© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and thank you for holding. Welcome to Aon Plc's Second Quarter 2018 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. 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 second quarter 2018 results as well as having been posted on our Web site.
Now, it's my pleasure to turn the call over to Greg Case, CEO of Aon Plc.
Thanks, Shaun, and good morning, everyone. Welcome to our second quarter 2018 conference call. Joining me today is our CFO, Christa Davies. After many, many conference calls, we’re excited to introduce a new approach today all intended to be hopefully more helpful for all of you. Christa and I would like to start by highlighting our colleagues around the world delivered a strong result in Q2 and the first half of the year reinforcing our continued momentum we talked about in the first quarter call as well.
Beginning on today's call, what we plan to do is post for your a comprehensive standalone document that provides both financial backup and a commentary on our strategic priorities, and really how are plans are producing results. And we're confident, you will let us know how we can improve the new approach, but we really want to make sure you know what our intend is here, a broader based conversation.
Fundamentally the document we posted is meant to provide all that we’d have covered in our initial commentary and more. And as a result, we plan to use our time on the call to provide a little bit more insight into the longer-term view for the firm. This approach will also allow us to describe two or three investment or growth areas that we think are strengthening our capability to serve clients pretty fundamentally and hopefully you get the idea.
We hope to give you a better insight on Aon, and important areas around our firm, like our journey to deliver Aon United. And that's really a perfect place to start a discussion today. The idea of Aon United at scale and the benefits that accrue when our global firm works together effectively are substantial. And it's not historically -- never, we’ve covered on this call, but nonetheless it's a very important piece of our long-term success and a real growing strength of Aon.
You will see we took significant steps over the last quarter to build on that strength, executing our announced changes to deliver more consistently. On a value proposition, we know our clients like and are demanding more and more, and we know its distinctive. And this is really about how we make available to them. The global capability of our firm tailored to them, fully suiting their business needs and objectives and we will be bringing us together the capability of Aon against client needs in a very broad based way, it is highly effective. Its powerful. It's meaningful. And we call this leading Aon United.
More specifically, you saw the thinking and the commitment reflected in our May 15 announcement, which described all these -- the number of these changes, all of which were designed to make it easier to bring the best of the firm to our clients. So you saw, we’re moving around leadership. We establish co-presidents, Eric Anderson and Mike O'Connor, two great colleagues of the firm that will be wonderful in these roles. They will also be overseeing a new global Aon Operating Committee, which also includes direction of global business services, all of which reinforces the single P&L that we announced in 2017 and really encourages Aon United decisions that accelerate growth by bringing the best to the firm to our clients. So a series of moves around leadership.
Single brand. You saw us announced that we'd be again retiring the remaining business unit brands, primarily Aon Risk Solutions and Aon Benfield, following on a similar step with Aon Hewitt in 2017. And I would tell you we’re very excited -- very excited about the prospect of 50,000 Aon colleagues going to market as Aon. I'm from Aon. Reinforcing our priority to address client opportunities and innovation and really creating more distinctive solutions. So a whole series of things around a single brand, around Aon.
And finally you saw moving around innovation, structural movement. We created a leadership capacity to drive more effort and drive forward on our new Data and Analytics offerings, we expanded John Bruno's role to become CEO of Data and Analytics services and always again designed a focus on investments and strengthen our innovation agenda and drive long-term growth. So in Aon, that’s -- what this is all about, long-term growth.
The idea of leading Aon United. For us, this is well beyond improving the value and the power of this idea and this ethic. We see very clearly so many examples of the economic leverage embedded in this pursuit. Now our leadership focus and what you’re seeing us do is how we deliver this more consistently, how we deliver this upscale across the firm. And we believe this is highly relevant for a call like this with our long-term partners as leading Aon United is a source of client value. It's also very compelling for our colleagues. It's really a magnet to attract and retain talented leaders.
And I will say we’ve been laying the foundation for Aon United for over a decade, evolving our portfolio, investing in new content capability, bringing those pieces together more closely together through programs like Aon Client Promise, which we’ve talked about before, but a number of others as well. But it's really just in the last few quarters that we truly entered the era of Aon United and taking more structural change to bring that about.
And I will just say, again on the spirit of the format here, I will just give you one example. And this is an example discussed last week with our colleagues, the large U.S health system. And the example brings to life, how colleagues come together to talk to clients. And this is historically been a strong commercial risk clients. So imagine we’re in the room with the risk manager and our commercial risk team, historically been a great client as I described before, as part of the Aon Client Promise work, which is a systematic way to understand client needs, our team begin to understand this major U.S health system at a desire and a strategy to begin to have their hospitals really seek out sort of the idea of be getting paid for outcome. So outcome-based payments. Obviously, this is a major trend that this client really wants to lead the way in that and obviously a whole series of substantial operating challenges ahead for them to do that.
But our team having heard that stepped back. So this risk team gather capability from around the firm. They brought commercial risk capability together more broadly. They brought our reinsurance colleagues to the table, reinsurance analytics colleagues to the table, and after a few hours together it was really clear. If our clients successful doing what they wanted to, they’re going to inject greater volatility into their business. They may be right in the first six or seven years, but in the eighth year, if something happens to the population, they’re actually trying to support, there's a lot more volatility, in fact, put the hospital at risk.
And when we talk to our clients about it, they were absolutely concerned. They really want to understand what we could do. And in the end our reinsurance colleagues bring to table analytic capability to model the risk, to really understand what was on the table for them and then giving them solutions on ways they could potentially transfer the risk. In essence what our colleagues did is we went from a risk discussion on the commercial side to really a more strategy discussion on how we can enable their strategy and lower the volatility and lower their risk. And this was really -- if you think about it, a constellation of colleagues, which we brought together broader commercial risk team with the reinsurance team and a set of topics we never would've talked about before with his client.
And this commercial risk capability, the reinsurance modeling access to the markets literally change the discussion with this client. And if you think about it, this opportunity for our colleagues was incredibly compelling. They’re very excited to serve this hospital system in a much more broad based way. Our clients are excited and I don’t need to tell you what that probably does for our -- back to our original relationship. On the commercial risk side, what that retention would look like sort of over time. So very, very powerful in terms of what this could be. So just to reflect sort of on those examples, these are the kinds of things that Aon United leadership enabled us to do.
In terms of financial impact and what this bring for us, we just highlight three overarching takeaways that come out of the first half of the year. The first, continued momentum. And we saw this in our accrual results and truly just continuous to increase the conviction we have to run or exceed $7.97 of EPS for the year, highlighted by a Q2 performance of 5% organic growth, margin expansion of 130 basis points, EPS growth of 31% and free cash flow growth of 17%. So strong momentum for the first half of the year and for the quarter.
Second, we are continuing to invest and to generate long-term growth, supported by our strong balance sheet and significant free cash flow. As I mentioned earlier, we believe leading Aon United at scale will translate into stronger organic growth. And we continue to invest in our inorganic opportunities that allow us to innovate faster than our clients on the topics that matter most to them. Then again in the spirit of the new format, the example the World Bank cap on I talked about in the last call, very compelling to think about that doesn't happen without Aon United behavior.
When you’re connecting the World Bank, trying to protect Chile, Columbia, Mexico and Peru, from earthquake risk that was here for -- not covered before, and you’re trying to bring together a constellation of leaders in each of those countries and the World Bank, imagine who we had to bring to the table or make that happen. But we have the analytic capability, the data capability to do this, but that wasn't enough. We also have the relationships at each one of the countries and with the World Bank to do it, but that wasn't enough. And it wasn't until we brought this whole group together that we have come up with a incredibly innovative solution of $1.4 billion bond that by the way the World Bank invest back into the country, so it strengthen their economy and protects them from a risk that here before was never, never covered before and a real investment instrument that has ever been brought to market before.
So you get the idea in terms of sort of what this means for innovation on top of just client leadership and finally it's important to highlight the long-term productivity improvements from a global business services model, also continue to enable additional investment in emerging client needs like cyber intellectual property. So whole series of things sort of come out of the quarter and come out of the first part of the year that reinforce the momentum and what we want you to try to understand is this context underscores that Aon United is all about growth. So we discuss with our team Aon United equals growth. When we drive this set of behaviors on behalf of our clients, good things happened. Client leadership happens, retention happens, new client opportunities happen, innovation happens. And again it's a simple concept to describe, but difficult to replicate, especially in our industry. And I will just say I’m very grateful to our team for their willingness to take on the opportunity and really excited about the progress we've made in these new expanded roles over the course of the quarter, over the course of the year, and what this means for us as we move Aon forward.
So giving you a little perspective on the topic, Again, we wouldn’t have discussed on this call traditionally. For us its fundamental to the long-term growth of our firm and we will drive long-term growth in our firm and we want to give you a little context that you wouldn't have otherwise got to put sort of the results sort of in the perspective.
And with that high level summary in mind, I’d like get Christa to offer a few thoughts and then we will open up to your questions. Christa?
Thanks so much, Greg, and good morning, everyone. In the spirit of this new format, I will cover the key metrics, and then talk for example how we’re driving operating leverage and investing in Aon, both organically and inorganically. The steps we’re taking and our strong progress here to date continues to reinforce both our short and long-term performance target.
Our performance in the first half reflects organic revenue growth of 4%, an acceleration from 3% in the first half of 2017. In addition to accelerating organic growth, M&A is continuing to contribute, both improving the mix and driving total growth of a 11% for the first half of 2018. Adjusted operating margins increased 200 basis points year-to-date, an acceleration from our historic average of 70 to 80 basis points a year over the last 10 years.
Accelerating revenue combined with margin expansion is delivering operating income growth, which was exceptionally strong at 20% year-to-date with core operating income growth reflecting half of the performance. EPS growth of $0.28 year-to-date places us firmly on track to exceed our short-term target of $7.97 in earnings per share for 2018.
And lastly, reported free cash flow decreased $52 million year-over-year, driven by increased restructuring, reflecting this is our peak year of restructuring cash usage. Adjusting for restructuring, underlying free cash flow grew 17% year-over-year, reinforcing our commitment to double-digit free cash flow. And even stronger performance when combined with the 6% reduction in shares outstanding.
Overall, the strong financial performance and long-term outlook are supported by the investments we’re making in our operating model in an Aon United way, as Greg described. Through the creation of our next generation of global business services model, we’re creating greater scalability, productivity, and operating leverage. One example is the consolidation of all of our North American call centers across our solution lines.
We implemented a single industry leading cloud platform with global reach. It resulted in higher support for clients, better flexibility in managing capacity and cost savings of approximately $10 million annually. Another example is consolidating our procurement spend globally. We now manage approximately 80% of our spend or $2 billion across nine major categories in four regional hubs. That’s up from about $1 billion of spend across four categories in our two largest countries.
To do this, we implemented a cloud based to pay solutions across 60 countries, supported by an offshore model. And that cloud platform is giving us greater insight into that total spend to be able to manage it more effectively over time. Through this, we’ve delivered $30 million of value in 2018. These are just two examples of the long-term margin expansion that will continue through productivity improvements from our single operating model and the remaining savings from our restructuring program.
We are also making investments organically and inorganically to shift the portfolio towards higher growth, high return on capital areas. With a strong discipline against capital allocation and maximizing return on invested capital. An example of investment is in our delegated investment management business where we have added over 50 colleagues and deep research capabilities in our core strength areas of DB and DC while continue to invest and expand capabilities in broader asset pools like insurance, sovereign wealth funds in the nonprofit arena. This is driving double-digit organic growth through new client wins as well as driving significant inorganic growth with the acquisition of Townsend.
Since inception, our AUM is growing from 0 to over 150 billion AUM, driven by strong performance, transparency fees and innovative solution for clients. Another example of investment is $950 million we invested in share repurchase in the first half of 2018. This remains the highest return on capital opportunity across Aon, given our valuation of Aon based on our free cash flow growth over time.
In summary, acceleration in revenue growth, greater operating leverage and continued working capital improvements of $500 million over time give us confidence in our ability to deliver double-digit free cash flow growth. Double-digit free cash flow growth combined with a reduction in total shares outstanding will drive significant long-term shareholder value creation.
With that, I will turn the call back over to the operator for questions.
Thank you. We will now begin the question-and-answer session of today's conference. [Operator Instructions] Our first question is coming from Sarah DeWitt from JPMorgan. Your line is now open.
Hi, good morning, and thank you for the new format. Given your comments on the growth initiatives in Aon United, where do you see the long-term organic growth profile of the company over time? I mean, clearly a 4% organic growth year-to-date you’re growing faster than the global economy, but where do you see that spread headed over the long-term?
So first of all, Sarah, I hope you like the format, love to get your comments, thoughts, if we can make it more helpful to you, but again we are trying to provide a little more perspective on sort of the long-term underpinning as sort of what's driving results. And this idea on Aon United is exactly at the core of what you're asking about. Aon United is growth for us. It really is about accelerating organic growth, that plus M&A we think is a very, very strong engine. And this idea of Aon United really fundamentally emanates from a client need, client view. They have talked to us about sort of how their needs are changing. They made it very clear when we bring our firm more effectively. It's very, very powerful. And if you think about that, we have done a number of things to reinforce this in an -- organically around the firm. Things like Aon Client Promise we have talked about or the Aon Impact model on how our colleagues conduct themselves. Things like articulating value, a whole series of things. But more recently, you have seen us take structural move. This is the new news. This is the news of the quarter, if you will, in terms of sort of how we're taking something we have done for a while and really accelerating it and it underpins organic growth. So we expect a continued progression. If you think about the last four years, 3%, 4%, and we have got momentum still building on that and we expect it to continue.
Okay, great. Thanks. And then just the expense savings, you have done $250 million to date and you target $300 million for '18. So should we expect a meaningful slowdown in the savings in the back half of '18, or are you running ahead of schedule or should we think about that ultimate target of $450 million as maybe being conservative?
Sarah, what we would say is where we’re up to year-to-date gives us a very strong confidence in being able to deliver the $300 million in savings in 2018 and the $450 million in savings in 2019. And so we're really pleased with the progress and confident about where we are up to year-to-date and we're not updating guidance for this year or next.
Okay. Thank you.
Our next question is coming from Kai Pan from Morgan Stanley. Your line is now open.
Thank you and good morning. Thank you for the refreshing format. We are still adjusting to it. And the first question follow-up to Sarah's question, organic growth. You have seen acceleration. And could you tell us a little bit more about is -- has the macro environment help you on that? And going forward, is your growth acceleration depend on macro environment improving further from here, or it's a self driven story?
Look, Kai, as we’ve said before, listen, our strategy, our approach is not to rely on market condition. Our approach is to rely on client needs and to address and to deliver on client need. And you have seen us consistently do that quarter-after-quarter. And to Sarah's question, we now believe we have the mechanism in place to accelerate that. And what you saw in the quarter overall from a market standpoint, look, at the end of the day we still continue to see exposures are modestly positive, the impact from pricing on average flat. There are spikes in different places, but on average basically modest. So this isn't about the market per se, this is about what we're doing to gather --- win more clients, retain more with those clients, we call it rollover doing more with them, rollover. So from our standpoint, we're going to continue to build that profile. I just would note, you saw real moment in commercial risk, you saw real moment in the reinsurance world, in the health world, real moment in the retirement world in terms of what we're trying to do. And so for us, what we have in place is designed to drive organic growth. And what we do know for sure is client need around the world is substantial and continues to grow. And so while we may lead a number of these markets, the world that we live in and our set of competitors are massively underpenetrated. So we believe there is substantial opportunity irrespective of market conditions to drive organic growth.
Okay. That's great. My second question is focusing on margin expansion. I hope you can comment on three particular points. Number one is, the 130 basis point margin expansion in the second quarter, mostly driven by the 160 basis point savings. Since not a lot sort of operating synergy or leverage, I should say, given that organic growth of 5%. Number -- the second item is that in the second half the cost saving, incremental cost saving will be much less than the first half. Does it mean that margin expansion would now be as strong? And the third item is you mentioned little bit in your prepared slides about drag from the recent merger acquisition, I hope you can give EBIT like figures around it.
Kai, I will certainly try to answer all those questions. So let's start with the facts. We’re up 130 basis points in margin expansion in Q2 and we are up 200 basis points in a margin expansion year-to-date. In any quarter this moment and we would highlight a few underlying drivers such as restructuring and FX as you mentioned, and with these our margins in the core standpoint are up 50 basis points year-to-date, a little more in Q1 and a little less in Q2. That said, there are other impacts as you mentioned in the quarter. We have a minus 60 basis points impact from M&A and a minus 30 basis point impact from FX, and a minus 30 basis point impact from timing from E&O. And so we have got sort of substantial headwinds in the quarter in addition to the investments we're making in growth. And so it's -- while it's easy to strip out certain items in and out of the quarter, we do manage margins overall for the year and that's why we feel very strongly about our margin expansion year-to-date at 200 basis points, and it gives us confidence at our full-year margin expansion and as you described leading to margin expansion in 2019 and beyond. And so, 2018 margin expansion will be driven by accelerating organic revenue growth, mix shift and operating leverage, both coming from restructuring and productivity.
Okay. Thank you for the detail. Last one, if I may, in the spirit of your new model. You also mentioned potentially inviting the business leader to this conversation. I don’t know if Eric or Michael is on the phone, so I would like to ask them what has changed into the day-to-day operation under the new model compared with the quarter's ago? And any potential -- you talk about the benefit, I just wonder is there potential drawback or downside risk to -- in the sort of implementation of the new model?
So, Kai, they’re not on the call today, but what we will do next is to tee up. We will actually start the call next time on sort of operational implications of Aon United. Eric and Michael comment on those directly sort of all the things that are happening in the marketplace, sort of on a positive way and sort of how they’re leading and managing that and how it's coming through. I think what you're going to find is you talk to them is the opportunity here is so substantial. Again, the client need is great. This is all driven on client need and when our colleagues get around the table and talk about client issues, and those colleague has come from the full complement or capability we’ve got, we create all kinds of possibilities. And even when there is not a commercial outcome, the client thinks about us differently. So fundamentally when we deliver Aon United capability, client perception changes and economics change, growth changes. So I think you're going to hear a lot about that. They can also talk a little bit about sort of the Aon Operating Committee they pull together, that really gives us a chance to sort of think about Aon United types of decisions in a way we have never done before. So a lot of momentum on this. And what we are excited about, I think you will hear it in their conversation is again we worked this for a decade on a number of different things we have done to create the conditions. Now we are taking structural change. Now we are doing things like the Aon Operating Committee, like the co-presidents, like the single P&L, like the single brand. These are things we have never done before that we believe will accelerate a proven concept and drive organic growth. So I agree with you. There will be two highlights, Eric and Mike for the next call.
Q - Kai Pan\
That would be great. Look forward to it.
Our next question is coming from Yaron Kinar from Goldman Sachs. Yaron, your line is now open.
Good morning. First question I just want to, I guess it's more of a clarification point. Christa, the 30 basis points in E&O timing and 60 basis points in M&A drags on the margins, were those year-to-date or for the quarter?
It was for the quarter, Yaron.
Okay, got it. And then if you look at the second half of this year, you're running up against maybe tougher organic growth comps. You highlighted FX, there's a potential drag as well as currency remains as is. Do you think that -- is margin improvement achievable ex restructuring phase?
Yes, it is, Yaron. So what I would say is as we look at the full-year 2018 and the second half, we are going to drive margin expansion through organic growth, continued investment in M&A, mix shift across the portfolio as we continue to invest in higher growth, higher margin areas. The operational leverage we're getting in our business both from restructuring and the productivity we are getting from the Aon United operating model.
And I would say, overall, Yaron, sort of we are continuing to build momentum sort of on the organic growth side. If you think about sort of where we’ve come in the first half of the year, very, very positive. The second half, we think we will have continued progress. There are a couple of categories, the reinsurance 8% sort of in the quarter when we have done for the first half. We are also going to be -- by the way up against a high comp in the second half. We also had some events that happened sort of last year that may or may not happen. Assuming they don't happen, there obviously be some -- there will be a little bit of a headwind to get some of those comps. But frankly we are going to continue to push and build momentum there. On data analytics, on the other side of the equation were negative for the quarter as you see when we talked about its due to a single incident and we expect the second half to be more positive. So there are lots of puts and takes through the course of the year, but you can expect us to continue build momentum sort of on the organic growth side.
Okay. And Christa you highlighted M&A as potential source of margin improvement in the second half, is that just the timing of the M&A that’s already come in that now becomes accretive or are there other elements there?
Yes. So what I would say is look I wouldn’t over [indiscernible] on M&A in anyone quarter. I would say over the course of the year, we expect investments we are making organically and inorganically in the business to contribute to margin expansion.
Okay. And maybe one last quick one. The $7.97 target, EPS target, is that still in place even with the potential pressures from currency?
It certainly is, Yaron. So we feel really confident about exceeding $7.97 for 2018, driven by core performance, restructuring savings, the returns on the investments we have made in M&A and allocation of capital.
Great. Thanks so much.
Our next question is coming from Adam Klauber from William Blair. Adam, your line is now open.
Good morning, everyone. Free cash flow, I believe peaked in 2016 around $2.1 billion. Do you think you will get back there by 2019, just roughly, an outlook for guidance? And then, once you hit that core rate, again, will growth of free cash flow be higher than EPS or more in line with operating earnings?
Yes. So, Adam, what I would say is we are not giving new cash flow target. What we have said is we are going to drive free cash flow on a double-digit basis. You can see that on underlying basis year-to-date of 17%, which we’re very pleased with. And what you have seen and you will see in calendar year 2018 is we’re at a peak year of restructuring cash usage. So you will see free cash flow on a reported basis accelerate in 2019 and that reported and adjusted free cash flow will start to come together in 2019 as the restructuring cash outlay winds down. As we think about free cash flow growth the longer term, you’re really going to have operating income growth plus improvements in working capital. We really outlined about $500 million of working capital primarily receivable sitting in our balance sheet, that we will free up over the next couple of years that will contribute to strong cash flow growth and strong double-digit great cash flow growth combined with the reduction in shares will dramatically increase free cash flow per share over time.
Thanks. And how should we think about, again, looking a bit more forward not look for guidance, but how should we think about CapEx and pension? Will they be positive and negative for free cash over the next couple of years?
So, we have given specific guidance on CapEx. And what we have said is CapEx is elevated in the current year and next due to the restructuring program and that is coming down and then pension is also coming down over time.
Okay. And then just a follow-up on health solutions. A good quarter, I think you mentioned that, there were strong growth in the U.S. What, I guess -- what was driving the U.S growth?
Again, Adam, step back and essentially think about sort of what we have done, as we described in the first quarter, we just have continued momentum in the first half of the year across all aspects of the business. Certainly like to benefit sort of the work the team has done around the world, terrific. In H&B, the work the team has done is terrific, but really across the board sort of in the exchange businesses as well. So it just continuing momentum on the health side. So the -- if you sort of think about what we have done historically sort of in health for the year, last year at 7%, we ended the quarter as you see, 7%. So you’re just seeing the momentum overall. It really is performance across the board.
Great. Thanks a lot.
Our next question is coming from Meyer Shields from KBW. Meyer, your line is now open.
Great. Thanks. Greg, I don't want to over analyze the comments you made with regards to the hospital strategic discussion, but am I right to think that having a strategy consultancy something like Mackenzie within the portfolio of Aon companies would make those conversation more robust?
Listen, Meyer, this is -- this -- I would also don't want to overplay. This is one example I pulled out sort of a last week example. Our team is bringing solutions. So forget sort of the traditional kind of strategic consulting firms, full respect to them, but our team is bringing solutions. They not only bought a diagnosis of the situation, which frankly open the eyes of the client, they brought a way to actually enable the client's strategy. And in this case, my gosh, without that there is a lot more risk in the process. So we have moved very much sort of around -- sort of a solution approach. You combine that with our data and analytics, we have in each one of the categories, we will bring to bear a set of -- the ammunition is amazing. It is always been amazing out there sort of the capability we have got in the data analytics on the commercial side, on the reinsurance, on the retirement side, on the health side, we have just got an incredible platform to sort of draw from. And what we have done before is taken that platform and pull it together and brought it and put it in front of the clients in a thoughtful way. Aon Client Promise gave us, Meyer, the basis of how much we can do that. It's a systematic way, we listen to clients, understand their needs, and react to those. And what we're doing is now breaking down structural barriers and make it easier for our colleagues to come together and talk about clients. And we just -- there is another example I could use, which is European headquartered, multinational building products company. You would know it very, very well and frankly had a very good relationship with them on the risk side, but they are under some real pressure from a performance standpoint. Our team brought together a full complement of folks from across our solution lines and came up with sort of whole way for them to think about their benefits for their colleagues, for their employees, and did it in a way that we believe will increase engagement. And it was a 50, 60 country answer. The client never would have thought about it and for god sake never would have thought anybody could execute it until we sat around the table, we got up 10 passports, talking about what we can bring to the table, from 10 different countries, I mean. And so, there is just so much opportunity and it's -- in so many respects, Meyer, it's so obvious and so clear, but doggone hard to execute. You’re getting colleagues to sort of work together in ways they haven't before, bringing expertise in a more integrated way and we have to break down the barriers to do that. And as I said, we have proven this works exceptionally well. We have done it in one-off different situations. Now the new news, which you're hearing is, we're taking various structural steps to make it easier for our colleagues to do this. And the beauty is when it happens, it doesn't have too result as I said before, in commercial gratification immediately. This is changing the dialogue with clients. Our colleagues love doing that. It's reinforcing, it's contagious. It's in fact -- it's a wonderful sort of outcome. And so, all the capability, ours is that we have the leadership will to make it happen, and that's what we are excited about.
Q - Meyer Shields\
Okay. Now, that's very helpful. Thanks. Two other quick questions. One, has the year-to-date results in organic fully reflect the strong acquisition activity last year. And Christa, could you identify the individual service lines that are most exposed to the FX headwinds on second-half revenues?
Yes. So, Meyer, the first thing I would say yes the M&A impact from last year does not impact organic. It adds to organic and so it doesn't reflect. And if you think about the M&A we did in 2017, most of it was in Q4. And so what you will -- what's showing up in organic this year is not M&A related to last year. There may be some portion of it that shows up in Q4, but some of the acquisitions were done in December Q4. So very little will show up this year. And then as we think about sort of the FX, we don't really break out the impact by solution lines, but it's fair to say we do have a local revenue and expenses in 120 countries. And so we generally prefer a weaker U.S dollar. And the big exception to that for us, Meyer, is the pound, but what you’re seeing I think in the FX headwind in Q3 and Q4 is primarily related to Latin America.
Okay. Thank you.
Our next question is coming from Elyse Greenspan from Wells Fargo. Elyse, your line is now open.
Hi. Good morning. My first question on just a numbers question. There was about a $103 million of legacy litigation that you guys pulled out of our adjusted earnings in the quarter. Can we just get a little bit more color what did that stem from? And is that something that we should think about impacting your earnings going forward?
Yes. So, Elyse, what we would say is we can't discuss the specific litigation. But one other things you should get comfort from is we have taken a number of steps over time to reduce volatility at Aon. We have put in place limits of liabilities. We've purchased additional insurance and what you will see when we file our Q later today is that we’ve decreased the estimated losses related to disclosed litigation from $300 million to $100 million as a result of the actions we are taking. And so we're dramatically reducing really legacy litigation as we continue to take steps to drive growth across the firm.
Okay. And then in terms of maybe a follow-up question on the margin side of things. You highlighted this quarter was impacted by 60 basis points from M&A and 30 basis points from currency to give us about the recent hit for the next couple of quarters. How do we think about currency, I guess, the margin impact on a quarterly basis implied by that? And then also you -- based on your commentary it seems like the drag from M&A will get better over the next couple of quarters? I'm just trying to tie together those numbers.
Sure. So the first thing I would say, Elyse, is we don't give guidance on the FX impact on margin. It's frankly pretty difficult to predict. But what we can say is that on an EPS basis, we expect $0.03 impact in Q3 and a $0.03 impact in Q4, primarily driven by Latin America. And then what we would say is we did have an impact as you mentioned, minus 60 basis points from M&A in Q2. We would expect over the course of the year for that to neutralize. I think we have spoken previously when you do M&A, the first year of integration is largely a negative impact on margin. And so, as you integrate the business and then longer term, it for sure drives margin expansion, because we are investing in high revenue growth, high margin area. So I hope that helps.
Yes. That's helpful. And then in terms of on the organic growth side, would you say I guess, it seems like other than the one-off that you called out on the data side that the quarter probably represents more or less a run rate level. I guess aside from maybe some of the headwinds on the reinsurance side and is that how we can kind of think about the growth level being sustained over the balance of the year? And just based off, how you guys see exposures in pricing and your ability to generate new business? How would you think about the organic growth outlook for 2019 as well? Do you have a kind of initial view at this point?
Elyse, as you know, we don't give specific guidance on sort of the growth profile and what it is going look like what you have seen it and fully agree with you on, so the quarters will be variable when you sort of saw things move around in the quarter. But over the course of the year, the first six months, it really is about continued momentum. And our goal each year is to sort of continue to build momentum. We have the structure in place to do that, the investments in place to do that. And that's really what we intend to do for '18 and into '19 and into '20. I want to emphasize again that for us this is not about pricing, this is really about what we do in the marketplace on behalf of clients to drive long-term value. That's going to be the driver of growth for us by far and sort of pricing and insured value sort of are important to understand, but are not going to be the drivers for us. And so you will see our anticipation is continuing momentum on the growth side in '18 and in '19.
Okay. And then one last question. One of your peers saw a slowdown in their defined benefits on consulting business. You obviously don't break out that line items. I'm not sure how much detail you want to go into, but are you just -- is that -- are you observing a slowdown in that business? Any color you can give us, and I'm assuming it's absorbed by growth within other area of your retirement business, if you're seeing that?
Well, listen, overall when you think about sort of the retirement piece, elements of this business are growing, elements are not growing, what we do know for sure back to the client orientation is that when you think about sort of retirements in the world today, roughly 20% of the population's prepared for retirement. Our companies, our clients are sort of dealing with that every day. It's becoming increasingly difficult for them to actually help their employees think about how they can deal with retirement. So we are bringing to bear as best we can, a full complement of ideas and perspectives to help them sort retirement. And we think that’s a major sort of opportunities long-term. Certainly elements within that will be positive and negative, but our view overall, but Christa thoughts on that?
Yes. So, but I would say, Elyse, is our results actually reflect solid growth in our core actuary retirement business. So we are very pleased we got a fantastic team serving clients. And it's driven by an increase in volume and rates across North America and EMEA. We're really helping clients solve a lot of pension issues around derisking, taking risk off the table, given interest rates j risen. And so there is a lot of opportunities for us to do that with clients and we are very pleased with the progress we are making to date. And, Elyse, it reflects a lot of other things that we're doing in our own pension plan at Aon as we continue to take risk off the table as you've seen, given the rise in interest rates and the ability to do that in the marketplace today.
Thank you very much.
Our next question is coming from Paul Newsome from Sandler O'Neill + Partners. Paul, your line is now open.
Good morning. The only question I really had was, I would like to if you would dive a little bit more into the organic growth for the reinsurance segment. And it seems like and tell me if I'm wrong that pricing is a little weak, but customers maybe buying more. What I don't know is whether or not there is actually a change in market share amongst the brokers themselves?
Listen, Paul, let me step and we would say overall market conditions are -- continued to be if you’re going to think about this from a one standpoint, challenge from the stand -- there is plenty of capital out there, lots of opportunity to serve our clients on that beyond -- on behalf. But if you look at our fundamental results on the reinsurance side, they continuous to be the basics. It is success in treaty, its success in fact, it success in insurance length securities, it's across the board. By the way it's another quarter of net new business win for us when you think about where we are. The data analytics, our team has is, its exceptional and just reflect back, a few years ago on these calls, everyone was asking about what about growth, what about growth, I just would just remind you there was a time when you literally were talking to the number one place in the world on treaty and basically property with 6% of the revenues and by the way a big chunk of that was in the U.S and those prices were down massively, and we are still net new wins. And so all those fundamentals are sort of in place and have been for a couple of years and continue to build and sort of you're seeing that result. And again, I would say obviously the result for the quarter is exceptional. We would ask you to sort of think about over the course of the year and our view is it's just reflects on 2018 versus 2017 versus 2016 and reinsurance you're going to see momentum.
Greg, thanks. Congrats on the quarter.
Thanks.
Our last question is coming from Kai Pan from Morgan Stanley. Kai, your line is now open.
Thank you. I have two more follow-ups. Number one on the buybacks. It looks like year-to-date you bought back a nice $50 million dividends like close to 100, and the acquisition probably about $50 million, so together $1.2 billion outlay. If you look at free cash flow including the restructuring charge $300 million and you’ve seem to raise a little bit short-term debt like $500 million. So I just wonder compared to those source of cash and use of cash, do you see that buyback has to slowdown in the back half of the year or -- and that the free cash flow coming in or you have additional room for the leverage?
Yes. So, Kai, it's a great question. And what we would say is as we think about cash flow over the course of the year, our strongest cash flow quarters have always been Q3 and Q4 and that remains true. So as you think about cash in second half of the year, it will be stronger in terms of just cash flow from operations. And then as we think about uses of cash, obviously, as we allocate cash to different activities, we are going to do it based on ROIC. And so what you're going to see is we will continue to allocate cash to buyback, because it remains our highest return on capital opportunity across the firm. You will see us continue to invest in M&A and organically as the return on capital opportunities are substantial. And then you did see us increase leverage slightly and we return to 2016 levels over the course of time. And then what you will see on debt really is as EBITDA grows we will continue to add debt, keeping our leverage ratio aligned.
Okay. My last one is back to the full-year guidance, $7.97. If you step back to the beginning of the year when you first sort of gave out the guidance, and you now seems like there is a little bit benefit about $0.06 that benefits from foreign exchange and also about $0.10 benefit from the lower overall tax rate. So why you’re not -- full-year guidance, why not be like 2% higher? Am I reading too much into it?
Yes. Well I would say, Kai, we don’t normally give guidance. When we announced the transaction in May 2017, that drove amazing benefits to shareholders, left Aon with a portfolio with higher revenue growth, higher margin, higher return on capital and a terrific cash benefit to shareholders, $3 billion. We really at that point in time, May last year, wanted to be clear that we would exceed EPS guidance for 2018. EPS is up 28% year-to-date and we feel confident about exceeding the $7.97 for 2018 and we're not updating guidance.
Okay, great. Thank you so much and good luck.
We have one last follow-up question in queue from Yaron Kinar from Goldman Sachs. Yaron, your line is now open.
Hi. Sorry for fixating on this, but I want to go back to M&A for a second. So, Christa, if I understand your comments correctly, basically you’re going to get some lift as you’re integrating some of the previous acquisitions and getting them into higher margins. But if we expect an overall lift in margins for the second half of the year, doesn't also mean that you are not getting as much of new M&A revenues coming in the door in the second half of the year that would offset the lift that you’re getting from previous M&A?
Yaron, I think you are hoping for a level of guidance on M&A that we are probably just not going to give. What I would say overall is as we think about M&A, the first year M&A integration is largely negative on margins, you saw that particularly show in Q2. Over the course of the full-year, it will be a little less than what you saw in Q2. And then over time what you see is M&A from previous years, example 2016 starts to contribute to margins, and so you have a mix shift going on. Of course, we are investing in higher margins businesses, in the businesses we bring into the firm, so that will contribute positively to margin over time. The last thing I would say on margins is, we do expect -- we are up 200 basis points year-to-date in margins. We expect margin expansion in the second half of the year to contribute to $7.97 exceeding EPS guidance for the year.
Okay. I appreciate it. Thank you.
Thank you. I would now like to turn the call back over to Greg Case for closing remarks.
Just want to say, on behalf of Christa, I appreciate everybody being part of the call today. As we said at the beginning, we took a bit different approach today, different format, trying to give you a view which sort of highlight some of the long-term efforts we’re taking or efforts that we think will impact the long-term success of the firm. So hopefully you found it helpful. If you have thoughts or comments or other ways we could sort of do this or create this kind of perspective, let us know. But really appreciate being part of the call today and look forward to our conversation next quarter. Thanks very much.
And that concludes today’s conference. Thank you, all for your participation. You may now disconnect.