colleagues are continuing to find innovative ways to bring and United solutions Depressing client needs. For example, one client facilities management and energy services company has been Stacy substantial challenges related to the current economic conditions.

Colleagues from commercial risk data analytics and human capital came together to collect we hope this company navigate short term headwinds, while also strengthening their operational efficiency and overall resilience.

One of their biggest challenges with the cost of operating and maintaining their fleet.

Archie the signed a new solution for risk management and talent assessment designed to reduce fuel insurance costs, while enhancing driver safety.

And outcome, that's all through our clients top priorities.

He was he was faced by clients today demonstrate that our economy is unprepared for complex and interconnected challenges fully demonstrated by the covert 19 endemic.

Looking forward there are other long tail risks on the horizon as climate changes population ages and the Wolfcamp continues to widen volatility will increase.

Our goal of a survey highlights the top 10 risks are clients say, it's only one is fully insured for partially insured and five are not insured at all the mandate is clear we must innovate faster to drive answers to these growing areas are quite.

For a on.

Our path forward to increase innovation and support clients he is clear.

And United booklet provides a proven roadmap and the combination with little starts Watson will substantially accelerate progress together will be better for our clients on day, one driven by the complementary nature of our core businesses across solution lines and geographies.

Well you better in the future driven by shared commitment to analytics and increased ability to unlock new sources of value for our clients.

We've been saying for some time, but the world is becoming more volatile economically demographically geopolitically.

And the events at the last hunger days only underscored that reality.

They also raised the stakes brand United Mission, and the goal of bringing the best apart from the clients.

At a time when our clients need us most the combination with all the stars Watson further strengthens our clients every capability and puts us in a position to best address their unmet needs. Those are they turned to us for today and the emerging needs. That's backed by the next generation professional services firm that we're bringing together.

In summary, we.

We delivered strong operational results in the quarter remain well positioned to manage through and accelerate out of these challenging times. Despite the pandemic, we're becoming a more capable organization and one that will be further advanced in combination with Willis towers Watson with that I'll turn the call over to Christa further financial review Christa.

Thanks, so much Greg and good morning.

As Greg mentioned, we delivered solid operational performance in both the Coursa I'm here today.

Significant macroeconomic challenges.

Constrained the resiliency of our business and the strength of I am United strategy in any economic environments.

The steps, we've taken to proactively and conservatively manage discretionary expenses I'm liquidity have enabled us to maintain financial stability.

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That's conservative that makes us resilient through these challenging Todd and positions us to come out stronger we remain committed to deliver significant shareholder value over the long time, which we believe will be accelerates it by a combination with Willis towers Watson.

As I discuss results today I would note, while we manage our business model.

Typically focused on that number.

My commentary today somewhat more bugs <unk>, especially given differences in the exit on Brahma in Q1 Q2.

That impacted our decisions results and outlook.

Second quarter results strong double that in challenging economic conditions.

Organic revenue declined by one cents <unk>, 9% organic revenue growth in reinsurance and 1% organic revenue growth in commensurate solution.

As I described block was Oh business had strong fundamentals with roughly 80, because that's been cool and then relatively more discretionary.

As expected, we did see lodge and more immediate impact the more discretionary portions of our business, which contributed to organic revenue decline in retirement solutions health solutions and <unk>.

I would also note the reported revenue was pressured by FX as well as no fiduciary investment income as a result, low interest rates globally.

As I look towards the rest of the yet.

As Greg mentioned, we remain confident in the underlying resilient.

However, given continued macro economic doesn't see yeah, not robotics and not just got a pop.

In terms of organic revenue expectations, if you agree and all the outlook obviously.

Its current macroeconomic conditions persist, we didnt see ongoing from wide revenue prices have a lot of what we observed in Q2.

Moving to operational performance.

That's hopper Twentytwenty, we delivered solid operating improvement with 7% Oh I gross.

Writing margin expansion of cheese anybody.

Yes growth of nine with that.

I would note while operational improvement in the first Warsaw includes strong organic revenue growth improvement in a second quarter includes the temporary reduction of discretionary expenses.

Quoting ridge is troubling event.

Not reflects favorable coal operating margin expansion.

As Greg mentioned Wesco preparing for a broad range of outcome.

