Marsh & McLennan Companies, Inc. (NYSE:MMC) Q2 2023 Earnings Call Transcript

Marsh & McLennan Companies, Inc. (NYSE:MMC) Q2 2023 Earnings Call Transcript July 20, 2023

Marsh & McLennan Companies, Inc. beats earnings expectations. Reported EPS is $2.2, expectations were $2.12.

Operator: Welcome to Marsh McLennan’s Earnings Conference Call. Today’s call is being recorded. Second 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. Forward-looking statements are subject to risk 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 in our most recent Form 10-K, 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. [Operator Instructions]. I’ll now turn this over to John Doyle, President and CEO of Marsh McLennan.

John Q. Doyle: Good morning, and thank you for joining us to discuss our second 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 Klisura of Guy Carpenter, Martine Ferland of Mercer, and Nick Studer of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. Marsh McLennan second quarter results were excellent. We performed well across our businesses and geographies extended the best run of quarterly underlying revenue growth in over two 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 second quarter of last year.

Adjusted operating income grew 17% versus a year ago. Our adjusted operating margin expanded 100 basis points compared to the second quarter of 2022 and adjusted EPS grew 16%. We also raised our quarterly dividend by 20% to $0.71 and completed $300 million of share repurchases during the quarter. 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 remain significant uncertainty given persistent inflation, continued central bank tightening and geopolitical instability. However, we continue to perform well. 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’ve 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. 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 four 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 have 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. Some estimates suggest over $1 trillion may be required for this effort. Yet investment capital will not be forthcoming until investors can protect themselves from war risk. To this end, we propose to Ukraine and the G7, the creation of a war risk 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.

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. As a reminder, in the first quarter, 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. This allows us to harness the benefits of our scale, data, insights and expertise to meet our client’s 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, rationalized technology, and reduce our real estate footprint. As we said last quarter, we expect roughly $300 million of total savings by 2024 with total cost to achieve these savings of $375 million to $400 million. 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.

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 first 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. Cyber insurance pricing stabilized after several years of increases. In reinsurance, challenging market conditions persisted at mid-year 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. 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 these dynamic market conditions. Now let me turn to our second 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%. Underlying revenue grew 13% in RIS and 8% in consulting. Marsh was up 10%, Guy Carpenter 11% versus 6% and Oliver Wyman grew 11%. Overall, the second quarter saw adjusted operating income growth of 17% and our adjusted operating margin expanded 100 basis points year-over-year.

For the six months, consolidated revenue grew 10% on an underlying basis. Adjusted operating income grew 15% and our adjusted operating margin expanded 130 basis points. 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. 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 second 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 delivered to our clients, shareholders and communities. With that, let me turn it over to Mark for a more detailed review of our results.

Mark McGivney: Thank you, John, and good morning. Our second quarter results were outstanding with continued momentum in underlying growth, mid-teens adjusted EPS growth and solid margin expansion. Our consolidated revenue increased 9% to $5.9 billion with underlying growth of 11%. Operating income was $1.5 billion and adjusted operating income was also $1.5 billion up 17%. Our adjusted operating margin increased 100 basis points to 27.7% a good result given the headwinds from the talent investments we made in 2022, the timing of our annual raises and the continued rebound in expenses such as T&E that we mentioned last quarter. GAAP EPS was $2.07 and adjusted EPS was $2.20 up 16% over last year. For the first six months of 2023, underlying revenue growth was 10%.

Our adjusted operating income grew 15% to $3.3 billion. Our adjusted operating margin increased 130 basis points and our adjusted EPS increased 13% to $4.74. Looking at risk and insurance services, second quarter revenue was $3.7 billion up 12% compared with a year ago, or 13% on an underlying basis. This result marks the ninth consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in nearly two decades. Operating income increased 20% to $1.2 billon. Adjusted operating income increased 18% to $1.2 billion and our adjusted operating margin expanded 140 basis points to 34.2%. For the first six months of the year, revenue in RIS was $7.6 billion with underlying growth of 12%. Adjusted operating income increased 17% to $2.6 billion and the margin increased 170 basis points to 36.4%.

At Marsh, revenue in the quarter was $3 billion up 9% from a year ago or 10% on an underlying basis. This comes on top of 9% growth in the second quarter of last year. Growth in the second quarter 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% and comes on top of 9% in the second quarter of 2022. Latin America was up 17%, EMEA was up 11% and Asia Pacific grew 6%. For the first six months of the year, Marsh’s revenue was $5.8 billion with underlying growth of 9%. U.S. and Canada grew 8% and international was up 10%. Guy Carpenter’s revenue was $576 million in the quarter, up 10% or 11% on an underlying basis driven by strong growth across all regions and global specialties.

For the first six months of the year, Guy Carpenter generated $1.6 billion of revenue and 10% underlying growth. In the Consulting segment, second quarter revenue was $2.2 billion up 4% from a year ago or 8% on an underlying basis. Consulting operating income was $388 million. Adjusted operating income increased 9% to $403 million. The adjusted operating margin was 19.2% compared to 19.3% in the second quarter of last year. For the first six months of 2023, Consulting revenue was $4.2 billion representing underlying growth of 6% and adjusted operating income increased 5% to $809 million. Mercer’s revenue was $1.4 billion in the quarter, up 6% on an underlying basis, representing the ninth consecutive quarter of 5% or higher underlying growth in Mercer.

Wealth grew 3% driven by continued strength in defined benefits. Investment management also delivered modest growth. Our assets under management were $393 billion at the end of the second quarter up 11% sequentially and 14% compared to the second quarter 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. Career revenue increased 6% on top of 17% growth in the second quarter of last year. We continue to see demand for rewards, talent strategy and workforce transformation advice and solutions. With first six months of the year, revenue at Mercer was $2.7 billion with 7% underlying growth.

Oliver Wyman’s revenue in the quarter was $798 million, an increase of 11% on an underlying business and reflected continued strength in the Middle East and Europe and a rebound in the Americas. With first six months of the year, revenue at Oliver Wyman was $1.5 billion, an increase of 6% on an underlying basis. Foreign exchange was a $0.02 headwind in the second quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.01 headwind in the third quarter and a $0.01 benefit in the fourth quarter. We reported $65 million of total restructuring costs in the quarter, approximately $50 million of which relates to the program we announced in the fourth quarter. 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 million to $400 million. To date, we’ve incurred approximately $300 million of charges and currently expect to incur most of the remaining costs in 2023. We still expect to achieve total savings of roughly $300 million by 2024, and now expect to realize approximately $200 million in 2023. Our other net benefit credit was $60 million in the quarter. For the full year 2023, we expect our other net benefit credit will be about $240 million. Investment income was $3 million in the second quarter on a GAAP basis and $2 million on an adjusted basis. Interest expense in the second quarter was $146 million up from $140 million in the second quarter 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 million of interest expense in the third quarter and approximately $567 million for the full year. Our effective adjusted tax rate in the second quarter was 24.2% compared with 23.7% in the second quarter of last year. Our tax rate in both periods benefited from favorable discrete items. 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% and 26% for 2023. Turning to capital management and our balance sheet, we ended the quarter with total debt of $12.6 billion.

Our next scheduled debt maturity is October 2023, when $250 million of senior notes mature. We continue to expect to deploy approximately $4 billion of capital in 2023 across dividends, acquisitions and share repurchases. The ultimate level of share repurchase will depend on how the M&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. Our cash position at the end of the second quarter was $1.2 billion. Usage of cash in the quarter totaled $1 billion and included $295 million for dividends, $421 million for acquisitions and $300 million for share repurchases.

The first six months, uses of cash totaled $1.9 billion and included $591 million for dividends, $701 million for acquisitions and $600 million 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. So outcomes could be different than our current assumptions. Overall, our excellent start leaves us well-positioned for another great year in 2023. And with that, I’m happy to turn it back to, John.

John Q. Doyle: Thank you, Mark. Operator, we’re ready to begin Q&A.

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Q&A Session

Operator: Certainly, we will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from the line of Elyse Greenspan with Wells Fargo.

Elyse Greenspan: 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 first six 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 the high-single-digits for the full year? And then embedded within that guide, what are you assuming for fiduciary investment income in the back half of the year?

John Q. Doyle: 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. We’ve been investing in talent, sales operations, client engagement. We’ve sold some non-core businesses and recently announced the sale 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, it’s again a terrific start of the year.

I feel like we’re well-positioned. 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.

Elyse Greenspan: 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 to pick up in the Q3 and the Q4, and with the higher expense savings now $200 million this year, does the higher savings in 2023, do those all come in the back half or was that spread throughout the year?

John Q. Doyle: Yes, I’ll ask Mark to talk about the restructuring program, but I was very pleased with the margin improvement in the quarter and year-to-date 100 bps in the second quarter, 130 bps year-to-date. And, just a reminder for everyone, margins and 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. I think we’re getting that balance right. Our growth in both topline and earnings shows that. We did guide to less improvement in the second quarter, Mark talked about in his prepared remarks some of the drivers behind that. But again, I’m quite pleased with where we are. We expect solid margin expansion again for the 16th year. And, Mark, maybe you can talk about the restructuring program.

Mark McGivney: Yes. Hi, Elyse, how are you? Elyse, you see that we did take up the outlook for this year to $200 million but left the overall at $300 million. 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, wouldn’t be a bad assumption just to assume the savings comes in ratably across the year. And, I would say the same thing. It’s just that we’ve gotten at the savings a little bit quicker. So, I would just assume a ratable spreading over course of the year as opposed to all the increase coming in the back half.

John Q. Doyle: 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?