Q1 2020 Earnings Call
Welcome to the Marsh <unk> Mclennan companies conference call today's call is being recorded.
Nice quarter, Twentytwenty Sinatra resolved and supplemental information we issued earlier this morning, they're available on the company's website at www and I'm Si Dot com.
Please note that I'm actually made today may include forward looking statements kitting second expectations related to covert 19 and other mass Gerry.
Forward looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ maturity from that was contemplated.
[laughter].
For more detailed discussion all those factors. Please refer to our earnings release for this call sure I'm sure. Most recent FCC filings, including our most recent form 10-K on which are there, though on the M.C. website.
During the course today, we may also discuss certain non-GAAP financial measures reconciliation of these measures to most guilty comparable GAAP measures. Please refer to the schedule to chase earnings release, and they're trying to so what you Dan Glaser, President and CFO of Marsh and Mclennan companies. Please go ahead.
Thank you very much and good morning. Thank you for Tony will discuss our first quarter results reported earlier today.
Dan Glaser, President and CEO Mark look funded.
Turning on the call today's Mark Mcgivney, our CFO.
Most of our businesses.
Mark Peter Hearn as Guy Carpenter marching Salon merger, and Scott Mcdonald of Oliver Wyman.
I also would talk this morning is there with head of Investor Relations.
I'm pleased to report that our first quarter results were excellent.
Right seeing early signs of coal with 19 related headwinds.
Before I get into our results I want to start by addressing the current crisis.
We are living.
We troubling times that are unprecedented in our lifetime.
First and foremost human tragedy would that help their livelihood of virtually everyone around the world is threatened and the ultimate economic impact is still very much on known.
We don't know that next several months and possibly longer will be difficult.
I'm sorry to see is that an all time high.
There is work visibility.
Outlooks have been severely damaged in confidence is down.
Even though it is hard to imagine that's right.
We will see the other side of this crisis.
In the aftermath, there will be a prolonged itself, but I.
I don't think any of US [laughter] returned to license we knew it.
However, recent data shows that our response to the crisis is helping to flatten the curve.
We can already see some parts of the world's take early that sport recovery.
I'm sorry.
We're working at multiple levels, you've got the global economy working again.
Underpinning our work is our interaction with governments and clients, including banks insurance companies that all facets of the global economic infrastructure.
Navigating the current period is counting for all enterprise.
Yeah, Mark Mcpartland has proven to be resilient solved and unique.
We will learn and improve as an organization during this difficult period.
Funded has never been flatter faster or more connected than we are today and I ask that some of how we are adopting through this period will benefit us over the longer term.
I wanted to share some insight about how we are operating in the crisis.
The safe and well being of our colleagues. It's our first priority we moved quickly to suspend travel implement work from home and put in place flexible work policies.
We have a world class executive team, which I'm incredibly proud to lead.
The watch the stack our colleagues who have rallied in their support of each other and our clients.
Over the last decade, we've invested significantly in the infrastructure of our business across the world.
We are a globally integrated.
In terms of systems and processes.
[laughter] proving invaluable in our response to this crisis.
Within <unk>, we were able to pivot close to 100% work from home with over 70000 concurrent remote connections across the world and virtually no disruption in our business and our ability to serve clients.
In fact, we've been number of recent new business wins, where nobody met in person.
We entered this crisis in a position that's right.
Focused on delivering reasonable financial performance in the short term, while supporting our colleagues and positioning the farm for the mid to long term.
We've made several decisions reflecting this approach.
In mid March we committed that while we are in that it could this crisis, our colleagues jobs or door.
We also said about $5 million supports fun for colleagues didn't need as well is committed to matching sourdough charitable contribution.
Our decision, but colleagues since the first is guided by our values and aspirations as a company.
Doesn't mean, we're being complacent on cost reductions during this period, it's simply the right thing to do.
It also speaks to our confidence in the strength of our business, which will rebound in the global economy in schools.
We have moved back non essential dispensers and reduced capital expenditures.
Well, obviously see meaningful decreases in DNA.
We are taking grouping necessary actions to manage expenses, but at the same time, we're still focused on positioning for the long term.
An example in early April we closed another terrific acquisition in that night, Stearns Cold and will operate as the Midwest Regional headquarters.
Hi.
So far in 2020, we announced three and then they acquisition and then just 10 years M.L.A. has grown into a leading midsize business platform in the U.S.
In 2 billion in revenue was 7200 colleague and 160 offices.
Hi, I'm inspired by the hard work dedication and focus of our colleagues and this unprecedented time.
Their efforts to demonstrate.
It's been character of marketing the funded.
Environment will remain challenging and the duration is unknown, but mark quite an interesting period in a position right now we will emerge on our funds but.
This month marks the one year anniversary of our combination with sales Pete I'm pleased to say the major elements of integration, including integration of colleague Coker and financial systems are behind US we are well along the way on technology.
