Edmund Reese
Executive Vice President & Chief Financial Officer at AON
Thank you, Greg, and good morning, everyone. I'm excited to be here discussing the results from yet another strong quarter. The cap's strong full-year 2024 performance and positions us to achieve our 2024 to 2026 three-by-three plan financial objectives. Before jumping into these results and providing 2025 guidance. I want to take a moment to highlight some critical milestones achieved in 2024 that demonstrate the strong progress that we've made toward our commitments. First, our full-year performance is right in-line with our objectives and guidance for mid-single-digit or greater organic revenue growth, adjusted operating margin and free-cash flow. In particular, organic revenue growth reached 6% for the year, giving us confidence that our three-by-three plans and our investments in hiring client-facing talent, developing client-facing ABS capabilities and expanding our enterprise client group will support mid-single-digit or greater organic revenue growth. Second, we completed the acquisition of NFP, which expanded our presence in the $31 billion in fast-growing middle-market. In 2024, we saw strong producer retention better than 2023, accretive top-line financial results and $36 million in middle-market acquired EBITDA with a robust Q1 '25 pipeline, all-in line with our expectations. Third, we paid down $2.1 billion in debt and returned $1.6 billion in capital to shareholders due to dividend and share repurchases, lowering our leverage in-line with our objectives and continuing our balanced capital allocation discipline. We are executing our plan and these milestones emphasize that with year-one of our three-by-three plant complete, we have momentum. And continued execution gives us a high-level of confidence in delivering on our three-by-three financial objectives, including a double-digit three-year CAGR in free-cash flow from 2023 to 2026. You can see from the financial summary on Slide 6, that full-year total revenue increased 17% to $16 billion and we delivered 6% organic revenue growth. Adjusted operating income increased 17% and adjusted operating margin was 31.5%, up 90 basis-points relative to a '23 baseline that includes NFP. Adjusted EPS was up 10% to $15.60. And finally, we generated $2.8 billion of free-cash flow, reflecting strong adjusted operating income growth and continued working capital improvements. Turning to the 4th-quarter, organic revenue growth was also 6%, marking a third consecutive quarter of growth at 6% or greater. Adjusted operating margin was 33.3%, expanding 140 basis-points relative to a '23 baseline that includes NFP and adjusted EPS was up 14% to $4.42. Let's get into the detail of these results, starting with organic revenue growth on Slide 8. In Q4, organic revenue growth of 6% was right on-track and in-line with our mid-single-digit or greater guidance range. In Commercial risk, organic revenue growth was 6% in Q4 and was broad-based, reflecting strength in our North American core P&C business, continued strong contribution from our international businesses and an uptick in-construction as we're beginning to see the impact from specialty hires. We also benefited from double-digit growth in M&A services as increased transaction activity continued to be a modest tailwind. Reinsurance organic revenue reached 6% in Q4 '24, growing over an elevated Q4 '23 on the back of continued strength in our strategy and technology group, strong treaty placements with existing clients and increased insurance-linked securities. Specifically, interest in catastrophe bonds continued to grow as investors seek unique asset classes with uncorrelated returns. And AON is the leading industry provider in cat bond placements. Health Solutions grew 5% in Q4 '24, also against a high Q4 '23 comparable. Growth in core health and benefits as well as in NFP executive benefits and pharmacy benefits was partially offset by lower revenue in Talent solutions. Finally, Wealth Solutions delivered 8% organic revenue growth in Q4, driven by continued strong demand for pension risk transfer consulting, regulatory work from policy changes across the UK and EMEA and new clients and market performance in NFP. Our Q4 organic revenue growth was powered by new business, which contributed 12 points from both existing and new clients as well as a modest contribution from M&A services, as I mentioned earlier. And with continued high retention in the mid-90s, supported by the increasing deployment of our ABS capabilities, as Greg mentioned, net-new business drove the six points of organic revenue growth. The net market impact from growth and exposures and rate was flat. Reinsurance did have a modestly negative rate impact in the 4th-quarter, consistent with early views of 1/1 renewals as capital capacity, up 7% for the year, outstripped demand. We