However, we did decrease likelihood of was pacing.

Well operating margins have improved to 70 basis points with both top and yet due in part the preempted and temporary expense actions, we took to decrease underlying expenses.

Right Yeah.

We expect operating expenses, the second half and Twentytwenty me more consistent with underlying expenses and the second half of 29 gene excluding restructuring charges.

This represents the difference in Q2 as her tend to more normalized levels of spend in the face of would use likelihood of what's kind of macroeconomic scenario.

We expect second half of the able include very targeted investment in priority areas, while maintaining strong operational discipline.

Finally as noted in any material.

That's an unfavorable impact of approximately 1002nd quarter and five cents used today.

At today's rates, we'd expect it seems that push out on favorable impact in Q.

Q3 in Q4.

Oh were confident the investments we've made in that and business other than operating platform and I'd love to continue the managed costs in the near term.

Significant operational leverage over the long time.

Mrs enabled our ability to distribute content of capabilities across the to drive long term growth and free cash flow.

I think it crashed and capital allocation.

<unk> increased 875 million to 1.1 billion driven by strong operational improvement the impact the temporary salary adoption midsized actions, we've taken to improve working capital and a decrease in restructuring costs out.

I would note that the impact of temporary salary adoption well reflected in the income statement in Q2, but the withheld and that will be paid an impact cash flow in Q3.

I wont lose some working remotely oh ability to essentially manage invoicing cash collections and vendor payments has been essential and this environment so to accelerate the transition to digital which it helps ensure were able to focus on driving free cash.

We remain very confident in the strength about balance sheet I'm, not as liquidity risk real well laddered maturity profile, we saw the improved liquidity in the second quota issuing a billion dollar debt.

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Million was used to pay down some debt coming due in September twentytwenty.

We ended Q2 hundred million lower total debt compared to the end of Q1.

Historically, we booked to increase its even talk rose while maintaining leverage ratios.

However, due to current macroeconomic conditions, we expect to continue to manage our leverage ratios conservatively in the near future.

We are diligent about maximizing return on invested capital I make capital allocation decisions through this framework.

While we pool certain discretion uses of cash in the first close up we are considering resuming limits its share buyback in the second half of yep subject to macroeconomic conditions business football that's on the timing restrictions related to our combination with Willis towers Watson.

We are likely to maintain higher than normal levels of cost for the near future given macroeconomic uncertainty.

As we've said before we are committed to maintaining our investment grade credit racing. Following the combination with Willis towers Watson and continue to make progress against hockey milestones.

We filed our joint definitive proxy earlier this month I look forward to devote the boys companies shareholders on August 26.

That's the deal to close in the both top 2021 as we previously communicated.

In summary, our business is stable and resilient in the face macroeconomic challenges.

Starts steps, we've taken to drive a ended <unk> strategy, and especially our ambitions of operational platform a more important now than ever.

Disciplined approach to return on invested capital provides financial flexibility to unlock significant shareholder value creation over the long term.

With that I'll turn the call back over the operator, we'd be delighted to take your question.

Thank you you will now begin the question answer session I would like to remind participants to queue up for questions. Please press star one and to withdraw you mean.

Our first question is from the line of Suneet come off of Citigroup. Your line is now open. Thanks. Good morning, I wanted to start with the merger in the past you guys were confident that you wouldn't need to divest any businesses I just want to first confirm is that still your view.

That doesn't actually did.

Okay, Great and then related.

Christa sorry.

All right. So yes, that's exactly how do we remain exactly on track to be able Mojo web very excited about in them frankly more excited today than when we announce it on last night and we expect to close a in 2021 with no divestures.

And so related Lee I, just I'm trying to reconcile your confidence with Hum industry commentary, we're getting in some investor concerns, particularly on the reinsurance business. If you could provide just some color on on why you're so confident with respect to that business in particular.

Sure. So we have had excellent anti trust palpable <unk> globally for quite some period of time as you can see from the proxy detail about background to the merger and therefore, we feel very confident about anti trust approval.

Reinsurance in particular.

Highly complementary a if I took the U.S. as an example were very strong on property Willis towers Watson a very strong.

In other areas.

Sample in out.

In.

Were very strong in lodged a mock at a very strong in middle market. So it's actually a highly complementary business and so we feel really good about our ability to close the transaction with no divestitures, including reinsurance.

So maybe if I could maybe if I could just at a couple of comments as well above the reinsurance market. The way clients access capital brokers are only one way with which they do it there's a very large direct market Oh weather, especially in Europe as well as in the U.S. where are the insurers actually go so many reinsurers directly they also raise money from side cars.

So so their access to capital is actually largely gone outside the brokerage business as opposed to within the brokerage business. So when you actually look at the entire marketplace.

It's actually the way people tend to look at it within the industry I think really is not the courts, where the do it.

Got it and then just my last related question is just what kind of feedback have you gotten from your customers since the merger announcement, obviously, it's been a several months now, particularly on a on the brokerage side, but also on the reinsurance site.

Loved the question Suneet listen.

We would suggest by the way you know any discussion of the combination a little stars Watson, It's got to begin and end with the only topic that really matters about someone you're raising when she's clients. It's really all about body for clients I'll take it from the orientation from the start John Healy and I talk all the time about a guiding aspiration that is very clear and straightforward. We view this combination as a once in a.

Generation opportunity to change the innovation trajectory for clients, it's really suneet set a new standard for client leadership, an impact naturally our focus probably get better faster how do we address I'm not quite needs and I will tell you. Since you know it's mid March I've talked to literally hundreds of clients about their needs and how they love all other shifting over time.

I heard for many of them by the way the stand Demichelis fundamentally reordered client priorities in a way never really seen industries.

They realize they need to solve knowledge for both what's going on today. The operate challenges today, but also the long tail challenges that could shut shutting down in the future tomorrow and their literally see turning to Watson asking the question.

How do we partner with them.

Prepare for the next pandemic, how do we best protecting value there were tangible assets and IP, which by the way is 80 plus percent other value when we really haven't addressed as an industry overtime. How do we mitigate those you know systemic and thoughts on climate change model the impact to widespread cyber outages or address things like to help gap. So point as our clients are asking for more choice.

Don't have a choice on these now that it's a little George for them and this up this integrated client driven approach that we're describing really defines or and United strategy and I will tell you. It reflects very similar aspirations. John Haley has for the will starts Watson team that's been remarkable to see in our combination with Willis towers Watson is the catalyst that advances our ability to meet.

Well I needed, let's think about soundness students is such an important question and the way you asked is exactly right, which is quite focused.

Just just reflecting on one of the hundreds of conversations.

You know the one client and they just summarize the best back for me because we went through all the things that we're facing and they said straight up you know when I look at you know what I need that's a decline in talking to me what I need from all of you on what's out there now in your industry fundamentally this combination.

It's about more choice more relevant in the central choice for me I don't have now and this gives me opportunity to have that so our response has been exceptionally positive.

Okay. Thank you.

The next question is from at least Greenspan from Wells Fargo. Your line is now open.

Hi, Thanks. Good morning, My first question if I look at the slide that you guys provided on the merger.

You know you that accretion related.

Are you know missing from what you had last quarter I Didnt see that it would then you know the most recent proxy I just want to confirm that your goal goals related to what we can really to EPS and free cash flow that you laid out that merger still stands day.

Oh. Thanks, so much of the question. So we did commit to 800 million of synergies and we still expect to deliver the synergies and the cost to achieve them and the timing of those synergies.

The accretion dilution was based on underlying EPS estimates.

And since then we have obviously withdrawn guidance given the macroeconomic environment has changed so we withdrew out but not to guidance with mid single digit organic growth and double digit free cash flow growth, but the recent macroeconomic events do not impact the 800 million accosted engine and we continue to be incredibly excited about the combinations potential there.

Clients as we talked about the beginning the strategic rationale for the deal is really around innovation and growth and its Greg talked about only a meeting unmet needs for cards, which we believe a substantial that Greg you may want to elaborate on that.

I'll underscore at least as we came into this and sort of prospectus in March as Christa highlighted.

You don't get arc stock someone thought around the integration that we're working on now those high expectations have been exceeded the opportunities that we see for innovation will be helping clients no greater than ever before obviously, all the economic pieces because to highlight our still fully in place, but that opportunity is we think very compelling for clients as they understand it.

ER and also Oh, you know very compelling for our colleagues and again. This is the conversation I have all the time with John Haley.

This is a two organizations coming together both on a similar journey and see the opportunity again I'll discuss accelerate that journey dramatically on the alpha clients. Since a lot really you know it's the momentum we steel as we spend time with with colleagues will start swaps and just continues to grow.

Okay, that's helpful and from the regulatory side of things.

Are you guys I'm kind of.

Well you thought you would be at this point in time.

You know like you might you know in terms of deal closing.

Half year, one is obviously a.

The timeframe on you have a sense you know when we when you think money part you know when you finally, thank you my close the deal sorry. Thank you.

Yeah. So at least we are exactly on track with our original time period.

We filed our joint definitive proxy on Wednesday July eight we're on track to hold closed shareholder votes on August 26, and were very excited about that.

And we expect to provide updates on the pros with when you have something to report, but we are on track and you said to close the deal in the both top of 2021 exactly as we communicate the beginning.

And I think really you know since March 9th and we're not the deal we've been spending a lot of time I'm on the Willis towers Watson integration and even more excited about the combination and the potential to meet unmet client needs, but maybe Eric you want to talk a little bit about that.

Sure Chris.

I'm really excited about the early progress that we've had on the integration.

Good day on it and Willis towers Watson are excited about really what it means for our colleagues in particular, we've been focused on the colleague mission for quite some time about what each individual colleagues and actually accomplish for themselves professionally but also on behalf of the firm in their clients and we're really excited to see the W. GW has been doing very similar mission.

My integration partner and this truly gay Bauer and I, both share are really growing excitement about what the possibilities are as we serve clients better as we actually help our colleague see themselves on the combined company. Yeah. We've been working a lot on the culture part recognizing that getting the people issues, right and and building that vision and that that that opportunity.

For them to build their careers here well end up with the team I think that will be the strongest in the industry and one that will draw in routine and attract talent that we need to solve the problems that Greg you were talking about before.

One last thing I, just thought on that at least if I could you just the piece around we've asked multiple times her what about GOGAS 19 is that slows you down and I will tell you. It resets to think about going to go back to one with our colleagues that are can talk to a little bit to krista and one of their clients and.

The client one.

Our clients actually see the world changing around them and it really does reinforce everything we've talked about in terms of meeting unmet needs not just in not just in kind of the you pandemic, but what comes after the pandemic so in many respects.

I would have known but covert 19 for all of its challenges is completely reinforced everything we've tried to do we're talking about doing and that's really showing up in the integrated integration planning that Eric was it was describing.

In terms of by Bob I'm like that limited by that.

Second half the year, you just kind of further define that and then what would you need the it sounds like maybe about.

Oh, good economic condition, you do walk you know more fully.

Yes.

Thanks, So much of the question as you know we value the five on free cash flow and allocate capital based on return on capital cash on cash for Todd and buyback remains the highest return on capital opportunity at wholesale.

We don't give specific guidance on buyback, but I was I did mentioned, we are considering limited Sarah but the second half of the is subject to macroeconomic conditions business before that.

Timing restrictions related to our combination with Willis towers Watson in 2020 with modest the balance sheet conservatively and we do not expect I'd the debt at the time given macroeconomic conditions, we remain committed to about current investment grade rating, including a combination with little powerful up than.

We issued $1 billion the debt and we've already used 600 million about to prepaid the 600 million attempt at the time do you Oh that is coming due on September 2020.

You should expect us to continue to manage our balance sheet conservative given the outlook on uncertainty around the macroeconomic environment. So you may see more elevated levels of cash and short term investments through the end of the yet when you think about our available cash and use the cash in 2020, we've spent or committed about 1.4 billion in cash on about.

60 million, a buyback, which we completed in Q1.

200 million of M&A, largely completed in Q1 400 million of dividends and almost 500 million a restructuring pension in capex as we've said in prior investor materials.

And we've also communicated 200 million of expected deal call.

36 million to which we've incurred you today with the majority to be incurred when we include when we closed the transaction with Willis towers Watson.

And we have 400 million attendant coming due in March next year.

So a lot likely rod elevated level, the cash and short term.

Balances a in the near future given macroeconomic uncertainty so while there's the potential for limited share buy back through the remainder of D.A. will be dependent on macroeconomic conditions like what we've seen the capital markets business pulled up including working capital and the timing restrictions around Willis towers Watson.

Thank you and then one last numbers question on the free cash flow pretty strong increase this quarter you highlighted.

With me temporary salary reduction.

Actions to improve working capital at lower restructuring costs.

The temporary salary reductions come back in the third quarter. So in a component of the four buckets, it's running late would tell us.

How big of a driver.

Intel and that was weak we castle acute you as we think about it reversing into Q3.

Yes, I think the question relates free cash flow to the for profit 2020 is exceptionally strong up 875 million. All 334 point, 343% just a very impressive performance on a result, with a focus of all of our leaders across channels, we drive revenue and trends like each dollar revenue into the maximum out of free cash flow I'll say that was.

Three big components relates to the free cash flow growth the largest single component was improvements in operating income.

And so we had a substantial growth in operating income and I'm in the second biggest driver was improvement for working capital specifically improve receivables unapproved payables. There was no meaningful change in free cash flow in Q2 from not repaying the reduction in temporary salary. So it really doesn't change.

The outside.

Okay. Thanks for the color.

Next we have Dave style.

Your line is now open.

Hi, there good morning, Thanks for the questions I just want to come back to leases question and then when they go in and just clarify.

I know consensus has changed a lot for eight on Standalone that was sort of the benchmark you guys used for EPS accretion I guess when I run the math I realize we're not going to probably get to that same peak in terms of an s. dollar, but it's still fair to think that the that 10% to 15% accretion by year three still holds.

[music].

But the accretion analysis was provided in connection with the combination. It was based on 800 million of expect <unk> annual pretax cost synergies, which we still expect to achieve however, the macroeconomic outlook has changed and we withdrew the for natural got up mid single digit organic revenue growth and double digit free cash flow growth, we have not really.

They did any kind of guidance going forward and so we caught actually update that got it at this point.

Macroeconomic events do not impact the 800 million a cost synergies and we continue to be really excited about the combinations potential the clients and revenue opportunities as well.

Yeah, I guess my point is if you were to Recasted and from the outside and we you know, we recast and am stand alone it still accretive to not new base. So by 10% to 15% is how I was trying to frame it if I didnt make it clear that.

Yeah. So look we think the opportunity economically still remains exceptionally strong I'm I wouldn't know that the accretion dilution. We originally provided only included the cost synergies.

Because that was the only thing under the Irish takeover code, we were able to report on that suddenly. So it doesn't include as an example, Dave any kind of improvements in working capital any kind of improvement in capex any kind of improvements in any other things actually drove a free cash flow equally it doesn't include any kind of revenue upside and so we do believe the opportunity the call.

Emanation remains exceptionally strong and its Greg holiday early on the call. We're more excited today about the combination that we well when we announced that on must not.

Yep, Okay. That's great and then on your comments for a second half obviously still an uncertain macro environment. I think you had commented that conditions are very similar to where we're at right. Now we might expect similar organic pressure I guess I'm curious why that pressure might not worsen.

As we go forward some of the feedback from from other companies and channel checks suggest that me, sometimes there's a bit of a delay on the revenue side, especially on the broking side. So curious as to reconcile those comments with some other things that we've heard in the industry in terms of why why things don't.

Down even further in the second half from an organic standpoint.

The overall I think you're at the macro 0.1, I'll start with which is literally in terms of overall organic revenue expectations for two three to four you know as you are like obviously uncertain as I mentioned in my comments like if the current macroeconomic conditions persist.

What we essentially highlighted as you know we expect to see firm wide revenue pressure is similar to what we observed in Q2 remember things do ebb and flow they do lags, but we're reacting all the time, Chris highlighted before when you think about where we have banana business services on what it means that enabled us to do to connect with clients. How we're innovating on frankly, new client development.

All these things sort of create opportunities for us off that are going to also evolve as the current situation of all so our view as it is uncertain.

But if you step back and think about it you know based on that uncertainty.

Some other Q2 was probably a good basis Sherwood.

Okay last one real quick I know last call you guys had talked about all the time it in Dallas, probably having more exposure to organic revenue pressure because higher discretionary spend in those businesses.

I haven't actually held up fairly well I'm curious to hear why that might have outperformed somebody comments relative to what we would have thought and and is there any sort of delayed impact there that that we might need to watch out for the back half.

There really isn't the retirement colleagues like like our colleagues across the across the.

Yes, I just want to highlight again how much.

We appreciate all they do to lead a and b, helping clients clinics extraordinary very strong continued performance on the investment side or the retirement piece computer. It's just it's incredibly strong franchise that he was built over time and that you know that continues to be a.

Foundation, obviously, some pressure on human capital side that was more than offset by a.

By the progress on a former too so that's really how we hold position and we'd expect to continue to do so we don't see a lag and not over time again, no prediction things around you know unclear, but that's really what drove the performance in Q2.

Got it thanks much.

Next we have Jimmy Bhullar from JP Morgan Your line is now open.

Hi, Good morning, another couple of questions. Both related on extensive I just wanted to clarify that you're implying that I'm, assuming sort of a stable type environment with what you're expecting right now discretionary spending.

The increase in the second half versus where it's been so that and then secondly, as you think about your expenses in the longer on is there anything that you're doing differently now.

That might have some sustainable benefits even beyond the covert endemic whether it's sort of less travel or a small the real estate footprint or something else.

Thanks, So much of the question Jamie I'm, we do as you said contingency macroeconomic uncertainty out through the second half of the yeah. How do we do see a decrease likelihood of worst case scenarios and into the first talk we didn't take preemptive and temporary expense reductions and the second half of 2020, we expect operating expenses to be more consistent with underlying expense.

The second half of 2019, excluding restructuring charges due to spending on some very targeted investments in priority areas due to some of the deferred expenses being spent on projects and necessary operations for example, in cyber, but maintaining strong operational expenses, the Clinton and and then I guess.

And add to your question on put a t. any I guess, what we would say as we expect small increases in T.N. into second half, but the margin expansion. We saw the top 2020 include.

<unk> reductions of DNA that isn't sustainable in the long term, but maybe Eric you want to talk about so the t. any and how that's actually applies to clots sure. Thanks, Chris and I think if you step back a big but the reason for kidney failure, which is really to get closer to our clients and our partners to develop a personal relationship whether you investments that we've been making a technology, we're using that video capability.

To actually get closer to clients and get closer to market partners.

Just as an example, just try and bring it home I participated in a pretty significant global placement for a new client literally last week, we were talking about the insurance capital available. We have people on the screen from New York, London, Singapore in Bermuda, and instead of flying everybody in for the meeting kind of burning four days and tens of thousands of dollars, we were actually able to create especially for the clock.

Right, where they could actually see our global experts talk about our capabilities talk about what was available and literally other than a couple of our sleep for our guys in Asia.

Who had to work through the time zones, the client walked away actually seeing the entirety of the from and what it could do for them on the topic as well if you the banter or see the relationships that were there see our ability to interact with global markets pretty much anywhere to help them and so well that yes, there will be some.

Interaction with clients a person obviously down the road, we really want to make sure that we pick the best of what we've been learning over the last four months and embedded into the firm because we actually think it drives a better outcome for the client and it showcases our talent and away that historically they would not have been in the room. So it really is I think we're really excited about what it can do for us.

Well, we interact with clients, especially when you need the global team together.

I'm good Jimmy just been onto your question, we do see opportunities as Eric described in potentially you know reimaginehr in the way, we we work with our colleagues and whether that from T. any or went up on real estate, it's really around the goal of actually maximizing client impact is aren't described.

With a more flexible inclusive unproductive <unk> environment for colleagues and Greg maybe you just want to talk a little bit about sort of the partnership we formed to actually reimagine the future work 'cause it's pretty exciting.

Got it really is terrific Christa I just online are exposed to remember if you think about strategy.

Actually operationalized clients kind of see everybody connected together and that actually met before it more travel because everybody has to come now they actually can show up they can show up to the technology. It actually it's a way to accelerate in the United So I think Eric's point was really terrific. One we Christmas highlighting is look we stepped back and asked the question how can we how could we as Alan how can we help clients.