Our strong first quarter results are evidence that the initial theory to Choppiness suddenly acquisition is over and when you emerge stronger more diverse company with more capabilities and geographic depth.
We are a unified farm globally, we are working as one enterprise smarter more connected and more creative than we were a year ago.
During 2000 times, we continue to innovate for positive change for our clients.
Focusing on shaping the indices and what's the operate.
In health and benefits Mercent, Mark benefits created a kogan, 19th bottle, which is now supporting over 500000 employees in Italy.
The team then develop similar products to support people in more than 30 countries.
All regions working together exchanging findings and school operating as one team around the world.
Our benefits technology Darwin has also proven very valuable to clients, helping them rapidly inventory there pandemic coverage address gaps and deploy creative solutions to their employees.
This access the virtual physical and mental well being services and Tele medicine.
We've also been advocating for the development of public private partnerships around the world.
<unk> pandemic risk.
Bar, some guy Carpenter upbringing policyholders third spend the government together.
Hello, public private partnerships to accelerate economic recovery and its or a more resilient global economy in the future.
Mercer is helping clients it sets up 80 pension costs and funding level, that's been an investment portfolio.
We've been advocating for short term pension funding relief health business is it right near term cash balances and protect jobs.
In Oliver Wyman, we're helping clients with their crisis for spot navigating the impact on demand and supply as well as working through financial and liquidity challenges.
We have developed a proprietary school called a pandemic navigator that helps companies predict future cold 19 development informed by different the person pattern.
And ultimately estimate overall and company specific economic impact.
Uhhuh covers more than 40 countries and all you what state will help our client I had for when and how to conduct business. After the crisis has subsided.
Many of our clients around the world already actively using the tools and accessing our experts, including more than 100 healthcare organizations, several government and public sector entities over a dozen major financial services companies and corporations across sectors.
In summary, I'm proud of how our company is responding to that Craig.
Let me spend a moment on current PNC insurance market conditions <unk>.
You see insurance pricing continues to increase.
MRC Global insurance market index increased 14% versus 11% in the fourth quarter and 8% in the third quarter Global property insurance is up 15% in global financial professional lines were up 26% well global casualty rates are up 5% on average.
Keep in mind, However, our index used to large account, that's where we typically earn fees.
All in middle market insurance pricing increase more modestly in the mid single digit range.
Given the losses from the pandemic pricing trends globally are likely to continue.
The range of insured loss outcomes from the pandemic is wide and evolving.
Loss is unique because it is ongoing it will take a long time burts bees fully understood. It affects nearly every country and it also led to a simultaneous assets stop.
What we do know is there will be significant losses in lines such as event cancellation travel you know workers' compensation line and political risk.
The potential for other losses.
Interruption or otherwise makes the overall loss difficult to estimate at this time the determination of coverage for the virus will be policy by policy.
Well, we think legislating retroactive coverage at the step too far I went to college, the very notion of insurance.
The decline in exposure units due to the economics fallout from covert 19 will put downward pressure on premiums.
Oh, it will vary greatly by industry and by line of business.
In some cases carriers are offering or considering proactive premium adjustments although to take this it's been limited in commercial lines.
In some markets regulators are looking to mandate response.
Turning to reinsurance the April 1st renewals are largely focused on to pad.
Following a couple of years that were the worse for Japanese typhoon activity experienced in recent times Japanese insurance paid significant increases to secure renewal of their catastrophe excess of loss coverage.
Erased in other lost three lines were stable.
The upcoming killing first renewals are largely focused on south beach U.S. wind exposure. Many renewal placements are expected to take upward rate pressure from continued lost Creek from 27 scene and 28 seen hurricane events.
In addition, reinsurance will be assessing the impact from Kols in 19 related issues.
Overall, the global PNC insurance market it's complex.
Mm issues continue to evolve and this just before we enter the U.S. hurricane season. It is in times like these where our expertise and capabilities are even more critical.
Now, let me turn into our first quarter financial performance, we delivered excellent results in the quarter with underlying revenue growth across both risk and insurance services and consulting.
Total revenue was 4.7 billion up 14% four or 5% on an underlying basis.
Underlying growth was strong in both segments with our is up 5% and consulting up 3%.
Adjusted operating income increased 15% versus a year ago to 1.2 billion.
The adjusted operating margin increased 80 basis points to 27%.
Adjusted earnings per share increased 8% versus a year ago to $1.64 cents.
Second strong underlying growth and margin expansion.
Even though covert 19 will impact towers, though for the remainder of the year. Our strong first quarter performance is evidence that we entered this period in a position of strength and able to manage through a difficult environment.
Moving to onto an update of our expectations for 2020, the current situation, it's still evolving and it is uncertain, how deep and prolonged downturn will be.
Our outlook is based on a sharp global economic pull back starting in the second quarter with the global locked out listing in the third quarter, but recessionary conditions persist things through the year.
For the full year 2020, we currently expect a modest decline in underlying revenue.
We are being vigilant and disciplined regarding discretionary expenses, we have strong control over our cost base and have levers at our disposal managed in the near term.
For the full year, if underlying revenue lines modestly we should see adjusted yeah, that's similar range for slightly better.
With that let me turn it over to Mark for a more detailed review of our results.
Thank you Dan and good morning.
Our first quarter results were excellent.
So the current prices when pack outperforming this year, we face is well positioned and strong.
Dan covered the high level results for the quarter. So I will provide some additional details on our results and then turn to updated views on our outlook in capital management.
Looking at risk insurance services first quarter revenue was 2.9 billion up 20% compared with a year ago or 5% on an underlying base.
Adjusted operating income increased 20% to 932 million and our adjusted operating margin expanded 90 basis points to 34.5%.
At March revenue in the quarter was 2.1 billion underlying growth 5%.
Brooklyn, the quarter was brought me and driven by strong new business and renewal.
You Western Canada Division delivered another quarter of strong growth with underlying revenue up 5%.
You listen, Canada has achieved 5% or higher underlying growth in seven of the last few quarters.
International underlying growth was solid at 4%.
Jimmy I was up 4%, representing the highest underlying growth in that region in 12 quarters led by strength in Continental Europe in the Middle East.
Asia Pacific was up 6% on top of 8% in the first quarter 2019. This result is impressive considering the virus impact in Asia in the first quarter.
In Latin America grew 3% on an underlying basis.
Guy Carpenter's revenue was 827 million up 25% or 7% on an underlying basis driven by strong growth in EMEA in North America and Asia Pacific.
Guy Carpenter has now achieved 5% or higher underlying rose nine the last 10 quarters.
In the consulting segment revenue in the quarter was 1.8 billion up 5% compared with a year ago were 3% on an underlying basis.
Adjusted operating income was 289 million in the adjusted operating margin contracted by 80 basis points to 17.2%.
As we mentioned on our last call we expected the first quarter margin to declining consulting due to some quarterly volatility and inclusion of Jltvs employee benefits.
Whose margins historically been relatively low in the first quarter.
At Mercer revenue in the quarter was 1.3 billion with strong underlying rose, 5% continuing the trend of sequential improvement in growth from the first quarter 2019.
Well increased 3% on an underlying basis, reflecting low single digit growth and define benefit and mid single digit growth investment management.
Our assets under delegated management were approximately 267 billion at the end of the first quarter up 1% year over year, but down 12% sequentially due to the decline in equity market.
Hello grew 8% on an underlying basis, the strongest growth since the fourth quarter 2015, reflecting solid performance across the portfolio and career from 2% on an underlying basis.
It Oliver Wyman revenue in the quarter was 511 million, which was flat on an underlying basis. After a good start to the year. We saw the beginning of virus related impact it Oliver Wyman in March.
Adjusted corporate expense was 54 million quarter.
Our other net benefit credit was 64 million in the quarter and for 2020, we anticipate this item will be modestly lower than in 2019.
Based on current expectations, we would assume roughly 256 million for this for a 2020 versus 271 million and 29 team.
[noise] Foreign exchange was a slight headwind D. P S in the quarter.
Assuming exchange rates remain at current levels, we expect FX to be approximately six cents per share headwind for the remainder of the year.
Our effective adjusted tax rate in the first quarter was 23.2% compared with 22.6% in the first quarter last year.
Our tax rate benefited from favorable discrete items, the largest which would be accounting for share based compensation similar to a year ago.
Excluding discrete items are affected adjusted tax rate was approximately 25.5%.
So the current environment is reasonable to assume the tax rate between 25 and 26% for 2020.
April 1st Mark the one year anniversary of our acquisition of jail tea and we are on plan are ahead of schedule on all of our key milestones, including cost savings and restructuring actions.
We incurred 80 million of JMP integration and restructuring costs in the first quarter, bringing the total to date to 415 million.
We remain on track to achieve our guidance of at least 350 million of JLTV savings by end of 2021.
We still expect to incur 625 million of Cashcall 75 million non cash cost to achieve these savings.
Well it remains our expectation that a significant amount of our actions will be taken 2020 current prices could impact timing as we navigate through the near term.
As a result, we can see some shifts in our expectations for integration cost savings between 2020, and 2021, but our current view the impact will be relatively modest.
Our outlook for 2020 has obviously changed in light of concurrent crisis.
We want to share how we think outperformance can develop that have to emphasize we have less visibility into how our results could unfold over the next few quarters then it anytime we can remember.
Our view is based on our outlook today and it goes without saying it conditions could turn out materially different than our assumptions, which would affect our projections.
Dan mentioned, our outlook is based on a sharp economic pullback starting in the second quarter with global locked down Liftings in third quarter, but recessionary conditions persisted through the year.
Based on these forecasts and our internal analysis.
Current view that we could see a modest decline in underlying revenue for the full year with the deepest declines in the second and third quarters.
At March we still see the potential for modest underlying revenue growth for the year, although the second and third quarters will be challenging.
We believe Guy Carpenter, we'll see mid single digit underlying growth for the year with a stronger first half and a weaker second half.
We currently expect our circuits the underlying revenue declined for the remainder of the year and be down modestly for the full year.
Oliver Wyman, we'll see a meaningful pull back in underlying revenue in the second and third quarters, they couldn't be greater than the peak decline we saw the financial crisis.
We would note however that once the financial crisis inside in the global economy stabilized, both Mercer and Oliver Wyman experienced a strong rebound in underlying wrote.
Contemplating this outlook on the top line, we moved quickly to manage our expense base and significantly cut back on every discretionary expense across the firm.
Our earnings will benefit from these actions as well as the continued contribution from JLTV synergies.
Based on this if our revenues in the range that we discussed.
We could see adjusted EPS for the year in the same range were slightly better.
Turning to capital management in liquidity in addition to our existing $1.8 billion credit facility of which 800 million was and you ended the quarter. We recently secured additional borrowing capacity in the form of a new $1 billion line of credit.
This was a prudent steps to increase our access to short term funding given the uncertainty if the current environment.
Our fourth quarter, calling provided an outlook for capital management and that outlook is clearly changed in like the current environment.
While we intend to maintain our dividend it is unlikely we will grow the dividend double digits. This year.
On the fourth quarter call. We indicated we did not expect any share repurchases in the first half 2020.
At this point, we do not expect to repurchase shares this year.
We were most we remain focused on de leveraging although the pace of debt pay down will ultimately depend on our cash flow generation in the current environment.
Total debt at the end of the first quarter was 13.6 billion compared with 12 billion at the end of 2019.
This increase in debt, primarily due to short term borrowings to fund seasonal cash needs, which are higher than the first quarter.
We were also holding additional cash at quarter end to fund the purchase of assurance Holdings and then they acquisition that closed on April 1st.
Our next scheduled debt maturities are in December 2021, 700 million senior notes will mature ended January 2021, when a 500 million term loan comes due.
During the first quarter, we repaid 500 million of debt that matures.
Interest expense in the first quarter was 127 million.
Based on current forecast, we expect approximately 140 million of interest expense in the second quarter.
Our cash position at the end of first quarter was 1.5 billion.
Uses of cash in the quarter totaled 476 million and included 232 million for dividend and 244 million for acquisitions.
Overall, we're pleased with our excellent first quarter results. We are resilient company. We entered this crisis from a position of strength and with that I'm happy to turn it back to Dan.
Thank you Mark.
Operator were happy to take questions.
Thank you and the interests of addressing questions from as many participants as possible. We had asked the participants limit themselves to one question and one follow up question.
Back to ask a question Keith taken out by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is switched off for now your thickness to reach out equipment.
Dan I just I wanted to ask a question when I take the first question from Mike Zinski from Credit Suisse. Please go ahead.
Hey, good morning, and thank you for sort of the you could prepared remarks and the update on that on the guidance.
My first question.
Is regarding your outlook and Oh there.
I guess, you know its revenues to potentially.
The decline by single digits and earnings could very well then potentially.
Also fall by single digits, I think I think has I think that's a pretty good outlook relative to to past recessions or maybe I'm wrong, maybe you can kinda talk through our.
Our our their dynamics different from four Marsh <unk> Mclennan this time around versus.
The past recession or there are there are you is the business less cyclical are there other means more kind of levers in terms of cost reduction efforts that you can call this time around versus versus recession, a decade or a plus ago. Thanks.
Thanks, Mike.
Never thought I'd Miss you guys. So it's good to have some people on the other telephone I'm getting tired of waiting at the same with my team every morning, So but you know every.
Befriend Mike It all has its own unique attributes and while while there are parallels to draw you can't get really focused on you know it was like this last time, so it'll be like at this time I think the important thing is and then see is really defensive and resilient yeah, we're not immune to these kind of.
Pricey, but for us.
In fact dog manifests itself is reduced demand for consulting series or services at lower premium growth duties exposure declined and the explosion declines.
Maybe more significant than they were in the global financial crisis, but on the other had at that point in time rates were generally going down and now rates are generally going up.
It's a recovery faster than we outlined in our in our scripted remarks, then we'll do better than our guidance and if the downturn is deeper and more prolonged well do worse, but the impact on US. We believe is is manageable and what I think about resilient everything about things like you know clients are going to continue to buy insurance.
They're going to continue to renew their health and benefits programs, they're going to do their annual actuarial work and so that kind of hitting the level of recurring revenue recurring engagements that we have in a little slow continue.
We mentioned that Oliver Wyman is expected to see that the most significant negative revenue impact, but keep in mind. The upsize mentioned many times before the cost structure. It Oliver Wyman is more variable than in the rest of the company and so.
You know it helps to mitigate the earnings impact because of the caught the variable.
Cost nature of Oh W. Now if you you mentioned you know the financial crisis and just to.
Go back in time, it'll all right. Yes, then though in 2008 was was it zero they were flat and in 2009 was a minus one.
And the consulting division that actually grew in 2008.
And was down 7% in 2009 and O. W. You know back in the last prices contracted for six quarters.
Consecutively, and then had a a pretty strong rebound after that and clearly when we looked at O.W. now.
Pick a completely different from and.
And certainly has has been our pet lower over that is long dated period. So it might have a follow up yeah. That's helpful. Not my follow up as you know Danny you talked about the extreme uncertainty regarding cobot 19 related losses, and I guess revenue.
Impacts for the entire industry I'm curious what are you guys see a in your teenage seeing an April regarding commercial PNC pricing yet you know it's it is it actually moving higher despite.
The economic pressures to did again certainty.
Maybe if there's any distinctions between M&A and then a kind of small medium sized businesses versus large as clients that that'd be great year. Thank you.
Sure and I I'll hand off to the John and and also to Peter to give some some deeper commentary, but I'll just start by saying.
We're an intermediary where insurance brokers and on the March side of the house, we do everything we tend to negotiate broad coverage terms.
Adds Ed I follow the best buy available sort of thing and that's what we'll continue to do that that's our job and so you know two to us.
We're not trying to strike a balance between insurance companies and at our clients were an advocate for our clients and these are tough times for a lot of our clients and so we're working hard to obtain the best terms possible because nobody wants to be paying premium increases at a time when a when cash is.
Okay, and so where we're really focused on on doing our best and you know, we expect and it's kind of environment, there's a bit of a flight to quality. There's also higher levels of playing the 10-K and anticipated and probably softer new business as we go forward as as we work through but I do want to talk about.
About the overall environment for coated losses, and how you're seeing the market today.
But those were where Ah we're gonna be plugging gone in in its second but what Peter we go to you and talk little bit about the.
Reinsurance size.
Yeah, Dan the you know the reinsurance market pricing was already increasing prior to covert 19.
It continues.
It continues to increase.
And and so we're looking at this.
As a continuation of a market that was already in transition principally in the United States more than in Europe, but I would imagine the advent of covert 19 that they'll be a reevaluation of risk due out reinsurers entire portfolio. So it April one we saw increases in Japanese risks principally based on you know.
Several years Typhoon loss in Florida, No doubt there will be a reevaluation of risk based on the lost Creek from events in 2017 in 2018, which Dan mentioned in his opening comments, but I would say in general the reinsurance market. It is active responsibly in their pricing to our clients faced on exposure of based on loss experience.
And based on their overall relationship with them.
Okay. Thanks, Peter what are the things that that we mentioned in our spread is that.
You know, where we're we're entering the U.S. hurricane season and so.
Market is fragile and you know the one thing that all companies want but in particular insurance companies see.
At some level of certainty with regard to you know what losses happened in how we're starting to impact them and because in a lot of ways premium levels at least on the rating side are determined by pass losses as probably the primary determinant of of what's going to happen to rates in the future is what happened to losses in the past.
And coal, but it's really unique because it is a low developing catastrophe. So we all know what's going to be paid.
But it's in real time right now you know I mean, the loss is ongoing and its global and so on the on that standpoint.
You know clearly we we you know where we're gonna be battling with insurers on our rate levels because in many areas, they're going to be seeking a higher rate levels.
Okay. So next question please.
The next question comes from Jimmy Du Lac from JP Morgan. Please go ahead.
Hi, Good morning, So first I just had a question on your exposure do but then showed sort of the debate that's going on them business interruption.
How do you sort of think about your exposure do you know claims or their client might think they're covered for something and then the they're not I know you had like a half a billion dollars settlement of Alaska about 10 years ago, but can you give us any details on your own liability coverage at redemption or lips.
Hi, Thanks, Jimmy Yeah, I mean, the Alaska situation is completely different from some from this one and so you know really really doesn't apply but no our role in principle focus at the brokers to advocate for separately for policyholders and you know doing our best to obtain.
Broad coverage then in the event the claim assisting them with recovery, you know and and so from that standpoint, that's what we do where on the client side of the table side to develop outcomes and as we mentioned in his script. This is going to be Oh, you know a case by case sort of basis, if there's different worthy gal.
There are some language is much clearer than others and and so therefore, there would be different impacts as we go through advocating for five in terms of our own risk management practices. You know over the last few years, we've streamlined our professional standards. We conducted you know training for thousands of Colleen and we then.
Suited widespread limits of liability so.
You know if they large risk exposure to us. We we are in the business is giving advice, but on that.
But you know I think were entering this crisis with consistent controls and in terms of how we render that advice.
Okay, and then we'll up.
Yeah on that just a different topic can you discuss this in your comment as well, but as the base and obviously you did the viruses and evolving situation, but based on the other deals right now.
Okay, that's probably going to be weak third quarter should be because well do you expect that.
Youre.
Golf and the other dogs to be in the third quarter or is it more likely until do you think you're going to slow need be emerging out of that in the third quarter.
No I say I've seen said the impact you know generally in in into parents do you have delayed impact geared up with.
With the renewal dates and that sort of thing it's not an immediate type of impact I think we're going to feel headwind and parts of our business significant headwinds.
Both in the second engines in the third quarter, and I can't really peg, which one is likely to be more significant you know when when I look at the overall company and as we've described.
Before you know are yet to do.
We probably okay in the circumstances. This year Mercer were thinking you know, it's always been negative most likely for the balance of the year, but overall, we think it's probably a modest declines for the year and they'll be copper pull back to know W. in fact.
At the end, we're very much focused.
Not only in managing this prices to the best weekend, but also emerging from this project is stronger than we otherwise would be and so you know.
Where we're not fighting every end or.
For the second and third quarter, where we're fighting for the next.
Three years, and we're making sure that we're doing the right things now to ensure that we're positioned well.
Next question.
Your next question comes from many screens from Wells Fargo. Please go ahead.
Hi, Good morning on my first question I'm going back outlets as well so like we did too.
Not at declining underlying about how walking pad that.
Yes could decline by tomorrow now so that would imply.
Margins would be fairly stable itself pulled up pretty well for the year I think when it comes on AIDS and I'm thinking about that right and then he then going back to make another called I came back implies a sharper decline consulting so is it like I think that.
More of a margin impact within consulting on and maybe why margins on hold up better during the downside.
Yeah, you [laughter], you're spot on elite and I'll, just say in general we're not really focusing on margin, where we're focused more on on issues around revenue and earnings and margin will will be an outcome of what happened on the topline to a two logs.
Makes sense, but yes, you're right on and thinking that based upon what we said about all right yeah.
It's likely that.
All right, yes is margins.
Hold up and may even improves a bit.
And on the other hand, it's likely that consulting margins based about what we said is going to occur with their revenue outlook are going to reduce then overall company wide you know.
I I can't make a call right now in terms is that I I do know I loved threeq.
And we've had 12 years in a row of margin expansion. So.
We won't give that went up to easily.
Okay. Thanks, I don't like Bucking question on like its you know something that down quarter on.
Sounds like you said in response to previous question, but now that there is a bit of Alas, one a broken side, so sounds like maybe a quarter weaker than the stock buyback themselves some of them.
You called out Oliver Wyman.
Uh huh.
I want media nature, So should we think about consulting.
Kind of falling off in over a couple of quarters.
No in line.
Okay. Thanks, Okay.
Yeah, I think the way to looked at it is.
What's recurring revenue and what's more project related and that has that has more of an impact as to whether something falls and consulting for something falls on the already sites on the side, there's a significant amount of recurring revenue. The parts of Mercer has a lot of recurring revenue as well.
And so both of those are occurring revenue piece is probably have a longer time horizon or a lag effect and so you will see an impact over the second and third quarter.
As those businesses the just.
Area, which has nonrecurring revenue you know it could be some project related consulting in career within Mercer It couldn't be most of Oliver Wyman is project related.
Those will be a factor decline more immediate decline and so you would see right into second quarter those those parts of the business coming off.
Next question please operator.
The next question comes from Greg Peters from Raymond James. Please go ahead.
Good morning, My first question.
Seen a number of companies and insurance industry announced no lay off what is one of your peers as announced salary costs.
And there seems to be a level of social responsibility that is becoming increasingly more important. So I'm curious about how you think that might impact things around cost saving initiatives and synergies.
Well currently and what future eminent.
Well, thanks, guys I mean, it's a it's a really important question that its multi faceted. So let me let me talk about a little bit.
Our perspective, I mean, I, we did talk about both Mark and I said, our visibility into our outlook is uncertain you know so making decisions with so much uncertainty about outlook, it's an easy.
But those decisions are best done with clear eyes, and the collective buds event of the seasoned team. So we spend a lot of time surveying the horizon and in our view as I was just mentioning we're in a resilient business.
Yes, it holds up pretty well.
Oh gosh meaningful pull back.
Well, we expect them to come back Oh, let's see economy recovers and so we've got many different levers on the expense side at our disposal.
We want to preserve flexibility and optionality for as long as we can we want to make decisions based data scenario planning stress testing and we've got all kinds of capability within the firm in order to do that and we recognize that there are different levers to some challenges you know when we think about expense Oh.
And our bonus pool, it's primarily giving us levers to protect earnings and by the way. It just doesn't aside our bonus pool in 2019 was the largest in our history. You know so from that standpoint, you know bonus pool expense costs are going to protect earnings as we go forward to us salary reader.
Since it seems like dividend cuts levers to protect liquidity, it's it's kinda like survival mode stuff and we would you know we oh.
Some other actions you know we secured additional assets liquidity early in the crisis.
We believe that that's going to help manage through most scenarios fit a slowdown in collections impact our cash flow.
And you know as we saw in the financial crisis, there wasn't a slowdown in the collection cycle, but it was temporary you know so solving that issue by reducing pay the awfully blunt instrument and it can have lasting implications you know starting with the notion of scattering roster with your colleagues base.
No not by challenging them you know when they're in this difficult period and the snap back then I will start in college once pay it back again, you know there's just a couple of things that make it really problematic also you know you you can implement that kinda think easily this consultation rules and most.
Countries in so doing some sort of broad based pay reduction programs are very difficult.
And the impact oftentimes will fall most heavily and on fairly on the U.S. population no and so based upon our outlets today levers like pay cuts for dividends are not necessary. We track daily cash activity. So we can get early warning signs that we can reach.
Quickly.
Those levers warranted, but you know I can't emphasize enough.
So we are managing this period is very closely we have never been more connected as an organization leadership team and I meet every day and we are watching new business expenses exposure I think cash flows obsessively as the leadership team and we are calm and we are so you're right in this crisis.
Our intention is that in terms of levers.
To avoid being late in pulling a lever, but also avoid doing something now that is harmful and later proves to be unnecessary.
Yeah I mean.
Yes, I do it right.
I want to give it to the balance sheet.
First the kids two parts the I'm just curious in the White House all these give it back and delayed programs in premiums. If you could address the note receivable balance on your balance sheet and if you have any concerns on that and then in be component I know you spoke and the opening.
Comments about how you took down that $2 billion. The revolver and then you paid off $500 million, but the long term debt payments increased.
Sometimes certain for one at the end the year to 11 231, you I don't understand why the long term debt would have increased when you paid down $500 million. Thank you for your time.
Sure sure let me hand over to Mark will walk you through not only our approached on on accounts receivable role, but what what were looking like on the debt side. So mark.
Sure. It here, there's a lot in that question. So I'll try to hit hit all those all those points.
First just to hit a little bit on on liquidity in the collection side and how we feel position it didn't hit on a little bit of this I mean, you go into a period like this and you pull back and focus on the basis and liquidity and flexibility are definitely on that list and so very early in the crisis we.
Don this from both a financial perspective and an operational.
Perspective, and so I mentioned earlier in addition to our $1.8 billion credit facility. We went almost immediately and on and secured an extra billion dollar short term line of credit just as additional firepower.
Going into this period of uncertainty and remember we had 1.5 billion of cash on our balance sheet of some of that was to pay for the insurance acquisition that we typically run about billions one on average at any given point in time, So we've got substantial liquidity.
Available to us as we entered this period, you know turns of collections and visibility.
We have operationalized around this like you know as I said, we did tighten visibility on the potential for a slowdown in collections and financial crisis, there wasn't one.
And so it's something we could anticipate a you didn't mention earlier, we've invested a lot of globally consistent systems and platforms in the finance area is one of those so having a common accounting platform and financial reporting platform use is very good visibility into accounts receivable balances aging trends and all.
Our businesses are taking and.
Taking advantage of that the other thing were doing is we have pretty good visibility no major countries and just daily cash deposit in cash flow activity and so this is something you know they that you can anticipate and prepare for and whether its financially in terms of flexibility or operationally to try to mitigate any impact.
As best we can we feel a wouldn't feel well prepared just a couple of things on what you said, we still have $800 million its capacity in our existing short term credit facility not even the 1 billion won so so not all of what do you see in short term debt. There is is revolver borrowing and that.
You know the we typically lead free suites on short term debt in first quarter is what we typically see every first quarter first quarter is one we pay out or bonus payments and we found that from short term short term financing as I also mentioned, we're holding onto a little bit of extra cash would be assurance acquisition and then just be increasing.
Long term debt was just a move or we need early in the year just to term out a little bit of the short term financing.
We had a it's a lot of flexibility with building into and have built into our term structure just relating to the debt debt and raised as part of financing jail T. So overall, we we have.
Pretty substantial access to a two short term liquidity and and we feel like we're pretty well mobilized around any risk associated with a delay in the collection cycle.
Our next question please.
[noise] and next question comes can say neat Suneet Kamath from Citi. Please go ahead.
Thanks. Good morning. My first question is around the environment I mean, typically when we would see two large competitors emerging I would've thought that could have created some opportunities for the folks that are not distracted by a large deal just wanted to get your thoughts on that or is that something we shouldn't expect given all the uncertainty related to the.
Kobin 19 pandemic.
Well I'm not going to comment on the potential merger between a on and Willis site.
Leave it to them to comment on it we like our strategic positioning we would not change positions with any of our competitors. We believe that you know where set up a very well we're in the right countries. You've got the highest quality colleague phase, we've got a appliance, which would be the envy of any.
Company in the World and so we think said you know we'll be able to grow substantially in the future based upon the fact that with a leading provider of services around risk strategy, and then people and so we we liked away.
We're set up I <unk> I do know you know, we've we've learned an awful lot about integration activities over the course is the last decade, we've done a number of acquisitions and and of course scale. He was the largest acquisition in our history.
And and you know we had a terrific here a remarkable year in 2019, even though we were doing a it's a lot of integration work and that is down to the quality of the executive team and the matching of poker.
That exist today, where the culture, so were not identical assets to be sure, but they're both high quality, they're both positive there both client focus and so on on that basis, you know I really think that our fourth quarter and demonstrate you know pick that Bob sales he was a.
Well acquisition for Marsh <unk> Mclennan and was a successful integration we had.
5% underlying revenue growth for the firm, but you know more specifically at the places that really overlap the most with let's say, okay, you've got market, 5% Guy Carpenter at 7% and Mercer was 5%, but it was 8% underlying and health and so.
You know the quality of what we've been able to deliver I mean, our adjusted operating income at almost 1.2 billion is a first quarter record for us and so what we're thrilled we were set up throw a wonderful year in 2020 in okay. So so now.
Like the rest of the world, where we're dealing with a crisis, but it doesn't take away from the fact that we are a.
Longer more capable more creative more connected from than we've ever been before.
Got it makes sense and then a quick one for Mark I think you had mentioned.
The debt maturity in early 2021, as well as a some term debt. So just the thoughts on retiring that those those are those debt securities.
Mark please.
Yeah sure. The the short answer is we would expect to you know to pay those off through operating cash flow you know notwithstanding the crisis and okay that the that's changed our outlook the second and third and fourth quarters for us a generally where we generate pretty substantial substantial cash. So we still anticipate that you know this.
Point based on what we see we're gonna have good cash generation through operations for the balance of the year.
Next question please.
The next question comes from sales to find out from Deutsche Bank. Please go ahead.
Yeah. Thanks.
Dan your talks about the expense levels that you have at your disposal to dial them back and trying to do so you know prudent action just given the outlook for where you think you're just things are going I, usually not too far but make sure they're far enough to have a it positive impacts I guess, when we think about be these expense ever done what are the.
Expense leverage you can pull more quickly than others.
And how do you have you saw a bounce.
Extensive which maybe some expense leverage don't come back because it there so easy to dialed down this quickly nor do we really need them as we think about business moving forward.
Yeah, I mean, it's a great question because I think there are certain things that that are occurring which which may actually last longer you know and maybe be permanent debt as we go forward I mean things like flexible work arrangement.
They may put downward pressure on our real estate costs over time not in the short term.
But over time as an organization, we have proven to ourselves into our client. They said that we can work from home, we can work remotely and and do it effectively so there isn't an awful I mean I, absolutely believe that more agile environment more digital are going to be a part of our.
Sure and and that would be a real positive sign in terms of expense levers. There. There's several that you can pull I mean, I I start from the idea that.
We have a very significant bonus pool that I mentioned before there's last plenty 19, our bonus flows.
It was the largest level in the aggregate in our history as as a company and it's it's all here to net operating income. So we are our our team you know deep within the organization.
It's very aligned with shareholders and very aligned with the net operating income of the firemen. So it'll be geared. It is that why is dropping while the bonus pool the top with it and that's a wonderful lever because its variable it's variable for a reason and.
And though we are there the other thing I would say.
You know where people business then you Hey, why you may have less its first and in a.
In a recessionary environment, you still have its person and we saw it in other recessions and you know we do not habits hiring freeze in fact, where we're hiring people every day, but we'll look to control our hiring and well make sure that our executive team is very involved in making the decision.
So that we want to make a but we'll manage our especially in that way and have some more control over that.
Clearly some significant pull backs in the U.S, so and so contractors and things like any and have fallen away a lot of marketing spend but you know things like conferences and meetings have been overtime. You know all things said that we have as.
As levers, which have largely already been been pulled to some extent then you can always go deeper there, but were comfortable and was and how were set up I mean as at the end. We said that we think that that our overall revenue might be down modestly as a company for the year and if so that our over.
All right, yes, it would be down modestly as well, but it might be slightly better than what our revenue.
Good so.
I I mean, other anything like that whole thing.
Just a quick ones that when you talk about B B P.S. being.
Down modestly to it's not like we that's correct based for that as the forces fees of 2019, adjusted EPS is that correct.
That's correct.
Okay. Thank you Sir.
Thanks.
I'd now like tend to call back over to Dan Glaser, President and CFO of Marsh and Mclennan companies for any closing remarks.
Yes, hi, Thank you operator, and I like to thank everyone for joining on the that's on the call. This morning.
In closing I want to applaud the tireless dedication of our 76000 colleagues worldwide and the important role they play supporting their colleagues clients in local communities.
I'd like these tests that food character of an organization and the strength of individuals and what I've seen from M.C. These past few months has done nothing sort of amazing.
So thank you all and have a good day.
That concludes today's call. Thanks for your participation you may now disconnect.