saw the lower rates in reinsurance offset with modest rate benefit across commercial, health and wealth. For the full-year, each of the solution lines across risk capital and human capital were well within or above our mid-single-digit or greater growth objective with commercial risk at 5% and all other solution lines growing at or above 6%. And I'll add that if measured separately, NFP and Aon are both generating mid-single-digit organic revenue growth. Turning now on the margins on Slide 10. Adjusted operating margin for Q4 was 33.3%, expanding 140 basis-points from our combined baseline within FP. On a full-year basis, adjusted operating margin was 31.5% and we delivered 90 basis-points of margin expansion relative to our combined baseline with NFP. We continue to drive adjusted operating margin expansion through the scale in our business, particularly through AAON Business Services, our continued portfolio management and the shift in mix to higher-margin businesses as well as ongoing expense discipline. And importantly, the benefit from our restructuring initiatives to accelerate our 3x3 plan. We ended the year $10 million ahead of our restructuring plan objective as savings in the 4th-quarter were $40 million, resulting in $110 million of savings for full-year '24. Restructuring savings contributed approximately 100 basis-points in Q4 and approximately 70 basis-points to full-year margin expansion. Looking ahead, we continue to expect an incremental $150 million of savings in 2025 and are well on-track to achieve our stated objective of $350 million of run-rate savings in 2026. Our strong organic growth and the actions that we are taking through ABS to standardize our operations and integrate our platforms are setting the foundation for ongoing margin expansion through operating leverage in our business. Moving to interest, other income and taxes on Slide 11, interest expense of $206 million in the quarter was up $82 million versus last year, primarily reflecting the issuance of $7 billion in debt to fund the NFP acquisition. We expect approximately $205 million of interest expense in Q1 '25. Other income expense was a $60 million benefit year-over-year, primarily due to the favorable net impact of gains from balance sheet currency exposures in our hedging program. And finally, the Q4 tax-rate was 17%, bringing the full-year rate to 20% with the year-over-year increase driven by growth in higher tax geographies, the unfavorable impact of discrete items and policy changes across the globe. Let's now discuss free-cash flow and capital allocation on Slide 12. We generated $2.8 billion of free-cash flow-in 2024, reflecting strong operating income growth and continued working capital improvements driven by the continued progress on our goal to improve days sales outstanding. While free-cash flow was impacted in 2024 by extraordinary items, all of which we previously communicated, including the NFP transaction and integration costs, restructuring and legal settlement expenses, we remain confident in underlying free-cash flow growth. We continue to expect free-cash flow to grow at a double-digit three-year CAGR from 2023 to 2026. Our strong free-cash flow allowed us to pay-down $2.1 billion of debt in 2024 and coupled with earnings growth, lowered our debt-to-EBITDA leverage from 4.1 times to 3.4 times. So we are right on-track to achieve a 2.8 times to 3 times leverage ratio in Q4 2025, consistent with the objective that we set when we announced the NFP acquisition. Additionally, we remained active in M&A, continuing our targeted tuck-in acquisitions across priority areas, including continued middle-market acquisitions through NFP, which acquired $36 million in EBITDA in 2024 and has a healthy pipeline of expected closings in Q1 '25. Our independent and connected strategy is resonating in the marketplace and we continue to expect to acquire $45 million to $60 million of EBITDA through MFP middle-market acquisition in 2025. Finally, in 2024, we returned $1.6 billion in capital to shareholders, including $1 billion of share repurchases. Our performance in 2024 is a great demonstration of our disciplined capital allocation model, beginning with strong free-cash flow generation and capital allocation that balances high-return investments for growth with capital return to shareholders. I'll wrap-up on Slide 13 with our 2025 guidance and a few concluding thoughts. In summary, our full-year 2025 guidance is mid-single-digit or greater organic revenue growth. Adjusted margin expansion, strong adjusted EPS growth and double-digit free-cash flow growth. Let me highlight the drivers of each guidance points starting first with organic revenue growth. We expect mid-single digit or greater organic revenue growth driven primarily from winning recurring new business from both new logos and existing clients, continued high retention and zero to 2 points from the net market impact of rate and exposure. I'll note that our increased talent acquisition of revenue-generating roles in specialty areas and enterprise client group hires, up 4% in 2024, is expected to contribute to organic revenue growth. Additionally, organic revenue growth is benefiting from our progress driving revenue synergies in NFP, and we remain committed to $80 million in NFP revenue synergies in 2025. Moving to adjusted operating margin, we expect to deliver continued margin expansion in 2025. And as we model the drivers of margin expansion, there are four components to consider. First, the net impact of four additional months of NFP given the late April 2024 closing and achieving $30 million in opex synergies will dilute margins by-20 basis-points. I'll note that the impact of four additional months of NFP will primarily be a Q1 impact with the remaining impact in April 2025. Second, the interest-rate impact on investment income from fiduciary balances is expected to dilute margins by-20 basis-points. Third, and as I mentioned earlier, we expect an incremental $150 million in restructuring savings, which would drive approximately 85 basis-points of margin expansion. Finally, we expect 35 to 45 basis-points of margin expansion from the operating leverage in our business, given the progress that we've made in ABS to drive scale in our ongoing disciplined expense management. The net impact of these four items allows us to fund ongoing growth investments while still driving continued margin expansion in-line with our historical performance. Given our outlook for mid-single digit or greater organic revenue growth, adjusted margin expansion and accretive NFP performance, we expect to deliver strong adjusted EPS growth in 2025. This guidance reflects our continued strong operating performance, partially offset by an approximately $0.32 or 2 point EPS headwind from FX rates based on today's FX rates remaining stable. It's also important to note that in Q1 '25, we estimate an approximately $110 million FX impact on total revenue and an approximately $0.16 or 3 point EPS headwind. Also embedded in this guidance is an expected -- expected tax-rate of 19.5% to 20.5%, excluding any extraordinary discrete items. This tax-rate considers the geographic mix of our growth and policy changes in the geographies where we are located. Additionally, we expect non-cash pension in OIE to be $88 million compared to $48 million in 2024. This performance positions us for double-digit free-cash flow growth in 2025, including over $300 million from NFP, driven by adjusted operating income growth and working capital improvements. Additionally, we expect to continue to return capital to shareholders in 2025, including $1 billion in share repurchases. Our 2025 guidance demonstrates the strength of our business and financial model and prioritizes investments that support sustainable organic revenue growth. Our execution in ABS is supporting both top-line growth and creating investment capacity through margin expansion. As a result, we expect to deliver strong adjusted earnings per share growth and to generate double-digit free-cash flow growth. And finally, we continue to have balanced capital allocation, investing in growth and returning capital to shareholders. And before closing, one logistical note. Effective this quarter, we will disclose adjusted operating income and adjusted operating margin for two operating segments, risk capital and human capital. Risk capital includes commercial risk and reinsurance and human capital includes health and wealth. These changes align our external reporting to our plan and how we go-to-market to serve clients and they provide increased transparency to our investors on our ability to drive margin expansion across the enterprise. The changes do not impact AAON's reported revenue or consolidated results. And we will also provide recasted financials for the past three years in our 10-K, which will be filed and posted on our website in the coming weeks. I will close with four messages. First, AAON delivered strong Q4 financial results to close-out a strong 2024 in-line with our financial guidance. Second, we are executing on our three-by-three plan, including our investments in client-facing capabilities in Aeon business services, middle-market expansion and priority hiring to drive continued strong performance. Third, with our 2025 guidance, we are well-positioned to continue AAON's long track-record of delivering mid-single-digit or greater organic revenue growth, adjusted margin expansion, strong adjusted EPS growth and double-digit free-cash flow growth. Finally, we continue to have balanced capital allocation priorities, investing in growth while returning capital to shareholders. So with that, let's jump into your questions. Rob, I'll turn it back to you.