Accelerate through a and create economic recovery faster and faster no coming out of this current environment and we ask clients. You know is there or is there a basis is or is there a benefit to compare notes with each other around what we're doing and we raise their hand first in Chicago and I will tell you that response was unbelievable. So we literally have.

Chicago. These are companies most significant companies in Chicago getting together talking about work travel it can be by the way we started with back to work. We all realize that was a joke everybody's already working so this is really not about work my way, we'd really around how you connect with clients and do what you do and you know in essence, we went from Chicago now launched are beginning to launch into.

New York, London, Singapore, we have Madrid.

The online as well so we have cities around the world comparing notes Jimmy on how we accelerate economic recovery.

And this again reinforces sort of what we're all about in terms of helping clients exceeded difficult environments, and leveraging and United capability in order to do that.

Thank you.

The next we have Sean writing box from KBW. Your line is now open.

Hi, I was hoping you could talk about maybe the trajectory in concert consultation project related work and how that if that started to kind of return slate in Twoq you into July and do you expect like as we the economy normalizes, they're going to be a more steady return of that business or do you expect it to be a little lumpy.

Sure.

So we actually see itself it really varies and a in offer some thoughts we get our to jump into it some color commentary as well as you go across solution lines.

This is really back to kind of you know we call the discretionary parts of our business in general and you know obviously they dropped off substantially in Q2, but we see them coming back as clients have had a chance to take a breath understand whether you are begin to get some stability they're happening in a different ways again advantage for us because we can connect with them or with and business services and actually offer new thought.

Some views and perspectives on how to improve what they're doing but it really does vary so we're seeing it and elements of commercial risky example, I gave.

In my opening comments really was about colleagues coming together across solution lines to create an innovative solution that didn't exist.

In some respects that was discretionary work for a bit and it became a real solution and ended up and being a series of products. So a whole series of things are happening across the firm in different ways and I think it's going to be in fits and starts you're going to see real opportunities pop up there is no kind of steady state return, it's going to be us doing what we do a finding opportunities and supporting clients, but you know Eric thoughts.

You're seeing that set across which ones you know look I think clients filled all over the world are trying to reposition themselves into this new economic scenarios. So whether it's on a retirement clients who are looking at the volatility in the marketplace using our investment consulting capability, whether it's the risk management clients, who are trying to figure out how to navigate.

New risks how to navigate the existing environment that they're trading and even on the reinsurance side, where the carriers are also looking at how do they reposition themselves to take advantage of growth opportunities.

Ultimately I think that type of work.

It's going to continue it is as Greg said coming in fits and starts as they sort of engaged outside providers as they after they've done their internal strategy sessions, but.

Yes.

I think it's the need is certainly there and we'll engage the clients as they get ready.

Coming out of the coalition work all the entire effort around talent management and how that's evolved over time and what's different about it you know in the current beyond the current environment with everyone.

Working from home sleeping at work as it were you know all these things sort of have created a level that project work. It wasn't there before we don't want to apply this offsets everything but it is it's evolving as client he does show some evolves.

Thank you that's very helpful. Helpful. Obviously reinsurance solutions had a strong organic quarter and I was just hoping if we get some commentary in terms of the reinsurance markets.

Well, what's going on with some supply and demand dynamics and based on kind of what we know now coming out of midyear renewals.

So on persistency for those trends to carry into one one obviously, there's still a hurricane season to come but based on what we know now kind of.

Yeah. There there is certainly a hurricane fees will become.

With that I really excited about the work that our reinsurance team has been doing in the first half of the year certainly working closely with the insurance company clients as they reposition themselves.

I would say listen the market very similar to what you see on a on a commercial risk side, the insurers will pick their spots with which to trade risk or find other ways to deal with it you through what they underwrite on the front end or raise capital or sidecar. So there's a multiple way with which the insurers will manage their risk. So I wouldn't get too caught up in the pricing convert.

Stations that are happening in the marketplace, because like commercial risk clients, they will either trade or hold or mitigate as best they can.

So I would say that we continued to be optimistic about sort of the reinsurance business in general the work they're doing most of the treaty revenue was done already as you said nobody really sells a property catastrophe or the middle Hurricane season. So it will be more of a fact business and Oh iOS business going into the second half and it's a 25% of the revenue left to do.

For the year, so, but I would say the insurance company clients are working hard at figuring out how they want to position themselves in this new market and we're there to help them.

Thank you very much be well.

Next we have fill stephano from Deutsche Bank. Your line is now open.

Yeah. Thanks.

Quick question about the the $16 million, just making Oh solutions and we've seen some peers I'm talking about 16 six.

Revenue adjustments because of things like exposure were down or or something along those lines.

In my mind, if we took a little bit of it different story, but I guess I was just hoping you can provide some color and get to what exactly do you don't get along its adjustments.

Yeah, So maybe just since those for a second.

I want to give you some some background on sort of our health results for the quarter and Chris who will talk very specifically about your question about the way it is apples and oranges not.

Doesn't apply which will describe in terms of organic revenue for us in Q2 and help it was really describe it as kind of though the perfect storm.

Well, there's good news. This result was absolutely no bearing on our long term outlook on what we believe as an incredible amount opportunity that solution line you know the context for US just for reference Q2 is relatively small quarter for us the changes or magnified, we obviously break out the health business a lot of others embedded in there are other solution lines, we don't.

We highlighted we completed implementation of a new system, which resulted in a onetime adjustment was approximately 5% or decline and the performance pressure is really around discretionary areas and core on reduction or employment as I described.

But I will say you know the work we did on for clients has been has been exceptional and health solutions for US is you know can you just to be just an exceptionally exceptionally strong positive area on opportunity area and cobot 19, Ironically again, nothing but underscore the long term unfortunate this priority area Oh, you might have noticed you know our last acquisition.

Ultimately Farmington, a welcome them a day on April seven earlier this year, absolutely a tremendous capability that we're going to be able to scale across our firm.

And last thing I wanted to say on this is that just opportunities everywhere in the world.

And you know.

While this isn't the result, we wanted we are disappointed in the result, I do want to call up my colleagues and healthier they've done a remarkable remarkable job supporting clients that have been under tremendous stross. That's reflected a sort of you see an economy everyday I mean, just an incredible job in that I think that bodes very well for our for our business going forward that your specific question.

On the Christa.

Yes. It fell just on May 16 million adjustment. It is identified with the new system implementation it will not repeat in future periods.

What specifically is we adopted I'm will be adopted the new revenue recognition standard on the first of January 2018, we had a temporary system in place the health and we've now adopted I longtime technological solution much more granular much more about not uncommon to have adjustments like this when you switch systems.

As Greg outlined a we feel really good about the growth of our business longtime unhealthy an exceptional up to me to deliver value for clients.

No.

So I wasn't trying to be political anyway, just ones are going to flavor for these aren't just because of the felt like it was definitely.

Just a quick procedural question. Please.

The extension there was a change in the outlook for the merger benefits or they need to divest of something among happened. After the shareholder vote. What was just looked like and I will be the next month or two unfold as we as we move towards merger.

Leasing I understand everything is on pace than that and that's not going to be they closed but just in some some crazy other scenario kind of world what does look like procedurally.

<unk>.

So from our standpoint, it's really not something we could speculate on because we don't see that in any way shape or form. Phil you know are you is as or describe this is built momentum from the get go with our with our colleagues as a come together and talked about the possibilities on integration planning with our clients who as I described before see this has the potential for something new for something they need to logical.

Central there we talked about the shareholder vote on the 26, a lot of momentum into that Bob and then we're working through all the normal antitrust processes as Christa described fully on track to close in Q1, So that's kind of how we see it but that's what's going forward and.

And all the original expectation certainly about the expense opportunities sure absolutely. There. This is never about expense it was about growth.

The combined from them, we subscribe mid single digit or greater that's still in place we pulled that for now for all the reasons that are obvious.

But as you think about long term everything we see a points to momentum and that's what that's what we're talking about.

Yes, so looking forward to seeing it and best of luck.

Thank you.

There are no further questions on Q I would now like to turn the call over back to Greg case for closing remarks.

Just want to say thanks, everybody for joining the call. We appreciate it and one last a shout out to colleagues today on around the world. Thanks for all you've done will be up from each other and enter clients and that's been exceptional thanks and talk next quarter.

That concludes the conference. Thank you all for participating you may now disconnect.