Aon plc. Fourth Quarter and Full Year 2017 Results February 2, PDF

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An plc Furth Quarter and Full Year 2017 Results February 2, 2018 Greg Case Chief Executive Officer Christa Davies Chief Financial Officer 1 Safe Harbr Statement This cmmunicatin cntain certain statements
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An plc Furth Quarter and Full Year 2017 Results February 2, 2018 Greg Case Chief Executive Officer Christa Davies Chief Financial Officer 1 Safe Harbr Statement This cmmunicatin cntain certain statements related t future results, r states ur intentins, beliefs and expectatins r predictins fr the future which are frward-lking statements as that term is defined in the Private Securities Litigatin Refrm Act f Frward-lking statements relate t expectatins r frecasts f future events. They use wrds such as anticipate, believe, estimate, expect, frecast, prject, intend, plan, prbably, ptential, lking frward and ther similar terms, and future r cnditinal tense verbs like culd, may, might, shuld, will and wuld. Yu can als identify frward-lking statements by the fact that they d nt relate strictly t histrical r current facts. Fr example, An plc ( An ) may use frward-lking statements when addressing tpics such as: market and industry cnditins, including cmpetitive and pricing trends; changes in its business strategies and methds f generating revenue; the develpment and perfrmance f its services and prducts; changes in the cmpsitin r level f its revenues; its cst structure and the utcme f cst-saving r restructuring initiatives; the utcme f cntingencies; dividend plicy; the expected impact f acquisitins and dispsitins; pensin bligatins; cash flw and liquidity; expected effective tax rate; future actins by regulatrs; and the impact f changes in accunting rules. These frward-lking statements are subject t certain risks and uncertainties that culd cause actual results t differ materially frm either histrical r anticipated results depending n a variety f factrs. The fllwing factrs, amng thers, culd cause actual results t differ frm thse set frth in the frward lking statements: general ecnmic and plitical cnditins in different cuntries in which An des business arund the wrld; changes in the cmpetitive envirnment; fluctuatins in exchange and interest rates that culd influence revenue and expense; changes in glbal equity and fixed incme markets that culd affect the return n invested assets; changes in the funding status f An's varius defined benefit pensin plans and the impact f any increased pensin funding resulting frm thse changes; the level f An s debt limiting financial flexibility; rating agency actins that culd affect An's ability t brrw funds; the effect f the change in glbal headquarters and jurisdictin f incrpratin, including differences in the anticipated benefits; changes in estimates r assumptins n ur financial statements; limits n An s subsidiaries t make dividend and ther payments t An; the impact f lawsuits and ther cntingent liabilities and lss cntingencies arising frm errrs and missins and ther claims against An; the impact f, and ptential challenges in cmplying with, legislatin and regulatin in the jurisdictins in which An perates, particularly given the glbal scpe f An s businesses and the pssibility f cnflicting regulatry requirements acrss jurisdictins in which An des business; the impact f any investigatins brught by regulatry authrities in the U.S., U.K. and ther cuntries; the impact f any inquiries relating t cmpliance with the U.S. Freign Crrupt Practices Act and nn-u.s. anti-crruptin laws and with U.S. and nn-u.s. trade sanctins regimes; failure t prtect intellectual prperty rights r allegatins that we infringe n the intellectual prperty rights f thers; the effects f English law n ur perating flexibility and the enfrcement f judgments against An; the failure t retain and attract qualified persnnel; internatinal risks assciated with An s glbal peratins; the effect r natural r man-made disasters; the ptential f a system r netwrk breach r disruptin resulting in peratinal interruptin r imprper disclsure f persnal data; An s ability t develp and implement new technlgy; the damage t ur reputatin amng clients, markets r third parties; the actins taken by third parties that prefrm aspects f ur business peratins and client services; the extent t which An manages certain risks created in cnnectin with the varius services, including fiduciary and investments and ther advisry services and business prcess utsurcing services, amng thers, that An currently prvides, r will prvide in the future, t clients; An s ability t grw, develp and integrate cmpanies that it acquires r new lines f business; changes in cmmercial prperty and casualty markets, cmmercial premium rates r methds f cmpensatin; changes in the health care system r ur relatinships with insurance carriers; An s ability t implement initiatives intended t yield cst savings, and the ability t achieve thse cst savings; risks and uncertainties in cnnectin with the sale f ur benefits administratin and business prcess utsurcing business; and ur ability t realize the expected benefits frm ur restructuring plan. Any r all f An s frward-lking statements may turn ut t be inaccurate, and there are n guarantees abut An s perfrmance. The factrs identified abve are nt exhaustive. An and its subsidiaries perate in a dynamic business envirnment in which new risks may emerge frequently. Further infrmatin cncerning An and its businesses, including factrs that ptentially culd materially affect An's financial results, is cntained in An's filings with the SEC. See An s Annual Reprt n Frm 10-K fr the year ended December 31, 2016 and its Quarterly Reprts n Frm 10-Q fr the quarters ended March 31,2017, June 30, 2017, and September 30, 2017 fr a further discussin f these and ther risks and uncertainties applicable t An s businesses. These factrs may be revised r supplemented in subsequent reprts. An is under n bligatin, and expressly disclaims any bligatin, t update r alter any frward-lking statement that it may make frm time t time, whether as a result f new infrmatin, future events r therwise. Explanatin f Nn-GAAP Measures This cmmunicatin includes supplemental infrmatin related t rganic revenue, free cash flw, adjusted perating margin, adjusted earnings per share, and adjusted effective tax rate that exclude the effects f intangible asset amrtizatin, capital expenditures, transactin csts and certain ther ntewrthy items that affected results fr the cmparable perids. Organic revenue excludes frm reprted revenues the impact f freign exchange, acquisitins, divestitures, transfers between business units, reimbursable expenses and unusual items. The impact f freign exchange is determined by translating last year's revenue, expense r net incme at this year's freign exchange rates. Free cash flw is cash flw frm perating activity less capital expenditures. The effective tax rate, as adjusted, excludes the applicable tax impact assciated with expenses fr legacy litigatin. Recnciliatins f nn-gaap measures t their mst directly cmparable GAAP measures are prvided in the attached appendices. Supplemental rganic revenue infrmatin and additinal measures that exclude the effects f the restructuring charges and certain ther items d nt affect net incme r any ther GAAP reprted amunts. Management believes that these nn-gaap measures are imprtant t make meaningful perid-t-perid cmparisns and that this supplemental infrmatin is helpful t investrs. Nn-GAAP measures shuld be viewed in additin t, nt in lieu f, the Cmpany s Cnslidated Financial Statements. Industry peers prvide similar supplemental infrmatin regarding their perfrmance, althugh they may nt make identical adjustments. 2 Accelerating a Prven Strategy t Unite Firm and Imprve Grwth Prfile An is a leading glbal prfessinal services firm prviding Risk, Retirement and Health slutins Using prprietary data and analytics t empwer results fr clients by reducing vlatility and imprving perating perfrmance Divestiture f utsurcing businesses represents natural acceleratin f a prven strategy Cnsistent with jurney twards ffering advice and slutins; further aligns the prtfli arund clients highest pririties Prvided apprximately $3 billin f incremental capital t accelerate investment in emerging client needs Reinfrces return n invested capital (ROIC) decisin-making prcess and emphasis n free cash flw Accelerating rganic revenue 1 grwth driven by investment in highgrwth, high-margin areas f ur prtfli Organic revenue grwth f +4% in 2017 and in 2016 versus +3% in 2015 and 2014 Uniting the firm t address client needs, drive scial impact and maximize sharehlder value One perating mdel t deliver additinal insight, cnnectivity and efficiency One prtfli f capabilities enabled by insights frm prprietary data and analytics Organic Revenue Grwth 4% 4% 3% 3% Reflects perfrmance frm cntinuing peratins. Organic revenue is a nn-gaap measure. A recnciliatin f rganic revenue t revenue, the crrespnding U.S. GAAP measure, can be fund in Appendix A f this presentatin 3 Q4 and FY 2017 Key Metrics 4 Key Metrics 1 Strng Finish t the Year with Mmentum int 2018 Q4 16 Q4 17 Organic Revenue +5% +6% Operating Margin 25.5% 27.5% Year-ver-Year +200 bps Earnings Per Share $2.00 $2.35 Year-ver-Year +18% Organic Revenue +4% +4% Operating Margin 21.6% 23.4% Year-ver-Year +180bps Earnings Per Share $5.58 $6.52 Year-ver-Year +17% Free Cash Flw $1,673M $486M Year-ver-Year -71% Q4 Organic Revenue Grwth: Highlighted by strng grwth in Data and Analytic Services and Reinsurance Q4 Operating Margin: Primarily driven by strng rganic revenue grwth and cre peratinal imprvement frm return n investments and increased perating leverage, as well as savings frm restructuring initiatives Includes -10 basis pints f transactin related csts frm recent acquisitins Q4 Earnings Per Share: Duble-digit earnings grwth primarily driven by strng peratinal imprvement and effective capital management, partially ffset by a higher effective tax rate and a lss n the dispsal f certain businesses Includes a +$0.06 favrable impact fr FX translatin, ffset by a -$0.06 lss in ther expense Repurchased 3.5 millin shares fr apprximately $500 millin 2017 Free Cash Flw: Cash flw frm peratins decreased apprximately $1.2 billin primarily driven by cash tax payments f an estimated $940 millin assciated with the divested business, $280 millin f cash restructuring charges and $45 millin f transactin csts related t the divestiture, partially ffset by peratinal imprvement Free cash flw reflects a decline in cash flw frm peratins and a $27 millin increase in capital expenditures, including investments in ur perating mdel 1 Reflects perfrmance frm cntinuing peratins. The results presented n this page are nn-gaap measures that are recnciled t their crrespnding U.S. GAAP measures in the Appendices f this presentatin. 5 Q4 and FY 2017 Grwth and Investment 6 Organic Revenue 1 Strng Grwth Acrss all Revenue Lines Q4 16 Q4 17 Cmmercial Risk Slutins +0% +5% Reinsurance Slutins +1% +8% Retirement Slutins -2% +4% Health Slutins +30% +6% Data & Analytic Services +4% +12% Ttal An +5% +6% Cmmercial Risk Slutins +2% +2% Reinsurance Slutins +1% +6% Retirement Slutins +2% +3% Health Slutins +13% +7% Data & Analytic Services +6% +6% Ttal An +4% +4% Cmmercial Risk Slutins: Strng grwth in U.S. retail and slid grwth internatinally led by the Asia and Pacific regins, as well as new client wins in the captive management business Reinsurance Slutins: Strng grwth acrss every majr prduct line, highlighted by particular strength in treaty placements reflecting recrd net new business generatin, and grwth in bth facultative placements and capital markets transactins Retirement Slutins: Grwth acrss every majr business and gegraphy, with particular strength in the talent practice fr cmpensatin surveys and assessment services and in investment cnsulting, primarily fr delegated investment management Health Slutins: Strng grwth glbally in health & benefits brkerage, reflecting cntinued strength in bth the U.S. and internatinally, partially ffset by a decline in prject related wrk in the healthcare exchange business Data & Analytic Services: Cntinued strength acrss U.S. Affinity, as well as an increase in claims activity in the Fld business fllwing certain catastrphe events earlier in the year 1 Reflects perfrmance frm cntinuing peratins. Organic revenue is a nn-gaap measure that is recnciled t revenue, its crrespnding U.S. GAAP measure, in Appendix A f this presentatin. 7 Strategically Investing in High-Grwth, High-Margin Areas f Client Need Clients cntinue t navigate an increasingly vlatile wrld with 2017 being the cstliest year n recrd fr weather related disasters at an estimated $344 billin f ecnmic lsses Weather related disasters, cmbined with ecnmic, demgraphic, geplitical frces and the expnential pace f technlgy change, are all cnverging t create a challenging new reality fr businesses An has a strng track recrd f develping innvative, firstt-market slutins t help slve prblems and create differentiated value in respnse t specific client needs Strategically investing rganically and thrugh M&A in the highest grwth, highest margin businesses acrss ur prtfli, r in attractive gegraphies, driven by a ROIC decisin-making prcess; including: Data & analytics Cyber Health and elective benefits brkerage Healthcare exchanges Delegated investment management Psitining the firm fr lng-term grwth and imprved perating leverage 8 Q4 and FY 2017 Financial Summary 9 EPS 1 Duble-Digit Earnings Grwth fr the Quarter and Full Year Duble-digit earnings grwth primarily driven by strng rganic revenue grwth, significant peratinal imprvement and effective capital management, partially ffset by a higher effective tax rate and a lss n the dispsal f certain businesses Includes a $0.06 favrable impact frm freign currency translatin Includes a $0.06 lss in ther expense frm the sale f a certain business and lsses n the remeasurement f assets and liabilities in nn-functinal currencies Repurchased 3.5 millin rdinary shares fr apprximately $500 millin in the furth quarter Q4 EPS frm Cntinuing Operatins 2017 EPS frm Cntinuing Operatins $2.00 $2.35 $5.58 $6.52 Q Q EPS frm cntinuing peratins and EPS attributable t An sharehlders are nn-gaap measures that are recnciled t their crrespnding U.S. GAAP measures in Appendix B f this presentatin. 10 Operating Margin 1 Driving Cre Imprvement in Additin t Savings Operating Incme ($ millins) $2,336 $2,030 $676 $799 Q4 Full Year Operating Margin (%) Operating incme increased $123 millin cmpared t the prir year quarter Cre imprvement drve $67 millin, r mre than half f the dllar increase, reflecting return n investments and increased perating leverage Includes $56 millin, r +190 basis pints, f savings related t restructuring and ther peratinal imprvement initiatives, befre any reinvestment Includes $3 millin, r -10 basis pints, f transactin related csts 25.5% 27.5% 21.6% 23.4% FX translatin had an immaterial impact n perating margin in the quarter Fr the full year, perating incme increased +15% and perating margin imprved +180 basis pints frm the prir year Q Full Year A strng perfrmance peratinally in the first year f executin against ur multi-year investment in the firm 1 Reflects perfrmance frm cntinuing peratins. Operating incme and perating margin are nn-gaap measures that are recnciled t their crrespnding U.S. GAAP measures in Appendix B f this presentatin. 11 Investing in One Operating Mdel Creating a next generatin glbal business services mdel that allws fr better scalability, flexibility and enhanced clleague and client experience Driving ne perating mdel acrss the firm t create additinal perating leverage and deliver additinal insight, cnnectin and efficiency: Infrmatin Technlgy create greater insight frm data center ptimizatin, applicatin management and strategic vendr cnslidatin Real Estate create greater cnnectin thrugh real estate prtfli ptimizatin Peple create efficient scalability f peratins and activity, including the use f centers f excellence and third-party prviders After evaluating the current prgress f the restructuring prgram and identifying further pprtunities t imprve ur perating mdel, the restructuring prgram estimates have been updated t reflect a $50 millin increase in ttal expected savings Expect t invest an estimated $1,175 millin in ttal cash 1 f the $3 billin ttal utsurcing divestiture prceeds ver a three year perid ( ) $975 millin f cash charges 1 ; with $497 millin f expense incurred and $280 millin f cash spent t date. Future cash utlay is expected t increase mdestly in 2018 and decline each year there after $200 millin f incremental capital expenditure investment; with $27 millin incurred in 2017, and apprximately $100 millin expected in 2018 and $70 millin expected in 2019 Expect t deliver $450 millin f estimated savings in 2019, befre any ptential reinvestment $165 millin in 2017, $300 millin in 2018, and $450 millin in Excludes $50 millin f nn-cash charges included in asset impairments. 12 Incurred 48% f Prgram Charges with 63% f Savings Left t Achieve We incurred $96 millin f restructuring related charges in the furth quarter and a ttal f $497 millin charges in 2017, primarily relating t wrkfrce reductin and ther general initiatives, representing 48% f the ttal prgram estimate The cash impact in 2017 is an utflw f $280 millin We recgnized $56 millin f savings in the furth quarter and a ttal f $165 millin in 2017, befre any reinvestment, representing 37% f expected ttal savings ($ millins) Q4 17 Ttal Since Inceptin Ttal Prgram 1 % f Plan Cmpleted Wrkfrce Reductin $42 $299 $450 66% IT Ratinalizatin $11 $33 $130 25% Lease Cnslidatin $0 $8 $85 9% Asset Impairments $0 $26 $50 52% Other Assciated Csts $43 $131 $310 42% Ttal Restructuring Charges 2 $96 $497 $1,025 48% Capital Expenditures $200 Ttal Savings $56 $165 $450 37% 1 Represents management s estimates as f February 1, 2018, which are subject t change if and when underlying factrs may change. 2 Includes $50 millin f nn-cash charges included in asset impairments and lease cnslidatins. Ttal cash charges are estimated at $1,175 millin, including capital expenditures. 13 Nn-Operating Segment Financials ($ millins) Q4 16 Q4 17 Interest Incme $3 $7 Interest Expense ($70) ($71) Other (Expense) Incme $9 ($19) Effective Tax Rate % 15.5% Nn-Cntrlling Interest ($7) ($7) Actual Cmmn Shares Outstanding at n/a Interest Incme increased $4 millin due t additinal incme earned n the remaining balance f prceeds frm the sale f the utsurcing business Other Expense f $19 millin primarily includes a lss n the sale f certain businesses and a lss n the unfavrable impact f exchange rates n the remeasurement f assets and liabilities in nn-functinal currencies Adjusted effective tax rate in bth perids benefitted frm a net favrable impact f certain discrete items Actual cmmn shares utstanding n December 31 st were millin, and there were apprximately 4.5 millin additinal dilutive equivalents. The Cmpany repurchased 3.5 millin rdinary shares fr apprximately $500 millin in the furth quarter. Estimated Q1 18 beginning dilutive share cunt is ~252 millin subject t share price mvement, share issuance and share repurchase 1 Represents the nn-gaap effective tax rate. See Appendices f this presentatin fr a recnciliatin f nn-gaap numbers. 14 Strng Balance Sheet and Financial Flexibility Supprting Investments Balance Sheet ($ millins) Sep Dec Cash Flw frm Operatins 1 ($ millins) Free Cash Flw 2 ($ millins) Cash $749 $756 $1,829 $1,673 Shrt-term Investments $1,640 $529 $ $ Ttal Debt $5,967 $5,966 Sharehlders Equity $5,175 $4,583 Debt t EBITDA 3 3.3x 3.2x Cash flw frm peratins decreased apprximately $1.2 billin driven primarily by an estimated $940 millin f cash tax payments assciated with the divested business, $280 millin f cash restructuring charges and $45 millin f transactin csts related t the divestiture, partially ffset by peratinal imprvement Free cash flw decreased apprximately $1.2 billin, reflecting a decline in cash flw frm peratins and an $27 millin increase in capital expenditures, including investments in ur perating mdel Excluding the tax payments and transactin csts assciated with the d
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