Marsh & McLennan Companies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 15 speakers on the call.

Operator

Welcome to Marsh McLennan's Earnings Conference Call. Today's call is being recorded. 2nd Quarter 2023 Financial Results and Supplemental Information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward looking statements.

Operator

Forward looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, included our most recent Form 10 ks, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. You may need to pick up the handset before pressing the numbers.

Operator

I'll now turn this over to John Doyle, President and CEO of Marsh McLennan.

Speaker 1

Good morning and thank you for joining us to discuss our 2nd quarter results reported earlier today. I'm John Doyle, President and CEO of Marsh McLennan. Joining me on the call is Mark McGivney, our CFO and the CEOs of our businesses, Martin South of Marsh, Dean Klasseur of Guy Carpenter, Martin Forlan of Mercer and Nick Studer of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. Marsh McLennan's 2nd quarter results were excellent.

Speaker 1

We performed well across our businesses and geographies, extended the best run of quarterly underlying revenue growth in over 2 decades and generated double digit growth in adjusted EPS. Top line momentum continued with 11% underlying revenue growth on top of 10% growth in the Q2 of last year. Adjusted operating income grew 17% versus a year ago. Our adjusted operating margin expanded 100 basis points compared to the Q2 of 2022 and adjusted EPS grew 16%. We also raised our quarterly dividend by 20 percent to $0.71 and completed $300,000,000 of share repurchases during the quarter.

Speaker 1

I'm pleased with our performance, especially when viewed in the context of the current macroeconomic and geopolitical environment. While the U. S. And other major economies have been resilient, there remains significant uncertainty given persistent inflation, continued Central Bank tightening and geopolitical instability. However, we continue to perform well.

Speaker 1

As we have discussed in the past, there are factors that are supportive of our growth. We also have a track record of resilience and believe we are well positioned to perform across economic cycles. We manage our business to grow revenues faster than expenses in both good and challenging periods. We made meaningful investments in market facing talent and improving sales operations and client engagement, which are contributing to our growth. And we continue to deliberately shift our business mix to faster growth areas.

Speaker 1

So while the macroeconomic and geopolitical environment remains volatile, we see opportunity to deliver greater value to clients through our leadership and capabilities in risk, strategy and people. A good example is Marsh McLennan's work to aid Ukraine's economy. Our 4 businesses together are mobilizing our unique expertise to support their future recovery and reconstruction efforts. In June, I attended the Ukrainian Recovery Conference hosted by UK Prime Minister, Rishi Sunak. We had the honor of hosting a delegation of Ukrainian and British officials at our London offices where we announced proposals to help with Ukraine's recovery.

Speaker 1

Some estimates suggest over $1,000,000,000,000 may be required for this effort. Yet investment capital will not be forthcoming until investors can protect themselves from WarRisk. To this end, we propose to Ukraine and the G7 the creation of a WarRisk insurance pool that would ensure commercial insurance is available for reconstruction projects. We also announced that we will partner with the Ukrainian government and insurers to create a data platform for the assessment of war risks. This project draws on Marsh McLennan's expertise and leverages data and information provided by the Ukrainians.

Speaker 1

By enabling effective and targeted risk modeling, it represents a critical first step for the industry to offer commercial insurance and unlock capital. Our colleagues at Oliver Wyman also partnered with the Ukrainian government to develop a post war transformation strategy. This would reposition Ukraine's economy in a way that leverages national strengths to move beyond resilience to opportunity. At Marsh McLennan, we consider it a privilege to support these endeavors. Now I'd like to take a moment to provide an update on the strategic initiatives we discussed last quarter.

Speaker 1

As a reminder, in the Q1, we appointed new leaders for Marsh McLennan International and U. S. And Canada as well as region and country leaders. These leaders are driving client impact through enhanced collaboration, while at the same time maintaining the individual value propositions of the businesses. We are bringing our collective capabilities where there is opportunity to provide greater value.

Speaker 1

This allows us to harness the benefits of our scale, data, insights and expertise to meet our clients' challenges and realize possibilities. This approach is already yielding benefits and improving the client and colleague experience. At the same time, we are also finding new ways to operate, reduce complexity and organize for impact. The actions we are taking aim to realign our workforce and skill sets with evolving needs, rationalize technology and reduce our real estate footprint. As we said last quarter, we expect roughly $300,000,000 of total savings by 2024 with total cost to achieve these savings of $375,000,000 to $400,000,000 Our go to market collaboration and restructuring actions are an opportunity to drive higher growth, enhance the colleague value proposition and be more efficient and connected.

Speaker 1

Turning to insurance and reinsurance market conditions. Primary insurance rate increases continued with the Marsh Global Insurance Market Index up 3% overall versus 4% in the 1st quarter. Property rates increased 10%, the same as last quarter. Casualty pricing was up in the low single digit range. Workers' compensation was down low single digits and financial and professional liability insurance rates were down high single digits.

Speaker 1

Cyber insurance pricing stabilized after several years of increases. In reinsurance, challenging market conditions persisted at midyear renewals. Reinsurers were disciplined and rate increases remained significant, although the market showed more interest in deploying capacity than at January 1 given the firm pricing and improved terms. Global property cat reinsurance risk adjusted rates increased about 30% on average with loss impacted clients seeing higher pricing. The impact of rate increases on ceded premiums was mitigated by higher retentions.

Speaker 1

On the casualty side, pricing pressure continued across most lines driven by prior year loss development and concerns about social and economic inflation. We continue to help clients manage through these dynamic market conditions. Now let me turn to our 2nd quarter financial performance. We generated adjusted EPS of $2.20 which is up 16% from a year ago. On an underlying basis, revenue grew 11%.

Speaker 1

Underlying revenue grew 13% in RIS and 8% in consulting. Marsh was up 10%, Guy Carpenter 11%, Mercer 6% and Oliver Wyman grew 11%. Overall, the Q2 saw adjusted operating income growth of 17% and our adjusted operating margin expanded 100 basis points year over year. For the 6 months, consolidated revenue grew 10% on an underlying basis. Adjusted operating income grew 15% and our adjusted operating margin expanded 130 basis points.

Speaker 1

Adjusted EPS was $4.74 up 13% from a year ago. Turning to our outlook, we are well positioned for a strong year in 2023. In terms of revenue outlook, given our momentum, we expect full year underlying revenue growth to be high single digits. This reflects a continuation of current trends. But as we noted, the macro outlook remains uncertain and can turn out to be different than our assumptions.

Speaker 1

As for the bottom line outlook, we continue to expect margin expansion for the full year and strong growth in adjusted EPS. Overall, I'm proud of our 2nd quarter performance, which demonstrates our continued execution on strategic initiatives and momentum across our business despite an uncertain macro environment. I'm grateful to our colleagues for their focus and determination and the value they deliver to our clients, to shareholders and communities. With that, let me turn it over to Mark for a more detailed review of our results.

Speaker 2

Thank you, John, and good morning. Our Q2 results were outstanding with continued momentum in underlying growth, mid teens adjusted EPS growth and solid margin expansion. Our consolidated revenue increased 9% to $5,900,000,000 with underlying growth of 11%. Operating income was $1,500,000,000 and adjusted operating income was also $1,500,000,000 up 17%. Our adjusted operating margin increased 100 basis points to 27.7 percent, a good result given the headwinds from the and investments we made in 2022, the timing of our annual raises and the continued rebound in expenses such as T and E that we mentioned last quarter.

Speaker 2

GAAP EPS was $2.07 and adjusted EPS was $2.20 up 16% over last year. For the 1st 6 months of 2023, underlying revenue growth was 10%. Our adjusted operating income grew 15% to $3,300,000,000 Our adjusted operating margin increased 130 basis points. Our adjusted EPS increased 13% to 4.74 Looking at Risk and Insurance Services, 2nd quarter revenue was $3,700,000,000 up 12% compared with a year ago were 13% on an underlying basis. This result marks the 9th consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in nearly 2 decades.

Speaker 2

Operating income increased 20 percent to 1,200,000,000 adjusted operating income increased 18 percent to $1,200,000,000 and our adjusted operating margin expanded 140 basis points to 34.2%. For the 1st 6 months of the year, revenue in RIS was $7,600,000,000 with underlying growth 12%. Adjusted operating income increased 17 percent to $2,600,000,000 and the margin increased 170 basis points to 36.4%. At Marsh, revenue in the quarter was $3,000,000,000 up 9% from a year ago or 10% on an underlying basis. This comes on top of 9% growth in the Q2 of last year.

Speaker 2

Growth in the Q2 reflected strong new business and excellent retention. In U. S. And Canada, underlying growth was 9% for the quarter. In international, underlying growth was 10% comes on top of 9% in the Q2 of 2022.

Speaker 2

Latin America was up 17%, EMEA was up 11%, and Asia Pacific grew 6%. For the 1st 6 months of the year, Marsh's revenue was $5,800,000,000 with underlying growth of 9%. U. S. And Canada grew 8% and international was up 10%.

Speaker 2

Sky Carpenter's revenue was $576,000,000 in were up 10% or 11% on an underlying basis, driven by strong growth across all regions in Global Specialties. For the 1st 6 months of the year, Guy Carpenter generated $1,600,000,000 of revenue and 10% underlying growth. In the consulting segment, 2nd quarter revenue was $2,200,000,000 up 4% from a year ago or 8% on an underlying basis. Consulting operating income was $388,000,000 Adjusted operating income increased 9% to 403,000,000 the adjusted operating margin was 19.2% compared to 19.3% in the Q2 of last year. For the 1st 6 months of 2023, consulting revenue was $4,200,000,000 representing underlying growth of 6% and adjusted operating income increased 5% to $809,000,000 Mercer's revenue was $1,400,000,000 in the quarter, up 6 percent on an underlying basis, representing the 9th consecutive quarter of 5% or higher underlying growth in Mercer.

Speaker 2

Wealth grew 3%, driven by continued strength in defined benefits. Investment Management also delivered modest growth. Our assets under management were $393,000,000,000 at the end of the second quarter, up 11% sequentially and 14% compared to the Q2 of last year. Growth was driven by a modest rebound in capital markets, positive net flows and our transaction with Westpac. Health underlying growth was 10% and reflected strength in all segments and regions.

Speaker 2

Career revenue increased 6% on top of 17% growth in the Q2 of last year. We continue to see demand for rewards, talent strategy and workforce transformation advice and solutions. For the 1st 6 months of the year, revenue at Mercer was $2,700,000,000 with 7% underlying growth. Oliver Wyman's revenue in the quarter was $798,000,000 an increase of 11% on an underlying basis and reflected continued strength in the Middle East and Europe and a rebound in the Americas. For the 1st 6 months of the year, revenue at Oliver Wyman was $1,500,000,000 an increase of 6% on an underlying basis.

Speaker 2

Foreign exchange was a $0.02 headwind in the 2nd quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.01 headwind in the 3rd quarter and a $0.01 benefit in the 4th quarter. We reported $65,000,000 of total restructuring costs in the quarter, approximately $50,000,000 of which relates to the program we announced in the Q4. These charges include costs related to severance, lease exits and streamlining our technology environment. We continue to expect total charges under this program to be $375,000,000 to $400,000,000 To date, we've incurred approximately $300,000,000 in charges and currently expect to incur most of the remaining costs in 2023.

Speaker 2

We still expect to achieve total savings of roughly $300,000,000 by 20 for and now expect to realize approximately $200,000,000 in 2023. Our other net benefit credit was $60,000,000 in the quarter. For the full year 2023, we expect our other net benefit credit will be about 240,000,000 Investment income was $3,000,000 in the 2nd quarter on a GAAP basis and $2,000,000 on an adjusted basis. Interest

Speaker 3

expense in

Speaker 2

the Q2 was $146,000,000 up from $114,000,000 in the Q2 of 2022. This reflects an increase in long term debt and higher interest rates on short term borrowings, which we use for efficient working capital management. Based on our current forecast, we expect approximately $142,000,000 of interest expense in the 3rd quarter and approximately $567,000,000 for the full year. Our effective adjusted Tax rate in the Q2 was 24.2% compared with 23.7% in the Q2 of last year. Our tax rate in both periods benefited from favorable discrete items.

Speaker 2

The largest discrete item this quarter was the accounting for share based compensation. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. When we give forward guidance around our tax rate. We do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate between 25% 26% for 2023.

Speaker 2

Turning to capital management and our balance sheet, we ended the quarter with total debt of $12,600,000,000 Our next scheduled debt maturity is October 2023 when $250,000,000 of senior notes mature. We continue to expect to deploy approximately $4,000,000,000 of capital in 2023 across dividends, acquisitions and share repurchases. The ultimate level of share repurchase will depend on how the M and A pipeline develops. Last week, we raised our quarterly dividend by 20%, marking our 14th consecutive year of dividend growth. This increase, the largest in 25 years, reflects our strong earnings growth over the past couple of years, confidence in our outlook.

Speaker 2

Our cash position at the end of the second quarter was $1,200,000,000 Uses of cash in the quarter totaled $1,000,000,000 included $295,000,000 for dividends, dollars 421,000,000 for acquisitions and $300,000,000 for share repurchases. For the 1st 6 months, uses of cash totaled $1,900,000,000 and included $591,000,000 for dividends, dollars 701,000,000 for acquisitions and $600,000,000 for share repurchases. Given our strong results in the first half, we now expect high single digit underlying revenue growth for the full year. We continue to expect margin expansion for the full year and strong growth in adjusted EPS. This guidance is based on our outlook today, but as John mentioned, there continues to be uncertainty in the environment looking forward.

Speaker 2

So outcomes could be different than our current assumptions. Overall, our excellent start leaves us well positioned for another great year in 2023. With that, I'm happy to turn it back to John.

Speaker 1

Thank you, Mark. Operator, we're ready to begin Q and A.

Operator

Certainly. We will now begin the question and answer session. In the interest of addressing questions from as many participants as possible, we ask that participants limit themselves to one question and one follow-up question. Please stand by. And our first question comes from the line of Elyse Greenspan with Wells Fargo.

Speaker 4

Hi, thanks. Good morning. My first question, you guys updated your Organic growth guidance for the full year to high single digits. You guys started off the year pretty strong at 10% organic growth through the 1st 6 months. So trying to get a sense as you think about the back half, what businesses might you expect to see some kind of moderation in right to get to high single digits for the full year?

Speaker 4

And then embedded within that guide, what are you assuming for fiduciary investment income in the back half of the year?

Speaker 1

Good morning, Elyse. Thanks for the question. Yes, we're as I said, I'm quite pleased with the growth year to date. And the macro environment, although volatile, remains Supportive of good strong growth, inflation, pricing, tight labor markets, our tailwinds. But As I pointed out in my prepared remarks, we've been shifting our mix of business to better growth markets.

Speaker 1

We've been investing in talent, sales operations, client engagement. We've sold some non core businesses and recently announced the of a non core business. So we've been working very hard at the growth profile of the company. And our outlook remains quite positive. So we upped our guidance to High single digits.

Speaker 1

It's again a terrific start to the year. I feel like we're well positioned. I think our team is executing very well in the marketplace. And In spite of the volatile macro environment, I think we'll have a good second half of growth as well. We're not going to give specific guidance on fiduciary income, but you saw what it looked like in the second quarter, obviously meaningful growth and we expect that to likely continue in the second half.

Speaker 4

Thanks. And then my second question is on margin. You guys had pointed right that the Q2 would see lower improvement than the other quarters of the year. Does that still stand and when you expect margin improvement pick up in the Q3 and the Q4? And with the higher expense savings now $200,000,000 this year, does the higher savings in 2023, Those all come in the back half or was that spread throughout the year?

Speaker 1

Yes. I'll ask Mark to talk about the restructuring program, but I was very pleased with the margin improvement in the quarter year to date, 100 bps in the 2nd quarter, 130 bps year to date. And just a reminder for everyone, margin is an outcome for us. It's not the primary objective, but we do expect to grow revenue more than expense over time. And we're constantly trying to balance with delivering today and investing for the future.

Speaker 1

I think we're getting that balance right. Our growth in both top line and earnings shows that. We did guide to less improvement in the Q2. Mark talked about in his prepared remarks some of the drivers behind that. But again, I'm quite pleased with where we are.

Speaker 1

We expect solid margin expansion Again for the 16th year. Mark, maybe you can talk about the restructuring program.

Speaker 2

Yes. Hi Elyse, how are you? Elyse, you see that we did take up the outlook for this year to $200,000,000 but let the overall at $300,000,000 It just reflects the fact that we're executing well and we've just gotten added a little bit quicker. And as we said last quarter, it wouldn't be a bad assumption just to assume the savings comes in ratably across the year. And I would say the same thing.

Speaker 2

Just that we've gotten at the savings, a little bit quicker. So I would just assume a ratable spreading over the course of the year as opposed to all the increase coming in the back half.

Speaker 1

And we do have a bit of better second half comps from the expense on the expense line. So thank you, Elyse. Operator, next question.

Operator

Thank you. And our next question comes from the line of Jimmy Bhullar with JPMorgan.

Speaker 5

Hey, good morning. First, just a question on revenues in the RIS business. You've grown at a pretty fast rate the last several quarters and I think generally better than some of your larger peers and part of that might have been Just the benefit from the hiring activity that you've done over the past couple of years. Is the tailwind from that fully reflected in your results and has it fully ramped up or is there sort of more to go there?

Speaker 1

Yes. Thanks, Jimmy. As I said, Quite pleased with our growth, pick up one of your words, just a benefit from some hiring. As I noted, we've been working quite hard at shifting the mix of business, bringing in talent, improving our sales operations, including investing in client engagement. We made terrific inorganic investments as well.

Speaker 1

And So it's much more than some of the lateral hiring that's in the market. Having said that, we are quite pleased with the hiring we did and We've gotten good returns from those investments. And as I pointed out in the past, not just We've not just been pleased with the financial outcome. Culturally, we're very thoughtful about who we brought into the organization and They're not only helping us grow, but they're making us better as well. So we're quite pleased with those investments.

Speaker 5

And then just you mentioned sorry, go ahead.

Speaker 1

No, I'm sorry. You have a follow-up? Yes.

Speaker 5

I was just going to say, you mentioned Macro and geopolitical a bunch of times and geopolitical obviously is understandable. Macro from the outside and it seems like most The factors are tailwinds more than their headwinds. The equity market is strong, inflation is high, GDP growth has held in. So maybe you could just elaborate a little bit on what is it that on the macro side that you see as a negative and specifically on inflation, if it stays elevated, is that a obviously, it's a positive Your growth, but is it a positive on your earnings as well overall? Or is the benefit offset by just higher expenses in your own business?

Speaker 1

Yes. It's a good question. I was trying to thread the needle a bit, right? I mean, again, the economy has been quite resilient, but inflation remains persistent. You're obviously beginning to see it come down here in the United States, but not at the level that the Central Bank seems to be targeting with their mission to reduce inflation, that's going to have an impact on not just the market here, but in other markets.

Speaker 1

And so I think there is still a meaningful risk of recession. And in fact, where we do have exposure in other parts of the world, we have economies in recession currently. So But I think you had it right. I think nominal GDP is a better indicator of demand for us rather than real GDP. And persist excuse me, inflation overall, we do think is beneficial to the company.

Speaker 1

We're not again immune to some of the challenges that we confront from an inflationary environment in our expenses. But overall, it's a bit of a benefit. And I would say, while equity markets you pointed out equity markets have improved year over year, we've had some headwinds in our investment business from a growth perspective, although we're pleased with what's an improving growth profile year to date in Mercer Investments. Thank you, Jimmy. Operator, next question.

Operator

Thank you. And our next question comes from the line of Michael Zaremski with BMO Capital Markets.

Speaker 2

Hey, great. First question, maybe I'll try to ask Jimmy's question differently. So in the risk segment specifically, organic growth much stronger than consensus expectations, which is great. Any way you can offer any thoughts on whether a material portion of that kind of excess growth was Market share taking versus just the entire maybe overall market conditions for the entire industry were stronger than maybe some expected?

Speaker 1

It's a mix of impacts, of course. So it's difficult to say with real precision, Mike. But again, you've started to see inflation come down here in the United States. You saw And in many markets, you're seeing GDP growth slow. P and C pricing moderated a bit in the quarter as well.

Speaker 1

Tight labor markets though remain a positive factor. And overall, at least compared to the 2010 to 2020 decade, it's certainly we have more tailwinds than headwinds. But again, we've been working quite aggressively to shift our mix and to improve the growth profile of the company and not just be a passive index candidly on GDP or for that matter P and C pricing. So again, we're pleased. I forgot to mention, when Jimmy asked the question too, I talked about the economy a bit, but the geopolitical environment remains a risk as well, right?

Speaker 1

So again, just trying to thread the needle between what's been obviously a terrific first half of the year and what we think is a terrific outlook for revenue growth in the second half, but there's macro risk as well.

Speaker 2

Okay. That's helpful. My follow ups on, if you look at cash flow from operations, Net of our CapEx, if I'm doing the math right, it looks like it's growing at a Pretty big clip. Do you expect free cash flow at this point to grow faster than earnings? And any comments, if that's the case, your cash flow conversion will take a step up this year?

Speaker 1

It can be a bit lumpier than earnings growth as we pointed out in the past and have demonstrated in the past, but maybe I'll ask Mark to talk about the outlook for free cash

Speaker 2

Yes. Thanks, Mike. I we've as I consistently say, we really try not to emphasize focusing too much on free cash flow growth in any quarter or even a year. It could be really volatile. Yes.

Speaker 2

As you point out in the Q2, free cash flow was up quite nicely. But there is you have to be careful especially early in the year for us because it's a bit of a low base issue. Our cash flows tend to be lower early in the year as you know than later in the year. But look, we've had a terrific run over a long period of time Double digit free cash flow growth that is tracked pretty closely to our run of double digit earnings growth last decade. And we've talked about, we're confident in our outlook for continued strong earnings growth and we would expect that our free cash flow growth in the future would track that as well.

Speaker 1

Thank you, Mike. Operator, next question.

Operator

Thank you. And our next question comes from the line of Robert Cox with Goldman Sachs.

Speaker 6

Hey, thanks for taking my question. Just thinking about the Marsh business and I realize Growth has been strong both domestically and internationally. But if you look at those domestically and internationally, if you look at those two areas over the next, say, the next year and the next 5 years, which are you most excited about?

Speaker 1

Well, we're not going to give revenue guidance past what we've given today past this year. But as I said, We're performing well. We're well positioned. I think we have the best talent in the market. I do believe we are capturing share, but maybe I'll ask Martin to talk a little bit about the growth so far this year and what you see for the rest of the year, Martin.

Speaker 3

Sure. Thanks, John. As you said, we had a great strong organic growth of 10% in the second quarter, which is on top of 9%, which we posted in the Q2 of 2022 and better the full year growth of 8%. As you said, Great Balance International was 10% Latin America, 17% EMEA, 11% APAC, 6% U. S.

Speaker 3

And Canada, 9%. I'd say the growth has been such really nice balance across all the geographies. Specialties growth was strong, Credit Specialties, Construction, Aviation, Energy and Power, strong. Our advisory business, part of the Risk Advisory of the Future, very strong double digit growth. NMB was strong, renewal growth was strong.

Speaker 3

So it's just a nice mix of business across the board, both new business and renewal.

Speaker 1

Yes. Thanks, Mark. Again, the consistency of growth has been just outstanding in addition to the total. Do you have a follow-up, Rob?

Speaker 6

Yes, thanks. And so maybe switching to Oliver Wyman, growth came in well above the levels you guys had guided from last quarter. And there's been a number of positive economic data points as of late. Do you see the pipeline reflecting that? And is it looking like growth in the back half?

Speaker 1

Yes, we're thanks Rob. Very pleased with the growth at Oliver Wyman. I'll ask Nick to talk a bit more about it in detail. Nick?

Speaker 7

Yes. Thank you, Robert. We still see a relatively wide range of possible future outcomes. When we gave guidance at the end of the Q1 that was based on what we saw in our sales pipeline, which was ticking up nicely, but not aggressively. In the second quarter, we saw quite strong growth in sales.

Speaker 7

I would say a reflection on places where Oliver Wyman is being selected to support our clients' really transformative moments, led by our public sector practice, led by our banking practice, transportation and services and our telco teams. And then also Some of our other businesses, our economic research consultancy, NERA and our brand consulting business, Lippincott, showing strong growth and our digital practice showing strong growth. So I wouldn't say yet, but it's correlated with economic uptick. Clients need to use this for their performance transformation as well as for the growth strategy. But sales in the second quarter have been better than we'd expected.

Speaker 7

And in the near term, I'm relatively optimistic. In the longer term, the economic outcomes are still fairly widely ranged.

Speaker 1

Thank you, Nick. Operator, do we have a follow-up? I'm sorry. Next question actually. That was the follow-up.

Speaker 8

The next

Operator

question comes from the line of David Motamedian with Evercore ISI.

Speaker 9

Hey, thanks. Good morning. Just had another question on The increased outlook to high single digit for the year. Just Sort of high level question, was that improved outlook more a function of the results you've achieved to date or has your outlook improved at all going forward?

Speaker 1

Thanks, David, for the question. It's really a function of both, right? We've had, again, a terrific start to the year, very, very pleased with the growth. And again, not just growth in parts of the business, just broad based good execution and a lot of hard work by the team and really a reflection of the value that we're creating for clients. And so we remain positive with that outlook.

Speaker 1

And again, geopolitical environment particularly, but also the macroeconomic outlook, there's volatility there. So we want to be mindful of that, but we feel very good about second half.

Speaker 9

Got it. Thanks. And maybe just a question on Mercer Career. So I saw that decelerated a little bit, the growth decelerated and the compare wasn't that much harder than the Q1. So I'm just wondering, is there anything that you're seeing there on the pipeline front or just anything that would indicate that any clouds on the horizon?

Speaker 1

Yes. Thanks, David. We love what we're doing at MercerCareers. Let me ask Martijn to talk about our results here today.

Speaker 10

Yes. Thanks, David, for the question. And you touched on it. The quarter growth this quarter was on top of challenging 17% comparable for the Q2 of last year. Our quarter at 6% in Q2 now has also been impacted by the delay of start of certain projects.

Speaker 10

But I would say that the fundamentals for the business remain Very strong. We have 9% growth year to date. The demand for service continues. Our clients still grapple with labor shortages, wage inflation, dealing with new ways of working, tech in the workplace. We discussed generative AI with the clients.

Speaker 10

So you're right. It's also a business that has the largest component of from clients for us at Mercer and we are always watching the macroeconomics. But I would say at this point, our sales, our pipeline, client sentiments, very strong. So it continues to give us good visibility into strength for the Q3 and beyond. So I'm confident that The rest of the year will be good for career.

Speaker 1

Thanks, Martin. Thanks, David. Operator, next question please.

Operator

Thank you. And our next question comes from the line of Mike Ward with Citi.

Speaker 11

Thanks. Good morning. You called out Global Specialty and Guy Carpenter. Just wondering if you can discuss some of those trends and maybe the runway and how significant those impacts are?

Speaker 1

Sure. Thanks, Mike, for the question. Maybe I'll ask Dean. We're quite pleased with our execution and what's been a very, very challenging reinsurance market in the first half of this year. But Dean, maybe you can talk about the growth at GC?

Speaker 12

Sure. Thanks, John. We're very pleased with our 11% underlying growth in the quarter, 10% for the first half of the year. As you call out, we've seen strong growth across all of our regions, in particular internationally and Global Specialties. Global Specialties plays deeply in the retrocession capital market based in London and globally and there's been some capital challenges.

Speaker 12

Despite that, we've seen some capital inflow into the marketplace. But despite market conditions, our global specialty team continues to grow and perform impressively. New business across Guy Carpenter continues to Some of that's from all the talent that we hired. We're winning in the marketplace. We're seeing very strong demand in this marketplace for analytics platform, which we think is the best in the marketplace.

Speaker 12

Demand for our advice and solutions remain strong. Our clients are really experiencing and seeing a flight to quality works in a challenging market environment where capital is still constrained, where reinsurers are driving really challenging terms and conditions, you want to be with the best. I think also Guy Carpenter Securities is differentiating in the marketplace. We did over 20 cap bond deals in the first half of the year with some of that new ILS capital coming into the marketplace. We've done ILS structuring for key clients.

Speaker 12

And so I think there's just kind of real momentum in the business kind of globally. And of course, the market continues to be a tailwind. There's not enough new capital in the marketplace to change the trajectory of the pricing environment.

Speaker 1

Thank you, Dean. Martin, maybe you could talk a little bit about the growth in specialties?

Speaker 3

Yes. Thanks, Johnny. As I mentioned earlier, we've seen really good growth in the specialty areas being in the credit specialties, maybe not surprising given what's happening in the environment. Construction has been very strong internationally. Aviation and Energy and Power as those go through a transition there and aviation has bounced back.

Speaker 3

So feeling very good about that a little. So take it with the advisory business as well where we the 2 businesses hang together. We're advising clients increasingly on how to manage their loss costs, how to drive growth during the energy transition and so So all of those specialty areas, we're seeing really strong growth and momentum and that's how we go to market.

Speaker 1

It's

Speaker 3

how we differentiate ourselves through that lens.

Speaker 1

In a world where the cost of risk is continuing to escalate our efforts to on risk consulting are really important to our clients and driving a lot of value, Mike. I also want to point out, it's obviously been a particularly on the reinsurance side of late, but after several years of pricing increases, of course, at Marsh as well, it's a difficult market. We take our role as a market maker quite seriously and in the quarter announced a couple of different things that I would point out, A multi line facility in London that we call Fast Track for our clients at Marsh. And then we also created a reciprocal inside of or MGA operations at Victor, as well trying to bring new solutions to what is a difficult market for clients. Do you have a follow-up, Mike?

Speaker 11

Thank you. Yes, that was super helpful. Maybe last quarter, you spoke a little bit about developing countercyclical products in Pulverwimena. Just wondering if you can share some examples on that?

Speaker 1

Yes. Nick, you want to talk about some of the capabilities we've been building inside of Oliver Wyman?

Speaker 7

Yes. I mean, There are various of our sectors which are perhaps less exposed to the cycles. So last year, you saw we acquired The excellent Avocent business, which is an aerospace and defense specialist as an example. So some of our sectors, We've been trying to position ourselves carefully through the cycle. And then on the capabilities side, we do a very large amount of work now in performance transformation.

Speaker 7

And that's not solely a downturn oriented solution, but It's needed when clients are going through either margin squeeze on the top line or the bottom line. And then a couple of years ago, we started to build a restructuring practice is still very nascent, but we've seen very strong growth in that area as well. So that's a few different examples. I think the final point I'd make is that really from the pandemic onwards, we've seen a reduction in the correlation between our different industries. Some have been in downturn for quite a long time, some are working through their own for mini crises, which sometimes requires advisory support.

Speaker 7

And then some are quite pro cyclical, but I'd note that our private equity, private Capital practice, which obviously slowed considerably over the last 3 or 4 quarters, has started to pick up. And we're seeing activity there both pre and post deal. So that's a sort of bit of a picture across the business.

Speaker 1

Thank you, Nick. Thank you, Mike, for the questions. Operator, next question please.

Operator

Thank you. And our next question comes from the line of Brian Meredith with UBS.

Speaker 13

Hi, this is Weston Blumer on Brian, my first question is a follow-up on Oliver Wyman. Obviously strong growth there and you highlighted a few subsectors that saw the growth. I'm curious within Financial Services and Banking, was any of that growth driven by the banking turmoil that we saw earlier in the year or more one off I guess I'm going with that too. Is that something that you think could play out in the back half of this year or 2024 given the turmoil earlier in the year?

Speaker 1

Thanks, Weston. Good question. Nick, maybe you could talk a little bit about you mentioned banking being a strength to date, but maybe you could talk about the outlook.

Speaker 7

Yes. There were different puts and takes in our growth numbers, but Perhaps 35% to 40% of our growth was driven by our banking practice. As you know, that is really a preeminent business for us. And at the beginning of that crisis, we felt that that was just adding to uncertainty, may lead to some pauses in decisions, which may slow down the pipeline. In the Q2, we did see some work coming through from it.

Speaker 7

It's hard to separate out exactly how much is driven by crisis response versus banks preparing to get ahead Those capabilities that they now know they need given the very different interest rate environment. There are a lot of the core essentials of the banking system are muscles that haven't had to be used in the very low rate environment we've had for a very, very long time. And so there is work on liability management, interest rate risk management, Deposit management, the value of the branch network, not to mention, tuning ourselves up for the new tech and AI capabilities that might be helpful. But yes, we have seen that be A driver of some business already and we continue to expect that over the coming quarters.

Speaker 8

Thanks Nick.

Speaker 1

Thanks Nick. Yes. And you

Speaker 13

could highlight that 35% to 40% of the growth was driven within Financial Services. Have you given a Rule of thumb, I'd always assume that financial services was the largest subsector within OI. Just want to confirm that that's the case or if you've given a breakout there?

Speaker 7

We don't give a breakout. I mean, it's one of our strongest practices. It's also one of the largest sectors in management consulting globally. But it's yes, it's one of our strength areas.

Speaker 13

Got it. And then just one more within Guy Carpenter. Can you talk about the dynamic versus 3 d versus fact placements, and the kind of the growth outlook that you're seeing there. Are there more opportunities within fact given just changes in buying or buyer behavior?

Speaker 1

Thanks, Weston. We've seen good growth in FAC over the course of the last couple of years, Both seated and client driven, in fact, Oliver Wyman and excuse me, Guy Carpenter at Marsh work quite closely together to capture that opportunity and to make sure we're bringing all the available capital all over the world to our clients to help again navigate what's been a very, very difficult marketplace. So the growth has been quite strong in both PAC and in treaty as well. Thank you, Weston. Operator, next question please.

Operator

Thank you. And our next question comes from the line of Paul Newsome with Piper Sandler.

Speaker 14

Good morning. Thanks for squeezing me in. I didn't think I heard much of anything about the M and A environment. I think we're all sort of waiting for Things have changed there versus the because the interest rate environment changes, but any updated thoughts on M and A and how you see

Speaker 1

Given the market and have a solid pipeline, we're of course, we continue to look for businesses with solid Growth fundamentals that are well led and have terrific talent and not only will they make us better, but hopefully we think we can make them better as well. I'd say the pipeline is pretty broad from both an RIS and consulting perspective. We of course did a big deal in Mercer Investments on the 1st April. So we're excited about that in Australia. And we're just in Australia as a team.

Speaker 1

I'm so excited about the acquisition there and what it means to our investments. The market, obviously, the number of deals is down. Some buyers, Primarily financial buyers are sitting it out at the moment, but strategic players are still quite active. And what I would say is demand is strong for higher quality businesses that are out there. And so while obviously the cost of capital has increased quite a bit.

Speaker 1

Prized assets are still trading at a premium. So but again, we're excited about what's possible there. And we've worked very hard and have built a very strong reputation as a buyer in the market and that creates a lot of opportunity for us. Do you have a follow-up, Paul?

Speaker 14

Yes. As a follow-up, Could you talk about the divestitures that you've made and how important or maybe not important they are to the margin improvements over the last quarter or last year.

Speaker 12

Yes. I mean I know they're small

Speaker 14

in size, but

Speaker 1

Yes. Yes. No, thanks. Sorry to jump in on you there. They are relatively modest in size, but We are being thoughtful about the portfolio in that respect.

Speaker 1

And for the most part, they've happened at Mercer. Again, we recently announced to the divestiture of what really is an admin business primarily or really entirely an admin business. And so not core lower growth capital intensive operations and candidly there are better owners of assets like that than us others that can bring greater scale and technology and solutions. So we don't expect to do a lot of it, but where we see the opportunity and it makes us better and stronger and enables us to invest in our core, we'll take steps to do that. Thank you, Paul.

Speaker 1

Operator, next question?

Operator

Thank you. And our next question comes from the line of Jing Li with

Speaker 8

KBW. Hi there. Thank you for taking my questions. Just a question on the Asia Pacific business. Can you add some color on it since I see that this is the rate of sum for this quarter?

Speaker 8

Do you expect it to continue for the coming quarters?

Speaker 1

Sure, Jing. Maybe I'll ask Martin to talk about it, but we're very Excited about the possibility for growth in Asia and in the Pacific, not just at Marsh, but across our businesses. As I mentioned, as a leadership team, we're recently in Australia and we see lots of possibilities. But Martin, maybe you could talk a little bit about the quarter and your outlook.

Speaker 3

I think the important thing when we look at international, we like to look at growth over longer periods of time. With regard to APAC 6% underlying growth in the quarter, It's 8% year to date. We think that's much more indicative of what the growth would be like over a longer period of time. Likewise, we probably Slightly elevated growth in Latin America. We'd expect that to normalize over a period of time as well.

Speaker 3

So I just think it's Something that we're not worried about. We have a great business in Asia Pac and feel very confident about the future.

Speaker 1

Lots of opportunities. It's One of the parts of the world where there's a meaningful protection gap. So, Jing, do you have a follow-up?

Speaker 8

Yes. So for this quarter 6%, I guess. So you mean that means that it's kind of like one time thing, so it continue to be a double digit kind of going forward?

Speaker 1

Yes. Sure. Yes. We're not going to give specific guidance on Asia Pacific underlying revenue growth. But we do think it's an area, a region that we're very well positioned for strong growth going forward.

Speaker 1

So as Martin mentioned, we're well positioned in that market. We've got terrific distribution throughout most major countries throughout the region and we're excited about it. It's one of the ways in which JLT made us quite stronger. So thank you, Jane. Operator, are there any more questions?

Operator

I'm showing no questions at the moment.

Speaker 1

Operator, I think we can wrap up if there are no more questions.

Operator

I'm showing we do have a question, a follow-up. One moment please. And our follow-up question comes from Robert Cox with Goldman Sachs.

Speaker 6

Hey, just one follow-up on the M and A, SPAC and Capital Markets activity. Can you give us a sense of whether that continued maybe just directionally if that was more or less of a headwind in this quarter versus the Q1?

Speaker 1

Sure. Maybe I'll ask Martin to unpack our growth at Mercer Investments a bit. Martijn?

Speaker 10

Yes, absolutely. I mean, we our OCIO business has It's grown really rapidly over the last few years, but as you know, it's been impacted by capital markets over the last many quarters. Although it does benefit from net AUM inflows, some of that volatility does drive demand for the OCIO service. What we've seen in Q2 is still a small drag due to year over year capital market, but Based on the value that we see at the end of the quarter, it bodes well for the rest of the year, small accretive growth from capital markets for Q3 as far as we can see from levels today. So this is a good business for us.

Speaker 10

It's a diversified portfolio. The volatility in the equity market has come down. On the bond market, it's still a little bit elevated, but all the data has contributed to a lot of need on the client side for advice regarding the volatility, the funding of their pension plans, etcetera. It's been good for us and our

Speaker 1

Thank you, Martin, and thanks, Rob, for the follow-up. I want to thank you all for joining us on the call this morning. In closing, I want to thank our over 85,000 And colleagues for their hard work and dedication. I also want to thank our clients for their continued support. So thank you all very much, and we look forward to speaking with you next quarter.

Speaker 1

Operator, thank you.

Operator

Ladies and gentlemen, this does conclude today's program. You may now disconnect.

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Earnings Conference Call
Marsh & McLennan Companies Q2 2023
00:00 / 00:00