Aon PLC Earnings Call Insights: Mid-Single-Digits Improvement and Brokerage Earnings Power
Aon PLC (NYSE:AON) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Michael Nannizzi – Goldman Sachs: Christa, so did you say – you said mid-single-digits improvement in consulting earnings, is that correct?
Christa Davies – EVP and CFO: Yeah. So, HR Solutions’ operating income will grow mid-single-digits in 2013, and we also said that we would expect margin expansion in 2013.
Michael Nannizzi – Goldman Sachs: So, I mean, in order to have double-digit earnings per share growth on the Company, what do you need from brokerage or deployment to get there?
Christa Davies – EVP and CFO: Michael, we’re giving that level of guidance. Really we’ve invested significantly in 2012 and we expect that free cash flow growth is really going to be driven by improved growth in operating margin expansion, decreased uses of cash, and significant improvements in cash flow from reduced tax rates. As we think about EPS growth, it’s really improvement in operating margin in both Risk and HR. It’s affected deployment of capital, as you’ve seen, during 2012 through share buyback, and continued improvements in effective tax rate.
Gregory C. Case – President and CEO: I’ll just add, Michael, as you think about our portfolios come together, the Risk Solutions part of the business there (as first), Aon Benfield, are a little ahead of where Aon Hewitt is and HR Solutions, which has sort of come together in terms of overall growth and development of the business and that’s what you’re seeing develop here.
Michael Nannizzi – Goldman Sachs: Then, I guess, if I remember right in the second quarter, I thought Christa maybe you had said that the expectations were for margin improvement on a year-over-year basis in Risk in the fourth quarter. Is that right or did I not have my notes right?
Christa Davies – EVP and CFO: We did originally anticipate that, and what we would say now is, there were two specific items in the fourth quarter of 2012 in Risk Solutions. One was a $7 million impact related to investment income; so a 30 basis point decline related to that. We did have interest rates decline even further in Australia and Europe which is hard to believe but true, and then we had a one-time item related to Denmark; $7 million or a 30 basis point impact. So, it’s 60 basis points between those two items.
Michael Nannizzi – Goldman Sachs: Then lastly just on the deployment, I mean do you feel like you’re going to be providing free cash flow, I guess from now, it sounds like on a quarterly basis. I mean, how should we think about the fourth quarter in context? Are we assuming that that was facilitated by some of the capital that was freed up during the repatriation or is there kind of an increased factor as far as the ability to deploy capital based on what you had given us in the past for expectations in 2012?
Christa Davies – EVP and CFO: Michael, it is exactly cash freed up from repatriation. If you look at share repurchase during the course of 2012, we repurchased $1.1 billion. Included in that was $300 million freed up from international cash held on our balance sheet. So, $800 million is the underlying amount of share repurchase. If you think about share repurchase for 2013, we would say it’d be similar to 2012 and similarly patterned ala back half weighted given that’s where seasonality of our business and cash generation occurs.
Brokerage Earnings Power
Dan Farrell – Sterne, Agee & Leach: Just want to ask a follow-up on the Brokerage business. So, I know you grew margins if you adjust Denmark and then even if you look at the change in the fiduciary income, I think people would have expected that it would be down versus the $14 million a year ago. So, there is improvement, but it still feels like it didn’t come through as much as you might have thought it would. I’m wondering if there is anything else either from an expense or revenue issue that we should be thinking about as we think about earnings power for next year?
Gregory C. Case – President and CEO: Dan, we don’t think there is. In fact, if you step back and think about how the margin evolved, Christa highlighted a few one-timers for Q4 which you’re always going to have back and forth. As we think about margin for the year, we put in the context of we were up slightly. But what was more important for us from an operating margin leverage standpoint is, the investments we were able to make in 2012 and how we were able to absorb them completely and still have positive margins for the year. When you think about our investment in GRIP, which we talked about in the first, second and third quarter, it was really at an unprecedented level as we’ve rolled that out with investments in Aon Benfield analytics and Broking et cetera. So, we were able to make a series of investments that we think are fundamentally strengthening the operating leverage of the Company and still absorb all that in year. So, from our standpoint, as we reflect on ’12, we feel very good about prospects for ’13 and ’14 from a margin and expansion standpoint, and in many respects, when we think about sort of how those investments have actually played out, and you couldn’t have made them in a year and still recovered margin unless they were really starting to pay dividends, we feel actually quite good about progress towards the 26% as Christa described. And then if you combine that with sort of the engine of the firm around record or sort of substantial growth, certainly greater than any time the last number of years, the cash flow generation in that engine is now just kicking in, in a way Christa described and then the re-domicile of the headquarters to the U.K., which is principally going to help the Risk Solutions business more than any other. We feel good about operating leverage for ’13 and ’14; in fact, probably stronger now than we did at the beginning of ’12.
Dan Farrell – Sterne, Agee & Leach: Then, one other question just on balance sheet cash. Of the $600 million roughly of unrestricted at the end of the quarter, how much of that you feel is usable? And then also, there is the $350 million of higher invoicing that’s dragging cash. If I recall at the beginning of the year, it was close to $400 million, so you’ve had a little unwind, but I thought at the beginning of the year, it felt like most of that would resolve through 2012 and it doesn’t seem like that much has. So, I am just wondering on the timing of when the rest of that $350 million actually comes back into the balance sheet cash?
Christa Davies – EVP and CFO: Right. So, we have made progress during this quarter; approximately $25 million, so at the end of Q3, it was $375 million; at the end of Q4, it was $350 million. We do expect the remaining $352 million reverse itself during 2013, so that will be a sort of improvement in working capital during the course of 2013.