怡安集團 (AON) 2016 Q2 法說會逐字稿

Good morning, thank you for holding. Welcome to Aon PLC's second-quarter 2016 earnings conference call.

(Operator Instructions)

I would also like to remind all parties that this call is being recorded. And 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 certainties that could cause actual results to differ materially from historical results or those anticipated. Information concerning risk factors that could cause such differences are described in the press release covering our second-quarter 2016 results, as well as having been posted on our website.

I would now like to hand the call over to Greg Case.

Thank you and good morning, everyone, and welcome to our second-quarter 2016 conference call. Joining me today is our CFO, Christa Davies. I would like to note that there are slides with our website for you to follow along with our commentary today.

Consistent with previous quarters, I would like to cover two areas before turning the call over to Christa for further financial review. First is our performance against key metrics we communicate to shareholders. Second is overall organic growth performance, including continued areas of strategic investment across Aon.

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

Turning to slide 3, in the second quarter, organic revenue growth was 3% highlighted by 4% growth in retail brokerage, with 6% growth in the international brokerage business. Operating margin increased 30 basis points, reflecting strong operating performance in risk solutions; EPS increased 6% to $1.39, reflecting operational improvement and effective capital management; and finally, free cash flow for the six months increased $224 million to $660 million, driven by a 32% increase in cash flow from operations and a decline in capital expenditures. Overall, results continue to reflect the strength of our industry-leading platform in a volatile microeconomic environment, with positive performance across each of our key metrics for both the second quarter and the first six months of 2016.

Turning to slide 4, on the second topic of growth and investment, I want to spend the next few minutes discussing the quarter for both of our segments. In risk solutions, organic revenue growth was 3% compared to 2% in the prior-year quarter, driven by growth across all major businesses.

As we've discussed previously, we're driving a set of initiatives and making strategic investments, but are strengthening underlying performance and positioned our risk-solution segment for long-term growth and improved operating leverage. With management of a renewal book portfolio through a proactive client partnership we call Aon Client Promise, which is driving retention rates of more than 90% on average across retail brokerage; new business generation of roughly $280 million across retail brokerage, including double-digit growth in Asia and EMEA; and another quarter of record new business in US retail; 21 consecutive quarters of positive net new business in core treaty reinsurance, an increased operating leverage from our significant investments in innovative technology and data and analytics, including, Aon InPoint, where we empower carriers to be more competitive, effective, and operationally efficient by integrating our market-leading data and analytics with strategic consulting and access to Aon's unmatched expertise. This includes the risk insight platform, which now captures 3.2 million trades of more than $160 billion of [bound] premium; and ReView, our reinsure dashboard.

Another example is our Aon broking initiative to better match client need with insurer appetite for risk and to identify structured portfolio solutions. A great example of client impact in this area was the launch of Aon Client Treaty, the largest ever underwritten portfolio of risk in the history of Lloyd's, enabling our clients to access 20% of pre-secured unique coinsurance capacity.

And finally, we're expanding our content and global footprint through tuck-in acquisitions that scale in emerging markets and expand capability. For example, in the second quarter, we completed the acquisition of Univers, an elected benefits enrollment and communications firm, strengthening our ability to serve clients as a leading provider of comprehensive benefit solutions. Reflecting on our individual businesses within risk solutions, in the Americas, organic revenue growth was 2%. Exposures continued to be positive across the region, while the impact from pricing was negative, resulting in relatively stable market impact overall.

We saw double-digit growth in Affinity, driven by growth across all product lines. In US retail, we saw a modest growth, driven by record new business generation and strong retention. Results also reflect modest growth in Latin America, driven by new business generation despite macroeconomic challenges facing the region.

In international, organic revenue growth was 6%, compared to 2% in the prior-year quarter. The impact from pricing remains negative, on average, driven by fragile market conditions in various countries across Europe and Asia, and continued pricing pressure in the Pacific region, while exposures are modestly improving. Results reflect solid growth across every major region, including EMEA, Asia, and the Pacific, driven by strength in both new business generation and management of the renewal book portfolio.

In Continental Europe, we delivered the highest organic revenue growth in over six years, with growth across all product lines, including health and benefits, Affinity, and retail, reflecting Aon's strength in client leadership across the region, despite macroeconomic environment that remains challenged in many countries.

In reinsurance, organic revenue growth was 1% compared to a negative 1% in the prior-year quarter. This marks the third consecutive quarter of positive growth in reinsurance, further reflecting our previous guidance of an expected return to modest growth in 2016. Results in the quarter were primarily driven by growth in global facultative placements, team demand in treaty, and from new business generation. Results were partially offset by an unfavorable market impact internationally.

As the rate of price declines continues to moderate, capital is being deployed to new markets, including US mortgage credit risk, life and annuity risk, and other emerging risks such as cyber-liability. And as highlighted in our prior discussions, new business opportunities for growth, combined with industry-leading data and analytics, has positioned our reinsurance business for a return to modest growth in 2016.

Turning to HR solutions, organic revenue growth was 1% overall, as growth across high demand areas where we continue to invest was partially offset by a modest decline in benefits administration and unfavorable timing. We continue to strengthen our industry-leading platform, with investments in innovative solutions and client-serving capabilities that reflect Aon Hewitt's leadership and in-depth understanding of market trend, including solutions to help plan sponsors both manage pension risk and drive better retirement outcomes for their employees.

A strong area of growth has been delegated in investment consulting, where assets under management have grown from $10 billion to roughly $85 billion in five years. We expect continued global growth in this area, as sponsors are faced with regulatory changes and increasingly complex global markets.

Continued investments to strengthen our industry-leading position of health solutions, covering the full range of benefit strategies, client size, and funding choices, including our suite of private health care exchanges. We continue to see strong and steady growth across our entire suite of exchange solutions for companies of all sizes and industries.

Starbucks recently joined a growing list of employers on our active healthcare exchange. We're proud to help Starbucks introduce a new health solution that enables Starbucks' US employees to have greater choice, opportunities for cost savings, and personalized support to select and get the most out of their health insurance coverage. Starbucks' decision to adopt a consumer-driven approach to health benefits underscores the sustainability of our exchange model and proven results that our exchange has achieved on behalf of clients over the past several years.

We also continue to invest in software-as-a-service models in our HR BPO business, where growth in new clients and conversion of existing clients is driving strong demand, as well as the expansion of our capabilities to include financial limitations. And finally, we're investing in data and analytics in our health and talent and rewards businesses, to provide superior advice to drive betters outcomes for our clients and our clients' employees.

Turning to the individual businesses within HR solutions. In consulting services, organic revenue growth was 1%. Results reflect growth in core pension solutions, where we provide clients an in-depth approach to pension risk management and the best solutions to take advantage of the market shift from defined benefit to defined contribution.

We also saw continued growth in retirement consulting, primarily driven by demand for delegating investment consulting services, as an increasing number of clients find significant value in Aon's ability to provide advice and manage their retirement assets. Results in the quarter were partially offset by unfavorable timing of revenue in our consultation consulting practice.

In outsourcing, organic revenue growth was flat versus the prior-year quarter. We saw strong growth continue in HR BPO, driven by new client wins in cloud-based solutions. Results in the quarter were offset by a modest decline in benefits administration, as well as a decline in project-related work around lump sum windows for pension plans that create an unfavorable comparison in the prior-year quarter.

Overall, in HR solutions, we expect to deliver improved organic growth in the second half of the year, driven primarily by growth in high demand areas where we've been investing, a modest benefit from revenue timing that impacted this quarter, and seasonal strength in the fourth quarter.

In summary, for both the second quarter and the first six months, we delivered solid organic revenue growth against a volatile macroeconomic environment, improved operational performance, and generated substantial free cash flow. With that said, I'm now pleased to turn the call over to Christa for further financial review. Christa?

Thank you very much, Greg, and good morning, everyone. As Greg noted, against continued volatility in the macro-economic, our industry-leading platform delivered solid progress in the first half of the year, with positive performance across each of our four key metrics. Results reflect organic growth in both segments, strong operating margin expansion in risk solutions, and substantial free-cash-flow generation.

Now let me turn to the financial results for the quarter on page 6 of the presentation. Our core EPS performance, excluding certain items, increased 6%, to $1.39 per share for the second quarter compared to $1.31 in the prior-year quarter. Certain items that were adjusted for in the core EPS performance and highlighted in schedules on page 12 of the press release, include non-cash and tangible asset amortization, non-cash expenses related to certain pension settlements.

There was no material impact on earnings per share related to foreign currency translation in the second quarter. If currency were to remain stable at today's rates, we would expect foreign currency translation to have no material impact going forward.

Now let me talk about each of the segments on the next slide. In our risk solutions segment, organic revenue growth was 3%, operating margin increased 70 basis points to 24.9%, and operating income increased 3% compared to the prior-year quarter. Operating margin improvement of 70 basis points, includes a 50-basis-point favorable impact from foreign currency translation. Excluding the impact from foreign currency, underlying operating margin improved 20 basis points in the quarter.

Operating improvement in the second quarter reflects organic growth in each business, including, reinsurance, and improved returns on our investments in data analytics across the portfolio. For the first six months, operating margin improved 80 basis points, including, a 40-basis-point favorable impact from foreign currency translation. Our performance in the first half firmly positions risk solutions segment for further margin expansion towards our long-term target of 26%.

With normal seasonal weakness in Q3 and seasonal strength in Q4, we expect a stronger second half of the year for risk solutions. Included in our expectation, are two underlying adjustments. We expect certain client revenue to shift from Q3 into Q4, and we expect a shift in certain underlying compensation expense from Q4 into Q3. As a result, we expect normal quarterly patterning to be more pronounced this year, with modest operating income growth in Q3, significant operating income growth in Q4, and no change to the full-year expected performance.

Turning to the HR solutions segment, organic revenue growth was 1%, operating margin decreased 40 basis points to 12.8%, and operating income decreased 8% compared to the prior-year quarter. For the first six months, operating margin decreased 90 basis points, and operating income decreased 11%.

Reported results are in line with our previous guidance of flat to down in the first half. Performance was primarily driven by investments to support future growth, timing of certain revenue in our compensation consulting business, and an anticipated reduction in operating income reflecting the disposal of two businesses in previous quarters. While we continue to reduce certain expenses that supported those non-core businesses, the monetization of those businesses in previous quarters generated other income gains and cash proceeds that will ultimately be deployed to higher return on invested capital opportunity.

Looking forward, in line with our previous guidance for HR solutions, we expect a strong second half of the year. This expectation reflects normal seasonality in Q4 -- sorry, of Q3 of relatively flat operating income growth and normal seasonal strength in Q4, of significant operating income growth. With full-year results continuing to deliver sold organic revenue growth, further margin expansion towards our long-term operating margin target of 22%, and increased operating income for the full year.

Now, me discuss a few of the line items outside of the operating segments on slide 9. Unallocated expenses were $43 million compared to $41 million in the prior-year quarter. Interest income was $3 million compared to $4 million in the prior-year quarter. Interest expense increased $5 million to $73 million, due to an overlap of long-term debt placed in the first quarter, we've set the matured in the second quarter. Other income was immaterial, as the losses on certain long-term investments and foreign exchange hedging programs were offset by the sale of a certain business. Going forward, we expect a run rate of approximately $45 million per quarter of allocated expense, $3 million per quarter of interest income, and $71 million per quarter of interest expense.

Turning to taxes. The adjusted effective tax rate on net income from continuing operations, excluding the applicable tax impact associated with non-cash pension settlement, decreased from 17.4% compared to 18% in the prior-year quarter. This was driven by changes in the geographic distribution of income and certain favorable discrete tax adjustments. The prior-year quarter adjusted effective tax rate excluded the applicable tax impact associated with expenses related to legacy litigation.

Lastly, average diluted shares outstanding decreased 6% to 269.8 million in the second quarter compared to 286.7 million in the prior-year quarter driven by share repurchase in previous quarters. The Company did not repurchase shares in the second quarter.

Strong cash flow generation was used in the near term, [with] $500 million of debt that matured in the quarter and an attractive acquisition in the quarter in the elective benefits space. We expect to return to deploying capital share repurchase in the second half of the year, reflecting our highest return on invested capital.

The Company has $3.3 billion remaining authorization under its share repurchase program. Actual shares outstanding on June 30th were 265.8 million, and there are approximately 5 million additional dilutive equivalents. Estimated Q3 2016 beginning diluted share count is approximately 271 million, subject to share price movement, share issuance, and share repurchase.

Now let me turn to the next slide to highlight our solid balance sheet and strong cash flow growth on slide 10. At June 30, 2016, cash and short-term investments were $689 million, total debt outstanding declined to approximately $6.2 billion, and total to EBITDA on a GAAP basis declined 2.4 times, reflecting the extinguishment of $500 million of debt that came during the quarter. Cash flow from operations for the first six months increased 32%, or $186 million, to $764 million, driven by an increase in net income, a decrease in cash back payments, a decline in cash paid for pension contribution, and underlying working capital improvements. Strong progress in the first six months of the year.

Free cash flow is defined by cash flow from operations less CapEx, increased 51%, or $224 million to $660 million, reflecting strong growth in cash flow from operations and a $38 million decrease in CapEx. Looking forward, we expect to deliver double-digit free cash flow growth for the full-year 2016 and are firmly on track to deliver against our near-term goal of $2.4 billion of free cash flow for the full-year 2017.

Turning to the next slide to discuss our significant increases in free cash flow. We value the firm based on free cash flow, and allocate capital to maximize free cash flow returns. Free cash flow $2.4 billion in 2017 is not our end goal, as further long-term sustainable free cash flow will be driven by continued operating income growth and additional working capital initiatives beyond 2017.

There are four primary areas that are expected to contribute to our near-term goal of delivering $2.4 billion or more for the full-year 2017. The first is continued operational performance driven by organic revenue growth and margin expansion. The second is working capital improvements, as we focus on closing the gap between receivables and payables. We've made substantial progress in the area over the last five years, with further opportunity to increase free cash flow by over $500 million.

Third, is declining uses of cash for pension contribution to CapEx and restructuring, which we expect to free up more than $90 million of annual free cash flow between the end of 2015 and 2017. And fourth, lower cash tax payments reflecting a lower effective tax rate.

Turning to our pension plan, we continue to take significant steps to reduce volatility and liability. In the first half of 2016, we completed two transactions to materially derisk our pension liabilities in the UK. The first, with a buy-in completed with assets in the trust to reduce the size of our largest risk within certain UK pension schemes.

And secondly, through a lump-sum offering Aon was able to reduce interest rate investment and longevity risk associated with certain UK pension liabilities. These transactions resulted in $62 million of non-cash settlement charges and related advisory freeze, which are adjusted for in our second-quarter results.

Both of these transactions were completed prior to the Brexit vote as a continuation of our derisking efforts. As a result, our UK pension scheme funding status remained relatively flat through the Brexit results, despite the recent fall in the UK interest rates and market volatility. Further, we expect pension contributions to decline by approximately $44 million in 2016, and expect non-cash pension income, excluding the expenses related to the described transaction, to be a modest benefit in 2016 versus 2015.

In summary, we delivered solid results for the second quarter and the first six months of 2016, and continued to take certain steps to strengthen the return on invested capital and free cash flow. Against continued volatility in the macroeconomic environment, we expect improved organic revenue growth and operational performance in the second half of 2016, primarily driven by seasonal strength in Q4. Our industry-leading platform and innovative investments across data analytics continue to position the firm for long-term growth, increase operational leverage and substantial free cash flow generation, with our near-term goal of $2.4 billion for the full-year 2017.

With that, I'd like to turn the call back to the operator for questions.

(Operator Instructions)

Sarah DeWitt of JPMorgan.

Hi, good morning.

Hi, Sarah.

First on the Starbucks announcement, how should we think about the benefit of that opportunity to the top and bottom line?

Well, first of all Sarah, let me start with overall. We're just really pleased, we're excited, we're proud to with Starbucks. This firm, obviously, as you know, has got a long history of providing industry-leading benefits to its partners or employees, and it's really who they are as a Company. They've been doing this for a long time.

But they're also an industry leader on the healthcare side, committed not only to providing partners with access to healthcare, but also, candidly, shaping the role of the future employer base health across the entire country. So this, for us, is a very -- an innovative company in multiple ways, who we've partnered with to get -- provide better choice, better transparency for their employees. So we're very excited about doing that.

And this, for us, is just a continuation with a host of other companies who have joined the exchange who want to make a difference on the behalf of their employees. And it's one option as part of our overall health platform, which as we've said before, we really -- we love. We love the set of opportunities here to support and help clients, and this is just a continuation of that.

As we've said before, we're going to continue to drive performance in HR solutions. You will see that for the year; Starbucks will be included in that. And that will just be a continuation.

Okay, great. Thanks. And then, given the decline in interest rates year to date, should we anticipate any higher pension contributions than what's outlined on page 11 of the slides, given that's as of year-end 2015?

No, and the reason for that is, we've really taken substantial efforts over the last 10 years to close our plans, freeze them, and derisk them. And so because of that, we're in a position where the pension contributions will not change.

Great, thanks for the answers.

Dave Styblo with Jefferies.

Hi there, good morning. Thanks for the questions. Let me just start out on the improved organic growth in the second half and make sure I understand. So it sounds like it's mostly related to the HR solutions side. And if that's really the case, can you again, walk us through some of the components? I know there was a little bit of timing and it sounded like the typical seasonality that you have. But is there other visibility that you have on project-based work that maybe wasn't there this quarter that you expect to come in later on?

Yes, Dave, this is -- really it's -- the commentary really is applicable to both the risk side of the business and the HR solutions side of the business. What you're seeing in HR solutions is just the natural continuation as this business trends to more of a second-half set of engagements, particularly around the fourth-quarter set of engagements. So that's really what you're seeing trending here.

That's amplified a little bit by some timing that Christa highlighted, but this is just for us a natural evolution. The real piece here is our expectation that the year stays exactly the same. There's absolutely no change in terms of what we were thinking about and have been thinking about for the first six months. And in fact, feel good about the trends against that.

We see what the pipeline look like, we see how it going to evolve, and it -- as I said before, it's really just, if you think about some of the work we've done in HR BPO and in cloud, it's more of a fourth-quarter business than it is -- than we've seen historically. And, and then on the risk side, same piece. We expect a stronger second half than we saw the first half and continued growth in the overall business. So no change to the year.

Okay. Got it. And then on the margin, sorry, there's some background noise. But on the margins, risk solutions up 20 basis points. I know I think you said it was up 40 basis points, excluding constant currency. Is that in line with what you are looking for, or some of the peers have reported some larger margin expansions with organic growth that hasn't been as robust as yours. So curious just to hear your thoughts on that.

And then, can you help us triangulate a little bit on HR solutions? I know the portfolio repositioning changed a little bit of perhaps the base, and so, margins down 30 basis points year over year but I think last quarter, there was -- you guys started to give us some facts and figures about the much the portfolio repositioning changed the underlying margin base. So if you could help give color on that so we understand that the down pressure on margins year over year, that would be helpful.

Sure, so let's start with risk. The first thing I'd say about risk is I wouldn't [over rotate] on any one quarter. We do expect a stronger second half to the year in both risk solutions and HR solutions, as Greg said. As we are becoming a more Q4 orientated, just in terms of the patterning of our revenue and operating income, and therefore, we expect for risk solutions strong organic revenue growth, margin expansion and operating income growth for the full-year 2016.

In terms of HR solutions, I would note, as you said, there is an impact, if you look at the first half of the year in terms of the divestitures, and that's having an impact of about $6 million in terms of lost operating income in the first half of the year. And, obviously, there are some stranded costs associated with those divestitures, which is really why you -- we originally gave guidance in HR solutions, which is down the first half, up in the second half. And what you're really seeing in the second half is we're working through exiting those stranded costs in Q3, and that's what Q4 will be stronger than Q3.

Okay. So about $6 million of cost you said, right?

$6 million of operating income.

Of income, right. Okay. And just lastly, just on free cash flow, obviously a strong start. I know there was some easier comps in the first half, but as we look into the second half, I can't imagine we keep up with that pace. There's some timing events that got pulled forward in the first half year, or maybe just help us bridge to what you might define as double-digit growth a little bit more precisely.

Yes, so we obviously expect very strong free-cash-flow growth for the full year, double-digit free-cash-flow growth for full-year 2016, which will put us well on track for our $2.4 billion, free cash flow in 2017. Obviously the 51% growth in free cash flow won't continue at exactly that pace, because we did have in Q2 2015 the $137 million cash outflow related to legal segments.

So, but we do expect very strong free-cash-flow growth and much stronger cash flow in absolute dollars in the second half of the year, aligned with the revenue and operating income growth for the Company.

And what you're really seeing, as we've talked before, is our intention is to grow organically, improve margins, and improve earnings per share. But to continue to work to translate our operating income and revenue performance into free cash flow. So that engine, the translation, it's continued to become disproportionately stronger, and that's exactly what you're seeing here, which is why we've been able to achieve the free-cash-flow performance in the first half, which is on top of record free cash flow performance in 2015.

Okay. Thanks for the questions.

Adam Klauber, William Blair.

Good morning, thanks

Hey, Adam

A couple of questions around the HR BPO. One, have you continued to have some major wins there? Two, any success moving over to the financials? And then three, just I think I heard that, and I thought that business is a little tilted towards the fourth quarter, is that right?

That's exactly right on the trend line in terms of the disproportionately skewed more toward the fourth quarter, and this is exactly what we're trying to highlight on the call today. We love the progress though here. The team has just done a terrific job, not only in the translation of what we do with our cloud-based businesses on the HR side, but also what we're doing on the finance side. And you can see that evolution starting in HR, moving to finance, and eventually connecting back to the -- connecting the two back, which is really where the opportunity is. And from our standpoint, our pipeline is literally sold out in this category. The team has just done a terrific job.

Great, so you have had some wins on the finance side?

We have actually made some real progress on the finance side. And I would say, the speakers on the phone today are quite engaged in that and are excited about that for Aon as well. So we're putting where our money where our mouth is, as we always do, and are very excited about what we're going to achieve in this -- not only for us and the opportunities there, but also globally in terms of what we've got going on. We are very excited about the possibilities here.

Okay, and then as far as Univers acquisition, looks like they do the engagement and enrollment; those are things that you are you did. What does this add? Does it help you attack a different market segment?

This is terrific, this is a great example of when we take businesses we've done very, very well in, add content capability and are able to scale that. So Univers brings -- it really, this is an elected benefits enrollment communications firm, as you've highlighted and we highlighted. They bring it into the middle market and across the US, and have just an incredibly strong client base.

We're going to be able to engage that client base with a broader set of products and services we provide, but also take their capability to our client base as well. So we're very excited about this. It's a great example of, as we've described, tuck-in acquisitions in which we can take content and amplify content. And, that's exactly what this is about.

And have you said what range of revenue they bring in?

We haven't talked about that, no.

Okay. Thank you.

Kai Pan with Morgan Stanley.

Thank you and good morning.

Hi Kai.

The first question is on Brexit. Can you elaborate a little bit on what the near-term as well as the long-term impact?

Well, Kai, I would say, maybe I'll divide the Brexit question into two parts; one is just for our clients, and that's really the lens as you know that we through for every -- we look through everything out in the world through the lens of our clients. And obviously there's a lot of uncertainty. Our clients are going through a lot of questions, both in the region but also globally in terms of what the impact is going to be. And we're very vigilant; we spend a great deal of time with our clients on the trade-offs and issues and in areas that they're trying to address in the context of it. And you've watched that evolve like we do and we think that there will continue to be uncertainty.

As it relates to Aon, the second part, for us, Brexit is like all things, that involve client uncertainty, it's a opportunity to help clients understand the situation and take actions to improve their positions. And Brexit has proven to be just that for us, both on the HR solutions side, as well on the risk side. So, from a financial impact and from our standpoint, this is really opportunity to help and support clients. And, as I said before, they're facing a lot of uncertainty and we want to help them address that.

Are there any near-term --

Hi, just in terms of the financial impacts, what I would say is overall, the biggest impact for us is on currency. And so, a weaker pound is better for us because we do have about $350 million to $400 million of US denominated revenue into the Lloyd's marketplace in the UK. And so, a weaker pound actually helps us.

There's an offsetting impact in the consulting business that is negative, but net-net, it's a benefit. And the only other impact I think I did previously address was interest rates. I think we've had a number of questions from people on interest rates and the impact of that on our pensions, and I said it's immaterial.

Have you seen any deferred project related to Brexit?

Listen, there's been -- again, there's a range of client reactions. Some clients are deferring and trying to understand and get great clarity; we're helping them to do that. Other clients are engaging us to actually understand the situation and figure out where there might be opportunity for them as they think about Brexit. So net-net from our standpoint, again, in times of uncertainty, it's a time to help clients exceed and that's actually been a benefit as we've engaged them to do that.

That's great. And then, on the risk solutions side, you mentioned their pattern shift in terms of revenue from third quarter to fourth quarter and also the conversation shifting from backwards from fourth quarter to third quarter. Could you provide a little bit more detail context to that? And also, will they be the same pattern going forward?

So the first answer is yes, it will be the same pattern going forward. And one of the reasons for this is we are seeing clients buying behaviors shift their buying patterns from Q3 to Q4 in risk to really align around budgeting for the calendar year. And so, we do expect that client buying trend to continue. And then, this shift in underlying compensation expenses from Q4 into Q3, we would expect to be permit shift too, yes.

And lastly, on tax rate, it had been consistently lower than our expectations. I just wonder, is that run rate for the last six months -- would it be good ones going forward?

No. We do expect that the correct ongoing tax rate for the Company is 19%. We did see some positive discrete tax adjustments again in the quarter, really around state audits. It is actually impossible to predict discrete tax adjustments; they could be positive or negative. And so 19% is the right operating rate for the Company.

Thank you so much for all the answers.

Charles Sebaski of BMO Capital Markets.

Good morning Thank you. The first question, Greg, I was hoping that you could help me understand a little bit on the Americas, organic growth and reconciling your commentary that US has had record new business. When I think of record new business in the US, it would seem that's the larger portion of that. And I would've thought that would be higher, just given that commentary.

Yes, what I was really talking about, first of all, just to be clear, the US did have record new business; actually it was a $100-million-plus quarter, the first time we've ever done $100 million in Q2. So it was really a terrific testament to the team with very strong retention. A lot of things go into that, rollover, et cetera.

But remember, Q2 is one quarter, and it tends to be -- it's one of our -- among our smallest quarters, Q2 and Q3. And from our standpoint, as we look at the overall trend line for the year, what I was describing is really the opportunities for the year. And that's really how we look at those and highlighted what we see in the pipeline for the opportunities in the second half for US retail and really for risk overall. And then, we skew, as Christa just described, I think very well, why the fourth quarter is higher or stronger than the rest of our quarters.

Okay. And Aon InPoint, could you give us some idea on what the size or scale of this business is currently? And what the expectation of that business could be going forward?

Yes, well we talked about, Aon InPoint is just a great example. When you think about growth for Aon overall, as we've highlighted on previous calls, we've got all the work we do on the traditional side of the business and putting in place things like Aon Client Promise and really substantially increasing our ability to acquire clients, retain clients and do more with clients.

We've also talked about some of the other areas of investment outside of the traditional areas, and we highlighted a couple on the last call. There are $1 billion plus businesses in Affinity and health and benefits that are growing substantially. And then Aon InPoint is another example, really outside the core, in which we've made substantial investment.

And Aon InPoint really is bringing together what is a very unique and the single biggest repository of insurance information that exists in the world today, and pulling it together on behalf of our clients. And in this case, they happen to be insurance carriers. We have got 45-plus carriers who are involved right now, and we're helping them think about how they improve their business, grow their business overall.

We haven't talked about the size, but what I would say is this is a very -- been very positive for us in terms of supporting carriers, strengthening overall position, and it's another example of how we've used data and analytics as a core and cornerstone piece of what we do. And so, for us, it's just another example of where we're investing to grow the business.

By the way, not only do we have Aon Inpoint, now we also have something called Aon ReView, which is doing the same thing on the reinsurance side. We've actually taken the data analytics approach that really underpins Aon InPoint and used it as part of our US mortgage effort, that's by the way reached $5 billion plus in premium since its inception, which is a great accomplishment. And then things like Aon Client Treaty; these are fundamentally data-driven, analytic-driven businesses that we see a lot of promise for.

And then lastly, Christa, could you help me out with the one thing on the cash flow, and I'm trying to work through understanding the improvement from cash flow, from improvements in working capital on the accounts receivable and payable that you've mentioned. And, how this is net new cash flow as opposed to accounting timing, if I think our polling receivables from calendar year 2018 into 2017, or 2017 into 2016. Or is it actually net new in some manner, and how would that be actual net new dollars?

Yes, so one way to think about it on the receivable side is if you've got $1 of revenue today, and it takes you 100 days to collect it, then you're tying up a lot of cash on your balance sheet in the form of receivables. And if we get the 100 days, for argument's sake, down to 50 days, then you've halved the amount of cash that you're tying up on your balance sheet in the form of receivables.

And what you can see if you divide receivables by revenue on our balance sheet, is that days sales outstanding has come down substantially. And so, it's taking us less time to collect cash from customers, and so, we are getting more in line with what we think a professional services firm should be, which is working-capital neutral. And today, if you looked at our days payables and our days sales outstanding, that is a 15-day negative gap, and we believe that should be neutral. And the difference between that is the extra $500 million of free cash flow, I mentioned.

So we think there's a substantial opportunity to continue to improve working capital, and generate substantial free cash flow in the coming years.

Is there a cost to that 15-day net in a low interest-rate environment like we're in today? What's the cost of that spread?

No, it's not; there is no cost.

Thank you very much.

It is just processing.

Quentin McMillan of KBW.

Hi, good morning, thanks very much guys. I just wanted to talk about the divestitures really quickly. You had a decrease in expenses for the divestitures, but the overall divestiture strategy, particularly as it relates to HR solutions, as you drive towards your 22% long-term margin target, do you need to divest some of the lower return businesses in order to achieve that in HR? Or are you happy with the current portfolio and it's just improvement in those businesses?

Yes, there really -- there's no divestiture strategy there is a return on invested capital strategy and a client strategy that drives everything we do. And we continue, we've made unprecedented investments back into the HR solutions business and the risk business. We're going to continue to do that; look for us to do that with the organic investments we've made, and then acquisitions that strength our position to serve clients more effectively. And then from time to time, as we look at that overall portfolio, we will make calls and decisions that will help us both improve client-serving capability, absolutely fundamental, and then also, improve return on invested capital. And you'll see us do that, it's just the natural course.

So if you think about over the last 10 years, it hasn't just been in HR solutions; it's across risk solutions, probably even more pronounced in risk solutions where we have transitioned out assets that weren't strengthening our client-serving capability as much and brought new assets in that helped us do that.

Great, just a quick numbers question, Christa. Thank for the high $500 million of working-capital improvement that you mentioned. But is that through 2017 or does that -- is that a number that you're talking about in a longer term?

That is a very long-term number.

Okay, and then got one last quick thing, on the Americas retail growth, if you're saying that there was $100 million of new business, a record number in the quarter, Latin America is included in your Americas retail, I believe. Does that indicate that LatAm was particularly weak in the quarter or don't read into it that way?

No, really don't read in. The real message cutting across the entire call is the first six months of 2016 have just been a continuation and a reinforcement of everything we expected coming into the year. Nothing has really thrown us off from that at all. Some up, some down, but overall, what we're seeing is growth across the globe, and we fully expect to see that for the year. And we fully expect Latin America is going to be a big contributor to that, as they've been for the last number of years.

Great, thank you very much, guys.

Jay Cohen with Merrill Lynch.

Thank you. Just a quick one on the benefits administration business. There's been some revenue pressure there. I'm wondering what's happening there. And should we expect that to improve, or is this going to be permanently relatively subdued?

We love the benefits administration business. We serve 22 million Americans across our retirement and health portfolios there and we continue to invest in the technologies of clients and develop unique solutions. So we expect to continue to grow in that business. We did have some anticipated losses coming into the year. Clients were in an M&A environment and were acquired, and we do expect to grow overall.

That's helpful. Thank you.

At this time, there are no additional questions. Thank you. I would now like to turn the call back over to Greg Case for closing remarks picks

Just want to say thanks very much to everybody for joining the call and look forward to the next quarter. Thanks very much.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation. You may now disconnect.