Gregory C. Case - Aon Plc Christa Davies - Aon Plc.

David Anthony Styblo - Jefferies LLC Adam Klauber - William Blair & Co. LLC Quentin McMillan - Keefe, Bruyette & Woods, Inc. Sarah E. DeWitt - JPMorgan Securities LLC Kai Pan - Morgan Stanley & Co. LLC Jay Arman Cohen - Bank of America Merrill Lynch Jon Paul Newsome - Sandler O'Neill & Partners LP Joshua D. Shanker - Deutsche Bank Securities, Inc.

Charles Joseph Sebaski - BMO Capital Markets (United States) Ryan J. Tunis - Credit Suisse Securities (USA) LLC.

Good morning and thank you for holding. Welcome to Aon Plc's fourth quarter and full-year 2016 earnings conference call. At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call. If anyone has any objections, you may disconnect your line at this time.

I would also like to remind all parties that this call is being recorded and that 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 Litigation 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.

Information concerning risk factors that could cause such differences are described in the press release covering our fourth quarter and full-year 2016 results as well as having been posted on our website. Now it's my pleasure to turn the call over to Greg Case, President and CEO of Aon Plc. Sir, you may begin..

for our outsourcing clients, a partner in Blackstone, who will set the global standard for operations excellence and technology innovation in this area, and for Aon, another step to sharpen our focus on advice and solutions.

We're reallocating resources from capital-intensive outsourcing assets to accelerating investment in high-growth high-margin areas across retirement and health, including such areas as delegated investment consulting, health and benefits brokerage, and private healthcare exchanges.

Overall, we're excited about the step and what it means for Aon, for our clients, and for our shareholders as the next step of significant shareholder value creation. I'm now pleased to turn the call over to Christa now for further financial review.

Christa?.

Thank you, Greg, and good morning everyone. As Greg noted, this transaction further strengthens the firm's advisory capability and accelerates innovation through effective allocation of capital to maximize client and shareholder value.

The pending sale of the benefits administration and HR BPO assets is expected to generate gross cash proceeds up to $4.8 billion, including $4.3 billion of cash consideration at closing and an additional consideration up to $500 million based on performance. Total after-tax cash proceeds are expected to be $3 billion.

This reflects a multiple of approximately 12.1 times 2016 EBITDA of $396 million, which includes intercompany corporate allocations and other expense adjustments.

We believe this transaction reflects a continuation of a proven strategy and is further evidence of our disciplined capital management approach to drive improved return on capital, which has increased each year since 2010, up 540 basis points to 17.1% in 2016.

Driven by effective capital deployment of free cash flow and transaction proceeds, savings from operating model integration, and a lower effective tax rate, we expect the transaction to be accretive to 2018 FactSet consensus analyst estimates of $7.97 per share.

Further, we also announced that part of the proceeds from this transaction will be allocated to an increase in our previously authorized share repurchase program. The repurchase program will increase by $5 billion, bringing the total amount currently authorized for repurchase to approximately $7.7 billion as of February 10, 2017.

Lastly, we expect the transaction to close by the end of the second quarter 2017, with the results of the assets being placed into discontinued operations for the first quarter of 2017.

For modeling, the impact of divested operating income and stranded costs going forward, we would eliminate $323 million of adjusted operating income while adding $91 million of corporate allocations and other expense adjustments.

These two adjustments we estimate would reduce your future expectations by $414 million on an annual basis before any other adjustments for timing of close and potential actions we may take to improve operational performance. Now let me turn to the financial results for the quarter and year on page 8 of the presentation.

Our results in the quarter reflect growth, operational improvement in both segments, strong double-digit free cash flow growth to a record $2.1 billion for the year, and effective capital management. Further, we deployed roughly $2.5 billion of capital in 2016 through share repurchase, attractive acquisitions in high-growth businesses, and dividends.

Our core EPS performance excluding certain items increased 13% to $2.56 per share for the fourth quarter compared to $2.27 in the prior-year quarter.

Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 13 in the press release include non-cash intangible asset amortization and non-cash expenses related to certain pension settlements, as well as transaction costs related to the sale of the outsourcing assets.

Also included in the results was a $0.03 per share favorable impact related to foreign currency translation, due primarily to U.S. dollar strength against the pound. For the full year, foreign currency translation had a $0.01 unfavorable impact on EPS.

If currency were to remain stable at today's rates, we would expect foreign currency translation to have a modest unfavorable impact in the first quarter of 2017. Now let me talk about each of the segments on the next slide. In our Risk Solutions segment, organic revenue growth was 3%.

Operating income increased 9%, and operating margin increased 190 basis points to 27.6% compared to the prior-year quarter.

Operating margin improvement of 190 basis points reflects solid organic revenue growth across every major business and 100 basis points of favorable impact from foreign currency translation, partially offset by $6 million or minus 30 basis points of transaction-related costs for acquisitions previously mentioned.

For the full year, operating income increased 5% and operating margin improved 90 basis points to a record 24.5%, driven by return on our investments across the portfolio and a 60 basis point favorable impact from foreign currency translation. Turning to the HR Solutions segment, organic revenue growth was 5%.

Operating income increased 7%, and operating margin increased 210 basis points to 28.3% compared to the prior-year quarter. Operating performance in the fourth quarter primarily reflects strong growth in our high-demand investment areas and expense discipline as we take steps to reduce certain costs related to previous dispositions.

Results were modestly offset by an $8 million or minus 10 basis point unfavorable impact from foreign currency translation. For the full year, operating income on a reported basis decreased 1% and operating margin increased 30 basis points to a record 18.4%.

Driven by specific decisions to dispose of certain businesses at the beginning of 2016, we believe it's helpful to look at the underlying operational improvement of the platform.

Adjusting for the impact of approximately $29 million of lost operating income and stranded costs related to previous dispositions and $20 million of unfavorable foreign currency translation, underlying operating income would have increased 5%, with operating margins increasing 120 basis points to 19.6% for the full year.

Now let me discuss the few of the line items outside of the operating segments on slide 9. Unallocated expenses decreased $4 million to $57 million. Interest income was $3 million compared to $4 million in the prior-year quarter. Interest expense increased to $2 million to $70 million due to an increase in total debt outstanding.

Other income of $9 million primarily includes gains due to the favorable impact of exchange rates on the remeasurements of assets and liabilities in non-functional currencies. The prior-year quarter primarily included a gain on the sale of our Asset Management business and Outsourcing in HR Solutions.

Going forward, we expect a run rate of approximately $45 million per quarter of unallocated expense, $3 million per quarter of interest income, and $70 million per quarter of interest expense.

Turning to taxes, the adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with non-cash pension settlements, decreased to 14.9% compared to 17.9% in the prior-year quarter.

Changes in the geographic distribution of income and certain favorable discrete tax adjustments impacted the adjusted effective tax rate in the current quarter and for the full year against our underlying operating tax rate of approximately 19%.

The prior-year quarter adjusted effective tax rate excluded the applicable tax impact associated with expenses related to legacy litigation. As discussed on prior calls, discrete tax adjustments can be favorable or unfavorable in any given period.

Lastly, average diluted shares outstanding decreased 4% to 268.3 million in the fourth quarter compared to 279.3 million in the prior-year quarter, as we effectively allocate capital. The company repurchased 1.8 million Class A ordinary shares for approximately $200 million in the fourth quarter.

Actual shares outstanding on December 31 were 262 million, and there are approximately 5 million additional dilutive equivalents. Estimated Q1 2017 beginning diluted share count is approximately 267 million, subject to share price movement, share issuance, and share repurchase.

As mentioned previously, the company announced an increase in its previously authorized share repurchase program this morning. The repurchase program will increase by $5 billion, bringing the total amount currently authorized for repurchase to approximately $7.7 billion as of February 10, 2017.

Now let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth. At December 31, 2016, cash and short-term investments decreased to $721 million. Total debt outstanding was approximately $6.2 billion. Total debt to EBITDA on a GAAP basis was 2.5 times.

While debt to EBITDA will be initially elevated as a result of this transaction, we expect to return back to the 2.5 area in 2018.

Cash flow from operations for the full year increased 16% or $317 million to a record $2.3 billion, primarily driven by an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions, and lower cash taxes.

We also saw underlying working capital improvement, reflected by a 2-day decrease in days sales outstanding over the trailing 12-month period.

Free cash flow, as defined by cash flow from operations less CapEx, increased 22% or $385 million to a record $2.1 billion, driven by strong growth in cash flow from operations and a $68 million decrease in CapEx.

In 2016, we delivered strong double-digit free cash flow growth, reflecting momentum as we focus on converting each dollar of revenue into the highest free cash flow yield.

Turning to the next slide to discuss our free cash flow growth over the long term, we value the firm based on free cash flow and allocate capital to maximize free cash flow returns.

We've made substantial progress since introducing free cash flow as a key financial metric in 2012 and continued to take significant steps to position the firm for the double-digit free cash flow growth over the long term. There are three primary areas that we expect to contribute to incremental free cash flow growth going forward.

The first is continued operational performance, driven by organic revenue growth and margin expansion. The second is working capital improvements as we focus on closing the gap between receivables and payables.

We've made substantial progress in this area over the last five years, and working capital provided a positive inflow as part of our record free cash flow generation in 2016. We expect working capital to contribute to free cash flow by over $500 million over the long term.

And third is lower cash tax payments, reflecting a lower effective tax rate rates over time. In summary, we delivered positive performance across each of our four key metrics for the quarter and full year.

We're heading into 2017 in a position of strength, driven by our substantial investments in high-growth areas, our record free cash flow generation, and continued discipline around capital deployment opportunities. We've increased return on invested capital from 11.7% in 2010 to over 17% in 2016.

The transaction announced this morning will further enable the firm to improve return on invested capital, accelerate free cash flow growth, and create the next wave of shareholder value creation. With that, I'd like to turn the call back over to the operator for questions..

Thank you. We now have questions on queue. The first one is coming from the line of Dave Styblo from Jefferies. Sir, your line is now open..

I think you might be on mute, Dave..

Here we go.

Can you guys hear me now?.

Yes..

We can..

Okay, great. Thanks for the questions. I think I'll start with a qualitative question just about the transaction here and understanding maybe the history of when you put these assets together. And I think the rationale back then was cost synergies and diversification and so forth.

And then over time as we fast-forwarded, can you just explain a little bit more about the rationale now? As you're divesting these assets, is it more so because it's maybe one of your lower margin business lines and you see better opportunities for the ROIC as you look to deploy some of that cash organically or inorganically internally to some of the other areas that you mentioned? Maybe you could flesh out some of those opportunities that you're looking at.

And then I've got a second question on just the accretion that I'll hold for you in a second..

Sure, and that's a great place to start, Dave. For us, we see this as very much a natural progression.

And really you go back more than a decade as you think about what we've tried to do, same strategy, same approach, focused on preeminent firm in the world focused on risk, retirement, health, all things around that, talent, capital, the things that come with that, really risk, retirement, and health.

You've seen us make substantial investments all along the way, particularly focused around expertise and excellence in advice and solutions. And where we can underpin it by data and analytics, we've doubled down and invested more and more against that. That has served us exceptionally well.

And we love that strategy, we continue to double down and invest in that strategy. The addition of Hewitt to the Aon family in 2010 was a great, great catalyst for us that reinforced our efforts around retirement and health among other areas, and we've really incorporated those capabilities and continued to strengthen and build Aon.

And all you're seeing today is yet another opportunity to step back and say where is the best place for us to put capital, how can we do it most effectively to reinforce the same strategy, preeminent firm in the world focused on risk, retirement, and health, particularly around advice, solutions, underpinned by data and analytics, and that's exactly what we're able to do today as we announced this divestiture.

And what's great about this is we're taking our outsourcing assets, partnering with Blackstone. Our clients are going to be exceptionally well-served with Blackstone and the innovation they can bring to the table.

And we are going to then now be able to innovate more and more focused on our core strategy around risk, retirement, and health on the topics of advice, solutions, and data. So for us, this is just a great outcome and represents a continuation of a strategy we've been on for a long time that served us quite well..

And, Dave, the other thing I would add just to your question on return on capital is it's absolutely driven by our return on capital strategy. This is a lower revenue growth, lower margin business for us. You can see that in the schedule attached to the transaction release, and it will improve the overall return on capital of Aon.

We believe Aon post this transaction will be higher revenue growth, higher margin, and a higher return on capital with higher free cash flow growth..

And as far as the areas, I know you mentioned a couple, the exchanges and then reallocating assets to retirement and so forth.

Can you talk a little bit more about those areas that you're most interested in, whether it's organically or inorganically?.

We're going to continue again to make investments all along the topics of retirement, health, risk, et cetera.

If you think about maybe just the last year, the investments we've made in Admix, Univers, Cammack, Mayfair, all these are areas that really are health-related acquisitions and brought great capability, the investments we've made in delegated. We love this space.

It's gone from $10 billion, as I said before, to $90 billion in delegated, so I love the spaces around retirement. You see us investing a lot in data and analytics as it relates to risk, retirement, and health.

So for us, Dave, this again is a continuation of the strategy we've been on for a long time, and this gives us the opportunity to allocate even more capital into these areas and really double down on risk, retirement, and health.

This is quite consistent if you go back in time and think about what we did when we divested of our insurance underwriting assets and invested it back into the business. Now we've got yet another opportunity. Christa described and I described a real catalyst for us to increase shareholder return as a result of this..

Okay, that's helpful. And then just on the numbers, maybe you can give us a little bit more of a quantitative bridge for the operating income loss. I think it's 15%-plus of the total, and how you replace that, whether it's – I think buybacks can only do so much. Maybe you could give us a better idea.

Are you thinking about using maybe half of the $3 billion for buybacks or some sort of range there? And then what else is helping to bridge that? I know you've talked about operating expense savings.

