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

David Anthony Styblo - Jefferies LLC Sarah E. DeWitt - JPMorgan Securities LLC Kai Pan - Morgan Stanley & Co. LLC Elyse B. Greenspan - Wells Fargo Securities LLC Jon Paul Newsome - Sandler O'Neill & Partners LP Jay A. Cohen - Bank of America Merrill Lynch Brian Meredith - UBS Securities LLC Ryan J. Tunis - Credit Suisse Securities (USA) LLC.

Good morning. Thank you for holding. Welcome to Aon Plc's First Quarter 2017 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 an objection, 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 reform act of 1995 [Private Securities Litigation Reform Act].

Such statements are subject to certain risk and uncertainty 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 first quarter 2017 results as well as having been posted in our website.

Now it is my pleasure to turn the call over to Greg Case, President and CEO of Aon Plc..

Thanks very much and good morning, everyone. Welcome to our first quarter 2017 conference call. Joining me here today is our CFO, Christa Davies. I would note that there are slides available on our website for you to follow along with our commentary today.

Before I begin the discussion on our finance results, I would like to spend a few minutes talking about Aon overall and our efforts to continuously strengthen the firm, consistent with our record of value creation.

Let me start by saying, it's an exciting time for Aon, as we're reinforcing and building upon a proven decade long strategy to be the leading global professional services firm, providing a broad range of risk, retirement, and health solutions using proprietary data and analytics.

We're privileged to take these new initiatives I will describe on the heels of a decade of improvement and innovation for our clients and shareholders. For our clients, NPS scores are at their highest levels since we began tracking them with strong client satisfaction and retention.

For our shareholders, 10 plus years averaging 16% annual shareholder returns. And we finished 2016 with accelerating organic growth, record operating margin, and record free cash flow exceeding $2.1 billion. We feel very fortunate to have real momentum. But we also share our conviction today on that, momentum never sleeps.

We must continuously innovate faster than our clients in our areas of expertise to add value. The Outsourcing platform divestiture provides a catalyst for our actions. As it is consistent with our focus in strategy to deliver advice and solutions and further aligns Aon's portfolio around our clients' highest priorities.

It strengthens our ability to make new investments in high growth, high margin areas across our portfolio. It reinforces our return on invested capital, ROIC, decision making process and emphasis on free cash flow. And it provides approximately $3 billion of capital to accelerate investment in emerging client needs.

We're excited because the actions we are undertaking, we believe, will further strengthen our firm, including operating as one global P&L to strengthen our client serving capability by helping us achieve our commitment to deliver all of Aon's global capabilities locally.

Providing greater transparency into our highest growth platforms through five revenue lines, more fully reflecting how our team thinks about our business. Investing $900 million back into our business to unify and improve our business services operating model, including technology, real estate, and our colleague experience.

The outcome of this work is designed to result in a substantially stronger firm with higher growth in top line, bottom line, and free cash flow. In short, Aon ends up stronger than ever before with over $2 billion of incremental dollars to invest back into Aon.

Continuing to reinforce and strengthen our free cash flow operating model, which has been very effective in strengthening the cash flow margins of our firm, thereby enabling more investment back into Aon.

These actions reinforced our industry leading platform, highlighted by leadership positions in each of our five revenue lines, Commercial Risk Solutions, Reinsurance Solutions, Retirement Solutions, Health Solutions, and Data & Analytic Services.

And more than $120 billion of premium placed annually, an unprecedented level of data from which to drive insight on behalf of clients through our InPoint, ReView, and Affinity technology platforms. $4 trillion of assets under advisory, providing the basis for strong growth in our delegated investment consulting platform.

And finally, the reflection of our client value, strong retention rates greater than 90%. Overall, the momentum we already enjoy, amplified by the new initiatives currently underway is expected to substantially strengthen Aon for our clients, colleagues, and shareholders. And we believe represents the next wave of shareholder value creation.

Now turning to the quarter on page 6. Consistent with previous quarters, I'd like to cover two areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders.

Second is overall organic growth performance including continued areas of strategic investment across Aon's industry leading portfolio of capabilities. On the first topic, our performance versus key metrics.

Each quarter we measure our performance against the key metrics we focus on achieving over the course of the year, grow organically, expand margins, increase our earnings per share, and deliver free cash flow growth.

In the first quarter organic revenue growth was 4% overall, the strongest rate of organic revenue growth to start the year since 2012, reflecting growth across the entire portfolio, including double digit growth in Health Solutions.

Operating margin increased 220 basis points, primarily reflecting strong organic revenue growth and return on investments across our portfolio, as well as expense savings from restructuring activities and other operational initiatives.

EPS increased 20% to $1.45, primarily reflecting strong operating performance, a lower effective tax rate, and effective capital management. And free cash flow increased $41 million or 38%, primarily reflecting strong operational improvement, partially offset by investments in our operating model.

Overall, our first quarter results reflect a strong start to the year with positive performance across each of our key metrics. Turning to slide 8. On the second topic of organic growth and strategic investments.

Organic revenue growth was 4% overall, an acceleration from 2% in the prior year quarter, reflecting strong growth across all five revenue lines, with particular strength in Health Solutions and Data & Analytics Services. Reflecting on each of our core growth platforms.

In Commercial Risk Solutions, organic revenue growth was 2% compared to 3% in the prior year quarter. On average globally, exposures were modestly positive and the impact from pricing was modestly negative, resulted in a relatively flat market impact overall. Results reflect solid growth internationally across EMEA, Asia, and the Pacific regions.

And U.S. Retail, new businesses increased over 10% in the quarter. And strong management of the renewable portfolio drove retention rates of 93% on average. Results were partially offset by a decline in Latin America, primarily related to unfavorable timing impact in the quarter.

In Reinsurance Solutions, organic revenue growth was 2%, an acceleration from flat in the prior year quarter.

Results reflect growth across every product line, including particular strength in capital markets transactions and advisory, continued net new business generation in treaty, and growth in facultative placements also contributed to growth in the quarter. Results were partially offset by a modest unfavorable market impact globally.

Similar to prior discussions, overall market conditions are improving, as price declines continue to moderate year over year and cedent demands continue to increase against record levels of capital. In Retirement Solutions, organic revenue growth was 3%, an acceleration from 2% in the prior year quarter.

Results reflect growth across every major practice. We saw continued growth in investment consulting, specifically for delegated investment management services, reflecting an increase in client demand for Aon's tailored solution and independent advice, as well as improved market performance.

The team surpassed the $100 billion mark of pension assets under delegated management, a real milestone. We also saw growth across our talent practice, primarily for compensation surveys and engagement services. In Health Solutions, organic revenue growth was 14%, an acceleration from 1% in the prior year quarter.

Results reflect solid growth globally in health and benefits brokerage, including double digit growth across the Asia and EMEA regions. Latin America also delivered solid growth in the quarter, following the recent acquisition of Admix in Brazil. New business for global health and benefits brokerage increased 6% in the quarter.

And strong management of the renewal book portfolio drove retention rates greater than 94% on average. Results also reflect double digit growth in healthcare exchanges, primarily driven by follow-on enrollments on the active exchange and certain project related work.

In Data & Analytic Services, organic revenue growth was 5%, similar to the prior year quarter. Results primarily reflect strong growth across our global Affinity business, highlighted by double digit growth in the U.S. We saw growth across all product lines in U.S.

Affinity, with particular strength in areas across consumer solutions like travel and financial solutions. Overall, we delivered solid growth to start the year, driven by high demand areas where we continue to invest in innovative solutions and client serving capabilities. Turning to slide 9.

Clients are navigating in an increasingly volatile world, where economic, demographic, and geopolitical landscapes, combined with the exponential pace of technology change, are all converging to create a challenging new reality for businesses.

Aon has a strong track record of developing innovative, first-to-market solutions to help solve problems and create differentiated value in response to specific client needs.

We're investing organically and through M&A across our portfolio in areas such as Data & Analytics, our InPoint and ReView businesses; cyber risk advisory, the recent acquisition of Stroz Friedberg; Affinity; health and elective benefits brokerage, Admix in Latin America and Univers; health exchanges, where we offer the broadest set of solutions in health; and delegated investment management.

Overall, our strategic investments in high growth areas and in Data & Analytics continue to drive new business generation, strong retention rates, and increased operating leverage across the portfolio, positioning the firm for continued long term growth.

In summary of our performance, our first quarter results reflect a strong start to the year, driven by investments in our client serving capabilities and operating model. We're accelerating a proven strategy, which has been delivering exceptional results for clients and shareholders for over a decade.

With significant financial flexibility to invest across our industry leading portfolio, our operating model, and to return capital to shareholders, we believe we're at the beginning of the next substantial wave of value creation for shareholders. I'm now pleased to turn the call over Christa for further financial review.

Christa?.

Thanks very much, Greg. And good morning, everyone. As Greg noted, we just completed a meaningful next step in the firm's decade long strategy. We are operating from a position of strength to unlock the next wave of shareholder value creation.

Our first quarter performance reflects accelerated organic revenue growth, substantial operating improvement, and 38% growth in free cash flow over Q1 2016. An exceptional start to the year, given the incredible effort by colleagues across the firm to complete the divestiture.

Now let me turn to the financial results for the quarter on slide 11 of the presentation. Our core EPS performance from continuing operations excluding certain items increased 20% to $1.45 per share for the first quarter, compared to $1.21 in the prior year quarter.

Certain items that were adjusted for in the core EPS performance and highlighted in the schedules on page 10 of the press release include non-cash intangible asset amortization and restructuring charges. Included in the results was a $0.01 per share unfavorable impact related to FX translation, due primarily to U.S. dollar strength against the euro.

In addition, we incurred a $0.03 per share unfavorable impact recognized through other expenses from losses on the remeasurement of assets and liabilities in non-functional currencies. If currency were to remain stable at today's rates, we would expect an immaterial impact for the rest of the year.

Further, discontinued operations represent an additional $0.18 of total earnings per share attributable to Aon shareholders in both Q1 2016 and Q1 2017. Total EPS attributable to Aon shareholders including both continuing and discontinued operations increased 17% from $1.39 to $1.63 in the first quarter of 2017.

Turning to the next slide to discuss our strong operational performance. Operating income increased 16% and operating margin increased 220 basis points to 22.3% compared to the prior year quarter.

Operating margin improvement reflects organic revenue growth across the portfolio, including strong growth in high demand areas of continued investment, as well as $12 million or 50 basis points of favorable impact from reduced expenses related to certain hedging programs, as a result of actions undertaken due to reduced ongoing transactional exposure to the Indian rupee post the sale of the Outsourcing businesses; $11 million or 40 basis points of savings related to restructuring and other expense discipline initiatives; and a 30 basis points favorable impact from foreign currency translation.

Turning to page 13. I'd like to spend a few moments discussing the investments we're making to create a next-generation global business services model that allows for better scalability, flexibility, and enhanced colleague and client experience. These investments are intended to create one operating model with increased operating leverage.

Our primary investment areas are across IT, real estate, and people. In IT, we expect to create greater insight from data center optimization, application management, and strategic vendor consolidation. In real estate, we expect it to drive greater collaboration and engagement through real estate portfolio optimization.

And in people, we expect to create efficient scalability of operations and activity, including the use of centers of excellence and third party providers. As part of these operating model investments, we plan to invest an estimated $900 million in total cash out of the $3 billion total Outsource divestiture proceeds.

These investments include $700 million of cash charges – expected to be incurred $350 million in 2017, $250 million in 2018, and $100 million in 2019 – and $200 million of incremental CapEx investment – expected to be incurred $30 million in 2017, $100 million in 2018, and $70 million in 2019.

There is an additional $50 million of non-cash charges included as part of asset impairments and lease consolidations. Overall, we expect these investments to deliver $400 million of estimated annual savings in 2019, including an estimated $150 million in 2017 and $300 million in 2018.

Following this $900 million investment in our operating model, we have approximately $2.1 billion of incremental capital left from the Outsourcing divestiture proceeds to invest in high growth, high margins areas across our portfolio and to return to shareholders. Turning to the next page.

In our first quarter, we incurred $144 million of restructuring related charges, primarily related to workforce reduction, representing 19% of the total program estimates. The cash impact in the first quarter was an outflow of $31 million.

We recognized $11 million of savings in the quarter, representing 7% of the expected savings within the year and 3% of the total savings estimate. Now let me discuss a few of the line items outside of operations on slide 15. Interest income was $2 million.

Interest expense increased $1 million to $70 million due to a modest increase in total debt outstanding. Other expense of $10 million or $0.03 per share primarily includes losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies.

Separately, unallocated expenses are now included in overall operating income as we manage one P&L across the firm going forward. Turning to taxes.

The adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with amortization, restructuring charges, and anticipated non-cash pension settlements in the fourth quarter decreased to 11.1%, compared to 15.7% in the prior year quarter.

Our rate of 11.1% in the first quarter primarily reflects a $29 million benefit from the required change in accounting for share based compensation.

The new accounting guidance requires excess tax benefits and tax efficiencies to be recognized as income tax expense and treated as discrete items against the underlying operating rate in the period in which the granted shares vest. Excluding the impact from this accounting change, the rate in Q1 would has been 17.5%.

Lastly, average diluted shares outstanding decreased to 2% to 267 million in the first quarter compared to 273.7 million in the prior year quarter, as we effectively allocate capital. The company repurchased 1.1 million Class A ordinary shares for approximately $125 million in the quarter.

The company has $7.7 billion of remaining authorization under its share repurchase program. Actual shares outstanding on March 31 were 262.8 million. And there are approximately 5 million additional dilutive equivalents.

Estimated Q2 2017 beginning dilutive share count is approximately 268 million, subject to share price movement, share issuance, and share repurchase. Now let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth. At March 31, 2017, cash and short term investments decreased to $633 million.

Total debt outstanding was approximately $6.3 billion. Total debt to EBITDA on a GAAP basis for the consolidated AON including continuing and discontinued operations was 2.7 times.

As discussed previously, while debt to EBITDA will be initially elevated as a result of the sale of the Outsourcing business, we expect it to return back to the 2 times to 2.5 times range by the end of 2018, driven by operational improvements.

Cash flow from operations for the first three months increased 26% or $38 million to $182 million, primarily driven by strong operational improvement in continuing operations, partially offset by $31 million of cash restructuring charges.

Free cash flow, as defined by cash flow from operations less CapEx, increased 38% or $41 million to a $148 million, driven by strong growth in cash flow from operations and a $3 million decrease in CapEx.

I would note, this is an exceptional start to the year in our historically seasonally weakest quarter, reflecting continued momentum in cash flow 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, reaching record free cash flow of $2.1 billion in 2016.

Our disciplined capital management approach is focused on maximizing return on invested capital, which we've consistently improved each year since 2010, increasing 540 basis points to 17.1% in 2016. The recent sale of our Outsourcing businesses is expected to improve this even further.

We've taken significant steps to maximize the translation of each dollar of revenue into the highest amount of free cash flow, including working capital initiatives and actions to manage our cash pension contributions. Since 2010, we've increased our free cash flow margin by nearly 1,000 basis points to 18.1% in 2016.

Looking forward, there are three primary areas that we expect to continue to contribute to incremental free cash flow generation. The first is continued operational improvement, driven by accelerated organic revenue growth and margin expansion. The second is working capital improvements, as we focus on closing the gap between receivables and payables.

We expect working capital to contribute to free cash flow by over $500 million over the long term. And third is the lower cash tax payments, reflecting a lower effective tax rate over time. Combined with our increasing free cash flow margin, we believe we are positioned to continued double digit free cash flow growth over the long term.

In summary, we delivered positive performance across each of our four key metrics for a strong start to the year. We saw accelerated organic revenue growth, driven by our investments in high growth areas and improved operational performance as we increase operating leverage across one operating model.

Operational performance combined with significant financial flexibility from transaction proceeds and underlying free cash flow generation position the firm to deliver on our near term goal of exceeding $7.97 adjusted earnings per share in 2018.

Most importantly, this reinforces our ability to deliver double digit free cash flow growth over the long term. We believe we are creating the next significant value creation opportunity for shareholders. With that I'd like to turn the call back over to the operator for questions..

Thank you. We will now begin the question-and-answer session. Our first question is coming from Dave Styblo of Jefferies. Sir, your line is open..

Sure. Good morning. Thanks for the questions..

Hey, Dave..

First is just a quick easy one, I just want to confirm that the $400 million of savings includes the $91 million of stranded costs you guys have talked about before?.

Yes, it does..

Okay. And then just can you talk a little bit more about the key buckets of that $400 million that your scoring, what those fall into? If it's people, real estate, IT? I'm assuming maybe it's along those lines.

But can you talk about how you score those, your confidence? And then on one hand, it's call it maybe 20% or 25% of your SG&A excluding comp and benefit. And then on the other hand – which seems sort of high.

And then on the other hand, you guys have a knack for doing better than your SG&A targets that you've put out there in the past on different programs.

So I was just trying to reconcile how confident and how far you scored each one of the key buckets?.

Sure. So, Dave, as we think about this program, it's really about bringing together Aon under one operating model. So as we think about the big buckets, they're exactly as you said. It's IT, it's real estate, and it's people. And if you look at the total $400 million in expense takeout, it's 5% of total expenses.

So it really isn't a significant sort of transformational activity. It's really increasing operating leverage across the platform. We have enormous confidence in our ability to hit the $400 million. As you accurately pointed out, historically our performance, we've overachieved on these programs. So we feel very good about the $400 million in savings..

Okay, that's helpful. And then obviously the new segmentation you've got, you've got five businesses, a couple are more granular than we've seen before.

Can you guys give us maybe just a high level view of how you think about sustainable organic growth across each one of those?.

So, Dave, from our standpoint we'd like you to think about these as five really revenue lines in terms of where we are. We really have one segment, that's really what we're trying to do. One overall P&L. And the opportunity here is it really reinforces what we know we're best at.

When we bring global capability, all of Aon to our clients in a local way, we do exceptionally well. And in essence we're reinforcing that. So not only are we taking actions to improve the operating model of the firm, as Christa described, but we're also taking actions that continue to align the firm.

So that's what we're trying to do with the revenue lines. And what you see is a reflection of exactly how we think about the business. So you're seeing opportunities – think about commercial risk, reinsurance, retirement, all the efforts around that. What we do in health.

And then now Data & Analytic services, which really represents what we do in Data & Analytic services, in which we sell directly to a client – or actually provide directly to a client, not embedded in the work we do. So for us this is the exact reflection of how we think about growing and building the business.

Which is why we're excited to actually take this forward on your behalf, because this again is how we think about it internally..

Okay. And then a final one, just on that point with it being sort of one global P&L, how do you balance that versus pushing down accountability for the business heads to, not just drive top line, but also hold them accountable for achieving certain margins.

Do they still have their own P&Ls that they're accountable for that report up? Or what does that look like in the new structure now?.

Yeah, this is – from the standpoint of accountability there's sustained or even more intensified accountability in terms of sort of what has to happen at the grassroots level to build bottom up, to deliver on behalf of the firm. What you see now though is it comes all together in one P&L, to think about kind of integrated Aon.

So this is how I think about the business when we think about – and how Christa thinks about the business, when we think about where and how to place capital. So the accountabilities at the front line remain the same and again are intensified.

And the opportunity for us is really to take some very substantial steps forward on where we're going to invest and shape the portfolio. And that's what you're looking at here. You're getting a chance to sort of see the five platforms that are really growth platforms.

And again if you step back and think about it from a growth standpoint, we started the year, first quarter 4% growth, strongest we've had since 2012. And we've been thinking about it this way for the last 24 months to 36 months. And now you're just seeing a reflection of that. So this is not any type of a change in sort of the detailed front line.

It really is how I think and Christa thinks about allocating capital and growing the business overall..

Okay. Thanks. I'll step back for others..

Thank you. Next question is coming from Sarah DeWitt of JPMorgan. Ma'am, your line is open..

Hi, good morning and congrats on a good quarter..

Thanks, Sarah..

My first question is just on the expense savings again. Could you just explain to us in layman's terms with maybe some examples of why the sale of the benefits administration business leads to savings for the remaining business? I'm just trying to understand it a little better..

Yeah. So I think the simple way to think about this, Sarah, is we used to have two different sets of infrastructure in IT or the operating support areas for Risk Solutions and HR Solutions. And we're really bringing those support areas together in one Aon business. And so it allows us to make substantial changes in IT around data centers.

The outsourcing business had a number of clients who were in the defense area as an example. And really it didn't allow us to utilize public cloud infrastructure as much as we can today. In the real estate area for example, we now – we've moved from 72,000 colleagues to 50,000 colleagues.

And our 50,000 colleagues are primarily client facing colleagues, who are actually not sitting in the office 9 to 5 in a call center for example, in the Outsourcing business, but actually need to collaborate a lot more to get their work done.

And so it allows us to actually optimize the real estate portfolio in a way that we weren't able to previously..

Okay.

And that IT and infrastructure that was for the ben and admin business, that doesn't go with Blackstone?.

It does, Sarah. But what it allows us to do is actually pull together the infrastructure that supported HR Solutions with the infrastructure that supported Risk Solutions into one Aon model, which allows us to actually design it for Aon today, which is actually much more like a professional services firm and much less diversified.

Because we have the primarily colleagues who are client facing and earning revenue through percent commission on premium placed or fees. And so you've got a much more homogenous environment to design a consistent operating model, if that makes sense..

Okay. Yeah. That does. Thank you. And then just on the proceeds from the sale.

Could you give us any more thoughts in terms of how you're thinking about deploying that $2 billion for buyback versus reinvestments? And just to clarify, the incremental buybacks from using the proceeds, is that on top of your normal pace of buybacks, which has historically run around $1.5 billion per year?.

So first of all I would say, we do have substantial amounts of cash over the coming years. You look at the $3 billion of after-tax proceeds from the sale, you look at $2 billion approximately per year in free cash flow. So you've got approximately $9 billion to invest back into reinvesting in Aon or returning to shareholders.

As we think about the balance of that, Sarah, it's really on the same basis we've done it historically, which is return on capital. And we would note that the highest return on capital across Aon remains share repurchase, which is why we increased the share repurchase authorization by $5 billion last quarter.

And the other thing I would say though is, we have a robust M&A pipeline with some really attractive opportunities. And so we are fortunate to have great options to both reinvest back into Aon and to return the money to shareholders..

Okay, great. Thank you for the answers..

Thank you. Our next question is from Kai Pan of Morgan Stanley. Your line is open..

Thank you and good morning. Following on the restructuring cost, the $900 million cash is higher than your typical – like your past restructuring program, about 1.25 times of the expected savings.

And what's the reason for that? And how much of $400 million will be flow through to the bottom line? And will this restructuring program impact your organic growth in the near term?.

Okay. So I'll do the first couple of questions. Then I think Greg will handle the growth question. So on the first question, the 2.25 times. So we're spending $900 million. We're getting $400 million of savings every year. We do think about this, Kai, on a return on capital basis, unsurprisingly, cash on cash returns.

And we feel really good about the returns on this business. As we look at the returns, they – we are actually – it's 2.25 times, as you said versus the 1.25 times we've done historically.

It's really because we are making structural changes to Aon around IT, around real estate, around some pretty significant investments to actually generate one operating model across Aon. It's going to result in a much more efficient operating model for Aon with much greater operating leverage.

And enable much greater growth through greater insights for clients. And so we feel really good about the return on this investment. Your second question about sort of how much of the savings drop to the bottom line, obviously there is a potential for us to reinvest some of it. And we'll think about that on a return on capital basis.

And we're not sure at this point whether we will or won't reinvest, but there's obviously the potential for that.

And then in terms of the growth and will restructure and savings impact growth, Greg?.

So, Kai, did we answer your first set of questions around sort of the reinvestment piece before we get to growth?.

Sure..

Okay. Excellent. Listen, on the growth side this is really important just from an overall perspective. Because hopefully you can tell from our tone this morning, we're very enthusiastic about this next set of steps for Aon. This is something we thought about for quite some time. And now we're able to put it into place.

Kai, if you think about it the – and this is about accelerating growth. Everything around this is accelerating growth and more impact for clients. The actions we're taking really reflect from our standpoint a real conviction around this opportunity we see before us. And as Christa described, a lot of confidence in our ability to capture it.

And remember we – same strategy. Same strategy for the last decade, preeminent professional services firm, focus on risk, retirement, health, underpinned by Data & Analytics. That strategy has served us exceptionally well.

As I described in some of my comments and Christa did as well, great NPS, value creation 16%, total return to shareholders for 10 years, great 2016 momentum as we jump into 2017. But we would say, and this what's so important.

As we think about the potential of our firm, we're still, Kai, at kind of a four out of 10 in terms of capturing the full opportunity. This is very much kind of the glass half full in terms sort of where we can go. And what we're excited about is we know how to get there.

We know this is around meeting client needs more effectively and they're evolving. And then improving Aon. And this is what the restructuring is all about from an Aon standpoint. To get from a 4% to a 7% to an 8% in terms of on a scale of zero to 10, this really involves investing and growing in areas of greatest client need.

And you're going to see us do that more and more and more, increase risk of innovation. And then on the Aon piece, it's really aligning Aon more effectively to consistently deliver on this idea of global capability delivered locally. And this is – we call it Aon United.

But this is really around becoming a better and better and better professional services firm. And to do that there is a whole series of things around technology, colleague experience, fundamental operations of the firm, as Christa described, we've got to improve on.

But we also know the economics and the impact of this as we get this right over the coming 24 months, 36 months has a disproportionate and very strong impact on clients and our colleagues and for our shareholders.

And then you get to the Outsourcing piece, why is this a catalyst? As we nurtured this and developed this and created the opportunity, the Outsourcing sale is such a great catalyst, because when you think about what happens when we're done with the moves on the restructuring, we end up with a stronger financial platform in terms of being enable to generate operating income.

Because the $900 million investment via the charge and resulting efficiency gain, so it more than just replaces lost income. It really creates operational leverage for us in a very positive way. So you now end up with a platform that has a stronger financial engine.

And by definition when you look at the math, is growing faster top line, higher margin, 100 basis points, free cash flow, faster growth, better operating leverage as we add and subtract businesses from the portfolio over time. And then, oh yeah, one other real positive, we generate $3 billion of net proceeds.

We invest $900 million back in the business. We've gotten more than $2 billion again to accelerate and invest back into Aon. So for us, Kai, I just – it's important you understand sort of the psychology that went into this. This is something that's been sort of in the works for a long, long time that we're now able to launch with a lot of velocity.

And we feel really good about it, which is why Christa described it as kind of in our view the next wave. The next wave for our clients, but equally the next wave for our shareholders. So I know it was a bit long winded, but it hopefully gives you a sense on – so what we're trying to do..

Will that in the near term – much appreciate the answers.

Will that impact the near term organic growth, given there's restriction programs going on?.

Well, if you see again – if you look at the first quarter and some were already underway, we had record first quarter growth, the highest growth we've had at the company overall since 2012. So our view is this is an accelerant. And that's what it's designed to be.

It's really – this is a set of very kind of offensive steps to sort of strengthen our client serving capability and accelerate growth..

That's great. Just quick number question on free cash flow and – because that's been a focus for shareholders as well as you guys.

Just what's your baseline for 2017? My maths run like if your regional guidance, $2.4 billion, if you take out $500 million from this sales divesture and you take out the $400 million recharging cost, but adding back $150 million of the savings. You get close to $1.7 billion.

Is that right way to think about it?.

Here's what I'd say, Kai. We're obviously not going to give guidance for the free cash flow of 2017. What we can say is that the right starting point for 2016 is to start with the $2.1 billion we actually delivered in 2016 and take out $400 million for the lost operating income from Tempo and other cash charges..

Okay. Great. Well, thank you so much..

Thank you. Our next question is from Elyse Greenspan of Wells Fargo. Your line is open..

Hi, guys. Thank you. Good morning. My first question. The tax rate was 17.5% ex the stock comp benefit in the quarter. Is – was there anything that impacted that? Just because I know you put the Outsourcing earnings in discontinued ops, but the sale did close after the end of the quarter.

Or is that how we should think about the tax rate going forward? I guess when you think about this deal being accretive to 2018, the prior consensus number, did that assume a tax rate around 17.5%?.

So what I would say is that the adjusted effective tax rate for continuing operations, not including the disposition, was 11.1% for Q1. And our rate of 11.1% in the first quarter primarily reflects the $29 million benefit from a required change in accounting for share based compensation.

Excluding that change in accounting, the rate for continuing operations would have been 17.5%. And we are not giving guidance going forward..

Okay. And then in terms of you guys used to have with the prior two segments, there were margins goals associated with both those segments. Are you going away from having a consolidated margin target? And then following up on Kai's question from earlier in terms of how much of these – the savings plan outlined today will fall to the bottom line.

As you think about reaching the 2018 earnings target.

Is there some type of assumption that you guys assume in terms of savings that will fall to the bottom line? And is there a way – I mean with your prior programs, can you give us historically how much of the savings on some of those past plans have actually fallen to the bottom line?.

So as we think about the business, we make decisions based on return on capital and free cash flow margin. We continue to focus on our four key metrics that we report every year and commit to grow every year, organic revenue growth, operating income, EPS, and free cash flow.

And we have two targets going forward, double digit free cash flow growth over the long term and then given all the complexity going on, we have an EPS target of greater than $7.97 in 2018..

Okay.

And so no more margin target?.

No..

Okay. And then one other question. Is there a way – it seems to me when I look at the new five lines that your retail brokerage business went into Commercial Risk, into Data & Analytics, and Health Solutions.

I just want to understand if that's correct? And then second, Greg, in your prepared remarks you mentioned some timing in terms of the Commercial Risk business I think negatively impacting the Q1 organic.

How do you think about organic? Is that something that's shifting over into the second quarter when we think about the organic outlook for that business from here?.

Yeah. All of us really trying to – I'll just say it in sort of in that. There is always timing around the quarters, Elyse, and there was in this quarter as well. But coming back to the revenue lines, really important. Again this is how we think about sort of the platforms or investment of the platforms for growth overall.

If you think about growth, we've encouraged you to look at Aon. And so that's what we're going to look at. Again back to Christa's four metrics, I would note as well, margin is included in that too. And we have a commitment to continue to improve that.

So while no target, we have a commitment to improve on all four of the metrics over the course of the year. And in the case of the revenue lines, we've got five revenue lines that for us represent in many respects how we think about growing the business.

On the Commercial Risk side, listen, we feel this has gotten off to a very solid start, very much in line with our expectations. Again we're never caught up in kind of the quarter versus the year. But the underlying activity was exceptionally good. New business, $270 million, up 17%.

Retention and rollover were up – both up marginally above 94%, very, very good. Marketing impact was flat. And strong performance internationally with some timing in LatAm. So for us we feel very good about the quarter.

You're absolutely right in terms of sort of comparing it to previous quarters, our Data & Analytic Services piece would have been in Risk Solutions. And parts of our Health piece would have been in Risk Solutions too. So for us, we feel very good about the growth for the quarter. Again it's record growth for Aon, back to 2012.

So feel very good about that and certainly feel good about where we are on the Commercial Risk side..

Okay. And one last question. You mentioned a strong pipeline in terms of potential M&A deals. Is that – would you say that's in relation to deals both in the U.S.

and internationally?.

Yes..

Okay. Thank you very much..

Thank you. Our next question is from Paul Newsome of Sandler O'Neill. Your line is open..

Hi. Good morning. With the change in segmentation and the view of the company as sort of one P&L, how does that change the incentives? Not necessarily at the very senior level, but the next tier down, the folks that run those segments.

How are their targets thought of if you don't really have a segment level P&L?.

So again, Paul, we would encourage you not to think about these as five segments. They're not in fact five segments. These are five revenue lines, where Christa and I and the most senior team think about capital allocation and disproportionate investments to change and modify the structure of the firm.

Sort of our front line continues as it always has continued, thinking about sort of how we serve clients day to day, supporting each other around where we are. So that – don't look for a lot of change there. This is not in any way, shape, or form a restructuring. This is really how we think about the business overall.

And we're trying to give you a much clearer window into how we think about capital allocation. We will continue to align the most senior team around a set of incentives. And we've done that for our executive committee, where literally everything is aligned around – together around shareholder value creation.

And then we've also got our top 150, top 175 colleagues, who also are now more aligned around this single P&L, which is a very substantial change for us at the most senior level. As well as individual results that they have responsibility for. So for us, we're creating alignment around the one P&L at the top.

But at the front line it is exactly as we've been doing. So this isn't a lot of disruption at the front line. This is really meant to create disproportionate investment around growth and to drive growth and to strengthen the firm..

Thank you. Appreciate it..

Thank you. Next we have Jay Cohen of Bank of America Merrill Lynch..

Yes, thank you. One request and then a couple questions. On the request side, in the future if you're doing a change in reporting format, we'd love a couple weeks of a heads up to get the models going. Not a big deal, but one request. Two questions, I think relatively short.

First, the modest benefit you got from the hedging – actually the $12 million I think it was, was there an offset somewhere else in the P&L?.

No. There was no offset. And, Jay, just to your request, we do recognize that there are a lot of moving parts at the moment. And you can imagine with us having to close the transaction, there was an enormous amount of work going on here too. And we've tried really hard to provide a lot of transparency to the numbers.

And I think page 17 of the press release really goes through our financials over the last couple of years on an Aon go-forward basis to help set up your model. And the Excel is actually on our website. So hopefully that will help. And we're here to answer any questions for you..

That was helpful. And I'm sure I have no appreciation for all that went into it, so thank you. The other question was on the Health side, you talked about some off-cycle I guess renewals on the healthcare exchange business.

As we think about the quarter's growth, as we look at next year's first quarter, is that going to represent a tough comp? Is there something a little bit extra that we shouldn't expect to continue in that revenue line?.

Well, Jay, consistent with what we just said before, sort of the quarters do what they do. We obviously love this segment, love this business, and have continued to invest in it, continue to see it grow. You're right. There's no doubt it's a hard comp if you want to go quarter to quarter for next year. No doubt about that.

But feel very, very good about the overall trajectory. And the off-cycle is literally – on the exchange side as you add companies, make their decisions to add companies, subtract companies, it really changes sort of the off-cycle a bit, another positive thing about this business. And that's what you see reflected here..

Got it. Thanks, Greg..

Yeah..

Thank you. Next we have Brian Meredith of UBS. Your line is open..

Yes. Thanks. Two quick ones here. First one, just curious to follow up on Jay's question.

Did the healthcare exchange numbers, the seasonality we've historically seen in that, is that no longer going forward? Or are we still going to see a better revenue growth typically in the fourth quarter?.

Yeah, you're still going to see it more, Brian – Q4 is skewed just as how companies make decisions. As we described before, we've really worked with clients to think about health really over the course of the year, which they do anyway, but in terms of the mechanics or the decision making process, so you're seeing that spread out a bit.

But it's still disproportionately skewed to Q4..

But not so from a margin perspective? Because obviously you don't have the big expense outlay, right, in the first, second, and third quarter?.

Correct..

Got you. Terrific.

And then second question, Greg, I'm just curious, with the new structure you've got in place, do you expect this to drive more cross sell between the health benefits consulting businesses and the commercial insurance brokerage business?.

Brian, I love that question. Here's – we don't think about it as cross sell. I'll tell you what we think about it as, delivering the firm. So this isn't about sort of a micro, I brought a new product, can you buy this or buy that? This is around an ethic. And we take this deadly seriously.

This is an ethic around delivering the global capability of Aon, sitting at the table with clients, thinking about their needs, and having enough understanding as an individual and credibility to introduce parts of Aon to help a client succeed. Sometimes, Brian, that'll result in a sale. Sometimes it's not. What it always does – and we know this.

What it always does is it strengthens the reputation of Aon in the eyes of a client. That creates greater degrees of freedom or opportunities for us to actually help that client succeed. And also it gives us more information on where and how to invest in areas that are important to clients.

So for us, this is why we're so excited about this opportunity. This is – as we take Aon United and we continue to evolve it and we go from a 4 to a 5 to a 6 to a 7 on that scale of 10 I described before, we know that's going to produce great results for clients and tremendous results for Aon. And in doing so obviously great results for shareholders.

So for us it's not cross sell. It's really around Aon United and delivering the firm. And with real credibility in a way we've done many times before, Brian, but we've never done fully consistently. That's why again this isn't about a new concept.

This is taking a concept we know works and then scaling it, which is why the investment back into the firm is so important..

Is it trading? Or are you changing the organizational structure within the company as well? More integration of somebody basically looking at one client and looking at everything and then looking down below? How is that working?.

The really – Brian, there's – this is the beauty of this is, this isn't about restructuring or reorganization. There's not reorganization in this.

This is literally stepping back and saying, what do we need to do to serve clients more effectively? And how do we work together to do that? In the one P&L, the five revenue lines, the alignment at the senior team, the restructuring that Christa described, all these things are around literally the mindset focus on clients overall.

So the beauty of this is, there's not a lot of organizational complexity embedded in this at all. This is really how we come together to support our clients. And again it's not something that's conceptual. We've been thinking about this now for the better part of 24 months. We know this has tremendous potential. It was just how we were going to scale it.

So for us this is not about sort of front line organizational change. It's really about how we think about clients..

Great. Thank you..

Thank you. Next we have Ryan Tunis of Credit Suisse. Your line is open..

Hey. Thanks. Good morning. I just had a couple I guess more technical ones that should be pretty quick. But the other associated cost bucket in terms of the saves, I think it was close to $200 million. Just a little more detail on what's in that please? Thanks..

Sure. So in there are things like corporate costs, data centers, marketing, there's professional services, there's an array of things in there..

Okay. And I guess along those lines, the $200 million of the CapEx that didn't have – I guess in the disclosures wasn't really bucketed.

Should we think about that as being allocated pretty similarly as to the reduction in expenses?.

Well, the CapEx overall, Ryan, as you know, what we showed before, the $200 million has actually come down over time as we exited our – exited the Tempo businesses. As you recall that was 36% of that CapEx, so that's come down over time..

Yeah. And so, Ryan, if you think about CapEx, we had $222 million of CapEx last year. We lost $80 million of CapEx with the divestiture of the – our Outsourcing business. So that gets you to $122 million as the right starting point. And then – sorry, $142 million as the right starting point.

And then you add on the CapEx of $30 million from the restructuring program, so you get to $172 million. And CapEx is mostly for Aon, IT, and real estate..

Got you. Okay. And then just the follow-up was on the change in the hedge program. I just – I was just curious if that has a predictable impact on the P&L over the rest of the year relative to 2016? Or was that just random? Or was that just related to 1Q? Thanks..

So, Ryan, the Indian hedging program has now ceased, because it was really primarily put in place, because we had a significant asset in India related to our Outsourcing business. And so now that we've dispositioned that Outsourcing business, you will not see this again.

Ryan, any other questions?.

No, I didn't have any. Thanks..

Thank you..

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

Well, thanks very much for joining us. We look forward to the next call. And everybody, have a great day. Thanks very much..

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect..