Veralto and Aon Report Strong Q2 Results, Highlight Growth and Strategic Moves

Earnings call: Veralto Corporation reports robust Q2 growth, raises EPS guidance By Investing.com

Veralto Corporation, in its Second Quarter 2024 Earnings Call, reported a strong financial performance with net sales of $1.29 billion and a 3.8% core sales growth. The company raised its full-year adjusted earnings per share (EPS) guidance, reflecting confidence in its end markets and strong execution. Veralto highlighted its growth drivers, particularly in the Water Quality and Product Quality Indicator (PQI) segments, and emphasized its commitment to sustainability. Despite flat sales in Western Europe and modest growth in China, the company experienced significant growth in Latin America and India. The quarter also saw a 7% increase in gross profit to $774 million and a 230 basis point improvement in gross profit margin to 60%. Veralto Corporation's second-quarter performance showcases its strategic focus on growth and sustainability, while maintaining a disciplined capital allocation approach. The company's optimistic outlook is supported by its robust pipeline and the essential nature of its products and services across vital industries. Despite some regional challenges, Veralto's overall growth trajectory and margin expansion plans reflect a positive forecast for the future. Veralto Corporation's recent earnings report paints a picture of a company with a solid financial base, underscored by a notable gross profit margin of 58.89% in the last twelve months as of Q2 2024. This impressive margin, highlighted as one of the "InvestingPro Tips," is consistent with the 60% gross profit margin reported for Q2 2024, indicating the company's efficiency in managing its cost of goods sold and maintaining profitability. InvestingPro Data further reveals that Veralto has a market capitalization of $25.91 billion, which speaks to the scale and market presence of the company. The P/E ratio, a measure of the company's current share price relative to its per-share earnings, stands at 32.06 for the last twelve months as of Q2 2024, suggesting investors are willing to pay a premium for Veralto's earnings potential. This aligns with the company's raised full-year EPS guidance, reflecting investor confidence and the company's own optimism about its future performance. Another InvestingPro Tip points out that Veralto's stock is currently trading near its 52-week high, with the price at 97.23% of this peak. This could indicate that the market is valuing the company's growth prospects and strong financial performance, despite the stock being in overbought territory according to the Relative Strength Index (RSI). For readers looking to delve deeper into Veralto's financial health and stock performance, additional "InvestingPro Tips" are available, providing a comprehensive analysis of the company's valuation multiples, debt levels, and stock price volatility. To access these insights and more, consider using the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription at InvestingPro. With 13 additional tips listed in InvestingPro, investors can gain a more nuanced understanding of Veralto's market position and investment potential. Operator: My name is Leo, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your conference. Ryan Taylor: Good morning, everyone, and thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the Investors section of our website later today under the heading Events & Presentations. A replay of this call will be available until August 9. Before we begin, I'd like to highlight a few recent disclosures. On July 24, we issued our 2024 sustainability report. That report can be viewed on our main website under Sustainability or on our Investor website under Corporate Governance. Yesterday, we issued our second quarter news release, earnings presentation, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. Additionally, our Form 10-Q was filed yesterday. These materials are available in the Investors section of our website under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from forward-looking statements. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'll turn the call over to Jennifer. Jennifer Honeycutt: Thank you, Ryan, and thank you all for joining our call today. I want to start this call by recognizing the engine behind our strong second quarter results, our more than 16,000 associates around the world. Their strong execution and support of our customers drove our growth and improved profitability during the quarter. Nine months into our journey as an independent company, we are hitting our stride and delivering winning outcomes for our stakeholders. A key catalyst has been increased rigor in deploying the Veralto Enterprise System. As I've shared before, VES is a key competitive advantage for Veralto. It drives continuous improvement, accelerates innovation, and enables us to win in our markets. Every day, at all levels of our enterprise, our teams leverage VES to solve problems rapidly and drive sustainable improvements. Our increased rigor in deploying VES has helped drive growth, expand margins, and ensure that we deliver on commitments. Our second quarter results demonstrate the benefit of this increased rigor, while also highlighting the durability of our businesses. We delivered core sales growth across both segments, led by better-than-expected positive volume and price increases in line with historical levels. We expanded margins at both segments through strong operating leverage, improved productivity, and cost optimization. Based on our strong execution in the second quarter and an incrementally more positive view of our end markets, we have raised our full year adjusted EPS guidance. From an end market perspective, we are capitalizing on secular growth drivers across our industrial and municipal markets in Water Quality. In water analytics, our commercial initiatives are accelerating volume growth and market penetration, particularly in consumables. And in water treatment, we continue to see strong growth, driven by our customers' water conservation, reclaim, and reuse initiatives. On that front, ChemTreat was recently recognized as Industrial Supplies & Services Supplier of the Year by one of the largest global beverage companies. ChemTreat is playing an integral role in helping this customer achieve its sustainability targets through wastewater projects that support the reclamation of hundreds of millions of gallons of water annually. In PQI, we are encouraged by ongoing recovery in consumer packaged goods markets and improved sentiment from brand owners and packaging converters. In our marking and coding business, recurring revenue grew mid-single digits for the fourth consecutive quarter. Notably, sales of marking and coding equipment accelerated during the quarter and grew on a year-over-year basis, with good traction on new product launches. One of those new products is Videojet's 2380 large character inkjet printer, which launched in early April and is off to an impressive start. This printer is designed for use on sustainable packaging materials, such as corrugated cardboard and other porous materials. Second quarter sales of the 2380 printer exceeded our expectations and we continue to build momentum through a robust sales funnel. In our packaging and color business, second quarter bookings were strong, driven in part by the success of new software launches unveiled at recent trade shows and industry events. At the Drupa Trade Show, our Esko, Pantone, and X-Rite teams jointly showcased their latest innovations and highlighted our seamless packaging workflow software and hardware solutions. At the event, Esko unveiled its S2 platform, a multi-tenant cloud-native platform that provides cloud computing, data sharing, and artificial intelligence. All Esko applications connect to this platform, giving all key stakeholders in the value chain access to live data and identical information wherever they are in the world. This integrated ecosystem will empower customers to compress workflows, harness cloud technology and artificial intelligence to accelerate speed-to-market with vital integrated color accuracy. This new technology helps our customers save time, reduce waste, and ensure brand fidelity. These workflow improvements help our customers minimize the environmental impact across their supply chains and achieve their sustainability objectives, while providing safe foods and trusted essential goods to their customers. This is a great example of the alignment between our product innovation and our purpose. Our work at Veralto is inspired by our unifying purpose, Safeguarding the World's Most Vital Resources. We live in a world with big challenges and Veralto plays a significant role in solving many of them. Helping customers ensure clean water, safe foods, and trusted essential goods for billions of people across the globe motivates all of us at Veralto each and every day. It inspires our associates who are drawn to Veralto because of the role our products and solutions play in helping preserve the planet, how we care for and invest in our people, and our efforts to minimize the environmental impact of our own operations. And it's easy to be inspired by the work that we do at Veralto. In 2023, our team helped ensure 3.4 billion people around the world had access to clean water for daily use, treat and recycle 13 trillion gallons of water, save 81 billion gallons of water, and ensure product authenticity and safety by helping customers mark and code over 10 billion products every day. In addition to these positive and enduring contributions, I want to highlight two important commitments featured in this year's Sustainability Report. First, in support of our commitment to minimize the environmental impact of our own operations, we disclosed our 2023 Scope 1 and Scope 2 greenhouse gas emissions and committed to a 54.6% reduction goal by 2033. Second, in support of our commitment to drive a responsible supply chain, we set an initial target to have 40% of our supplier base certified through the EcoVadis program. EcoVadis is one of the leading sustainability rating agencies and will help us measure, assess, and improve the impact of our supply chain on the world. The role our products play in preserving the planet and the targets we have committed to achieve embody the culture and are made possible by our people. Our people are the most important part of our strategy and we invest heavily to recruit, develop, and retain the most talented and diverse team possible. Our 2024 Sustainability Report published earlier this week contains more details about our commitment and ability to deliver positive, enduring impact, and drive sustainable outcomes for the benefit of humanity. Now turning to our Q2 financial results. Before getting into the details, it's important to highlight a key underlying strength of Veralto, and that is the durability of our businesses. Approximately 85% of our sales are related to water, food, and essential goods. These are large attractive markets with steady growth, driven by strong secular trends. Our customers in these markets have an essential need for our products and solutions to support critical aspects of their daily operations where the risk of failure is high. Our durability is further bolstered by a razor-razorblade model, which drives a high level of recurring revenue, further catalyzed by VES. The CEO kaizen events we kicked off in Q1 are a strong proof point. These events, which focused on value-accretive growth, have already had a positive impact on our 2024 performance, evident in our second quarter results. On a consolidated basis, we exceeded our guidance on all fronts, with 3.8% core sales growth and 24% adjusted operating profit margin. Adjusted earnings per share was $0.85, up 6% year-over-year and $0.05 above the high end of our guidance range. And we generated $240 million of free cash flow, further strengthening our financial position. Looking at core sales growth by geography in the second quarter, sales in the North America and high-growth markets grew in the mid-single digits and sales into Western Europe were essentially flat. In North America, core sales grew over 5%, driven by both segments. In Water Quality, we continued to capitalize on strong demand for our water treatment solutions, which grew high-single digits in North America. This growth was broad-based across most industrial verticals, with the strongest growth in food and beverage, mining and power generation. We also continue to see strong growth for UV systems at municipalities in North America. In Water Treatment, we're partnering with customers to help them achieve their sustainability goals related to water conservation, reclamation, and reuse. Our water treatment businesses are also well positioned in North America to support onshoring or reshoring activity, including tech operations, such as semiconductor fabs and data centers. Relative to North America, our PQI segment grew 3.5% in Q2. Packaging (NYSE:PKG) and color grew mid-single digits, with marking and coding up low-single digits. In high-growth markets, core sales grew by more than 4%. We continue to see strong growth in Latin America and India. And in China, core sales grew low-single digits year-over-year. In Western Europe, core sales were essentially flat year-over-year, including 50 basis point headwind related to the strategic portfolio actions in our Water Quality segment that we mentioned on prior earnings calls. Excluding this headwind, core sales into Western Europe were up modestly. At this time, I'll turn the call over to Sameer to provide more details on our Q2 performance and our guidance. Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the second quarter on Slide 8. Net sales grew 2.8% on a year-over-year basis to about $1.29 billion. Core sales grew 3.8%. Currency was an 80 basis points headwind or approximately $10 million. And the small divestiture of Salsnes was a modest headwind. Our core growth in this quarter was balanced, with both volume and price increases driving our growth. Price contributed 2% growth in this quarter, in line with our expectations and historical levels. Volume grew 1.8%, with positive volume growth across both Water Quality and PQI. This marks the first quarter since the second quarter of 2022 in which volume grew across both segments. Our recurring revenue grew mid-single digits year-over-year and comprised 62% of our total sales. We expanded margins at both segments through strong operational leverage, improved productivity, and cost optimization. Gross profit increased 7% year-over-year to $774 million. Gross profit margin improved 230 basis points year-over-year to 60%, reflecting the benefits of pricing, as well as improved productivity and reduced material costs. Adjusted operating profit increased 5% year-over-year and adjusted operating profit margin expanded 70 basis points to 24%. We delivered strong margin expansion, while investing in our sales and marketing efforts to drive future growth. We also increased our R&D investments, with R&D as a percent of sales increasing 20 basis points over the prior-year period. These investments are aligned with our strategic growth plans and we expect to continue to fund ongoing growth investments. Looking at EPS for second quarter, adjusted earnings per share grew 6% year-over-year to $0.85. And free cash flow was $240 million, down from the prior year, primarily due to standalone public company costs and cash tax payments, which were not incurred in the prior-year period. Moving on, I'll cover the segment highlights, starting with Water Quality on Slide 9. Our Water Quality segment delivered $777 million of sales, up 2.8% on a year-over-year basis. Currency was an 80 basis points headwind and the divestiture of Salsnes had 40 basis points impact versus the prior-year period. In addition to this divestiture, small product lines that were strategically exited in the fourth quarter of 2023 resulted in approximately 80 basis points headwind to core growth for the Water Quality segment in the second quarter. Despite this headwind, core sales grew 4% year-over-year. Pricing contributed 2.4% and volume growth contributed 1.6% to year-over-year core sales growth. Our volume growth was driven by strong demand for water treatment solutions in our industrial end markets and UV treatment systems in municipal end markets. We also saw growth in sales of lab instrumentation, reagents, and chemistries to municipalities. Recurring sales across the Water Quality segment grew mid-single digits. Adjusted operating profit increased 5.5% year-over-year to $192 million, and adjusted operating profit margin increased 70 basis points to 24.7%. The increase in profitability and margin reflects strong pricing execution, leverage on volume growth, and improved productivity. To a lesser extent, our adjusted operating profit margin also benefited from a favorable sales mix this quarter. Moving to the next page, our PQI segment delivered sales of $511 million in the second quarter, up 2.7% year-over-year. Currency was a 70 basis point headwind. Core sales grew 3.4%. Positive volume contributed 2% growth and price increases contributed 1.4% to the year-over-year core sales growth. PQI's recurring sales grew mid-single digits year-over-year for the fourth consecutive quarter with growth across the portfolio. Recurring revenue increased to 63% of PQI sales mix in the second quarter of this year. Breaking this down by business, core sales growth in our marking and coding business was in line with the segment, driven by growth in both consumables and equipment. This growth was driven by both CPG and industrial end markets. In our packaging and color business, core sales grew about 3% year-over-year, led by growth in recurring software and subscription revenue. PQI's adjusted operating profit was $141 million in the second quarter, resulting in adjusted operating profit margin of 27.6%. That represents a 100 basis points improvement in adjusted operating profit margin over the prior-year period. This was another quarter of margin improvement for PQI, driven by the strong operating leverage, particularly on the recurring revenue growth and productivity improvements. Turning now to our balance sheet and cash flow. In the second quarter, we generated $251 million of cash from operations and invested $11 million in capital expenditures. Free cash flow was $240 million in the quarter, or 118% conversion of GAAP net income. As of June 28, gross debt was $2.6 billion and cash on hand was just over $1 billion. Net debt was $1.6 billion, resulting in net leverage of 1.3 times. In summary, our financial position is strong. We have flexibility in how we deploy capital to create long-term shareholder value with a bias towards M&A. Turning now to our guidance for 2024, beginning with our updated expectations for the full year. We increased our full year guidance to reflect our strong second quarter execution and incrementally positive view of our end markets. For core sales growth, our target remains low-single digits, however, we are trending towards the high end of low-single digits. Through the first half of 2024, core sales growth was 2.8%. For the second half, we are targeting core sales growth in the low to mid-single digits range, similar to what we achieved in the second quarter. Looking at adjusted operating profit margin for the full year, we now expect to deliver approximately 75 basis points margin expansion year-over-year, which would put our full year adjusted operating profit margin at about 24%. This implies an incremental margin or fall-through of around 50%. For adjusted EPS, we raised our full year guidance range to $3.37 to $3.45 per share. At the midpoint, this represents 7% growth year-over-year and is $0.11 or about 3.5% higher than our previous guidance. And our guidance for free cash flow conversion remains in the range of 100% to 110% of GAAP net income. Looking at our guidance for Q3, we are targeting core sales growth in the low-to-mid single digits on a year-over-year basis. At the midpoint of our Q3 guidance, we are modeling a core growth rate similar to second quarter. We expect adjusted operating profit margin of approximately 23.5% in the third quarter. This represents 100 basis points of improvement in adjusted operating profit margin on a year-over-year basis. And our Q3 2024 guidance for adjusted EPS is $0.82 to $0.86 per share. At the midpoint, that represents double-digit year-over-year growth. With that, I'll hand the call back to Jennifer for closing remarks. Jennifer Honeycutt: Thanks, Sameer. In summary, we are executing well across the company with greater focus and rigor using VES, and we are capitalizing on the secular growth drivers in our key end markets. We delivered a strong second quarter across the board, with core sales growth approaching mid-single digits, continued margin expansion, and strong cash generation. Based on the strength of our execution and positive view of our end markets, we raised our full year 2024 adjusted EPS guidance. As we look longer term, we remain committed to creating value through steady, durable sales growth, continuous improvement, and disciplined capital allocation. That concludes our prepared remarks. And at this time, we are happy to take your questions. Operator: [Operator Instructions] Thank you. We'll take our first question from Scott Davis of Melius Research. Scott Davis: I've got to ask -- good morning. I got to ask about the gross margins just because they've been so incredible, strong. Is -- A, I guess, is 60% the new normal or is that just more of kind of a shorter-term impact? And second, maybe I heard the word price in the context of pricing power more on this quarter and last one, too, than we would have thought in the past. And are you finding there's just more pricing power in your markets maybe than you thought you had before and that's driving that 60% gross margin. Is that a fair takeaway? Sameer Ralhan: Yeah. Scott, let me just touch on the margin and then I'll have Jennifer just talk about the price. On the gross margin side, it's really been really in -- the increased rigor on VES really driving the execution side. Frankly, it's been lots of singles and doubles that are driving the margin here. And also, as you see, we are benefiting a little bit from the recurring revenue here, right? The mix is more towards consumables to the spares, which is impacting and helping us on the margin. The packaging and color business, as you know, that tends to be on the software side with a little higher margin. So, that's helping us. So, those things are helping us. I would say, you should expect the gross margins to come in a little bit as the growth rate equilibrates between the equipment and consumables overtime. But we feel really good about 60%, but I think once the transition happens, we'll be more in the high-50% or 59% growth range. Jennifer Honeycutt: Yeah. And I think, Scott, what you're seeing relative to price is our ability to sort of hold the value of our products in terms of commercial excellence related to VES. So the teams commercially are executing well around the world, but we have seen price normalize to historical levels, which we believe fit in the range of 100 bps to 200 bps. Scott Davis: Okay. Fair enough. And just I feel obligated to ask about M&A. I know these things are lumpy and it's hard to kind of talk about it, but any update on maybe your pipeline and your enthusiasm about the assets that are out there? Jennifer Honeycutt: Yeah. We remain pretty convicted about our M&A approach. We've got really robust funnels for both PQI and Water Quality. We're looking at a lot of assets and we're actively engaged in our market activity here. But consistent with what we've said on prior calls, we're really going to stay close to our heritage and the disciplined capital allocation around market, company, and valuation. So we obviously like businesses that have similar operating models and secular durability, financial profiles that look like us, and certainly businesses where we think VES can add value. So we're active here. We're excited about the space. We're working hard kind of on both sides of the fence, and more to come. Scott Davis: Yeah. Best of luck. Congrats on the first two quarters here of the year. Jennifer Honeycutt: Thanks, Scott. Operator: We'll take our next question from Deane Dray of RBC Capital Markets. Deane Dray: Scott's comments, that's a clean quarter, kind of hard to find anything to quibble about. So maybe I'll start with product quality. Your primary competitor had some similar results yesterday in terms of strong aftermarket, but it looks like your printer sales are stronger. I know the 2380 sounds like that was a boost. Just can you comment on the mix and the go-forward, especially with the recovery expected in the consumer packaging goods? Jennifer Honeycutt: Yeah. Thanks for the question, Deane. Our PQI businesses in the main are performing well. I think you see that both in terms of our marking and coding businesses. You also see it on our color and packaging side. We're not going to comment really on competitors' activity, but what we can say is, our marking and coding businesses are performing well and I think in line with the recovery of the consumer packaged goods market. So we see this fourth consecutive quarter of mid-single digit recurring revenue growth. And we also see, as you rightly point out, Q2 marking the return of growth in equipment sales. And so, this follows a nominal recovery that we see when we're coming out of a down cycle where consumables and by way of inks and solvents and spare parts and so on recover before equipment does. We're excited about the funnel that we have for equipment. And certainly, as we talk to our CPG customers, they are -- their sentiment is more positive in terms of the future outlook. From a packaging and color standpoint, we've just finished the Drupa Trade Show, where we got a lot of positive response in terms of the products being launched there, mostly around our S2 native-cloud, digital integrated solutions. This really helps reduce time-to-market for the brands. It also helps mistake-proof relative to the information that they're passing around between their functional departments. So, funnels are healthy on both sides. The market recovery in terms of CPG itself is a little bit lumpy. We do see mixed results across various CPG categories. But certainly, we're encouraged by the market indicators and I think our teams are executing well with recent product launches, and our new product innovations really are gaining momentum. Deane Dray: It's all very helpful. And just a geographic question. Just for both businesses, what was the sense of demand in China and the outlook? The expectation is that you all have a very defensive type of mix there, but will you feel any of the ongoing pressures in the economy over the next couple of quarters? Jennifer Honeycutt: Yeah. I think, Deane, our view of China hasn't materially changed from quarter-to-quarter. I think we believe that China has stabilized related to the end markets, but we don't expect to see any meaningful recovery in China this year. I think for state-owned or state-sponsored municipalities, funding is still extraordinarily tight. So we're not seeing much money flow there. I think long term, China is anticipated to improve. It's got a large and aging population. Those folks are going to require clean water, safe food, and trusted medicines. But our China team has stepped up to the challenge here in the slower growth macro and we continue to ensure that we have a China business that's creating incremental value for Veralto. Sameer Ralhan: And then, Deane, from a guide perspective, effectively, you assume China will be sequentially flat, right? So, as you know, we were down quite a bit in the Q3 and Q4. So you're going to see a little bit of an uptake on a year-over-year basis as we kind of get into the second half, but sequentially, it's effectively flat. Deane Dray: That's real helpful. Thank you. Operator: We'll take our next question from Andrew Kaplowitz of Citigroup. Andrew Kaplowitz: Jennifer, Sameer, you raised your revenue guidance by $100 million for '24, I think, versus last quarter's forecast. So, maybe just give us a little more color into what markets are better than you expected. I know you just talked about Videojet equipment starting to accelerate. What are you baking now -- baking in now for the second half of that improvement? And then in Water Quality, is it more that water treatment is driving continued strong momentum, or are you seeing more improvement in water analytics? Jennifer Honeycutt: Yeah. I mean, I think we see strength across the board, really. We benefit, I think, from a couple of areas here. One is just the markets that we're in and the quality of the products we bring to market being part of the essential nature of customer operations. I think the deployment of VES and the increased focus that we have as a standalone company continues to help us execute well commercially. From a macro standpoint, on where the demand is occurring, water and municipalities, particularly in US and Europe, continue to execute on project backlog in terms of improvements to their respective plants and their run rate business is steady. We do see some nice pockets of growth coming for our water treatment businesses and see some tailwind and some benefit from things like CHIPS Act in terms of build out their data centers, which are requiring an extensive amount of water in their cooling towers. And those kind of two markets really benefit our ChemTreat and our Trojan businesses, respectively. So we're seeing good sort of solid, steady, robust demand really for both water treatment and Water Quality. Andrew Kaplowitz: Very helpful. And then Jennifer, just going back to M&A, like, I know timing is always difficult, but would you expect to get something done this year? And then under what conditions would you do a larger deal where you may potentially raise equity? Jennifer Honeycutt: Yeah. I think you are right that M&A is clearly episodic. We can't guarantee the intersection of when we will see market, company, and valuation come together. As we've mentioned in the past, we're going to stay disciplined to that approach. We have to like the market, right? It's got to be adjacent or near adjacent to where we play. The company has got to be a strong company that has secular drivers that we value under the umbrella of Safeguarding the World's Most Vital Resources, and we got to be able to get at the right price. I think right now, valuations are still a little bit inflated. So we're looking at the intersection here, but we've got to fundamentally get to all three of those variables. And all I can say is, we're working hard in this area. Sameer Ralhan: And Andy, just going to look, think about the equity side, it's just one of the components of how we think about funding any transaction. The main thing is value creation, right? Anything that can ultimately help us create long-term value, we'll look at all forms of funding, as we have kind of talked in the past. Main thing for us as we're going to think of any kind of funding is maintaining investment-grade balance sheets. That's sacrosanct for us. Andrew Kaplowitz: Appreciate the color, guys. Operator: We'll take our next question from John McNulty of BMO Capital Markets. John McNulty: Yeah. Thanks for taking my question. Maybe one on the free cash flow side. Obviously, a really strong quarter for you there and hitting kind of conversion levels that are above what you're certainly looking for the year. I guess, can you help us to think about what drove that? And if that -- if we see more things that you can kind of wring out from, whether it's a working capital side to kind of keep that level elevated for the next couple of quarters, how should we be thinking about that? Sameer Ralhan: Yeah, John. Thanks for that. As you kind of look at the free cash flow conversion, quarter-to-quarter, it can vary. As you know, we have the bond payments that come in, in the first quarter and the third quarter. So that gets -- impacts timing of the cash payments. So I would say, when you look at the free cash flow conversion, really look at it on a full year basis. Overall, given the strength that we're seeing in the business, the execution, we feel pretty good about delivering 100% to 110% free cash flow conversion, that's off GAAP net income. John McNulty: Got it. Fair enough. And then just a question on SG&A. It took a reasonable jump up, somewhere in the 7.5% kind of range. I guess, can you help us to think about how much of that is just general labor, inflationary type trends versus the corporate side, where now you're a public company versus investment for growth? I guess, how should we be thinking about the various buckets there? Sameer Ralhan: Yeah. I think it's -- let's take it in two buckets, right? One is -- first, on the business side, as we kind of told you, right, at the beginning of the year, we will be we -- are investing in the sales and marketing side to really drive the growth of the business, and you've seen that kind of really coming through or flowing through the numbers in the first quarter and second quarter. John, inflation is there a little bit, I think, just like everybody else. There's nothing outsized. But it's -- these are really heads that are added more on the sales and marketing side to drive the growth, and you started seeing a little bit of the impact and more in the 2025 that you're going to see. So I would say, on the business side, we are more or less in a normalized state, so to speak, and SG&A as a percent of revenues. On the corporate side, we were very judicious in how we bring the cost in. So what you're going to see is more of a run rate view of the corporate expenses in the second half of the year. So there's going to be a little uptick in the second half versus the first year that you're going to see on the corporate side, but that should normalize in the second half. So, nothing extraordinary on that front. Mike Halloran: So, just some thoughts on the product rationalization side of things, some of the initiatives you're doing there. Maybe just how far along do you think you are in that journey in general? Have most of the areas been identified already, or do you think that there's more to come on that side of things? Jennifer Honeycutt: Yeah. I think, Mike, what you've seen us do here is just pruning around the edges, right, and this is actually part of standard work that we do day-in and day-out in managing the portfolio of the businesses. It's not an -- it's not something that we look at on an episodic basis. We're looking at this all the time. So, I would say, when we see opportunities for continued portfolio evolution to get us a stronger portfolio, focused in the higher areas of growth with higher margin and recurring revenue, anything that falls materially far away from that profile is something that we'll take action on. So we feel good about the portfolio we have today. We'll continue to prune around the edges as and when we see that it's appropriate to do so. Mike Halloran: Makes sense. And then just to follow up on, I think, Andy's question earlier, when you think about the greater confidence going into the back half of the year, has anything actually changed, or is this just about starting to see the momentum into this year, first quarter, and is actually having to materialize that gives you extra confidence? In other words, has there any -- been really any change in your thinking about how these end markets are going to progress? Jennifer Honeycutt: Well, I think we've come out of a pretty tumultuous several years following the impact of the pandemic, Mike. And we saw a lot of whiplash, right, in terms of price and volume and demand cycles and consumer spending and what they were spending on and so on. I would say that our confidence is built more as a function of an enduring steady state for our Water Quality businesses, driven by the secular drivers that we've talked about and an incrementally improving macro here for consumer products, goods markets. 85% of our revenue goes into water, food, and pharmaceuticals, and provided that those markets are steady or improving, we're going to see that benefit. Brian Lee: Hey, everyone. Good morning. Thanks for taking the questions. I guess... Sameer Ralhan: Good morning, Brian. Brian Lee: The first one on -- hey, Sameer, good morning. Sameer or maybe Jennifer, you mentioned during your prepared remarks some favorable mix, I think, in the Water Quality segment that might have helped margins. Can you elaborate any -- on that, and is that something that either you can quantify or, as you think about the next few quarters, is that expected to persist. Sameer Ralhan: Hey, Brian. Yeah. I'll take that one. The mix comment is really around consumables. We've seen a good amount of consumable uptick that's driving it. As you've seen, our recurring revenue is almost at 62% right now and that is predominantly mix and a little bit of spares and the -- some of the SaaS software side, but predominantly consumables. If you recall and go back into the history, when things are more normalized, that tends to be in the high-50s, right. So that kind of helps you dimensionalize now the transition as the volume comes back on the printer side, in PQI, instrumentation side, on the Water Quality side, it's going to be a multi-quarter journey as we kind of move. So, you're not going to see a big variation quarter-to-quarter, but that sort of 62% versus high-50s is the way to dimensionalize the change over time. Brian Lee: All right. Fair enough. That's helpful. And then I know you're talking about improving end markets kind of across the board. Jennifer made some comments around the strong backlog trends in Water Quality. Can you maybe talk a bit more specifically around -- I think you had comments in the release about strong bookings in packaging and color. Our understanding is that that's more of a short cycle business. So, where is the visibility? Are those the areas where you're seeing trends improving as well? Just kind of any commentary on the short cycle side of your business? Thank you, guys. Jennifer Honeycutt: Yeah. Relative to packaging and color, as we mentioned, we've just concluded our Drupa Trade Show. That's a trade show that runs once every four years. And given the pandemic, this is the first time that show has been conducted in eight years. So there were some really good kind of pent-up demand that we saw there. But I think our solutions and, particularly those around innovation that we're providing in the S2 cloud-native digital integration of the workflow has got the attention of a lot of brand owners, because they are under pressure to compress their development cycles and ensure the integrity of the information that they're working with, which gives every user of that system access to the same information. So we had a great showing there. The teams -- all three teams in terms of Esko, Pantone, and X-Rite really did a great job there. And I think the -- outside of the enthusiasm generated in Drupa, the recovery of the CPG markets will lend itself to new product releases and new product innovations from brand owners. So they are getting ready. They have a number of projects that they're considering in terms of new product releases and so on and so forth. And so, this is the front end of that. And I think we're well positioned to be able to help them with their solutions. Brad Hewitt: So, I guess, I wanted to start on the margin side of things. Your guidance implies about a 50 basis point step-down in margins in Q3 versus Q2 despite the fact that revenue, I think, should be flat to slightly up sequentially. And then also your trade show expenses should step down quarter-over-quarter. So, just curious if you can talk about kind of the drivers of the sequential margin pressure there. Sameer Ralhan: Yeah, Brad. This is Sameer. Effectively, really two things here. The first one is the mix comment that you made earlier. Our mix is pretty rich in consumables and recurring revenue right now. We have started seeing some good, encouraging signs on the equipment side. We said in the second quarter, we finally see -- saw a positive revenue growth on the equipment side. So we've modeled in kind of a decent equipment growth in the Q3 and second half of the year. So mix impact is what's kind of flowing through here. And the other one I would say is really on the corporate side. As we kind of get into the second half of the year, we are going to be getting more towards the run rate expenses on the corporate expenses. So that's impacting the margin side as well. So it's really those two things that are impacting the margin. Brad Hewitt: Okay. That's helpful. And then, I guess, going back to the long-term incremental margin framework of 30% to 35%, I know that includes kind of some reinvestment in the business. But just given the strong execution on VES since the spin, as well as the implied 50% incremental margins this year despite volume growth kind of in the 1% to 2% zone, does that give you confidence on perhaps something more like 40%-plus incrementals going forward over the medium term? Sameer Ralhan: Yeah. No. Thanks for that. Look, I mean, it's first of all, really kudos to all our teams, all our 16,000 people that are really helping drive this kind of fall-through that you're seeing, right? Really proud of what we've been able to achieve this year. But as you kind of think about 30% to 35% is really on the -- over the longer term, right? We do want to incorporate in that long-term value creation algorithm, a healthy investment mix from the sales side, from R&D side. So I think from a long-term value framework perspective, I think still 30% to 35% is the right way to look at it. But I think -- and in the near term, really good performance and execution of the teams is driving a fall-through close to 50%. Nathan Jones: I guess, I'll follow up on that last question. You guys have made it pretty clear that you intend to continue to invest in growth here. Can you talk about what you think the growth rates will be in kind of investment in commercial resources, investment in sales, investment in R&D kind of over the next several years rather than just any one year to the next? Sameer Ralhan: No. I think as you kind of think about long term, Nathan, these investments should be supportive of the mid-single digit growth framework, right? And that is 4% to 6% kind of a range, as we have kind of talked about. So as when we think about that mid-single digit growth framework, we do reflect the incremental contribution coming from these investments on the sales and marketing side, as well as on the R&D side, right? This is a technology-heavy business as you kind of think about in the commercial execution business. So those investments are key as we kind of think about long-term sustainable value creation. Nathan Jones: So, you would be looking at kind of that kind of mid-single digit growth in those investments as revenue? Sameer Ralhan: It kind of depends, right -- just to make sure, Nathan, right, it -- on average, right, this is a cumulative thing that we're looking at. Of course, the new investment should be incrementally driving higher growth from their side, but some things fall out of the portfolio, too. Nathan Jones: Got it. The other question I wanted to ask is on the recycle, reuse, reclaim market driver. I think that is likely to be a pretty considerable driver of investment from industrial water users. So I'm hoping you could talk a little bit more about where Veralto plays, kind of how much of your revenue that makes up where you think it could go to over the next five-year to 10-year kind of time frame, long-term growth rate you're expecting out of that, just because I think that's going to be a pretty good driver of incremental demand. Jennifer Honeycutt: Yeah. Thanks for the question, Nathan. We do see great demand here in recycle, reclaim, and reuse. The businesses most impacted by that certainly is our Trojan business who is well positioned there to help customers with their sustainability initiatives in this space. ChemTreat also has a play here. And certainly, if you're going to be moving water around, you're going to have to test it as well. So it does create some opportunity for our analytics businesses. But the primary beneficiary really of this opportunity would be our Trojan business. And frankly, we see this space growing probably mid-to-high single digits for the foreseeable future. Lots of industries are under pressure to achieve their sustainability targets, and we're well positioned with solutions to help them. Andrew Krill: Thanks. Good morning, everyone. I wanted to circle back on margins again from a little bit more of the medium-term perspective. I know there's been a lot of discussion just that the company has meaningfully more opportunities to improve margins than might be improved -- appreciated by investors. Just can you update us any of, like, the findings you've had since the spin on that and whether you would consider explicitly quantifying those at any point? And then would you also say, is there more opportunity in one segment versus the other or do you think it's kind of similar? Thanks. Sameer Ralhan: Yeah. Andrew, thanks for that. As you kind of look at the opportunities on the margin expansion, right, this is -- the work that the teams have been doing on the procurement side, really our folks on the front lines and the shop floor, on the factory optimization, so these are lots of singles and doubles. As I said earlier in the call, it's not one or two factors that are driving this margin expansion. And that, frankly, really is the beauty of the kaizen culture, right? That's where you're going to see the margin contribution coming in. Those efforts really that the teams have been doing and execution that is happening is giving us the confidence to really up the bar on the margin expansion for the full year or we have -- instead of 50 basis points to 75 basis points, what we've said -- raised the guidance to is 75 basis point margin expansion for the full year this year. So that should get the full year pretty much close to 24% on the operating earnings margin. Andrew Krill: Okay. Great. Very helpful. And then can you give us an update on the situation in Argentina and maybe just how much contingency, if you will, you have left in your guidance for the full year? And then, I guess, depending on how that shakes out the rest of the year, how that could help or hurt PQI margins in the back half? Thanks. Sameer Ralhan: Yeah. Very brief, right, Andrew, as you kind of look at Argentina, as we said at the Q1 call, we did the Blue Chip Swap to really insulate any impact on the historical cash that really drove the impact last year. But as you kind of move into this year, effectively, our exposure is much smaller, and that's reflected in the guide. Andrew Buscaglia: I'm just looking at your guidance and trying to map out the ranges. And looking at the high end, I'm wondering kind of what's contemplating or what informs the high end of your guidance? Because it's difficult to get there. So, you either need sales to accelerate for some reason or maybe you have some extra margin expansion in your back pocket. I guess, of those two or what -- what's behind that high end is my question. Sameer Ralhan: Yeah. No, thanks for that. It really comes down to how you're going to think about the CPG markets, right? CPG markets are evolving, incrementally becoming positive, but it's a pretty fast-changing views that we are seeing. So I think, as you kind of look at the guidance range, one of the big drivers is how we kind of think about the CPG markets and the impact they will have on the on the PQI topline. I would say -- if there's one thing I can say, that's one of the key things. And then on the margin side, right, I mean, there's always the raw material price versus raw material contribution we always look at. We believe we have baked in a pretty prudent view here. So, any benefit from that will be more enduring towards the high end of the range. Andrew Buscaglia: Okay. That's helpful. And yeah, I wanted to ask, any update on the PFAS regulation opportunity in terms of whether anything new around your discussions with customers or -- I know you guys are talking about product development. Just what's the latest there? Jennifer Honeycutt: Yeah. We continue to be interested in this space. But as you know, this is an incredibly difficult and complex problem to solve. We believe that we're well positioned, given our 70-year history at Hach for democratizing tests and analytics and our long track record at Trojan for developing treatment solutions. So we continue to invest in this space and stay focused there, but real fit-for-purpose solutions that are focused on at-site or in-line testing and at-site real-time destruction of PFAS are going to be -- remain a difficult problem to solve. But we're focused on creating winning outcomes for our customers that have fit-for-purpose solutions. So, still a few years away here, but we are interested in the space, as we are with sort of all of the micro-contaminants that come into the regulation frame. Joe Giordano: Good morning. Thanks for taking my questions. I was interested in the industrial growth commentary. It's just we're not hearing that in a lot of places, right? Industrial data is pretty bad and most companies, we're seeing orders decline. So it was interesting and good to see that there. Can you kind of -- what's driving that? Is it new project ramps? Is it -- like, is it optimization at existing facilities? Like, what's the nature of this kind of growth there? Because it does seem somewhat unique. Jennifer Honeycutt: Yeah. I think what you're seeing here is that there's really three things that differentiate us from other industrials. We play in the end markets with really attractive and kind of non-optional secular growth drivers, right? So, when you've got a business that's 85% of our sales into food, water, and pharma, it's -- these are not elective areas of testing, right? So these are really durable markets. And as a consequence, the way our businesses have been built are durable in turn. 60% of our recurring revenue or 60% of our revenue is kind of in this recurring revenue space. It's a razor-razorblade business model with high-margin consumables. And these products and services that are deployed for our customers are essential parts of their operation. So, if they choose not to use our products or they choose not to treat and measure and monitor and so on, the cost of failure to them is high, because we're really tied to sort of product quality and public health. So the last thing I would say is, VES provides a competitive advantage for us really in terms of differentiating us relative to talent growth and continuous improvement. Joe Giordano: And then just last for me on the margins. So, we touched on this a bunch, but with gross margins at 60%, it's excellent. If I look at the spread between gross margins and EBITDA, 30% in SG&A seems a little high, like you're a newer company. Like, long term, what's like a real -- realistic level that that should normalize out at? Sameer Ralhan: Yeah. Joe, I'll take that one. It's really the sales and marketing, right? If you -- just to take you back, effectively, when you look at the P&L, it really aligns with how we create value in the business. It's more driven by investments in R&D, it's a technology-driven business, and then on the commercial side, right? The secret sauce, what we believe and our competitive strength, is a direct business model that effectively does result in the sales and marketing that you -- impact that you see on -- in the numbers. Overall, we feel really good about our business model that is more direct, and it really drives a competitive advantage in the marketplace. Joe Giordano: Thanks, guys. Operator: And this does conclude our question-and-answer session. I'd be happy to return the conference to Ryan Taylor for closing comments. Ryan Taylor: Thank you, Leo, and thanks for everybody that joined us on the call today. We really appreciate your engagement and the discussion. Feel free to reach out to me if you have any more follow-ups. Thanks again for joining us, and we'll talk to you next quarter. Operator: This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.

Earnings call: Aon reports solid Q2 growth, details NFP integration By Investing.com

Aon plc (NYSE:AON), a leading global professional services firm, reported a robust second quarter in 2024, with total organic revenue growth of 6% and significant contributions from its recent acquisition of NFP. The company is successfully executing its 3x3 plan, focusing on Risk Capital and Human Capital solutions, and is on track to deliver double-digit free cash flow growth. Aon also announced the appointment of Edmund Reese as the new CFO effective July 29. Aon's strategic initiatives, including the integration of NFP and talent acquisition, are setting the stage for sustained growth. The firm remains committed to capitalizing on opportunities in the middle market and reinforcing its M&A plan. With these efforts, Aon aims to continue its momentum and drive results in 2024 and beyond. Aon plc (AON) has been showcasing a strong performance with its recent earnings report, and InvestingPro data provides additional insights into the company's financial health and market position. With a market capitalization of $70.23 billion and a P/E ratio of 25.97, Aon stands out in the professional services sector. The company's commitment to shareholder returns is evident, as it has raised its dividend for an impressive 12 consecutive years, signaling confidence in its financial stability and future growth prospects. InvestingPro Tips highlight that Aon's stock may be in overbought territory according to the RSI, suggesting that investors might exercise caution. However, with 4 analysts revising their earnings upwards for the upcoming period, there is a positive sentiment surrounding the company's future earnings potential. It's also worth noting that Aon has maintained dividend payments for 45 years, which speaks to its long-standing commitment to providing shareholder value. For those interested in deeper analysis and more InvestingPro Tips, there are additional insights available for Aon at https://www.investing.com/pro/AON. And remember, you can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, giving you access to a multitude of tips, including 6 more for Aon, to help inform your investment decisions. Operator: Good morning and thank you for holding. Welcome to Aon plc's Second Quarter 2024 Conference Call. At this time, all parties will be in a listen-only mode until the question-and-answer portion of today's call. I would also like to remind all parties that this call is being recorded. If anyone has any objection, you may disconnect your line at this time. 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 first quarter 2024 results as well as having been posted on our website. Now it is my pleasure to turn the call over to Greg Case, CEO of Aon plc. Greg Case: Good morning, everyone. Welcome to our second quarter conference call. I'm joined by Christa Davies, our CFO; and Eric Andersen, our President. Additionally, we're delighted to be joined by Edmund Reese, who will succeed Christa as CFO on July 29. On our call today, Christa and I will provide our usual prepared remarks, and Edmund will highlight a few initial observations before he officially steps in to report Q3. As in previous quarters, we posted a detailed financial presentation on our website. We begin by thanking our colleagues around the world, including the 7,700 colleagues we welcome from NFP for the great work they do to deliver for clients, on each of the three pillars of our 3x3 plan, delivering Risk Capital and Human Capital solutions through our Aon Client Leadership Model scaled by the Aon Business Services platform. Let's now turn to Edmund. Edmund, on behalf of Global Aon, we're thrilled to have you on our team and your first day on Investor Call as you officially step into the CFO role on Monday. Welcome. Edmund Reese: Thank you, Greg, and good morning, everyone. I'm incredibly excited to be here. First, I want to start by thanking my Aon colleagues for their very warm welcome. I've connected with literally hundreds of colleagues over the last month. And it's been great to meet everyone and really experience the energy and the enthusiasm of Aon, and the commitment to deliver on our plans. What's been most exciting for me is seeing firsthand the investment in the corresponding growth opportunity for our clients, colleagues and shareholders as we deliver on a 3x3 plan over 2024, '25 and '26. And I have to say that with the 3x3 fully in place in '26 and the building momentum, equally compelling is the significant opportunity that will deliver value creation beyond '26 and over the long-term. Finally, the financial model is strong, and the company is performing and well positioned to continue to deliver long-term double-digit free cash flow growth. I also want to add that I'm looking forward to meeting investors and the sell-side in talking through how we will deliver on our guidance and continue to allocate and invest their capital with discipline, focused on high-return investments and capital return and, of course, reporting our third quarter results and fielding questions at that time. So Greg back to you. Greg Case: Thanks, Edmund, and we're very excited to have you here. Before speaking to results in detail, we want to highlight a great example of the power of a united firm to deliver solutions where they're needed greatly. In Ukraine, until last month, there was no functioning war risk insurance market because carriers couldn't get reinsurance coverage due to standing war exclusions. Working with the US and Ukranian governments, we created a solution that provides insurance and reinsurance capital to Ukrainian insurers, which has already brought in $350 million of new capital, encompassing a first-of-its-kind structure that facilitates new investments and economic recovery. This structure enables rebuilding and economic activity during the war and much more rapid investment in reconstruction and resilience longer term. This product couldn't have been created without global connectivity, expertise, data and analytics, on-the-ground relationships and local market knowledge and our proven ability to match risk and capital across private and public sectors. This innovative structure helps protect and grow the economy and helps the people of Ukraine recover and rebuild. It's a compelling example of the positive impact that our industry can have in addressing major challenges in the global economy. Turning now to current quarter results. In Q2, our team delivered 6% total organic revenue growth with all solution lines at 6% or greater, and both Aon and NFP delivering mid-single-digit organic revenue growth. For clarification and transparency, the 6% organic performance for Aon is 6% without NFP. With this organic growth, in the addition of NFP, we delivered 18% total revenue growth, 19% adjusted operating income growth and margins of 27.4%, an increase of 10 basis points year-over-year and 60 basis points from our combined 2023 margin baseline, including only two months of NFP. Year-to-date, we delivered 5% organic revenue growth, 11% total revenue growth and adjusted operating margin expansion, contributing to 12% adjusted operating income growth and 7% growth in earnings per share. Turning to our solution lines. In Commercial Risk, organic revenue growth of 6% reflects double-digit growth in EMEA and LatAm, with strong growth in North America, driven by net new business growth and strong retention. On average, we saw growth in exposures and generally flat pricing, resulting in moderately positive market impact. And while we're starting to see the turnaround in external capital markets, our M&A services business had modest positive impact in the quarter, although the available pipeline remains strong and growing. For NFP, growth for the two months was consistent with our North American business. Overall, a strong result. Finally, we're making great progress on priority talent acquisitions with continuing focus in this area and expect these new colleagues to contribute to further growth over time. Turning to Reinsurance. 7% organic revenue growth in Q2 reflects strong growth in treaty, with strength internationally in LatAm, EMEA and APAC. We saw increased capacity in the US property CAT space, which provides ongoing opportunity for our clients to increase and optimize their coverage supported by our team's leading expertise, data analytics and insight. Health Solutions delivered 6% organic revenue growth with high-single-digit growth globally in core health and benefits and real strength in consumer-facing and executive benefits, driven by new business wins. The market environment reflects an increased health care cost trend and positive impact from enrollment levels. NFP's contribution was consistent with Aon's performance, an impressive result in the midst of the closing. And finally, Wealth Solutions organic revenue growth was 9%, an outstanding result, reflecting ongoing strength in pension derisking and core retirement. NFP also delivered strong growth, driven by asset inflows and market performance. Overall, we're pleased with both the top and bottom line growth in the quarter as we continue to deliver against our 3x3 plan on all fronts. Further, after only two months of NFP, early progress is fully on track or ahead of expectations. Four key growth and value creation opportunities highlight this strong start. First, on independent and connected, outlining how we're bringing NFP into Aon. Our teams are coming together with a shared vision and client-first mindset, and they're building connectivity across Aon and NFP. Our early close is increasing momentum as we work together to deliver wins and bring the best from Aon and NFP to our clients. Second, top line growth. We're seeing strong organic revenue growth from NFP. And though early, we're on track to deliver our revenue synergy commitments, noting that we modeled zero net impact in 2024 and have seen strong client and colleague retention. Third, NFP's M&A engine is operating exceptionally well and the pipeline remains very strong. We've completed 14 deals so far in 2024 at attractive multiples weighted toward commercial risk and health. And we're finding that our independent and connected value proposition is distinctive and highly attractive. And fourth, bottom line growth. We're on track to fully deliver in line with guidance on all aspects of the combination through efficiencies, cost synergies and free cash flow impact, leveraging operational best practices from Aon Business Services. In summary, our Q2 and year-to-date results demonstrate progress against our financial guidance and our 3x3 plan, which will deliver superior content and capability across Risk Capital and Human Capital through Aon Client Leadership, ensuring we bring relevant client solutions all the time, all enabled through Aon Business Services. This performance will deliver compelling long-term value creation for clients, colleagues and shareholders. Before I turn to Christa for one final time, I want to take a moment to thank her again for a great partnership, leadership and friendship, and for her inspiring and invaluable commitment to building our firm. Christa, over to you for your thoughts on our financial results and long-term outlook. Christa Davies: Thank you so much, Greg, and thank you so much for the partnership. My time at Aon was and will continue to be the highlight of my career. I remain incredibly excited about the value creation potential we have ahead of us through the 3x3 plan. I'm thrilled to welcome Edmund, and I look forward to serving as an advisor to the team to support and ensure a smooth transition. Turning now to the quarter. As Greg highlighted, we delivered exceptional results in the second quarter, with 6% organic revenue growth highlighted by 7% in Wealth and 7% in -- sorry, 9% in Wealth and 7% in Reinsurance. Our overall organic revenue growth does not include the impact -- does include the impact of NFP, beginning from April '25 when we closed the acquisition. So we only had two months performance, NFP's Q2 performance was in line with the business case as it delivered mid-single-digit organic revenue growth. NFP also contributed to the 18% total revenue growth in the quarter, which translated into a 19% adjusted operating income growth, margins of 27.4% and 6% adjusted per share -- earnings per share growth. These results position us well to drive progress against all elements of the 3x3 plan, driving results in 2024 and over the long-term. As I reflect on our performance for the first half of the year, as Greg noted, organic revenue growth was 6% in Q2, driven by net new business generation and ongoing strong retention. We continue to expect mid-single-digit or greater organic revenue growth for the full year 2024 and over the long-term. As Greg described, we're making excellent progress with NFP. We continue to expect that NFP will contribute to the firm's overall revenue growth through organic revenue growth, including $175 million of net revenue synergies by 2026 and inorganic growth from ongoing M&A. While it's early, we're on track to achieve deal synergies, with no net impact in 2024 from cost and revenue synergies and positive impact in 2025 and 2026. This is exactly in line with the guidance we gave when we announced the deal. It's also worth noting that voluntary colleague attrition at NFP is down year-over-year. Moving to operating performance. We delivered strong operational improvement with adjusted operating margins of 33.8% in the first half, an increase of 20 basis points, driven by revenue growth, portfolio mix shift, efficiencies from Aon Business Services and restructuring savings, overcoming expense growth, including investments in colleagues and technology to drive long-term growth. If we consider the combined historic margin profile of Aon and NFP, including two-thirds of NFP's results from the second quarter of 2023, adjusted operating margins expanded 60 basis points in Q2 and 80 basis points year-to-date, which is how we think about ongoing margin expansion. We're making meaningful progress on our Aon Business Services strategy, including through our restructuring program, which helps to accelerate our 3x3 plan and contributes to margin expansion through net savings. We continue to streamline and improve operational processes, moving work to the best locations and enhancing colleague and client experience with powerful new tools such as our property, casualty, D&O, cyber and health risk analyzers. Restructuring savings in the second quarter were $25 million, resulting in $45 million of restructuring savings year-to-date and 60 basis points of contribution to adjusted operating margin year-to-date. Restructuring actions completed so far are expected to generate $95 million of savings in 2024. We expect restructuring savings will fall to the bottom line. At this time, we continue to expect $100 million of realized savings in 2024 as we continue to accelerate our plans for Aon Business Services and our business. As we think about adjusted operating margins moving forward, we continue to expect to drive adjusted operating margin expansion over the full year on a combined firm basis and the long-term through ongoing revenue growth, portfolio mix shift to higher revenue growth, higher margin areas of the portfolio, and efficiencies from Aon Business Services. As we previously communicated, we think the right baseline from which to measure 2025 adjusted operating margin growth is 30.6%. Calculated out as 31.6% from 2023, less 100 basis point drag from NFP for the period from the 2020 -- from the April '25 close through the end of 2024. We also expect fiduciary investment income to be relatively flat year-over-year based on current interest rate expectations. So we expect the tailwind we've seen in the first half of the year will be reduced in the back half. So we remain committed to driving full year adjusted operating margin expansion in 2024 and over the long-term against this adjusted baseline of 30.6%. Turning to EPS. Adjusted EPS grew 6% in Q2 and 7% year-to-date, reflecting double-digit adjusted operating income growth and ongoing share buyback, partially offset by higher interest expense, the issuance of 19 million shares to fund the acquisition of NFP and a higher tax rate. Turning now to free cash flow. We generated $721 million of free cash flow year-to-date, reflecting strong operating income growth and lower CapEx, offset by payments related to NFP transaction and integration charges, legal settlement expense, restructuring and higher cash tax payments, as we've previously communicated. As we look forward, our free cash flow outlook remains strong based on our strong expected operating income growth and a $500 million long-term opportunity in working capital. We've communicated that, in the near term, free cash flow will be impacted by restructuring, higher interest expense and NFP deal and integration costs. In 2025 and 2026, NFP is expected to add $300 million and $600 million of incremental free cash flow, respectively, contributing to our overall expectation of long-term double-digit free cash flow growth. We allocate capital based on ROIC and long-term value creation, which we've done through time through core business investment, share buyback and M&A. As we look historically, we have a successful track record of balancing organic investment, acquisitions, divestitures and share buyback as we continue to optimize our portfolio against our priority investment areas on an ROIC basis. Given the very strong long-term free cash flow outlook for the firm, we expect share repurchase will remain our highest ROIC opportunity. We completed $500 million of buyback in the first half and continue to expect share buyback to be substantial at $1 billion or more in 2024 based on our current M&A expectations for the rest of the year. We also expect to continue to invest organically and inorganically in content and capabilities that we can scale to address unmet client needs. Regarding M&A. Our M&A pipeline continues to be focused on our high priority areas, including the mid-market and attractive geographies that will bring scalable solutions to our clients' growing and evolving challenges, known that we closed an acquisition in France this quarter, bringing new specialist capabilities and health and benefits into Aon. We are also continuing to see success from NFP's impressive M&A engine. Since the beginning of 2024, NFP has completed 14 acquisitions at attractive multiples weighted towards commercial risk and health, representing $36 million in annualized revenue. As we previously communicated, we expect NFP to do M&A comprised of $45 million to $60 million of EBITDA per year, and they are on track for the full year 2024. We look forward to building on their established track record and executing against this strong pipeline to drive future growth in the space and value creation within our ROIC framework. Going forward, we'll continue to actively manage the portfolio and assess all capital allocation decisions on an ROIC basis, contemplating buyback, M&A and delevering. Turning now to our balance sheet and debt capacity. We remain confident in the strength of our balance sheet. As previously communicated, we expect our credit ratios to be elevated over the next 12 to 18 months, as we bring our leverage ratios back in line with levels consistent with our credit profile, driven by substantial free cash flow generation and incremental debt capacity from EBITDA growth, noting our track record of effectively managing leverage within our current ratings. In summary, our strong financial results in the quarter and year-to-date position us well to continue driving progress against all elements of our 3x3 plan and driving results in 2024 and over the long-term. We look forward to building on this momentum. With that, I'll turn the call back over to the operator, and Greg, Eric and I'd be delighted to take your questions. Operator: Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Elyse Greenspan with Wells Fargo (NYSE:WFC). Please proceed with your question. Elyse Greenspan: Hi, thanks. Good morning. Before I get into the questions, I just -- also just want to extend my congrats to Christa just on your successful career at Aon. Christa Davies: Thanks so much, Elyse. Elyse Greenspan: Yes. Thanks, Christa. My first question is on Commercial Risk. I guess it's two parts. Maybe, Greg, you said the overall organic growth wasn't impacted by NFP. Would that statement also hold true for Commercial Risk? And then can you also just expand on what turned in the quarter? You guys went from 3% to 6%, you saw a doubling of growth within that segment in the quarter. Greg Case: Yes. Maybe I'll start, Elyse, but then important to get Eric's input and Christa's here, too. Listen, first of all, to your first question, yes, we want to be really clear about NFP has been two months. So you take NFP out completely, the 6% and all the solution line results would have been exactly the same without NFP. So that's exactly correct. And think about Commercial Risk, maybe put it in context a little bit. What we're seeing in Commercial Risk is exactly consistent with what you're seeing really across the firm. And you should expect and we expect that we're going to continue to make progress and build momentum in '24, '25 and '26 on the 3x3 plan. And again, this all starts with better understanding the client need and then taking some very specific hard steps to put Aon in a position to address this demand in a way that we think, Elyse, is going to be a better set of solutions and really distinctive and that's really the 3x3 plan, and you know what the elements of that are. And that's what delivered the 6% organic, the margin expansion and the OI growth. In Commercial Risk, specifically, again, even without NFP, 6% growth was driven by real strength in net new business generation and strong retention. And really the strong performance held across all major geographies. And we wouldn't probably get into quarter-to-quarter because the quarters are different. The mix is different between them. As we said in Q1, there were some external factors we saw last quarter that we didn't expect were ever going to repeat and they likely won't repeat, and they didn't repeat. And on average, you step back, you see growth in exposures, generally flat pricing resulting in modestly positive market impact. As we said, M&A services, we're starting to see the turnaround in external capital markets, but really M&A services really had a modest positive impact in the quarter. But our team, look, with the investments we've made and the caliber of that team and the capability are incredibly well positioned to take advantage of the growing and what is available pipeline out there now. And then again, with that said, NFP growth for the two months was consistent and that went into the overall, as Christa described. And I would also say we're making great progress on our priority hire pipeline in areas like energy and construction and expect these new colleagues to contribute to further growth over time. But really, Elyse what we're trying to highlight is Q2 is just a continuation of what we're doing with the 3x3 plan and you're starting to see that really play out and we expect it's going to continue for the rest of the year and then to '25 and '26 and beyond. But Eric, what would you add to that? Eric Andersen: Yes, Greg. So first of all, I would say that strong retention and strong new business really are an outcome of the work that's been going on in the quarter. But just to touch a little bit on the priority hires, if I could, for a second, as you mentioned, in the key specialty areas, construction, energy, other industry areas. We're looking at those investments in people like we do any other investment. We want to bring in the best talent that is out there, support them with the best tools and analytics, whether it's the new analyzers that Christa talked about, some of the broker-led analytics, new tools like automated certificates of insurance to make sure we're providing the right colleague and client experience. But I would also say that the analyzers fit into what we've been doing around the $1 billion investment in ABS and those tools. And when you match that talent, that new talent and existing talent, right, the great talent that's already here at Aon, with those new tools, you begin to provide a different experience for our colleagues who can actually serve their clients better, but also to the clients themselves who get better insight from us really begin to unlock the analytics that we've been talking about, match that with the global broking capability, the access to the reinsurance capital, really the whole strategy around how we're bringing capital to clients, and you see a different experience. And we've seen it in client events, whether it's at RIMS or our property symposium or other client events that have been going on in the first half of the year, you really see the excitement from the clients who are starting to really understand what we're trying to give to them in the whole ecosystem of tools and talent and people. I could share stories and tell you some client wins and things. But really, the new news are these risk analyzers and you see it also on the Health side. The ability to show a client where their risks are, how they structure a program around it and then how they access global capital with a client leader who fully understands their business is actually helping us drive better, stronger retention and better net new business wins. Elyse Greenspan: Thanks. And then my follow-up question, the tax rate in the quarter went to -- above 22%. I know you guys have typically guided, right, to 18.5%, which is like the five-year average. Is there something -- is your tax rate structurally higher with NFP? Or is there something one-off that we should think about when thinking about the run rate tax rate? Christa Davies: Thanks so much for the question, Elyse. In Q2, similar to Q1, the tax rate was driven by a geographic mix of income and the impact of unfavorable discretes. I would note that discrete can be favorable or unfavorable in any one quarter, and therefore, the rate can be lumpy quarter-to-quarter. We really do think about it over the full year. And as you said, Elyse, we don't give guidance going forward, but that is a historical accurate rate going backwards. Elyse Greenspan: And then one more quick one, Christa. I think you said NFP expected $45 million to $60 million of EBITDA in M&A, and you're on track this year, but I think there was $36 million of revenue so far. So is it just that you guys are -- see a pipeline that would probably be more back half than first half-weighted in terms of transactions? Christa Davies: That is exactly right, Elyse. And what we've really seen is the acquisition activities NFP slowed down a little as they were negotiating with us for obvious reasons. But the pipeline looks incredibly strong in the back half of the year, and we think they are fully on track to deliver that $45 million to $60 million of EBITDA in 2024. Elyse Greenspan: Thank you. Operator: Thank you. Our next question comes from the line of Andrew Kligerman with TD Securities. Please proceed with your question. Andrew Kligerman: Hey, good morning. And also just a congratulations to Christa on the next phase of her career. What an awesome run you've had at Aon. Just exceptional leadership operationally, technologically, I mean, unparalleled as a CFO. So we'll miss watching you in action, but congrats on the next phase. Christa Davies: Thank you very much, Andrew. Andrew Kligerman: Sure. And then I guess moving back to Commercial Risk Solutions, and Greg, you mentioned and Eric mentioned new hires in the energy area. Could you elaborate a little bit on where -- and actually, let me take a step back. I mean, there was a lot of maybe concern out there that net hires were negative at Aon. So could you talk about 2Q was net producer staffing positive or negative? Was that a big influence on the 2Q? And how do you see that playing out in the second half of the year? Do you think you'll be net hiring positive? Greg Case: Yes. So thank you, Andrew. Appreciate it, and I really appreciate your perspectives. First, take a step back overall. Just to remind, we have currently the highest engagement we've had in basically almost forever. It's a really positive story that continues to evolve and build. And it really is a function of our colleagues understanding and really contributing to and leading the ability for us to support and help clients. And if you think about the example we started off with today, it's a powerful example of what we can do and the impact our firm can have, and that's really -- that generates a lot of energy around our firm. That's why our engagement is so high. That's reflected in our attrition, and our voluntary attrition continues to be very low, lower than back to pre-pandemic. So very, very positive from that standpoint. It's really against that context, we also, though, said, listen, there are some areas where we think there are some priority opportunities. Construction is one, energy is one, et cetera, and there are a few others around the firm. And we've had great fortune in bringing colleagues in to drive that. But I think Eric's point that we're not just -- this isn't about numbers, this is about capability. So it's bringing in great practitioners and then arming them with our colleagues with these capabilities, these set of analytics. And make no mistake about it, what we've done with the analyzers, we think, is unique and it really is supported by an Aon Business Services platform also unique. And then remember, we also made the unpopular decision to invest $1 billion to accelerate that capability. And you're starting to see that show up, the beginnings of that. You saw it in the second quarter, you'll see it in the third and the fourth quarter and into 2025 and 2026. So that's really what's going on in terms of where we are. And you'll see us continue to make that investment as it strengthens the firm and our client-serving capability. But Eric, what else you got there? Eric Andersen: I would also -- I would broaden the aperture a little bit around just thinking about producers. Greg, you talked about the tools, which are absolutely right. But when you think about what we do for clients, it's more than just production. It's does the client manager or client executive understand the client industry? Does the broker, if it's an energy broker, be able to talk about the risks of a client? Or the claims people or the risk analytics people being able to sort of match that to the industry expertise? So when we talk about investments in areas like construction or energy or life sciences and pharmaceuticals, it really is broader than just a producer. You actually have to have that skill set to be able to serve that client all the way through the chain on the risk side and more and more so on the talent and health and wealth side as well. So we are investing in those areas where we see growth, and we plan to continue to make those investments as the year progresses. Andrew Kligerman: So I guess just kind of putting the -- framing it a little bit. This 6% organic revenue growth, it fits in with your mid-single digit or higher objective and it really shouldn't come as a surprise, right? It kind of fits with this strategy that you're describing? Greg Case: Yes. Andrew, if you step back and think about where we were, I know everyone tends to look at the quarter-to-quarter, we look at the overall trend over time, and in particular, just great, pure, core skill in our ability to make a difference with clients. And what we're describing is with the 3x3 plan, this is not conceptual. This is a serious double down on an organization around risk capital, which means we're connecting reinsurance and commercial risk capability in a way that's never been connected in our industry before. On the human capital side, as Eric talked about, with talent, health and retirement, that combination that has then been reinforced and supported and driven by Aon Business Services, and if you think about the talent, to the talent question you raised, we brought a very unique set of talent skills in Aon Business Services from our industry, but candidly, well outside of our industry from firms like Conagra and like Walmart (NYSE:WMT), and like Google (NASDAQ:GOOGL), and like Accenture (NYSE:ACN) and they've come together and did some things that have never been done. So that, to us, is the foundation that's been set down. And all you're seeing in the second quarter is just a manifestation of as that happens. That then gets amplified when you bring in capability, as Eric has described, and we're doing that and continuing to focus on that. So that's the story. And our view is, again, it's '24, '25 and '26. It's three commitments over the next three years that we think put us in a unique position to not only succeed with clients, but to build momentum, even Edmund alluded to this as he came in, to build momentum beyond 2026. So that's exactly what we're on track to do, and you can expect continuation in the second half of the year to see that play out. Andrew Kligerman: Got it. And then just quickly on NFP. Christa mentioned $45 million to $60 million of EBITDA acquired -- each year. How about a more sizable middle market acquisition? Is that something in the cards? Or is it something that maybe you need to digest NFP and maybe a year or two or three down the road, you start thinking about that? Greg Case: Listen, first of all, you always step back, as Christa described, and has always done around our ROIC, return on invested capital framework, and what we're trying to do to sort of maximize outcome for our clients but also for our shareholders. So everything is in the construct of that. Listen, we love this platform. This has been fantastic. We had very high expectations of NFP coming in and they've been exceeded. Now it's only two months, but Doug Hammond and the team have been fantastic working with Eric, absolutely fantastic. We love this platform, what this platform can do. So that's really where we're going to concentrate. We're going to focus on that and reinforce the M&A plan that Christa talked about and really bring capability of Aon Business Services into the middle market in a unique way as well. And if you think about it, we want our colleagues in NFP to understand had a great franchise and capability before, now with additional capability for Aon, wow, even more for that producer group. So this is really going to be our focal point in every way, shape or form. And what we're finding is that's absolutely true. And also NFP has capability that actually resonates across global Aon. So it really is going both ways sort of in the context of it. So look for us to focus on that, to get that right and that's going to be our mission and really our obsession as we sort of complete '24 and into 2025. Andrew Kligerman: Awesome. Thanks, Greg. Operator: Thank you. Our next question comes from the line of Mike Zaremski with BMO Capital Markets. Please proceed with your question. Michael Zaremski: Hey, good morning. Back to the -- so on the -- just curious with the math when you say share repurchases is the highest ROIC opportunity. Am I wrong to assume that M&A now on the NFP platform would be a higher ROIC opportunity? But of course, given just the size of Aon and the amount of M&A you can do that you can't spend it all in the near term. Or am I thinking about the math incorrectly, assuming recently a market multiple is paid for M&A and smaller acquisitions. Christa Davies: Yes. Thanks so much for the question. The first thing I'd say is if you model the free cash flow growth of Aon, which is substantial and accelerating as a result of the 3x3 plan and the investment we've made in restructuring and the return on that and NFP, the highest return on capital across Aon remains share buyback. It is a phenomenal return. It's a phenomenal return at today's price. It's a phenomenal return at our all-time highs. And so we will disproportionately allocate capital to share buyback, which is what you've seen us do, despite commitments we've got in 2024 on paying down debt and delevering and the NFP transaction costs and some other uses of cash in 2024. And we'll commit to do over $1 billion of buyback in 2024 and over the long-term because that's really driving amazing free cash flow growth, and therefore, amazing free cash flow per share growth for shareholders. Michael Zaremski: Okay. Interesting. Some of your peers, I guess, maybe probably more optimistic on the margins that I'm modeling out. But just switching gears a bit to just the overall market environment in organic growth. Great to see an improvement in Risk Solutions and organic. Would it be -- I know you characterized the M&A environment is picking up a bit. I mean, would it be fair to say, I know you've given us tidbits in the past that financial lines, cyber where Aon is one of the leaders, is still kind of a drag, but lesser of a drag. And to the extent those lines eventually kind of pricing normalizes that we -- that this is just a kind of a pricing impact that's going on? Any other color you want to kind of provide on some of the macro that's been going on? Eric Andersen: Sure. This is Eric. Why don't I take this one? I think, listen, what we're describing here is a transitioning market where you look at it across the global platform of Aon, you'd see essentially pricing is, we'd call it, flat. But within that, there's 100 mini markets. You've got property, you've got casualty, specialty lines, et cetera. Overall, you're still seeing, as you asked around cyber and D&O, you're seeing pricing very much in favor of a buyer, a buyer's market, but that pricing is moderating. So it's not as steep as it was earlier. On the transaction services, Greg mentioned it, but I would just say that we're seeing an appropriate share of the pipeline of things that are happening. So we feel pretty good about that. Property is, I would say, heading towards flat for -- on average. But with better risks, maybe there's an opportunity for a price decrease. For more challenging risk, maybe it's still up a little bit. Casualty is probably the area that's getting the most attention right now, especially based on sort of coming out of the pandemic, was the pricing right and there have been reserve needs. So there's questions around casualty, especially around auto and anything with wheels, I would say, but that will develop. But that is actually still an increasing market from a pricing standpoint. What I would also say, when you get into a scenario, like this client's behavior actually changes. They make different decisions. So as they're able to potentially save in certain areas, they will invest that premium elsewhere because during the last five years of a challenging market, they made decisions going the other way where they actually reduced some of the insurance, took higher retentions, narrower coverage, that type of thing. And so they're able to revisit some of those decisions in this kind of a market. So our expectation is as we go through the rest of the year, you're going to continue to see the market transition in the way that it is right now. But ultimately, client behavior changes. And it's one of actually, just to go back to the analyzer comment, it's one of the beauties of this risk analyzer on the insurance side that it actually compares their existing programs and allows them to make different risk trading decisions as to where to deploy new capital to protect themselves and change structure. So it is a great opportunity for clients to reevaluate where they are today and how they build the right financial protection for them going forward. Michael Zaremski: Thank you. Operator: Thank you. Our next question comes from the line of Jimmy Bhullar with JPMorgan (NYSE:JPM). Please proceed with your question. Jimmy Bhullar: Hi. Good morning. So first, I just had a question on organic growth in Commercial Risk. This was, I think, the best quarter you've had in over a year. So if you were to point to maybe two or three items that might have -- like what are the few large items that might have driven the uptick versus what you've seen in the last several quarters? I don't know to what extent it was hiring or capital markets activity, but any color that you could give on the drivers of the pickup? Greg Case: So Jimmy, thanks for the question. I'll start, and Eric, add additional color from the client standpoint. As we talked about, Jimmy, this is really net new business generation and strong retention. Those are the two macro pieces sort of that drive this. What causes that? What causes that is literally what we're doing at the call phase with clients, and what we put in place last year on risk capital and human capital really reinforces that. Eric just talked about the examples on the risk analyzers. These investments, Jimmy, are unique. I mean they are literally putting us in a position where we can help clients see the risk market a bit differently and make different choices. The prior question was about unit price. This isn't about unit price. This is overall about overall volatility and how you think about it across the coverage lines. We have a chance to sort of talk to clients about that. That's why you win new logos. That's why you do more with clients. That's why you keep them longer. All those things are beginning to show up. And what we've highlighted is you can expect that to continue to progress for the back half of the year and into '25 and '26. So this is really what's driving what we're doing. This is the baseline. When you add on top of that the investments we're making in capability in some of these priority areas that we see great demand, we've name checked construction and energy. There are a few others, but those are the big pieces. And that's really the overall set of drivers. Eric, anything else you want to throw in there? Eric Andersen: Greg, maybe let me pick it up a little bit of a level. We put out a report recently around a better decisions report that focused in on these four major trends that are happening around tech, trade, workforce and weather and how business leaders feel like they're not prepared to deal with all these. And this cyber-attack or system outage that happened this week is just one example that brings it to mind. And so clients are really looking hard at their risk exposures that give us an opportunity as a connected firm globally with the right analytics to be able to help them navigate some of these topics. And so we've been seeing this building in terms of client need and strong growth in Europe, strong growth in Latin America, connected around client opportunities everywhere in the world. So a lot of the underpinnings that have been our Aon United strategy have really begun to take effect in a period where clients feel significant need. Jimmy Bhullar: Okay. And then maybe on the tax item, how much of the uptick in the tax rate versus last year was because of just the geographic and the product mix versus maybe some discrete items, just to get an idea on where it would have been otherwise? Christa Davies: Yes. Thanks for the question. We haven't actually given that detail in terms of the split, but it is consistent with Q1 in that the two things driving it really are the mix of geographic income and unfavorable discretes. And I would say discretes can be favorable or unfavorable in any one quarter, which makes the tax rate lumpy by quarter, and I would go back to saying the way we think about it is over the course of a full year. Jimmy Bhullar: Thank you. Operator: Thank you. Our next question comes from the line of Rob Cox with Goldman Sachs (NYSE:GS). Please proceed with your question. Robert Cox: Hey, thanks. So yes, there's been a couple of questions here on Commercial Risk, organic. But I don't think specifically on net new business in the US, which I think you guys were a little bit more cautious on last quarter. It looks like North America turned around a bit, and I don't think net new business would have necessarily been one of those things that were kind of nonrecurring last quarter. So any additional color on how that net new business trends in the US? And if it improved meaningfully, what would have driven that quarter-over-quarter? Greg Case: Yes, Rob, thanks for the question. Step back for a second. Be careful with quarter-to-quarter you sort of compare where we are. Think about sort of Commercial Risk versus Q2 '23, we're 6% here, 5% the last quarter, so it's a progression over kind of a comparable quarter. And really, the fundamentals are exactly what we said they are. It really is net new business. It's better, it's stronger retention across the board. And also, by the way, the connectivity of our firm means we're doing things in human capital that leverages off of risk capital and then in risk capital it leverages off of human capital in ways that's sort of actually we're doing more with clients, and you're seeing that as well. And so that's the progression. And as we really dug into the 3x3 plan, as we closed last year and began this year, you're starting to see the momentum around that. You didn't see as much of that in Q1 as you now see in Q2, and we think it's going to continue to pick up as we continue to introduce the analyzers and all the capability and the service enhancements that Eric has talked about. So that really is the driver. This is really global, though. If you think about it, all of our solution lines are at 6% or greater, all of our solution lines. And the geographic strength was really global, even more so outside the US than even inside the US. And so that will continue to progress. And -- but that's really -- it's not complicated. It's just execution and we continue to execute and then amplified by priority capability we're bringing in from a hiring standpoint. Robert Cox: Okay. Got it. Thank you. And then on this priority hiring pipeline, I think energy and construction are two areas with strong current growth. I guess, do you see growth in those areas continuing to be strong? And maybe you could help us size maybe the margin impact from this priority hiring pipeline. Eric Andersen: Sure. And I would say, listen, if you go back to what I just said about those four trends and you think about trade and the reshoring. So that's usually manifest in our industry as construction as global supply chains become sort of nearer to home basis you see a significant amount of construction. Our enterprise client strategy where we are connecting with clients around the world, as they build into North America or they build into Mexico or other areas, we're there to capture and work with those clients on those exposures. Certainly, energy, not just traditional energy, but renewable energy. It's a very specific expertise both on a client management but also a sort of brokerage capability to be able to draw capital. Our ability to invest there is important. Don't forget the analytic investment that's needed as well to be able to provide the insight around how to strategically manage those risks and ultimately match capital to that risk. So we are investing across the spectrum of capability within that industry framework. You could put financial institutions, you could put pharmaceutical. We highlight construction and energy because they're so tangible and people can see what's happening, but there are certainly other areas where we are investing as well. But it goes across not just production, but through capability all the way through analytics. Robert Cox: Okay. That makes a lot of sense. Thank you. And if I could sneak in one more. Just wanted to ask if the time line for NFP to be accretive to adjusted EPS is still 2026? And if you could provide any updated color there? Christa Davies: Yes. So we are exactly on track with all deal financials and returns on the deal, including EPS accretion. Dilutive in '24, breakeven in '25 and accretive in '26. And I would note that free cash flow per share follows that same trajectory. And so we are super excited, albeit early days, two months in on delivering on the revenue synergies, the cost synergies and the free cash flow of $300 million in 2025 and $600 million in 2026. Robert Cox: Thank you. Operator: Thank you. Our next question comes from the line of David Motemaden with Evercore ISI. Please proceed with your question. David Motemaden: Hey, thanks. Good morning. Also, I wanted to extend my congratulations to Christa and wish you good luck on the next chapter. Christa Davies: Thanks so much, David. David Motemaden: So I had a question just -- so Greg, when I -- it's a bigger picture question just sort of looking back over the last seven, eight years at the drivers of organic growth at Aon. And if I look historically, we've seen most of the organic growth really coming from productivity improvement as opposed to adding head count. Over this call and the last call, it's mentioned just hiring more than in the past, which I think is a welcome change. I just wanted to sort of level set my expectations here and how you guys are thinking about the balance between maybe adding head count now as well as productivity improvement going forward? Greg Case: Yes. Really appreciate the question, David. Listen, to step back, again, this thesis we've talked about is consistent and it will continue forever with this team and it really is around capability and delivering one client at a time and how you create the maximum leverage to do that for that client. And that means that whether you call it productivity, effectiveness, we need better solutions, better content to support these clients. By the way, if you haven't seen this megatrend analysis Eric's talked about, we love to send you a copy. You've got to take a look at this. And this is not -- our genius, this is looking around the world in the sense of saying what are clients facing? And we not only did the megatrends report, we actually did a survey on top of it. Went out and talked to 800 C-suite executives around how they think about these megatrends. David, all four of these were kind of five alarm fires, three of which they basically said, I need help on. And so right now, I don't know exactly what to do. Against that, you need, again, whether you call it productivity, you need better capability. To be blunt, you've got to give them better insight and that's really been the investment. And if you think about it, part of the investment is connected investment. We actually have to operate as a global firm. If someone's coming out of Europe to invest in the US and our colleagues aren't talking to each other, that means our clients integrating for. No, we're not going to do that. We're going to serve in an integrated way on behalf of client need. And we've done that. And by the way, call that productivity over the last number of years, that served us really well. And what you've seen us now do with the 3x3 is say, look, we're going to double down on that. We see even more opportunity, again, coming out of this megatrends report and what we're hearing from clients, and we are doubling down. This is a Aon Business Services. This is talent, capability and the risk analytics. This is a $1 billion bet to really strengthen that. And then we've said with that capability, our ability then to bring in colleagues and to arm our current colleagues is now greater. And so the reason we see opportunity to bring additional talent is the need is high. And when they come in, it isn't just more bodies. It's more individuals, no doubt, but it's actually more individuals, each of whom have greater capability, both in analytics, but also in a way in which we are really delivering on their behalf. So this is what you see us doing right now and it really cuts across all of our solution lines. So it really is a nice combination sort of in terms of where we are. And we're going to be able to do this without backing up on our commitments, mid-single-digit or greater, improved margins and free cash flow. And just to be clear, what's happening on free cash flow is an opportunity for us, which we think is quite unique for us and for you, and it really is the translation of revenue into free cash flow. The 3x3 is going to take what has been a decade-plus double-digit free cash flow growth and it's going to strengthen it. And so that's with additional capability, magnified by additional individuals. And so really -- there really isn't one over the other, David, it's both, and we're doubling down on capability and in doing so, it creates the opportunity. It's also why NFP was so attractive for us. We can bring this capability now not just at the large corporate arena, but into the middle market and we can do so with this incredible platform called NFP. So that really -- that's the combination. Now that's easy to say and really hard to do and almost impossible to duplicate. But that's the mission, that's what we love. And that's what you're starting to see in Q2 and you'll see throughout the year. David Motemaden: Great, thanks. That's helpful. And then maybe just a quick follow-up on that. You mentioned the middle market business. I guess, could you just now, with NFP, how much of the Commercial Risk business is middle market as you guys would define it? Eric Andersen: Look, I think there is still a significant amount of room for us to grow in middle market. It's one of the reasons why we're so excited about this independent and connected philosophy that we're bringing to the NFP team. Independent as in we want their 900 salespeople certainly continuing to do what they've been doing historically for NFP, but they're seeing challenges to their client base around some of these risks that we've been talking about, whether it's cyber, et cetera, that are actually getting closer to the middle market as a real risk. And their ability to use Aon content or Aon producers and client leaders being able to use some of the NFP content for the middle market business that sits within Aon is such a great opportunity to drive more activity and more opportunity for us to serve that middle market client base. But we're still -- we still see a lot of runway in front of us on what you would call a $31 billion market. We're still relatively underweight in that space. And so there's a lot of good room to run here. David Motemaden: Great. Thank you. Operator: Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your questions. Meyer Shields: Great, thanks. Thanks so much. I also want to congratulate Christa on never having to take another question from me except for this one. Christa Davies: Thank you, Meyer. Meyer Shields: My pleasure. Is it safe to say that the geographic footprint of earnings, including NFP, with regard to taxes is different than legacy Aon over the last decade? Christa Davies: We are definitely more US weighted, that is true, because NFP is more US weighted. Meyer Shields: Okay. Perfect. That's what I wanted to know or confirm. And with regard to the investments in talent that you've been talking about, can you give us a sense of the timeline in terms of -- like how much of this unusual effort has already been done? And how does the hiring timeline compared to the productivity timeline? Eric Andersen: Listen, I would say when we launched the 3x3 strategy back at the middle of -- the end of last year, we outlined for ourselves the priority investments that we wanted to make where we thought there was real need for us to serve clients. And so it is not something we started last week, if that's your question. We've been looking at it essentially over the last 12 months. How you actually build that pipeline of talent, how you actually get them into the firm, how you onboard them, how you take existing Aon clients and deploy them into those growth areas as well has been something that's been going on parallel to bringing in outside talent. So it's not just an outside talent discussion. So it's something that we identified as we laid out the 3x3 plan. It's something we see over the next two to three years as well as a real opportunity for the firm to invest in growth. Greg Case: And Meyer, to your question on productivity, listen, productivity evolves over time. It doesn't happen immediately, as you know. If you ask yourself how much of the hiring shows up in Q2 of 2024? Limited, right? These folks are just coming in. But by the way, they ramp a lot faster when you give them the content capability Eric's describing because they have skills and capability and it's not going to their existing clients, it's going to new clients, which they love to be able to do and come in and build our portfolio. So for us, this amplification is going to really play out in '25 and '26 in a powerful way. But in the meantime, the capability we have across our current field is what's driving results. Meyer Shields: Okay, perfect. That's what I needed to know. Operator: Thank you. Our next question comes from the line of Grace Carter with Bank of America (NYSE:BAC). Please proceed with your question. Grace Carter: Hi. Thanks for taking my question. I have one more on, I guess, talent acquisition. I think you mentioned maybe some talent acquisition in NFP. Just how have you found, I guess, competition for talent in the middle market versus where you've historically played so far? And I guess, how receptive are people that have historically worked in the middle market to joining a larger organization? And how might your capabilities be an advantage when you're looking to hire in that market? Eric Andersen: So thanks for the question. I would say there is a war for talent where there is good talent everywhere. So whether it's the large segment, whether it's the small segment, the mid-market segment, whether it's in Health and Wealth or Risk. So I think you can safely assume that where there are good people, there are people chasing those good people. And so when we laid out the premise for the NFP integration with Aon around independent and connected, we did that under the guise of understanding that would be valuable to the individual colleague at NFP is to be able to serve their client in the same format that they used to serve them in terms of that strong personal relationship, but give them better content and give them better tools over time. And so early on in the process, the content piece we are connecting very quickly, which can be connecting them to our broking centers, giving them access to our programs or facilities, showing, beginning to map out how do you deliver analytics at scale through ABS into the middle market client base. On the Health side, how do you actually -- with complementary client sets, how do you begin to aggregate the data to be able to give better insight to that client. So really what we're trying to do with the NFP colleague is make them better in terms of the tools that they have. They already have great relationships. It's how do we make them better in the areas that they want to serve those clients. We think that ultimately will allow us to draw more individual people in. We're already seeing that the pipeline on M&A is a better quality pipeline for the NFP team because this independent and connected capability is really resonating with these firms who are seeing that their clients are looking for more. They don't want to give up that relationship piece. And so I think we're finding the best of a big firm with a lot of capabilities and a mid-market firm that's strong in relationships and finding that connection, being able to use the analytics, being able to use the technology and being able to use the content, but in a way that drives for them better outcomes while still maintaining those relationships. So that's the goal and that's what we're -- as Christa said, two months in, early days. But we feel pretty good about how we've started. Grace Carter: Thank you. And I also wanted to ask about the Wealth organic growth. It was quite a bit higher than how it's historically trended, maybe kind of in the mid-single digits, maybe low single digits. Is there anything in there that would be unusual this quarter? Or to what extent like these results are sustainable going forward? And can you just remind us if there's anything in the NFP acquisition that might change the mix of that business going forward? Thank you. Greg Case: Appreciate the question. And just to be brief, we can go into any detail offline, if it's helpful, Grace, as you think about it. But listen, this has been -- it's just a terrific business and the team has done an amazing job. The pension risk transfer is a big, big part of the world these days, particularly in the US and the UK. We have an incredibly strong leading position in that. You're seeing that play through, the regulatory challenges and changes. So all these things sort of fit and NFP has an incredibly strong capability in this arena, too, and we're seeing that as well. But again, to emphasize what you see in the 9% is the Aon results overall, even without NFP, and that's what you see playing out. Just an exceptionally strong team in the current environment. Cave Montazeri: Yes. I just wanted to follow up on your comments you just made on the last question. The NFP, the legacy NFP producers, are they already using the new tools from Aon? Or is that something that's going to take a bit longer to give them access to? Eric Andersen: So in the planning process leading up to the close and then in the 90 days since we've closed, we've put a significant amount of work to connect them first with products and capabilities because I think that's the easiest thing to get started with. And then we're laying the track to be able to provide the analytic capabilities, both in Health, Wealth and in Risk, which will take a little bit of time as we go through the year. But we started with opening access to our broking center, opening products that we have an affinity or programs we have in Risk and Health to be able to offer them to their client base. So we've started with the things that are easier to connect, and we're laying the plans to do some of the more -- sort of the more structural things around analytics. Cave Montazeri: Makes sense. And my second question is on cyber. In light of last week's CrowdStrike (NASDAQ:CRWD) outage and the fact that it's unlikely to be the last time we see this given how interconnected the digital world is, on a go-forward basis, do you think your clients who already have cyber insurance, do you think they have the right amount of insurance and the right type of cyber protection in place in case their business comes to a halt due to systemic outage driven by the software glitch from the third-party or something of the like? Eric Andersen: Sure. Listen, I think that's hard to answer that question on a macro basis in terms of what does each client have. Certainly, the focus has historically been on kind of malicious intent on a cyber-hack, but certainly a system outage not driven by a cyber-assault does create a new form of risk exposure. That's always been there, honestly, but maybe now is at the front of mind as people look to see the type of cover that they have. I think the insurance part of it, the risk taker part is certainly going to look at that from a scope of cover, price for the coverage, all that's healthy in a growing marketplace. But certainly, technology overall whether it's AI or cyber or what have you, it's certainly front of mind of our clients as we, Greg and I, both mentioned in that survey we just put out. And so I do think it will be an area where we continue to invest and want to be able to provide that capability and understanding to our clients with the cyber analyzer that we're launching. But certainly, when things like this happen, it certainly raises the profile and causes each of our clients to look pretty carefully at their own risk platform to understand it. Cave Montazeri: Thank you. Operator: Thank you. I would now like to turn the call back over to Greg Case for closing remarks. Greg Case: Just wanted to do two things. First, again, recognize and welcome Edmund. Edmund, so awesome to have you around the leadership table, and just looking forward to our work and our mission together. And will be teed up and ready to go for Q3 to lead the call. So thanks for that, Edmund. And then, of course, to Christa. Christa, you are an extraordinary leader and an even more compelling individual. And thank you. Thank you so much on behalf of global Aon for 16 years of true, true excellence. Thanks so much. Talk to you soon everyone. Operator: And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.