Is that more so because you're just integrating the businesses a little bit more? And then on the tax savings, is there actual real tax savings, or does the tax rate go lower just because the business mix changes?.

Thanks, Dave. So I think in terms of how you think about modeling this, if you took the 2016 operating income number on a GAAP basis, you'd eliminate $323 million of adjusted operating income and then you'd add back $91 million of corporate allocations and other expenses.

So therefore, you'd adjust your 2016 numbers by $414 million on an annual basis, and that's really the base from which you then start to model going forward. So I think that's what you're taking out. In terms of guidance going forward, what we have said is we expect to be accretive to 2018 FactSet analyst estimates of $7.97.

And the way in which we would get there is continued operating income growth of the business, continued savings as we bring together the operational model of Aon under Aon United, areas like IT and real estate as you think about Aon much more focused on advice and solutions.

As outsourcing business being much more capital intensive, it allows us to actually generate savings there on the operating model side. We will have a lower effective tax rate really as a result of the things we continue to say, lower tax rate, rate reductions in different countries around the world, and overall geographic distribution of income.

And in terms of use of proceeds, as we think about the business going forward, we really think about continuing to employ proceeds on a return on capital basis in terms of cash-on-cash returns.

As you look, and we would expect that we would deploy the proceeds and our free cash flow growth in a mix of M&A and share repurchase, if you look at 2016, we did about $1 billion of M&A. As we think about the pipeline of M&A, we have fantastic return on capital opportunities there, we'd expect that trend to continue.

And we also, as you saw, authorized an increase in our share repurchase program of $5 billion, and we now have $7.7 billion of share repurchase authorization remaining. And share repurchase remains our highest return on capital opportunity across Aon.

But we do see terrific opportunities through improved operating income growth, M&A, share repurchase, reduced operating model savings, and a lower effective tax rate to get back to accretive in 2018..

Thanks, I'll step back for others..

Thank you. Our next question comes from the line of Adam Klauber from William Blair. Your line is now open..

Good morning, thanks..

Hey, Adam..

Also on the transaction, so you're selling the benefits administration platform, the HR BPO, but it sounds like you're still going to be in the benefit brokerage business and the exchange business.

Can you tell us how that's going to work?.

Adam, it's very much going to work like it works today. I mean, think about it, we're going to – just take the exchanges for an example.

Just as it is today, we're going to be involved in architecture and design, all the carrier relationships, the plan details that come together, the actuarial work which underpins that, the risk management which is so important and critical for the back-end risk adjustment of that.

And our new partner at Blackstone, is going to be helping and supporting around administration and call centers and enrollment flow and all the things that are important to that.

And at the front end, this is a place where as we think about innovation, we're going to continue to invest in data and analytics to really innovate on the front end as we think about the architecture and design. So for us, this is a very, very natural progression.

And what we're excited about is we're now going to actually to be bringing to a client innovation on both the front end more intensively through us and on the operations side through Blackstone.

So we think this is again, as I described, a real win-win-win and lets us really focus on the areas that we have highest interest in, highest return on invested capital, high margin, high growth, and it gives our clients the opportunity to actually benefit from more innovation across the supply chain..

So it sounds like you're still going to sell and distribute the product, but Blackstone will really run the technology and call center.

Is that sort of how the arrangement works?.

Yes, it really is. That's a great way to describe it. And again, I'd think about it, for those who are more focused and familiar with the risk side of the business, it's not dissimilar to us structuring an incredibly complex transactions for a client on the risk side.

And then we partner with insurers, who obviously do the underwriting and the claims, some of the claims processing and pieces around that. So we think this is a very natural progression, and we're very excited about it..

Okay, thanks.

And then as far as the Workday and some of the other ERP implementation service business, is that a similar arrangement? Are you keeping the distribution, or is that business mainly going to Blackstone?.

No, this all goes to Blackstone. And it really, again, we wanted to make sure that platform was a very standalone clear platform to serve clients effectively. We believe we've got that accomplished, and we're going to focus on the advice, solutions part of the overall supply chain for our clients..

So will you still be selling that Workday implementation, but then Blackstone will be doing the work? Is that again how it works?.

No, it's not. Again, Blackstone owns all the pieces that are around the outsourcing parts of this..

Okay..

And the execution parts of this. We're going to be relating to clients on the front end on the overall program and how it would work for them..

Okay. And then on the free cash flow, obviously you've done a great job. You had previously talked about a target.

Does the target reset lower because you've taken a lot of free cash out of the business? How should we think about that going forward?.

So obviously, we're very pleased with the $2.1 billion in free cash flow for 2016. It was really driven by operating income growth, improvements in working capital, lower pension cash, and lower cash taxes, so we're very pleased with that outcome. And you can see, we expect free cash flow to continue to grow double digits going forward.

And so that will be the expectation, as I said, because Aon exiting this business, Aon post this transaction is really a higher revenue growth, higher margin, higher return on capital business, with higher free cash flow growth..

Right.

But does the base start from a lower basis because you're losing?.

Yes, that's right..

Okay, okay, okay, that makes sense.

And then as far as the cost saving element of this, will there be a charge related to it, and will most of those cost savings be attained in 2018, or is this going to be a several-year program?.

Like we've always done, Adam, for us this is about building long-term value, so you will see us invest back into the business in all the ways Christa described, but also around creating efficiencies. And so in the coming months and quarters, you're going to see us take up efforts and initiatives to do that.

And again, we have an opportunity now to really streamline the business in ways we haven't done before, very much focused on the areas around advice, solutions, and data and analytics..

Okay, thank you very much..

Thank you. The next question comes from the line of Quentin McMillan from KBW. Your line is now open..

Hi, thanks very much, guys. I just wanted to touch on the tax rate. You obviously said that you're going to be able to achieve a lower tax rate by divesting this business. And I'm assuming that's in relation to the current tax environment that we have today. But could you talk about any thoughts that you might have if the U.S.

corporate tax rate was to decline? Would that, thoughts basically still hold true? And then just on the bigger picture questions that are out there, do you have any current thoughts about interest deductibility going away or anything else that may come to pass?.

Look, Quentin. As we think about the legislative environment we're in, obviously there's a lot of uncertainty right now. We're certainly monitoring it very closely. At this stage, it's too early to tell as there's little guidance and no draft legislation written on how this would impact financial services, insurance, or insurance brokerage.

And so we'll let you know as we learn more..

Okay, great. Then just in terms of the health and benefits business as it relates to the healthcare exchange, are you going to be folding the healthcare exchange in there as a tool that will be sold in conjunction with that? And then also obviously putting up double-digit growth in health and benefits in Asia and EMEA was very strong in the quarter.

But in the Americas, some other peers of yours had talked about a little bit longer decision-making process from some of their clients related to the ACA and other healthcare decisions that could be changing.

Did you see any weakness in the America that could show up in the back half of this year or might have changed the selling cycle there at all?.

We really didn't on that point, Quentin. And we'd step back and say listen, for us it isn't about one specific area, so it's not about an exchange or health and benefits piece, it's about health. As we said before, we love the category.

We've got a business, it's a $1.5 billion business that has grown double digits over the last three years with a very, very attractive margin. And we're doubling down and investing in that. Whether it's on the exchange, in H&B, in elective, we love the space and we're going to continue to double down and invest in it. We see a lot of momentum there..

Okay, great, and just one quick one. In terms of the share repurchases, just a little bit below what I would have expected in the fourth quarter.

Can you just comment? Was your share repurchase in the fourth quarter impacted by the fact that you had material non-public information from this deal?.

Yes, it was..

Okay, thank you..

Thank you. Our next question comes from the line of Sarah DeWitt from JPMorgan. Ma'am, your lie is now open..

Hi, good morning..

Hi, Sarah..

I'm looking at the Risk Solutions organic growth in the quarter. I thought there was going to be some revenue that was shifting from the third quarter to the fourth quarter, so I thought you would have seen a sequential pickup in organic versus 3Q.

Could just talk about what was going on there?.

Really for us, we actually feel good about where we finished in the year overall. Sarah, obviously the 6% comp in the prior-year quarter created a little headwind. We don't ever like to use that as an excuse, but the math is the math. But we really feel good about how we finished the quarter and the year.

If you look at net new business growth, it's again another record across the firm, with real momentum particularly around what we've done on Aon Client Promise and how that's affected retention rates. So we feel good about it. We would reflect – again, we always want to drive for more growth, and we're working on doing that.

But we finished the year at 3% overall and record margin. And so for us, it's pretty good progress..

Okay, great. Thanks, and then just a couple numbers questions on deals today.

How much of the proceeds will you be using for share buyback? And how much do you expect your overall tax rate to fall, and how much could the return on invested capital improve?.

Sarah, as we think about the starting point, we do believe that the after-tax cash proceeds are expected to be about $3 billion. And as we think about those cash proceeds plus our free cash flow, we have substantial amounts of cash to invest. And we really believe we're going to invest in a mix of M&A and share repurchase.

And we're going to allocate that based on return on capital and cash-on-cash returns. And you can see the chart in the release in terms of return on capital how much we've grown, over 540 basis points over the last five years.

And so we are divesting a lower revenue growth, lower margin business, and therefore you can expect return on capital to continue to increase. And we haven't given specific guidance around overall mix of allocating the cash because we continue to optimize it on a return-on-capital basis..

Okay, thanks, and then just the tax rate?.

So as we think about the tax rate going forward, we are not giving future guidance. As we said, we're monitoring the legislative environment very closely, and we'll continue to update you as we learn more..

I just meant with the deal.

Could you even just tell us what the tax rate was on the business sold?.

It's certainly a higher-tax business because it's mostly a U.S.-based business. And so as you look at the gross proceeds, you can see the tax rate applicable is very high because it's mostly a U.S.-based business..

Okay, all right. Thank you very much..

Thank you. The next question comes from the line of Kai Pan from Morgan Stanley. Your line is now open..

Thank you and good morning. So with the divesture, in the past you talked about HR Solutions operating margin target of 22% over the long run.

Could this change the target as well as the trajectory towards there?.

Kai, for us again, we feel very good about where we are and the momentum we have around risk, retirement, and health, and this will continue to reinforce progress there. So you will see momentum and push against that. And again, we had a record margin as you reflect on the year.

So we finished the year at 18.4%, which was again the highest it's ever been, and you're going to see continued progress against that. As Christa described, we literally just divested of a business that was lower growth, lower margin, and lower return on invested capital.

So by definition, we're going to get some momentum against that, but that's not as important for us as what we're going to be able to invest now back into the business in the way as Christa described, both in M&A as well as in what we're doing in areas like delegated, like the exchanges, like data and analytics organically, which underpin that.

So for us, we believe this is a catalyst for performance, which is what Christa highlighted in her discussion..

Great. And then you talk now more about potential acquisition opportunities. I just wonder. In the past, you've in recent years been more focused on buybacks and now acquisition pickup. I just wonder.

Is buyback still the best return from your perspective, or will we see probably more active in terms of acquisitions?.

So, Kai, buyback, as I said earlier, is still the highest return on capital opportunity across the company, and that's why you saw the increased $5 billion authorization of buyback this morning. And so we have $7.7 billion of buyback authorization remaining. And what we see in the M&A pipeline is some terrific high return on capital opportunities.

And we will be generating tremendous free cash flow growth over the coming years and we've got proceeds from the transaction, so we expect to be investing in both..

If you look back over time, just filling in on what Christa just described, over the last 10 years we've really deployed $18 billion plus just around decisions roughly, which were obviously in dividends, but also the part left over was roughly half in buyback and roughly half in M&A. So for us, it really has been an investment opportunity over time.

We have been very, as Christa described, very disciplined about how we've done that. I think Christa – last year we had zero in M&A in 2015, and this year we've got $1 billion in 2016. So if you think about – and now we're going into 2017, so for us this is not about any criteria.

This is about straight-up return on investment capital and making sure we're delivering on behalf of our clients in that regard, but also our shareholders. And that's how you'll see us deploy capital going forward, just as we've done in the past..

Great, last one.

On free cash flow per share, will that also be accretive in 2018 similar to the adjusted EPS?.

We haven't given guidance on that. What we've said about free cash flow is we expect free cash flow to grow double digits going forward..

Okay, great. Thank you so much..

Sure..

Thank you. The next question comes from the line of Jay Cohen from Bank of America Merrill Lynch. Your line is now open..

Thank you.

Just to clarify one thing, I'm assuming that the added potential consideration of $500 million, that will not be included in earnings, correct?.

It's going to happen over time, Jay, so it would happen in many years from now. And so we really think about that being based on performance. And so we give you guidance over the coming years as the performance gets delivered..

But you will include it then in your adjusted earnings eventually?.

It's cash. It wouldn't flow through earnings..

Right, okay, that's what I thought, just double-checking on that.

And then given your goal of reducing the leverage, will you have to take some explicit deleveraging actions to deal with your debt at all?.

We do not intend to do that. We do believe that the growth in operating income, the additional operating income that we will add from M&A will be terrific. And as I said, our debt to EBITDA on a GAAP basis was 2.5 times at year end 2016. And while we'll be slightly elevated post this transaction, we expect to return to 2.5 levels in 2018..

That's really helpful. I'm going to sneak one more quick one in. And as we talk about a lower tax rate helping the accretion by 2018, I'm assuming that's simply because you're getting rid of the business that has a higher tax rate.

This sale should not impact your tax rate from your other businesses, correct?.

It shouldn't, no..

Good, thank you..

Thank you. The next question comes from the line of Paul Newsome from Sandler O'Neill. Your line is now open..

Good morning, maybe some clarifying questions.

The $3 billion in cash, does that include the proceeds from the $500 million in the performance bonus related to?.

No, it does not..

So that's theoretically a positive prospectively?.

It would theoretically be incremental cash over time. And given it's performance-based, as I mentioned earlier, we would give you an update on the timing and amount of that based on performance in the coming years..

Was the outsourcing business that you're selling inherently more volatile business from an earnings perspective than the rest of Aon, or was it pretty similar?.

It's fairly similar. The way I would describe it is it was a lower revenue growth, lower margin, more capital intensive business, but it was not more volatile..

And then this is a little bit aside.

The accounting change that you made related to the revenue rec in the risk business, am I to assume that that seasonality change will persist prospectively?.

Absolutely right..

Okay, that's it for me. Thank you..

Thank you. The next question comes from the line of Josh Shanker from Deutsche Bank. Your line is now open..

Thank you very for taking my questions, two easy ones.

Does the $3 billion you're citing, does that include or exclude the potential higher price if you were to meet certain performance objectives?.

It does not include for $500 million earn-out..

Excellent, great. And two, following on Adam's question just a little bit, when I think about healthcare exchanges, I think it's a technology, I think it's a distribution platform.

Is Blackstone going to be operating the healthcare exchange and you're going to be doing I guess the healthcare design? How is that relationship going to work on this very growthy business?.

On the exchanges, again, as I described before, we're retaining the exchanges. We're going to work with Blackstone on the exchanges, but we're retaining the exchanges. So we're doing design, broking, actuarial as those are put into place, and Blackstone will be doing administration delivery against that platform.

Again, we think this is going to be a very seamless connection. And the beauty of this is we're going to have more innovation on the topic of exchanges than ever before, us on the front end doing what I just described, Blackstone on the operating back end doing what they described.

And it allows us to apply data and analytics more effectively to actually create that innovation. And you can expect Blackstone will be doing the same thing on technology innovation from an operations standpoint.

And for us, the net is, as Christa described before, we're in a less capital intensive situation in which we're able to focus on advice and solutions consistent with what our overall strategy is..

Let's say hypothetically an employee accesses a portal and the company is giving $150 – $200 to the exchange operator.

Is Aon getting those revenues or is Blackstone getting those revenues?.

These are split. Blackstone owns the processing pieces of this, as I described before. And we own the front-end design, broking, actuarial pieces, as I described before..

And so you'll share portal fees?.

We're going to get a commission from that standpoint. And then from the operating side, Blackstone will get the operating revenues from that..

Okay, thank you very much..

Thank you. The next question comes from the line of Charles Sebaski from BMO Capital Markets. Your line is now open..

Thank you, good morning or afternoon I guess. I guess, Greg, I was hoping you could just walk us through or at least help me understand relative to the original Hewitt acquisition in 2010.

I know in your prepared comments at the beginning, you mentioned that this is a low margin business and low growth and compared it to the previous sale of underwriting.

I can understand, but the underwriting business was a legacy business I guess when you came on board and the construct of Aon, as opposed to Hewitt, which was a deal you guys did and the benefits in HR BPO being the lion's share of that business when it was transacted. I guess I was trying to understand.

What's transpired over the last six years that's given you a different view of that because on a return on capital basis of that $4.9 billion deal done in 2010, I guess I'm not seeing the return on capital of that transaction then? Or is it just – is the world different? Did the pieces come together differently than expected in hindsight, or just the thought process I would appreciate?.

Let me just step back, Charles, because I think you're making some assumptions which actually are not how we saw it at all. In fact, if you step back, we couldn't be actually more excited and pleased with bringing Hewitt into the Aon family. This has always been about building content capability around the topics of risk, retirement, and health.

And Hewitt brought such tremendous capability for us on retirement and health. We're sitting today in the strongest position we've ever been in categories we absolutely love. We just delivered record margin against those categories. And now we're in essence in a position where we can continue to grow and reinvest in those areas.

So for us, Hewitt was just an incredibly positive catalyzing event for Aon that really reinforced and underpinned our strategy. So we love this.

And the outsourcing business from that standpoint was a business that was more capital intensive, was a business that was lower margin, lower return on invested capital, but we continued to invest and build that as well.

And now we have an opportunity, as we announced today, to step back and say now that we've achieved that, we can actually now divest that asset and now redeploy back into the areas that we have really been focused on all along.

So for us, this is very much a continuation and very much a logical step and a strategy we've had for over a decade, and really reinforce it.

And by the way, just as a reference, again if one were doing the math, if you were to go back in 2010 and look at our return on invested capital, and since 2010, our return on invested capital has increased 540 basis points. We feel pretty good about that progress.

We can always do better, feel pretty good about that progress, and it's a record now 17.1%. And the day before we announced it to you, I think we're trading at about $38, and last I looked, we were slightly higher than that now.

So from a standpoint of how things worked, we feel great about that, not so much from a return standpoint, which by the way, the mechanics were exceptional, just exceptional, but really from a strategic standpoint. And I would urge you not to compare what the acquisition of Hewitt was versus what today is because we didn't keep Hewitt separate.

Hewitt was about Aon. It was about strengthening Aon, and it actually accomplished all that frankly and exceeded our expectations..

Okay. And then I guess – I appreciate that – and I guess a couple of numbers questions. For Christa, I guess thinking of the free cash flow going forward, you guys have put in this presentation the annualized growth, which is very helpful.

Is it reasonable since how you calculate the cash flow of operating cash flow less CapEx, but we don't have it split out by business, our starting point of the $2.1 billion for 2016 just being netted down by the adjusted EBITDA number that you provided for the sold business, is $1.6 billion the adjusted starting point for cash flow for 2016? Is that a reasonable way to think about your double-digit starting?.

Yes, I think that, and then there was CapEx of about $80 million. And so as you think about that, you're starting with slightly higher basis and then double-digit cash flow growth from there I think is the right way to think about it..

Okay. And then finally on taxes, I know you don't giving guidance.

But the tax hit on the sale, about 30% I think on the $3 billion cash versus the $4.3 billion sale price, is that going to have a disproportionate effect in 2017 numbers relative to your tax rate going back? Is that going to flow through differently than the business would? I'm just trying to understand on how that's going to affect current year's overall organizational tax for the 2017 period..

I would separate out the transaction from the operating rate. And I did say again for 2016, the right underlying operating rate for Aon was about 19%, and it has remained that way for several years. And so that's been the operating rate for the last couple of years.

The transaction is a one-time item and would not flow through the adjusted EPS and effective tax rate..

Thank you very much for the answers..

Thank you. Our last question comes from the line of Ryan Tunis from Credit Suisse. Your line is now open..

Hey, thanks. I just had a question on how we should think about the level of accretion possible here relative to the consensus $7.97. Because I guess thinking about the deployment of proceeds into all buyback or M&A and the lost operating income of $323 million doesn't seem to quite get me back to $7.97.

And I hear you guys that you're not giving the guidance on the tax rate or specific cost saves, but I'm wondering. Should we be thinking about this as significantly accretive to $7.97 to compensate you guys for the risk of having to do this, or is $7.97 more the target now for 2018? Thanks..

So, Ryan, what we've said is we're going to be accretive to the FactSet $7.97. We haven't given more guidance than that.

And what I would say is it is a combination of proceeds and return on those proceeds from the transaction, continued organic revenue growth and margin expansion in our businesses, savings as we bring together the operational model, particularly in IT and real estate, and a reduction in tax rate. So they're the component pieces that get you there..

And what I might add, Ryan, if I could, we didn't see this, you mentioned risk, compensate for risk. We don't see it that way. I just want to emphasize again. We really see this as an opportunity to take another step forward in a journey that we've been on for over a decade.

This is exactly consistent with what we continue to do as we allocate capital, reallocate capital, think about our structure, think about performance improvement, all against a strategy around being the preeminent firm focused on risk, retirement, and health in every single way, and using more and more data and analytics, content, insight as a way to drive that strategy.

And so for us, this was a natural progression. In fact, the possibility to do it and serve clients well on the outsourcing side for us made it an imperative. This is something we absolutely had to do because we're excited about what it means for Aon.

We're excited about what it means for Blackstone, and we're excited about what it means for our clients. So for us, this wasn't about risk. This was a real step forward that strengthens our firm for the long term. And we'd just say, as we started this conversation, we see this as a real catalyst for shareholder value creation for Aon..

Okay, understood. Thank you. And then I think Christa just mentioned that what can continue to drive accretion here is margin expansion in the remaining businesses. I guess looking at organic growth this year, just in the brokerage side 3%.

To have margins expand off of that, are you saying that you think that organic can accelerate off the 3% next year, or do you think that 3% organic growth can still produce margin expansion in that business? Thanks..

Ryan, one of the things we're extremely proud of is in 2016, our risk business, we delivered 3% organic revenue growth overall and record margins of 24.5%.

And one of the things that we've mentioned many times is, because of the investments we made over the last several years in data and analytics, we can drive margin expansion quite substantially at lower levels of growth. It's certainly not our aspiration. Our aspiration is to grow higher than we are today.

But we are getting return on those investments in data and analytics, and that is driving more than half of the margin expansion you've seen in each of the last three years. And so we're very confident about continued margin expansion in our risk business..

Thank you for the questions..

Thank you. I would now like to turn the call back over to Greg Case for closing remarks..

Thanks very much, everybody, for joining the call, and we look forward to our discussion next quarter..

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect..