Q2 2021 Aon PLC Earnings Call
Yeah.
Yes.
Good morning, and thank you for holding welcome to Aon plc second quarter 2021 conference call. At this time, all parties will be in a listen only mode until the question and answer portion of today's call.
And I'd like to remind all parties that this call is being recorded if anyone has and.
And objection you may disconnect. Your line at this time it.
It is important to note that some of the comments and today's call may constitute certain statements that are forward looking and nature as defined by the private Securities Reform Act of 1995, such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.
And concerning risk factors that could cause such differences are described in the press release, covering our second quarter 2021 results as well as having been posted on our website.
And it's my pleasure to turn the call over to Greg case, CEO of Aon plc.
Thank you operator, and good morning, everyone welcome to our second quarter conference call I'm.
And for making me by Christa Davies, our CFO and Eric Anderson, our president and.
As in previous quarters, we posted a detailed for natural presentation on our website.
We want to begin by thanking our 50000 Aon colleagues for their dedication and focus on serving clients over the last year plus certainly every organization around the world as Russell with how to best support.
I'm joined breweries, how to manage record volatility and how does it look for more value to customers and Aon our colleagues and let you all of this while also preparing for a substantial integration.
What our team has accomplished is ex.
Jordan Eric today.
Today, we moved forward with the benefits of all of that work without the constraint of regulatory.
And my remarks will cover our outstanding financial performance in Q2 and year to date provide some observations on the termination of our combination with Willis towers Watson and speak to our go forward plan to continue delivering great service and innovation on behalf of clients, enabling growth for colleagues and delivering excellent return to shareholders.
And Q.
Our global team delivered outstanding results across each of our key financial metrics and I.
No particular strength across the top and bottom line with 11% organic revenue growth driven by mid single digit for greater organic bread when the growth from every solution line, how about it for particular strength and commercial risk at 14%, which translated.
2.2% adjusted EPS growth and Q2, and 13% free cash flow growth for the first half.
Our 8% organic revenue growth for the first half reflects mid single digit of greater organic revenue growth from 4 of our 5 solution lines.
Our Aon United strategy is delivering net new business generation and ongoing strong retention.
And in the summer.
All of the saw double digit growth overall, and the more discretionary portions of our business, including transaction liability human capital and project related work.
Risk solutions.
And 1 fantastic Aon, United and client example, and the quarter was around cyber security organization design and Aon colleagues came together across.
The solution lines to address the significant yet calm and client challenge our clients' cyber risk was increasing while the security organization case, the rapidly increase and cost of attracting and retaining top talent to ex U.
Their cyber defense strategy.
Colleagues from our cyber solutions group and the commercial risk and for my rewards practice and human capital.
Retention and with our unique expertise and cyber risk with best practices and benchmarking around talent and compensation and.
The result for our client and organizational design solutions that aligns their HR and technology teams to manage their cyber risk and a more cost of the Fisher way. The result for Aon is the repeatable offering that helps the drought the common.
And for many of our clients and an area of growing risk.
I would also note that we saw strong global macroeconomic conditions and the quarter.
So we continue to assess 3 key factors as we have since the beginning of the pandemic those.
And those factors of the virus and vaccine rollout, including the potential impacts of the Delta variant as well as government stimulus.
And overall GDP growth.
Macro conditions do affect our clients and our business. For example, we continue to see impact of our travel and defense practice within data and analytics services.
Considering the current outlook for these factors, we continue to expect mid single digit or greater organic revenue growth for the full year 2021 and over the long term.
Turning now for the termination of our combination with Willis towers Watson.
We recently announced our mutual agreement to move forward as 2 independent companies.
On behalf of Aon I'd like to thank our counterparts at Willis towers Watson for their professionalism of the past 16 months since we announced the transaction.
We of the utmost respect for them and I've truly enjoyed.
Joy getting to know the team.
The combination had significant regulatory of momentum, including notably the approval from the European Commission as well as approval for many jurisdictions globally, who have thoroughly evaluated embedded the transaction.
And the exception with the United States. The demands made by the U S Department of Justice on.
And our U S fitness wood of stifle innovation and reduced our client serving capabilities meeting. These demands would have significantly impacted our existing U S business and the potential shareholder value creation of the combination and our ability to continue to drive ongoing progress against our key financial metrics.
Similarly, the path for it on litigation was untenable.
Tenable because of current course appear to take us well into 2020, 2 and we could not accept that level of delay.
Ultimately the choice was clear we simply.
And would never compromise colleague and client priorities to close the combination of.
Our decision to and the combination and pay the termination fee create certainty and.
About how we move forward and we're confident.
This is the right decision for our firm for our colleagues our clients and our shareholders. We moved forward with energy and the high confidence and our ability to continue delivering new and innovative solutions for clients and exceptional opportunity for colleagues and the financial performance for shareholders.
Unclear as we look forward there are 3 important points that were clear when we announced the combination and are equally if not more important now.
First.
The world is becoming more volatile and clients need of partner capable of accelerating innovation on their behalf.
Just look of the socio economic impact of the pandemic the.
The rise of the state sponsored cyber hockey the floods and eastern Europe.
Buyers and Western America, and the challenges globally are working remotely.
Second the events of the past 16 months of home the power of Aon, United and our ability to work together to deliver new sources of value to clients over this time, we crystallize our operating model and cemented our 1 for mindset, we've uncovered countless new.
Europe, the investment and efficiency opportunities and at this point, we're better connected across our firm with all of the value of this work and none of the integration distraction.
Third.
We're moving toward with the proven platform and are operating from a position of strength and momentum as demonstrated by our client feedback and colleague engagement scores.
And at or approaching their highest levels for the past decade.
Our colleagues of delivering client retention and net new business generation across all solution lines, driving 8% organic revenue growth over the first half and 11% organic revenue growth this quarter, our strongest performance and almost 2 decades and.
Aon business services operating platform.
It's digitizing our firm improving the client experience and enabling of efficiency as demonstrated by operating margin expansion and 13% free cash flow growth and the first half.
Aon has never been here and a better position to propel top and bottom line growth and build on over a decade of progress on our key financial metrics.
In summary, our second quarter results demonstrate the success and momentum of our Aon United strategy, We're operating from a position of strength and we've never been better positioned to deliver for clients and support our colleagues and generate shareholder value now I'd like to turn the call over to Christa for her thoughts on our results the financial impact of the termination and our long term outlook for.
Metrics to shareholder value creation Christa.
Thanks, so much Greg and good morning, everyone.
The continued progress of both the closer and yesterdays, including an impressive 11, just kind of organic revenue growth and P. J.
Through the first half of it.
Translated strong organic revenue growth into double digit operating income.
Earnings per share and free cash flow growth demonstrating the power of value.
And I think strategy.
As I further reflect on our performance for the first half of the and as Greg noted organic revenue growth was 11% and the second quarter and 8% of Yesterdays, We continue to expect mid single digit or greater organic revenue.
The growth for the full year 2021 and.
And over the long term.
I would also and not the total reported revenue was up 16% and Q2, and 12% yesterdays, including the favorable impact from changes in FX rates driven by a week of you asked a lot versus most currencies.
Our strong revenue growth and ongoing operational.
Discipline contributed to adjusted operating income growth of 11% and future and force aimed to set for the first half of the year.
Turning to expenses and margin there are 2 key points I wanted to describe the.
First I want to speak to the impact of the previously communicated rehashing of the expenses as compared to Covid impacted spend.
<unk>, and 'twenty, and 'twenty, which I'll describe before any 2020, 1 and growth.
As we communicated in Q1 and the timing of expenses is changing year over year, such that $135 million of expenses moved into Q2 from Q for.
This impact is due to the actions, we took and highlighted last year.
And as we reduce discretionary expenses.
<unk> for the potential impacts of COVID-19, and potential macroeconomic distress.
The 135 million is approximately 1 of the half of that total.
2020 expense base.
In Q2, this free passionate negatively impacted margins by approximately.
470 basis points.
Resulting in Q2 operating margin contraction of 100 basis points.
Excluding this impact margins would've expanded by 370 basis points and future and 250 basis points for the first half of 2020 go up.
As we said before we expected a further 60.
And $5 million to move from Q4 into Q3 for a total of $200 million of expenses moving out of Q4.
Our second key factor impacting margin that's been the relative the speed of revenue growth and investment.
In Q2, excluding the impact of re patterning, our strong revenue growth.
And they significantly outpaced expense Greg we.
We continue to evaluate investments using our ROIC framework, while we made deliberate investments in people and operations and technology to enable long term growth the expenses associated with this investment will not fully and cut in Q2 and will ramp up during the second half of the yet.
We also anticipate some potential resumption of T and E and modest potential increases in real estate costs and more colleagues returned to the office collectively.
Collectively the headwind from extent, 3 patenting and tailwind from slow of investment as compared to growth were the main factors driving 100 basis points of margin contraction and.
Okay, and the 40 basis points of margin expansion and the first half of 2020.1.
Looking forward as we said historically, we expect to deliver for margin expansion for 2020, 1 and of the long term.
Yeah.
Turning back to the results and the closer we try and cited strong operating income growth.
The adjusted EPS growth of 17% and Q2 and 16% year to date as most of the earnings material FX translation with the favorable impacts of approximate full sense in Q2, and 22 cents yesterday if.
If constant and remain stable at today's rates, we would expect a 2 cent per share of favorable impact to keep free.
And future and 1 cent per share of favorable impact in Q4.
As Greg mentioned, Aon and Willis towers Watson mutually agreed to terminate our business combination of agreements and moved forward immediately as 2 independent firms.
In accordance with the business combination of agreement, we have paid the $1 billion termination fee to Willis towers Watson.
With respect to the termination fee out of U S businesses with the primary focus of the department of Justice Challenge and we pay the speed to defend that business from additional remedy divestitures that are essential to our ability to serve clients as well as the continuing delay and uncertainty and completing the combination.
As part of the termination.
And we also expect to incur approximately $350 million to $400 million of additional charges in Q3 related to transaction costs and compensation expenses as well as a small number of actions related to further steps on our aon, United and operating model.
These charges are related to cost to terminate and conclude the combination including related divestiture.
And they will all be incurred in Q3 as part of the clean break with Willis towers Watson.
Given the outstanding work I'll colleagues of the thought over the last past 6 to 8 months, we've taken steps internally to ensure our colleagues share and the growth potential of the firm going forward and this includes those who have previously up and retention bonuses and.
In connection with the combination.
The majority of the cash related to these charges, we paid in Q3 and Q4.
Aside from these transaction costs, we do not expect any further significant impacts and the termination of the transaction off the natural going forward.
Excluding the termination fee outperformance and outlook for free.
Free cash flow growth in 'twenty, and 'twenty, 1 and going forward remains strong free.
Free cash flow increased 13% is the day to 1.3 billion driven primarily by strong operating income growth and the decline in structural uses of cash we.
We continue to expect to drive free cash flow growth over the long term building on our long term track record of.
14% CAGR over the last 10 years based on operating income growth working capital improvements and reduced structural uses of cash and.
As we communicated in Q1, we continue to expect Capex for the full year to increase modestly year over year as we invest in technology to drive business growth.
And our outlook for long term free cash flow growth, we expect share repurchase to continue to remain our highest return on capital up she need for the capital allocation.
And the second quarter, we repurchased approximately 1.1 million shares for approximately $240 million.
We also expect to continue to invest organically and inorganically.
<unk> and innovative content and capabilities to address unmet client needs.
Our priority areas of investments are focused on addressing new forms of volatility like cyber.
And client build of resilient workforce with better solutions around the engagements unemployed benefits.
<unk> access to capital such as with.
For the intellectual property solutions and addressing the other says with digital solutions like coupled with us.
Our M&A pipeline is focused on bringing innovation at scale to our clients' biggest challenges the limit by the productivity of Aon United.
Now turning to our balance sheet and debt capacity, we remain confident and the strength.
Thanks of our balance sheet and manage liquidity risk throw of well lot of debt maturity profile of.
For the natural profile has improved over the past 18 months and considering our June 30 balance sheet and the payment of the termination fee. We estimate we have 1.5 billion of additional debt capacity for discretionary use of the second half of it.
Sure.
And historical leverage ratios, while maintaining our current investment grade credit.
Credit ratings.
Over the long term, we expect returns of our past practice of growing debt as EBITDA grows.
Further I'd note that free cash flow generation and the second half is seasonally stronger than the first half and we intend to allocate this cash.
Draw of highest and best use based on return on capital.
In summary, we ended the second quarter and a position of strength of our Aon, United strategy and investments and long term growth of driving strong top and bottom line performance, while the termination of our combination with Willis towers Watson was not the outcome. We originally intended.
And the opportunity for Aon has only grown.
Our disciplined approach to return on capital combined with our expected long term free cash flow growth and increased debt opportunity provides financial flexibility to unlock significant shareholder value creation over the long term.
With that I'll turn the call back to the operator, and we'd be happy to take your questions.
Yes.
The phone lines are now open for questions if you'd like to ask a question over the phone. Please press star 1 and record your name if you'd like to withdraw your question Press Star 2.
First question of the cues from Elyse Greenspan with Wells Fargo Your license now and open.
I think.
Good morning, Mike.
The question Chris.
And is on buyback and so.
And you pointed out that you guys typically sounds of free cash flow and the second half and the first half. The lack of you guys had around and wanted to ask him 1 of second half of free cash flow and then you alluded to maybe an incremental 1 and a half a billion of additional debt.
At and you guys can issue. So is that and then to apply that we could see around 3 billion of incremental share repurchase and the back half of this year.
So the leads we don't give got it from share repurchase, but what we can say is our as you mentioned cash flow and the second half of the it is a seasonally.
Cash flow generating a 2 quarters Q3 and people are we've been very clear that we have the opportunity for additional debt of $1.5 billion and the second half of the year and therefore, we have substantial cash to invest back into the firm, whether that's organic investment M&A or share repurchase I would note that we do allocate cash.
The stronger the return on capital and cash on cash returns and buyback remains our highest return on capital opportunity even at today's prices. It is a fantastic return on capital for shareholders and on that basis, we expect to do substantial share repurchase in the second half of the year.
Great and then my second question I think you mentioned.
But I thought of you know folks that were eligible for retention payments with the transaction would be receiving on some payments I think that was the basis for the charge that youre going to take in the.
For the third quarter, but can you and so I just want to confirm that and then can you give us a sense of how the employee retention has trended.
The past year has been during the pandemic the why the mergers going on or even over the past couple of months with the regulatory review have retention levels and in line with normal expectations. Just can you give us a sense of how things have been trending there.
Sure so regarding the 350 to 400 billion.
And the charges and in Q3, they really related to the transaction costs and compensation expenses as well as a small number of expenses related to further steps and I and and adopt.
For any model I would say these charges is really related to the cost of terminate and conclude the combination. It's part of a clean break with Willis towers Watson and.
And then at times of the.
The outstanding.
Additional dock colleagues who've done out of the Pos exceed months, we've taken steps to ensure that all colleagues share and the growth potential of the firm going forward and that includes those who have previously offered retention bonuses and connection with the combination so with that I'll hand to Eric talked for retention and overall at Aon.
Sure. Thanks, Christa and I would just say at least we continue to attract great people.
And all of the key strategic areas for growth and can expertise the christa outlined in her remarks.
We don't really pay too much attention to the headlines of the commentators that and talk about talent and.
And certainly reject the premise of disruption that we've been hearing.
Look we have a great team and and just to give you a couple of facts.
Voluntary attrition continues to be excellent for.
For US we just did a poll survey in June and ended up with top quartile of engagement scores for our colleagues.
And you know these trends I think are of the result of all of the flexibility and connectivity and the support we've been giving to our colleagues over the last 6 months not just with the real if theres lots of combination, but also with the pandemic and.
And so we feel really good about the team that we have.
Thanks for the development of all of our talent and know, we're really well positioned going forward.
Maybe it looks like it's without a thought on top of that you think of it as a colleague and you're sitting across the table from the client you know listening and their challenges their opportunities are.
Where would you want to be affirm that the capability, we have and the here and now what we can do.
Also a greater level of spend and investment innovation and anyone in the world and you know it's just been it's been of Great stories, that's evolved and pandemic as I tried to highlight in the opening comments of just amplified the importance of this around the need for innovation climate.
Actual property and cyber et cetera. So all of these things come together to make the the value proposition.
The unique.
But really I just wanted to call out of our colleagues of them just magnificent over the last the last 16 months and every way share perform in terms of how they've not only.
And I only manage through all of the different pieces around the integration, but also what they've done for clients at the spend the extraordinary to see and that's showing up in multiple ways.
Okay. Thanks for the color.
Ex question and the Qs from Sunny and come out with Citi. Your line is now open.
Thanks, Good morning.
Yes for Christa to start if I think back to your guidance sort of free Willis towers Watson in terms of free cash flow growth, you've typically talked about.
The double digit growth rate and in today's deck, you just talk about free cash flow growth. So I'm just trying to figure out is there something that's different relative to what you said in the past or do you still think double digit free cash flow growth over the long term is what you guys are positioned to achieve.
So Nate we absolutely believe and double digit.
Free cash flow growth out of the long time, and we're incredibly excited about the growth potential and times of revenues margins and the free cash flow over the long term so nothing's changed there.
Okay, and then and I did note and in the second quarter free cash flow was down maybe 13% relative to the second quarter of last year.
Or anything unusual that sort of drove that.
No nothing what we would say look you should really look at free cash flow growth over the course of the year.
And we will absolutely grow free cash flow during 2021 and I would just say quarter to quarter. There are some lumpy things. We're very excited about the free cash flow growth year to date, especially in the sense.
Okay. It makes sense and I guess, maybe bigger picture question for Greg.
The post this experience with Willis towers Watson just wanted to ask about your thoughts on you've mentioned transformative M&A and in your deck.
What are what are you thinking there in terms of M&A should we expect and things that you do would be on the smaller.
Side given.
The past 16 months or just how you're thinking about inorganic growth.
The city for US you come back to what Christa teed up just a bit ago on at least the question we have.
We've just got it.
Honestly positive performance and that's sort of carrying through over the last 16 months, that's showing up and we're really.
So the focal point for Aon, which is translating revenue into free cash flow of and the ability to grow free cash flow and with that with that cash and it really comes how he invested and are truly comes back and return on investment capital. So we're always going to take steps that actually maximize return on invested capital with the cash on cash return and we'll look for opportunities aren't we have tremendous organic opportunities.
He is inorganic opportunities and you know all shapes and sizes.
And and very much looking forward, the sort of driving shareholder value of applying the cash and the appropriate way and well continue to look for all means to do that.
And maybe I might just add and say look we are incredibly excited about the cash flow growth potential of the phone and both in the second half of the year.
I'm going for it and then obviously our ability to grow debt as EBITDA grows who's got an enormous amount of cash to invest and will and guests invest organically inorganically with M&A and and buyback Oh, the return on capital basis, and as I mentioned, we've actually got a number of priority areas for for investment really focused on meeting.
And I bet, it's the clients addressing me for the volatility like ciba, helping clients build the resilient workforce rethinking access to capital and innovative new areas like intellectual property and addressing the other served through our investments like the top of wallet and so we've got and exciting array of investment that we are continuing to invest in and so we're really excited about the growth.
Potential going forward.
Okay. Thank you.
Yeah.
Next question is from Jimmy Buhler with J P. Morgan Your line is now open.
Hi, good morning, and so I had a question on just the organic growth and the commercial lines commercial risk business and it was obviously the 14 per cent for you guys.
And for most of your peers as well and obviously comps were pretty easy, but other than comps and what are sort of the main drivers of that are I think you mentioned in your release pricing was a modest positive, but just trying to assess the water some of the things that might not be sustainable because they are related to either do a catch up and business activity of the other.
The things versus things that might continue.
And at least in the near term.
And maybe I'll just start with a couple of more of your thoughts and and Eric can talk about the different pieces and geographies around the world, where we've seen it's really the strength of on the strength to continue to evolve.
For US there was really no catch up and any way share perform for you going back to early last year.
The strong strong position and not just continued to build through the pandemic and that's client need increase and our ability to react the clients and serve them also continued to increase and so Jimmy we ended up with new business generation net new business generation really at all time highs and the continued to build mood and ended up and the third and fourth quarter of last year and now you see it and the first half.
Of this year and really for the last 5 quarters.
The real kind of 2 of the force effort on behalf of colleagues around the world on all areas.
2 as it relates the growth, it's why we underscore and reinforce the mid single digit organic for the year and ongoing beyond 2020.1.
But it really is the fundamentals of it really is how we're connecting.
And with clients and supporting clients, how we're applying the aon United strategy and bringing the best of our firm to clients every day and that actually is just strengthened and grown and that's why we you know we really come out of the last 18 months. When you think about the the chassis of day on the and the United Foundation is stronger than ever before but Eric of what's going on around the world by geography, and a lot of good stories.
Thoughts.
Yeah sure it listen I think there's a couple of things to point out 1 of we had double digit growth and commercial risk and each of our geographies around the world. So it was really a great quarter all the way around really strong rollover really strong retention, which really set you up and the future for continued growth and it was a couple of things right. The core P&C business performed.
Performed really well so we're really pleased about that everywhere, but also the discretionary work that Greg and Christa had talked about whether it was transaction liabilities cyber construction. Other project type work all of which were performing very well and equally across the world. So we had a really solid performance everywhere and we're really excited about it obviously.
Okay, and then just on pricing you mentioned the modest positive.
It seemed like it would be of better than modest positive just given what we've seen <unk> been seeing with the underwriters, but the what are your.
What's the sort of color on that yeah, sure and it's always a great question because people always wonder why the direct carrier.
The per unit price doesn't show up and translate across to the intermediaries on the risk side and listen I would just say clients clients make choices when prices move up or down right and 1 of the things that we do with them and I think I've mentioned this in the past. We first helped enjoy identify the risk of that they have and then try and manage them right without the use of risk transfer.
And then as prices go up clients finance more of it themselves if they can handle it and then ultimately when you get to the risk transfer part of why do they decided to trade the risk they make choices there too of the amount of insurance that they buy the coinsurance deductibles things of that try and manage for them. The budget that they have to spend on topics like risk transfer so.
It's never a direct line from what the carrier publishers as rate to 1 of client actually does for the risk of that they're trying to transfer and so all of those areas that we're talking about clients of a real heightened focus on during a time when pricing is increasing and.
And they get very specific around how they try and manage it themselves or finance it themselves before they.
And just transfer and into the market.
Are you seeing more pushback from clients on price hikes, because it seems like the commentary from the underwriter side is still pretty positive on what's going on.
Well listen clients certainly don't want the after 3 years of of rising market to pay more for a similar risk, but ultimately I think what they've done is it continued.
Try and really just get more sophisticated and I think we've been able to help them with all the data and analytics and insight to be able to make better choices around how they how they handle the rest.
Okay.
Next question is from Greg Peters with Raymond James Your line is.
Continued.
Good morning, Thanks for taking my questions. My first question will just.
And stay focused on organic.
Beyond commercial risk solutions, you had some very strong results and reinsurance and and health and and Greg I think you did call out of headwind or 2 and data analytics.
Now all of US your guidance is for mid single digit or better going forward.
I guess, what I'm trying to get out here is how much of the second quarter result was the snap back and how much of it is is permanent in terms of how we should think about it organic going forward.
So Greg.
And I'll, let Eric I appreciate the question and the thought of the terrific listen as we think about the growth profile, we keep coming back of this idea of the commitment around mid single digit of greater for the rest of the you know for the year and for 2022 and beyond and think about it. We did 4 of the 5 solution lines sort of of meeting that standard and then the first half and we've got great trajectory no doubt.
Variance sort of and the search minds, Ryan I highlighted and data analytics services. Most of our travel business is still under a tremendous amount of pressure and he would expect but still.
Still our colleagues are fighting through that and finding opportunities finding ways to connect with clients and you're seeing that so for us we feel good about mid single digit of greater we made that commitment before.
And there was really no snapback as we said before the the ability to connect with clients and drive growth and sustained throughout the pandemic and certainly sustained and.
The you've been amplified into 2020, 1 and so that's that's why we feel quite strongly about the outlook.
Got it and then.
The on the expense free patterning.
And you know as we as we gradually return back to whatever the new normal looks like when we and and I know you don't like to comment on projections, but when I think about 2022, all weekend and I have another expense.
Expense free patterning, if things got back to what the old normal was or.
Is what you're experiencing here and 21 sort of the new bar, which we can go to and measure on a quarterly quarter quarter over quarter basis going forward.
So it is the new basis, and you should expect expenses to be consistent with this patent and going forward and so really what I would say.
Say is it's reflecting changes from the Covid impacted 2020 expense base of 2020 was the unusual pattern and Greg and <unk>.
'twenty, 1 way of re patenting of to get back to a normal expense pattern. It because this is the correct performance across the year going forward.
And it got us the ranking of the Greg as Christa highlighted very well.
When you think about this over the course of the year and what we're trying to do not live in quarters.
Exceptional performance that continues to improve.
Makes sense thanks for answers.
Yeah.
Next question is from David Lewis with Evercore ISI. Your line is not 1 of them.
Hi, Thanks, good morning.
I wanted to stick on on cash flow and I guess first.
You know it looks like Yeah. I was just wondering do you think capex looked a little bit lower than I had thought do you still expect that to be up for the full year.
And also I think.
When I think about the seasonality and you know second half is higher than the first half.
I just wanted to confirm that that's excluding the $350 million to $400 million of termination costs and retention bonuses and so we should think I yeah.
No I think that would take away a lot of the seasonality, but just wanted to confirm that.
Ah, yes, so firstly.
We expect very strong cash flow and the second half and yes. It excludes the we expect the termination expenses to be adjusted out of Q3 and.
Having said that.
The year do you expect you know free cash flow to be strong for the full year and we're extremely excited obviously about the especially if it's net growth and free cash flow year to date.
In terms of your question around Capex, we would say that you know the capex should increase modestly year over year, driven by investments and technology to drive long time, Greg and I would say look going forward, we expect free cash.
We did grow double digits over the long term really driven by 3 key things growth and operating income declining uses of cash and improvements and working capital and so we're really excited about the growth and free cash flow of long term as well as our ability to add debt.
And as EBITDA continues to grow so substantially.
That's the amount of cash flow to invest back of the Aon.
Got it that's helpful and and then maybe.
You know just the question you just you know it definitely sounds just on the Willis merger and any sort of impact that might have on.
The business.
I know you I know you guys spoke about it a true.
And in response to a previous question, but you know I'm I'm hearing that you know it sounds like you know you didn't want the deal the fresh into 'twenty 2.
And and also you know obviously there are the the retention payments and some.
The other termination payments.
I guess could you just maybe elaborate on if you would expect any sort of disruption going forward and and the organic growth.
And maybe it was the start it's worth actually just putting things in context, and you think about sort of where we've come over the last 16 months.
And the translated directly and the growth which will be of.
The great stories as we've shown for the first half when you take a step back for the last 6 months the.
The primary thesis behind the combination of exceptionally strong and track the pandemic just made it stronger over that period of time.
Obviously, the strong shareholder approval of regulatory momentum and virtually every.
Every jurisdiction around the world and I noted, obviously DG comp and the European theater, but others around the world as well and just so you understand we reached an impasse and the U S Department of Justice, we could have completed the deal and a couple of ways, but we made the choice to reject what we believe are too unacceptable options..1 was the remedies and we could have completed the deal through the remedies.
Remedies, just like we did in Europe.
But it wouldn't have been the right answer for us simply would not have been the right answer we roughly know what it would take but candidly with the damage to our client serving capability as we've described before stifled innovation and you know as I've said, you've heard Eric and Christa talked about we will never do it.
Just never sacrifice.
And you're right, it's relative to close the transaction just not gonna happen and.
The and that's where we were on the remedy side and the second option equally unappealing with litigation.
And exceptionally strong hand from of her view, but the timeline pushed the deal into 2020.2 it and listen it looked like it did in every way share perform also unacceptable and we're just not going to wait and a holding pattern.
And well into 2022 to sort of have the resolve it is just too too long. So so we wanted to make a choice David for our firm and and what's the you know on our terms to move forward independently and obviously the position of strength. If you think about where we were in 2000, Twenty's and net where we are now very much of a position of strength and we're excited about how we move forward with real.
Sales and different by our team and the strength of our and our strategy. So that's the rough picture in terms of sort of where we are but when we get the growth Eric of course.
Anything else you Wanna comment all of them, Yeah sure, Greg maybe I'll talk a little bit about the the integration planning process and how we're using that work to help propel us for you know.
This event you know maybe to go back a little bit.
We went into the certainly the pandemic and the real estate was watching combination and a great place right. We were very strong going in both operationally and with revenue growth and when we started the integration management effort, we were essentially able to maintain the client momentum and continue to work on our strategy.
During the last 16 months of planning and the teams really.
Really perfected our Aon operating model.
The delivering aon United strategy as well as you know our go to market how do we actually pull all of these teams together for the benefit of our clients all of that is gonna be incorporated going forward, which will continue to.
The build the momentum so.
I think while we came into this process and our strong position I think we're actually.
Coming out of it and an even stronger position.
Completely agree and I would say up and actual results have strengthened and.
Growth in margin and free cash flow. If you look at 2020, 1 we delivered 11% growth and Q2 organically, 8% growth organically year to date and 13% growth and.
And free cash flow I guess day, just stunning for that sort of adults in 2020.1 building on a really strong 2021% growth organically through Covid 100 basis point margin expansion to 28, 5 per cent and 64% growth and free cash flow is $2.6 billion building on a decade of progress for percent average.
Okay and it grows over the last 10 years 890 basis points of margin expansion out of the last 10 years and 15% free cash flow growth each and every year over the last 10 years. So for nominal set of financial results. So we would say.
Our financial results have strengthened and gross margin and free cash flow.
Greg do you just want to come back to.
Yeah. So again, David I think I'm, just trying to give you a sense and sort of what that history of them over the last 16 months for your question and then you kind of say well, how does that translate and the growth.
I think Eric's point, you make the really important the fundamental capability actually a strengthening of the we spent so much time thinking about opportunities on the growth side on the.
Efficiency side on the investment side, and we came up with a ton of them and we're incorporating all of those all of that and reinforced by the Aon United strategy and the connectivity and Ironically [laughter] Covid created a situation, where we are on Webex Douglas of different different systems, and webex connected our permanent way and in the sitting across.
The growth of control people from clients and a way that's been incredibly incredibly powerful and that's what's led to literally net new business growth and and and also grow for exit with existing clients and with the strongest we've ever seen and so it really puts solutions us exceptionally well to continue to increase market share and take share around the world, which we've been doing and continue to do as well as create net new.
And I just want it don't Wanna get away. This is not a zero sum game for us we're winning the zero sum game, but it isn't about that it's about net new as we put solutions in place around cyber intellectual property.
And and climate.
The 3 we talked about a lot and we spend a tremendous amount of time and focus on those so we're very.
And we're very excited about the growth prospects. It's why we talk about mid single digit or greater and across all of our solution of mines and 2021of the young.
Great. Yeah. Thanks, so much I really appreciate that color was really helpful and yeah, and it's obviously not showing up any sort of disruption and there's no evidence of that and the results. So I definitely appreciate that.
Thanks, a lot for.
Next question.
And as for Mayor Shields with K VW and your line is now open.
Thanks, I guess my first question is on and how do I put it to be the case and philosophy, because it looks like the expectation for organic growth for 2021and.
Is mid single digits.
And I would assume that this is on a year for your base, it's probably just a phenomenal operating environment with the economy, hopefully coming back and sustained rate increases and I'm wondering whether the use of the sort of traditional language is.
And to indicate that we shouldn't expect too much from the tailwind.
Well.
Well.
I wouldn't say that and in fact, what we're trying to highlight is listen there's still a lot of volatility out there and the world. It's moving around and we essentially of said in the face of that volatility of wherever it goes we're very confident of the mid single digit for greater.
And the way not just for this year, but ongoing.
And as a piece and the double digit free cash flow.
And our view is that economic models and you think about it from an investor standpoint is extraordinary and in terms of the sort of what that means and so were just well we want to do is make sure you understand what we're reflecting the high confidence and our ability to achieve that.
And and we'll keep pushing for it on that basis, So there's and it's.
It's not about it's not about rebound or anything else.
But you know Christy anything else, you went out and sort of an event.
The other thing I'd Admira's, there is still some macroeconomic uncertainty and there are still some areas of that business.
And I traveled and met that haven't fully come back and say you know we will navigate through this and still deliver phenomenal financial results for the year.
The mid single digit or greater and 'twenty, 'twenty, 1 and going for it.
Okay. That's very helpful. Second question and I appreciate Eric comment on.
Employee retention and attrition.
When we look at the I don't know number of brokers that are out there and I guess reinsurance or la.
Accounts.
Is there any.
Increased competition for talent that would require a higher organic growth rates for margin expansion and we've seen in the past.
And even just say overall of the it's competitive out there its always competitive as Eric highlighted very well, we love the model, where you have because the.
For colleagues and individual level and a and it literally together and that's really what we talked about the individual capability, but also collective greatness collective ability to succeed is exceptional day and and that's you know for us and served us exceptionally well, but I would say Eric comment on this any more or less competition and there's always been in terms of sort.
And what's been out there.
Yeah, I agree Greg I mean, it's always been a very competitive business across all of the risk platforms, whether it's the primary brokerage or the reinsurance brokerage.
And so yeah I think just ultimately we continue to have to bring our best for each and every day to our clients with the best tools and insight and and if we do that I think it will be fine for Christa.
Christa and any of that.
Yeah, and maybe some of the margin point I guess, what I would say is we can grow margins and any operating environment. You saw last year, when we produce lumpiness and organic revenue growth, we expanded margins and because of the investments we've made and Aon business services and really bringing together all of our operating sort of infrastructure in 1 place some of.
The of excellence of all of the people and capabilities in 1 place, we're able to drive productivity benefits each year at scale and so we'll continue to drive margin expansion for the foreseeable future building on the 890 basis points of margin expansion, we drive for 90 basis points of yeah.
The other you know it each year.
So we expect to drive margin expansion in 2021, and each year thereafter, regardless of growth.
Okay. That's perfect. Thank you so much.
Okay.
Next question is from fills the funnel with Deutsche Bank. Your line is now open.
Yeah, Thanks, and good morning.
And I'll take the if I heard you correctly.
Earlier, I think you had talked about the ramping of investment it's going to pick up.
And the near future I guess in my mind, the GAAP of growth and revenues versus the underlying expenses is going to narrow and look and the long run. This normalizes, if you'd talked about the expectations for margin expansion, but can you just give us.
And to think about how this looks like and the short run it and the extent to which the gap narrow and maybe some economic sensitivity to the the broader recovery.
Yeah, So really the point I think I was making so it was in Q2, we did see greater of underlying margin expansion excluding the rate.
Patenting of expenses because growth outpaced our our ability to invest in that growth and a lot of the investments, while we did invest and people and operations and technology to drive up is less of some of that was not fully incurred in Q2. So it was really a statement about Q2, specifically fell and really what.
The free what you said is exactly right over the long term growth and expenses to drive that growth will be aligned.
Okay got it and I said.
That's my fault and that goes perfectly into my follow up and you talked about deliberate investment in people and technology could you give us a little more color on.
What exactly that means.
I would say, maybe an example of 2 of them.
What's driving these deliberate investment.
Yeah, I mean, there's a number of areas are and where we're investing for maybe I'll start and Eric and Greg you can jump in and.
But you know as an example of where we're investing a lot of and technology to help deliver innovative.
If you know of data analytic based solutions to our clients to help them manage risk retirement and health more effectively so that would be 1 area, we're investing and in security because obviously you know the security environment and cyber it's become a great effect for it for colleagues and inside of that.
And that is.
Neither of them another big area of investment and.
The losses, I'd say, we're actually continuing to to Ohio, great talent and to the fun, but maybe Eric and Greg do you want to sort of build on that.
And just 1 piece of 1 real quick and the due on and Eric and I have some really important comments here when you think about.
As you know and business services for that.
Platform as Christa described the technology investment and Simon. This is you know over the years it would've been very difficult for us the sort of current global impact and about investment because we couldn't scale. We can scale at the house, so as Christa and the team guide. This investment is incredibly efficient in terms of of how we can we can actually increase capability and make it real around.
And so they don't want to lose that point, it's very very fundamental of what happens in services and all about but in addition to that these net new areas and of course, it was alluding to.
Really exciting and this is of net new capability, where Brexit and some of it is connected the risk some of it the connectivity of just fundamental capability and certainly on the climate side for property side and on the cyber side. So a lot we're doing.
And that we are very excited about in terms of the ability to help clients address issues critical to them, but heretofore havent been addressed and the way than many of the beat so a lot happening from that standpoint, but Eric and anything else, you're throwing them and yeah. You just gave a great a great overview of of Greg, but do you think about intellectual property and the new skills required. There do you think about the new risk areas.
For us about renewable energy by climate modeling capabilities that we need you mentioned cyber of.
And certainly and our human capital business trying to invest and how we do ESG at scale for client and so there's a whole lot happening on the ground as Christie said that is supporting the growth that we're seeing and recognizing that we need to keep investing to make.
Make sure we keep growing.
Thank you good luck.
And the last question that we have and accused for today is from Brian Meredith with UBS. Your line is now open.
Yeah. Thanks, I had 2 quick questions here first 1 I'm just curious christa, what's the revenue impact of the sale.
All of the retirement of exchange it looks like you continue for with that 1.
Yeah, So the revenue Brian in 2020 for the retiree exchange of $176 million. It is a predominantly of Q4 of business as you know well mhm.
Great and then second question and I'm, just curious and that's a part of this process that you were going on.
Towers Watson, you'd obviously identified a lot of cost synergies and expense of potential savings from the transaction I'm curious if you were able to identify any specifically for a on that you could see potentially here going forward to help with cost savings interest and uncertainties. As you went through this process.
Ryan This is what we were alluding to and talk.
And with before and all.
And come back in the air.
And I can kind of jumping on this slide this.
And the last 16 months and this has really been at the 1 foot level literally as we engage and connect with our colleagues around the world and with clients around the world and we've seen and uncover multiple growth opportunities our investment opportunity.
And I forgot what is the expense opportunities highly applicable to.
The Aon, specifically and all of those are gonna be baked and as we move forward and this is back to the the theme we came and the 20 March 2020 was exceptional capability strength and what we've done over the last 16 months around the integration is fundamental and improvement of our platform, what's it going to be.
Opportunity and combined platform, but it absolutely is applicable to aon, but Eric and let us what do you think.
Yeah, Greg I think there's 2 buckets right I think on the revenue synergies you were talking about the client value creation model that we've been working on otherwise you know of delivering in the United strategy about how you bring the firm together, we were talking about the or how we're perfecting it.
The comment that was done in the context of the integration management planning, but also on the expense side, certainly real estate strategy technology strategy all of the areas that you would think having a fresh look with.
The teams that were built specifically to try and challenge the status quo and really pressure test how can we do it better and how can we do it more efficiently how do we leverage our and.
And it services model and a way the we'd really started during the pre Willis towers Watson combination to really accelerate how we actually use that capability I wouldn't necessarily call that last 1 new I would just call. It expanding what we have been building and really getting and embedded across the firm across the world.
Terrific. Thank you.
Thank you I would now like to turn the call back over to Greg case for closing remarks.
Thank you and just wanted to say to everyone and thanks very much for being part of the discussion of day. We appreciate it and look forward of our discussion next quarter. Thanks very much.
This concludes today's call. Thank you for your participation you may disconnect at this time.