Q3 2020 Marsh & McLennan Companies Inc Earnings Call
Mclennan companies conference call today's call is being recorded.
Third quarter 2020 financial results and supplemental information were issued earlier this morning.
Our available on the company's website at <unk> Dot com.
Please note several must meet today may include forward looking statements, including certain expectations related to cause that my team and other matters.
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.
A more detailed discussion of those factors. Please refer to our earnings release for this quarter and to our most recent SEC filings.
Leading our most recent form 10-K, all of which are available on the MMC website.
During the call today, we may also discuss certain non-GAAP financial measures.
A reconciliation of these measures to the most closely comparable GAAP measures. Please refer to the schedule in todays earnings release Oh.
I'll now turn this over to Dan Glaser, President and CEO I'm watching that couldn't companies.
Thank you John and good morning, and thank you for joining us to discuss our third quarter results reported earlier today, I'm, Dan Glaser, President and CEO of Marsh and Mclennan.
Joining me on the call today's Mark Mcgivney, our CFO.
The Ceos of our business.
No I look more Peter.
Peter Hearn Guy Carpenter 14 for long Mercer.
And Scott Mcdonald of Oliver Wyman.
Also with US this morning, as Sarah Dewitt head of Investor Relations.
We are pleased with our third quarter and year to date results, which demonstrate the continued strong execution and resilience of Marsh <unk> mclennan at least challenging time.
The economic impact of the pandemic continues to unfold government swiftly providing necessary.
Earlier, this year and societies adopting as health care professionals continue to drive better health outcomes.
Nevertheless, the consequences are likely to be with us for some time.
This is not a sprint.
Or even a 10-K it is a marathon.
Oliver Wymans pandemic navigator model, an expert currently predicted but even in the more optimistic scenarios, where a vaccine or therapeutic it's hard to develop unavailable. We are still unlikely to return to more normal conditions before the end of 2021.
Marshall Mcluhan and we are prepared for the long haul the company has been resilient amid the challenges of 2020.
We are experiencing one of the worst recessions in history and our performance to date is nothing short of outstanding in the circumstances.
I'm glad we validate our purpose and make a difference in moments that matter, we've done just that by.
The financial crisis.
Expense disciplined across the firm has allowed us to achieve strong margin expansion at 9% adjusted EPS growth year to date.
Our solid earnings growth, coupled with a firm wide focused on working capital is drive insignificant free cash flow, enabling us to increase our dividend complete acquisitions and remain largely on track with our deleveraging plans.
We achieved all this while at the same time continuing to position the company for the long term, we're pursuing strategic hires and see an opportunity to benefit from industry consolidation.
We continue to build out MMA through acquisition was 2020 seeing the most revenue acquired and capital deployed since we launched the business in 2009 and the pipeline is solid.
In addition.
Tunis to benefit from new areas of growth increased our penetration of existing markets as well as the chief higher levels of efficiency.
With the heavy lifting from the jail feet integration well behind US we are connected unified and focused on growth in all dimensions, we are executing well and icy opportunity to emerge from this period, even stronger the crisis proved our workforce as agile and there is opportunity over.
The long term to operate with greater flexibility increase the use of technology reduced travel and shrink our real estate footprint. This will not only drive savings for shareholders, but increased colleagues satisfaction and enhance our ability to bring the best of Marsh Mclennan to every client situation.
In some ways the crisis acted as a natural accelerant for collaboration and cross business activity, we are increasingly bringing together our businesses to help clients. For example, COVID-19 increase the cyber risk profile of nearly every firm and our businesses or.
Working hand in hand to deliver a holistic cyber advisory an insurance solutions to aid in mitigation response and remediation.
We are also bringing the businesses together to help clients address climate risk March 1st consulting Oliver Wyman and Guy Carpenter came together recently help a major international pack analyzed and create a mitigation strategy on climate risk.
Mercer Oliver Wyman and Marshalls consulting continue to come together to assist clients with returned to office initiatives in the face of the global pandemic.
By leveraging their combined data, we're providing clients with operational support predictive models for reopening financial planning communication strategies, an overall benefit reviews.
Underpinning these initiatives is the proprietary data and analytics from Oliver Wyman pandemic Navigator model, which was recently recognized as one of the most accurate predictive models of COVID-19 cases, and fatalities and is utilized by the CDC.
These are just some of the examples of the collaboration and innovation that support our continued growth potential.
Let me spend a moment on current P&C insurance market conditions, the third quarter marks the 12 consecutive quarter of rate increases and the commercial P&C insurance marketplace.
The Marsh global insurance market index increased 20% year over year versus 19% in the second quarter at 14% in the first quarter.
Global property insurance was up 21% and global financial and professional lives were up 40%, while global casualty rates are up 6% on average and worker's compensation pricing remain negative in the period.
Keep in mind, our index excuse to large account business, however, use small and middle market insurance pricing continues to accelerate as well, although the magnitude of price increases is less that for large complex accounts.
Pricing continues to react to multiple external headwinds impacting ensure profitability and this is only exacerbated by COVID-19 losses, which continued to evolve COVID-19 will be a long and complicated loss and the interpretation of various policyholder wordings will be determined in the courts.
Over time.
And reinsurance price increases evidence at the four one Japan renewals at six months, Florida renewals continued until the 10 one renewals.
These were larger increases that of January one, but primarily driven by Los impacted business Guy.
<unk> carpenters use right online index was up 12% year over year in July reflecting reduced alternative capital inflows constrained retrocession, our capacity and traditional reinsurers exercising caution regarding the amount of capital they are willing to expose in the face of wind wildfire and.
Developing COVID-19 losses.
We are currently near the tail end of one of the most active hurricane seasons in U S history with a record level of named storms, making landfall.
While numerous aggregate losses were thankfully not as severe as they could've been.
The PNC insurance and reinsurance markets overall are showing the heightened degree of scrutiny in recent election with continued push for higher pricing.
He advocate for the client we remain steadfast in our goal to deliver the highest quality coverage at the best possible terms in these challenging market conditions highlight the value of the advice and services that Marsh Mclennan delivers.
Now, let me turn to our third quarter financial performance, we delivered adjusted EPS growth of 6%. Despite the global impact of COVID-19, our EPS growth in the quarter reflects great execution on the part of our colleagues and continued expense discipline.
Total revenue was unchanged versus a year ago at 4 billion and down 1% on an underlying basis.
Underlying revenue grew 2% in RIS and declined 4% in consulting.
And rich can insurance services third quarter revenue was 2.3 billion an increase of 4%.
Underlined revenue growth was up 2% in the quarter, reflecting solid growth three percentage marsh and flat Guy Carpenter, which overcame a previously disclosed 17 million one time benefit in the year ago period.
RIS adjusted operating income increased 24% to $388 million and the adjusted operating margin expanded 280 basis points versus a year ago.
And consulting third quarter revenue was one 7 billion underlying revenue declined by 4% for the quarter.
Alison alignment Immerses career business continue to feel the greatest impact from recessionary conditions.
Consulting adjusted operating income declined by 5% of your adjusted margin expanded 20 basis points versus a year ago.
Overall, adjusted operating income increased 9% versus a year ago to $638 million.
Or adjusted operating margin increased 150 basis points to 18.4% adjusted earnings per share increased 6% versus a year ago to 82 cents per share even though the impact COVID-19 may be far from over our strong third quarter and year to date perform.
Months is evidence that we are executing well in this challenging environment.
Given our excellent third quarter performance, our full year outlook has improved.
For the full year of 2020, we now expect underlying revenue to be roughly flat with growth and RIS offset by a decline in consulting.
In addition, we expect to generate mid single digit growth and adjusted EPS for the full year.
With that let me turn it over to Mark for a more detailed review of our results.
Thank you Dan Good morning, we're pleased with our third quarter and year to date results, which demonstrate the resilience of our business as well as how well we are executing through the crisis.
Despite a modest decline an underlying revenue in the quarter, we generated solid earnings growth strong free cash flows and margin expansion both segment.
Overall revenue was flattened third quarter and declined 1% on an underlying base.
Operating income in the quarter was 540 million an increase of 15% over last year.
Just did operating income increased 9% to 638 million and are adjusted margin increased 150 basis points to $18, 4%.
Gas EPS increased to 62 cents in the quarter and adjusted ETS increased 6% to 82.
For the first nine months of 2020 total revenue growth was 3% with underlying growth one person.
Are adjusted operating income grew 12% are adjusted operating margin increased 180 basis points to 23, 8% and are adjusted EPS increased 9% to $3 77.
And risking insurance services third quarter revenue grew 4% to two 3 billion underlying growth 2%.
A decline in fiduciary interest income driven by lower interest rates served as a 100 basis point drag on underlying growth in the third quarter and a 60 basis point drag for the nine months.
Operating income increased 52% to 333 million ajar.
Just did operating income increased 24% to $388 million and the adjusted margin increased 280 basis points to 22%.
For the first nine months of the year RIS revenue was seven 8 billion representing growth of 8% an underlying growth 3%.
And just did operating income for the first nine months of the year was up 20% to 2.1 billion.
At March revenue in the quarter was 2 billion with underlying growth, 3%, representing another solid quarter of growth considering the macroeconomic headwinds.
U S and Canada grew 5% on an underlying basis in the quarter led by strong growth in MMA.
Is march 13th consecutive quarter U S and Canada is delivered 3% or higher underlying growth.
An international underlying growth was 2% with Asia Pacific up, 4%, Latin America of 2% and EMEA flat.
For the first nine months revenue Marsh was six 2 billion with underlying growth 3%.
U S and Canada was up 4% will international was up 2%.
Guy Carpenter continues to have a great year.
Guy Carpenters revenue was $274 million in the quarter, which was flat on both the reportage an underlying base.
As we disclosed previously guy carpenters growth in the third quarter of last year benefited from the true up of a multiyear contract.
Excluding this item underlying growth was 6% in the quarter and reflects continued solid results across the portfolio.
For the first nine months of the year Guy Carpenters revenue was 1.5 billion, 6% underlying growth.
And consulting third quarter revenue was $1.7 billion.
Underlying revenue was down 4% in the quarter, reflecting the impact of the current crisis.
Adjusted operating income decreased 5% to 306 million, while the adjusted margin increased 20 basis points to 18.9%.
For the first nine months of the year consulting revenue was 5.1 billion down 2% on an underlying basis and adjusted operating income declined 6% to $860 million.
Mercury revenue was 1.2 billion in the quarter down 3% on an underlying base.
Well underlying revenue decreased 3% led by a decline in DB.
Within wealth. However, we continue to see growth in the outsource CIO business and at the end of the quarter, our assets under management, where approximately 321 building.
This 5% sequential increase was driven by strong new funding and marketing.
Help underlying growth is flat in the quarter and career underlying revenue was down 11%.
Careers, where we have more discretionary project business, which is seeing the most impact from the crisis.
For the first nine months of the year revenue at Mercer was three 6 billion down 1% on an underlying basis.
Oliver Wyman revenue was $480 million and a quarter a decline of 6% on an underlying date.
This margin improvement from the pace of decline in the second quarter and reflect stronger sales and continued solid delivery projects.
For the first nine months of the year revenue would Oliver Wyman was $1.5 billion, a decline of 6% on an underlying basis.
Turning to corporate adjusted corporate expense was 56 million in the quarter.
Based on our current outlook, we expect approximately $58 million in the fourth quarter.
We had $2 million investment income on unadjusted basis in the quarter and we continue to expect the contribution from investment income for the balance of 2020 will be immaterial.
On a GAAP basis investment income with the loss of $14 million in the quarter, primarily reflecting a change in the market value of our remaining investment and Alexander for.
Foreign to foreign exchange with a <unk> headwind to adjusted EPS in the quarter.
Assuming exchange rates remain at current levels, we expect FX to be a slight benefits in the fourth quarter.
Are adjusted effective tax rate in the third quarter was 26, 5% compared with 25% in the third quarter last year.
Excluding discrete items are adjusted effective tax rate was approximately 25, 5%.
Through the first nine months of the year are adjusted effective tax rate was 24, 6% compared with 24, 3% last year.
And we expect a full year right to be between 25% and 26% due in part to an expected impact from discrete items in the fourth quarter.
Turning to the JFC integration I am happy to report that the bulk of integration activities largely behind us and we have achieved the vast majority of the targeted savings, which is well ahead of schedule.
We occurred 44 million of JFC integration and restructuring costs in the third quarter, bringing the total to date to $516 million.
The remaining work to be done consist primarily of ongoing technology application migration and the further consolidation of real estate, which will continue through 2021.
I want to take a minute and provide an update to our outlook for 2020.
Or 2020 outlook assumes recessionary conditions persist for the rest of the year.
Despite this headwind, we expect RIS to generate underlying revenue growth for the full year offset by a decline and consult.
At March we see underlying growth in the low single digits for Q4, and the full year a solid result in the face of the pandemic.
At Guy Carpenter, we continue to expect mid single digit underlying growth for the full year.
Guy carpenters fourthquarter could be impacted by difficult comparisons to last year, although queue for the seasonally small quarter.
We continue to expect Mercer underlying revenue will decline in the fourth quarter and be down modestly for the full year.
Finally revenue weakness and Oliver Wyman will persist through the fourth quarter.
As we learn to live with the virus, we're progressively moving to a more normal course for business decision.
We expect fourth quarter adjusted earnings will be impacted by sequential uptick in expenses due to a general loosening of spending restrictions strategic hiring and costs associated with employee related activity. It would have taken place over the course of the year, but was delayed due to the pandemic.
Despite this we are raising our adjusted EPS outlook for the year to mid single digit growth. In addition, based on this outlook. We expect our overall margin will increase which would mark our 13th consecutive year of reported margin expansion.
We ended the quarter to $4 billion of cash saw sequential reduction in outstanding debt and have the entirety of our combined $2.8 billion a credit facilities available.
We remain committed to deleveraging and we continue to expect to reduce overall that this year.
Total debt at the end of the third quarter was 12 7 billion down from 13 2 billion at the end of the second quarter, reflecting the repayment of a $500 million one year term loan ahead of its scheduled maturity.
Our next scheduled debt maturities in December when $700 million, a senior notes mature.
Interest expense in the third quarter was $128 million based.
Based on our current out forecast, we expect approximately $127 million of interest expense in the fourth quarter.
While uncertainty remains high in the current environment, we feel the actions we have taken to secure additional flexibility along with our strong performance to date physicians as well to continue to continue to navigate the crisis from a liquidity perspective.
In line with our prior commentary, we did not repurchase any shares in the third quarter and do not plan to repurchase shares for the remainder of 2020.
Uses of cash in the third quarter totaled $295 million and included 59 million for acquisitions and 236 million for dividends.
For the first nine months uses of cash totaled 1.5 billion and included 753 million for acquisitions and 702 million for dividend.
Overall, we are pleased with our third quarter and year to date results. We are on track to deliver a solid year. Despite the ongoing global pandemic.
Ah results reflect the strength and resilience of our company and our colleagues and we remained focused on striking the right balance between delivering solid results today, while continuing to invest for growth in the future with that I'm happy to turn it back to Dan.
Thank you Mark an operator, where we're ready to go to the Q&A.
In the interest of is asking questions from as many participants as possible. We would ask the participants limit themselves to one question and one follow up question.
To ask the question you would need to first start wanting a telephone to withdraw your question press. The pound key please somebody will be compiled Q&A roster.
Our first question comes from Microsoft Iwinski with Credit Suisse Your line or something.
Hey, Thanks, good morning.
I guess I'd love to hear more about parts of the consulting segment that seems to be the area.
With a higher level of organic growth uncertainty, we're we're getting most of our questions and coming from the investors you clearly improved margins there in the segment despite negative organic growth.
Maybe you can talk about.
Some things that drove that the.
Sustainability.
Is there more or less uncertainty minute segment going forward, given the pandemic seems to be causing some some shutdowns again.
In Europe, so broad question.
Yeah sure bike.
Well I'll start by saying.
We're lucky to have a <unk>.
Variety of businesses within Marsh Mclennan.
Mainly consulting as an example, we have businesses, which have high we breezed of recurring revenue such as our health business at our investment business parts of our retirement actuarial business. As an example, we have other parts of our consulting business like merchant his career business and Oliver Wyman, which one of our project.
Space.
Project paid work has an awful lot to do with general economic conditions in business confidence. So it is a natural outcome for us to feel pressure on those businesses in times of recession or at times, where there's a high level of uncertainty, but we can navigate it.
As a total upload again, we understand that businesses, they're terrific businesses market leading.
Tastic businesses and they make the overall company smarter as well so.
Our perspective, it's the grouping together that matters the most.
Certainly businesses that have less to occur in revenue and more project work are under more pressure on times like these and that will continue to that ended up we felt it during the financial crisis and will feel it now now the balance back can be very swift because as soon as the turn happen.
Then companies get back in that business as usual return to growth type of load.
That work picks up now I'm happy to say that both of those businesses.
Are holding up better than during the financial crisis, because in the beginning of this crisis, we weren't sure whether that would be the case or not and it has turned out that those businesses have proved to be more resilient.
They were during the financial crisis.
And if you have like yeah.
Yeah.
I'll I'll switch gears too.
To a property and casualty insurance.
<unk>.
Right increase momentum.
Is is is accelerated and I think a lot of your clients are are seeing double digit rate increases year on year now.
For some of the carrier doesn't seem to be translating into them as much top line growth as we expected even.
Taken into account weak exposures. I mean are you are you guys seeing more of your clients Self-insurer and just kind of you guys have to do more work. There is that is that impacting your marsh and mclennan at all.
Feels like there's the market's just so so tough and challenging in certain places that corporates are you are having to help corporates too.
Offset some of the the pain per se.
Yeah, No. It's a great question and also John and the second to address it because it's really a march question more than a guy Carpenter what.
The market, Scott and while we're on the side of the tub clients and we're advocating for the client during the best we can in the circumstances.
In some ways subtle level the increases in certain parts of the business.
Are probably justified based upon lost levels and a soft market environment environment that had persistent for years, although we don't like the speed of the increases ultimately I don't think that benefit the market our benefits our clients wait is one eight.
Snapped back in such a in times harsh way, particularly in this kind of environment, where clients in certain industries are really feeling a lot of pressure on revenue.
Survival, and then being hit with large levels of insurance increases.
Real tough environment, and we're doing our best for our clients and the circumstances that John what to add to that.
Sure that might get big obviously every transactions got the mix of different factors that drive.
Drive the outcome.
Our clients that they're very very challenging market for them.
Especially given the comic environment.
So.
We have putting aside the price and exposure aspect of.
Drive the ultimate premium.
That gets charged to the client.
Some clients are being forced to retain more risk.
Fewer but whether it's through higher retentions or very very few circumstances, where.
And we can't get Uhm, the limit that we would like or that our client would like but with some level of frequency clients are electing to retain more risk. So it could be a higher retention.
It could be buying lists limit and.
In certain cases for example, the Dino market, where there is a meaningful amount of stress in the U S U K and Australia in particular, some clients are electing to buy a side only coverage or where they do buy some b and C cover.
Take down the limits, where they where they do by being C and so we obviously work with our clients very very closely.
Working hard to present their risks as best we can to drive the best possible outcome and then the other day ma'am I would mentioned as well as we are seeing an increase in the number of captive formations as well. So so a lot of different strategies, obviously, helping helping our clients navigate the market as best we can.
Thank you nice quarter.
Okay. Thank you next question please.
Kind of next question comes from neatly screens name what was your line is open.
Hi, Thanks, Good morning, Uhm My first question again, starting on revenue outlook within Alright, I asked and maybe joining in on March on.
Strong results there I guess given on the backdrop that you want me to to Dan in your opening remarks.
How do we think about like.
You think the queue to in the queue three for that business, specifically I'm talking to March represented that kind of that trough.
Down some covid I know, there's a lot of obviously uncertainty out there, but let me think about the fourth quarter.
I need to 2021, I know you said that these conditions can preset into <unk> into the end of 2021, but how should we think about that that business specifically it seems like it's been pretty resilient and could the Q2 and Q3, the trough and we could we start thinking about things getting better just based off of what you know today yeah.
Okay. So it's a terrific question.
I'll start with it and then I'll hand off to John and it also Peters so they can address it in more depth.
Start by saying.
We're thrilled with Ris's performance and yet they have proved to be tremendously resilient.
Market, leading flight to quality type of that abuse and.
I want to make one point because fiduciary income as often ignore.
Lord in the next year and you've just looked at it ris's underlying growth.
3% in the third quarter, rather than two and 4% year to David by exclude fiduciary income the reality of fiduciary income has dropped in half a year to date, who is $80 million within RIS and Alex $40 million. When you look at our performance snipers topline, but more specifically on the bottom line and over.
Coming the loss of that fiduciary income and growing through it.
And overall terrific performance now getting to your to your real question is like is the worst over I'd have to say, it's really impossible to say, we all want to pay it but it's impossible to say that it's only going to get better from here so much the pain.
Covid and the government response to need economic implications of any government response, and so it's it's really too early to say that we're out of the woods as we mentioned in our remarks, our experts within the Oliver Wyoming.
Who would buy.
Many governments et cetera are really thinking that at the earliest this model return to what feels like normal.
Mmm kind of this time next year and so.
Is a long haul and we have to be prepared for a walk long haul I think that that one of the things that we can say not only as marsh mclennan, but also as a society. We are resilient. We are learning we are adapting and it should get better from here you know 2021 should at a macro base.
Get better from here and as you know many of the so.
Rob notices.
Of 2021 is that recession.
Some time second third quarter of 2021, and so it should be better, but but it's very difficult to call. The trough. What I would say is we will lines through and power through any scenario, we will grow our revenue in almost all circumstances faster.
And we grow our expenses as we've done for 12 or 13 years in a row that will continue with John why don't we start with new and then hand over to Peter.
Yeah. Thanks, Dan.
Look I I was pleased with our results or our team is highly focused in and I'm very very proud of them and and what are very difficult circumstances for folks on a on a personal level, but but also in a very very difficult insurance market R. U S business continues to grow well Dan mentioned Mark mentioned, the the growth of MMA was.
Very strong candidates performing very well, our MGA operations at Victor's, where the largest M. J in the world performing quite nicely internationally I've seen good growth in Asia, and the Middle East.
Africa, Uhm as well and a number of different specialties somewhere under pressure of course aviation and energy as you might expect but been pros growing very well construction actually out a good quarter for US. We we grew nicely credit credit lines as well I mentioned earlier.
With Mike some clients or or.
Deciding to buy less insurance one.
Exception to that is in cyber so our cyber business is growing very very well at the moment and we're seeing particularly in the U S and in the U K, our clients elect to buy more limit there. So.
Dan Pinpointed out it's difficult to project, where things go, but I'm confident in or on our ability to perform relatively well and the other point I would make is just.
Where is deepened as strong as we've ever been from a talent point of view last year was a big year of change for a spring J O T. In March together, we did a lot of work on our culture and becoming a team and we weren't doing it of course in anticipation of the pandemic, but we really were coming together.
Very very nicely at a time when our clients need us the most and so so anyway. The the teamwork. There has been has been outstanding.
Peter.
So Peter I mean, it's hard to talk about potential trough with you at 6% year to day, if that's if that's the trouble.
Any comments Peter.
Yeah as I said before we built a carpenter to produce consistent results regardless of the market conditions and I think we've demonstrated that over the past few years, and well Q3, and Q4 tend to be seasonally small and by nature inherently volatile.
I couldn't be more pleased with our flat result, given the fact that we had this one time multiyear chew up from 2019, plus some negative timing.
And on a normalized basis, we would have grown 6%. So when I look at the year when I look at the environment that we're operating in where there is still a high degree of fear and uncertainty based on both prior years and the unknown relative to COVID-19, I think a carpenter as well position and as I look at our new business growth for 2020 were on.
Track for our fourth year of record new business growth. So overall I feel very good guy carpenters position in the market.
Thanks.
Any follow up.
Yeah. Thanks that was very thorough my next question is on the margin side.
<unk>.
Good margin improvement given the headwinds as well hundred and 50 basis points in the third quarter overall hundred and 80 year to date, obviously, that's a function. Some <unk> some clothing related savings that you guys have alluded to just trying to extrapolate that so uhm 150 in the queue three.
You guys have said.
Marching improvement for the year, so that needs a bit of a range for the.
The fourth quarter to turn out just trying to think about K L. P C as well as some covid pain.
That could per cent like how should we think about kind of the expense Paul file.
And what type of some one time items in the third quarter.
No that is it's another good question and it's a ferret, but because we're basically say we're at 9%.
But just in EPS growth year to date that will be mid single digits of the year for the year and our outlook. So it stores as well what's happening in the fourth quarter. So it's a it's a fair question.
I would just say you know.
There was some loosening of expense control in Q3, and we'll go ahead and that will increase in queue for we are getting back progressively to a more normal pattern of our business and that will mean, so that there'll be more hiring hiring is down. This year are all of the level of turtle.
Over as a company is down relative 50 years, Pat there'll be some employee unrelated actions as we position ourselves for for 2021.
Some picked up demand and some tax up that will happen in the fourth quarter, but have you take a step back from this I just wanted.
To say that every company has sort of a natural kadish to both the revenue and expense and as we have demonstrated over many years, we understand that and so therefore.
And every single year, our revenue growth.
Worked out as exceeded our our expense result.
Look at our typical level of underlying expense growth you live.
The last five years four of those five years that there was 2% expense growth on an annual basis underlying.
Including 2% of 2019 at 2% in the first quarter of 2022% could be looked at as a natural sort of cadence of expense growth and that's why we were having really good.
Resolved over the last couple of years, because we were growing topline at 4% that we were having expense growth at 2% underlying as as an overall company.
The second quarter of this year, we went from 2% growth on expenses in the first quarter to minus five underlying expect growth in the second quarter. So clearly hold back.
Discretionary expect and we set a high bar for what was actually necessary and required in the third quarter that became to my four so.
So that's going to continue I am not going to say, whether it's a minus reminder to buy but it's probably still going to be on my right. So we're not going to grow expenses in the fourth quarter year over year, but our expect grow will sequentially go versus the third quarter, which also went up versus the where we were in the <unk>.
Quarter. So that's about you know the right way to look at it from my perspective.
Next question please.
Our next question comes home soon Stephano, which which bank Caroline is open.
Yeah, Thanks, and good morning, So damned, you've talked about and you I think it was your prepared remarks.
The potential for it and I've taken expense actions that were delayed throughout the year and just thinking about all the uncertainties that we have in the world and I think they're totally understandable and warranted, but what what gives you the confidence or the the thought to start bringing back expenses and and how do we think about.
Unfolding of catch up.
The next year or two as we get to whatever normal is in the in that timeframe.
Well, we all exist in the world right. So at the end you know.
Our performance in Clarksville.
Reflect what's happening with regard for the virus and what's happening with regard from the general economic environment.
I'm, not saying that thing with the virus carpeting material the better I do think that health outcomes are materially better than they were in the early stages the virus.
Not certain healthcare professionals have adapted they've learned.
So oftentimes.
The results have been better hospitalizations are quite not quite a severe fatality globally are generally well that that's not the make.
Nationwide of of any illness illness, as an illness, but I think.
More importantly, the world is learning to live with the virus Covid and so you know investment decisions are being made thoughts about next year and the year. After are being made the idea that the sun will rise.
In the future that is the thought process within within companies and so our feeling is 2021 on a macro basis should be better it may not be materially better but should be better than 2020.
The other thing is we have now two quarters to look at where we were in the thick of this crisis and look how are businesses for Florida.
Our expectations were exceeded on both top and bottom line or consulting business held up if non-recurring parts of it better than our expectation RIS business spoken margin guide Carpenter.
Have done phenomenally well in the circumstances.
And our year to date results very stuff. So that that is our all learning from that and adaptability has given us the confidence to step out a little bit and say okay.
We won't return slowly to normal operations, and we're still largely revolt working.
Progressively moving towards something that can feel a little bit more like normal like for as an example, we do performance appraisals every year year near the end of the year, we're going to do that this year I mean, I will do the same thing and yeah, maybe it will be a little bit more awkward because it's overdue.
Or anything else like that in terms of having discussions, but it's important for people to know.
Either on or off doing a great job or not and so we're going to continue with that the more and more areas.
Then that HR, but but really across the peace digital transformation work.
We're working on.
Further integration activity, we find out is pressing ahead and going forward with some of the things that we delay in this decade and early parts of the third quarter.
Nope, you've got it thank you and I'm thinking about it.
Outperformance at least based on on our expectations for RIS, an organic I was hoping you could just help us think about it.
Economic benefit versus maybe what we feared a couple of months ago versus.
Potential implications from two of your larger competitors going through a merger in any any benefits at that may have.
No I mean in terms of.
As I indicated in my initial remarks, our performance. This year has been nothing short of outstanding and that and.
I'm, saying that as a total company or I guess, maybe in particular are a total comfortable I mean, the the protection of shareholders and the consultant segment in a year, where they are challenged saw the top line.
Is remarkable and appreciated and we're continuing to execute well through merchant road Oliver Wyman, So I think as an overall company.
I said, it's nothing short of outstanding.
Of our competitors, we're running our own right and we are focused on serving clients like never before they need us now more than ever before and supporting our columns and standing up for each other we wouldn't train our strategic positioning with anyone and we believe that we will benefit from consolidation.
As clients and industry professionals consider their options in the future.
Next question please.
Our next question comes from Jimmy Bullard with J P Morgan and let me something.
Hi, good morning, So I have a couple of questions along the same lines as the discussion earlier, but any comments on the project pipeline at Mercer and all of her by them and I think you mentioned you expect negative organic grow with him for cute but.
Based on what you're seeing have these businesses bottomed already or it's hard to say given the uncertainty at the moment.
It's impossible to say.
I think you have to bear in mind that Mercer at all of the Wyoming are quite different in terms of their clients segment.
Part of Mercer end of our team could add add more more details with a part of the merger and the career business is project related work. So in that way similar to Oliver Wyman, which is almost all project related work, but a good chunk of Mercer has recurring revenue.
What a way to RIS until it's not quite as exposed to project working and the vagaries of the economic environment as as Oliver Wyman is but let me let me hand off the first Martine and then Scott to talk a little bit about outlook and project pipeline.
But but I'll start by say, we're in a highly uncertain environment and so therefore, it's impossible to say anything definitively at this stage in terms of trough, where where we go from here, but Marty.
Yeah. Thank you then absolutely. So as you said career as for US is that yeah that is the most discretionary project. So we've seen I've reduced demand there and some of the regular three words and consulting work, but at the same time.
We were able to help clients with their first model, they're returned to work their reinvention that transformation, it's very exposed to the kind of make conditions, though so N ripley's to see that we had a better two three then too too, but we cannot say whether.
The the outcome.
What it will be because of course, it's it's very related to the conditions out there and as we're seeing knockdowns continuing if I paid it to uhm help for example, we we've had aspect of our health business and it's been Super resilient, there's been lots of demand for digital help such as.
R. R. Darwin platform solution I have one entry benefit support from a health and wellness and mental health issues and the like but there's a part of our help business. That's also related to the head counts at our clients and therefore, depending on the level of lay off that <unk>.
You said, we see we see some headwinds and that way, although so far for 2020, it's not been to sit there and and find me on on the wealth business. There's a large part of the well business that is regulatory work that is recurring so it can be resilient, we've had a little bit less project worked as the <unk>.
Markets come down and two three verses the first half of the year, but they're very bright spot is R. M O T I O business or implemented asset business, we've seen improve capital market performance in Q3, but also very strong net inflows and we had seen a very similar pattern during the global financial crisis.
Where when you see but let's say they can't certainty on the market declined one strong governance agility tendon transaction of assets and I'd like to quality. So we're seeing very strong inflows and very strong pipeline buildings in that business. So so that that's that's.
<unk>.
Thank you thank you and.
And the financial crisis, Oliver Wyman decline six quarters in a row, including two quarters at 19% so.
Yeah. This has been far more manageable than during the financial crisis that Scott you'll have to talk about your pipeline.
Sure I'll try and give you some color Jimmy as you know in the second quarter, we had a pretty severe contraction and revenues not as bad as the financial crisis, but like most times of stress. It was really driven by our clients focusing on just immediate emergency issues as they dealt with the the severity of the pandemic.
But throughout I'd say the back end of Q2 and Q3, we've shifted our portfolio to services to help clients manage the crisis think about the future strategic and operational challenges they faced and it's been a really fruitful.
Shift for Us and recent sales would be very strong. We think we think we are improving our competitive position.
And we feel pretty good out there with our clients, but we do need the global economy to get back on track, we need business confidence to remain solid.
And if that happens you know there's no reason, we can't get back to our historical growth rate sometime next year.
Okay. Thank you and just on your reluctance on share buybacks. The theater not that you buy back a lot, but you have bought back some stock each of the last several years. So what's the reason and the results have actually been better than expected. This year. So what's the rationale of reasoning behind not buying back cause it's the macros.
Stock's valuation like deals uhm any insight into that.
Sure, let me hand over to Mark or give me some mark.
Sure Hey, Jimmy.
Actually the whole cash generation capital management story. This year has been a great one for us remember back to some of the guidance. We gave earlier in the year about capital deployment with largely on track. Despite the pandemic with with those plans and if you remember coming into the year the priorities were dividend.
<unk> in the big chunk of deleveraging and as as I said, we are largely on track with all these so we raised our dividend we've got a.
Very active year for M&A. Despite the pandemic is Dan said earlier and I think it is actually remarkable <unk> MMA biggest year in terms of.
Deal value in revenue acquired so we've been active on the M&A front and we're still committed to deleveraging. This was going to be a big year of debt pay down and that's really what you're going to see in the fourth quarter. We may we may actually see a little bit more M&A activity in the fourth quarter, so coming into the year.
We didn't seek share repurchase was.
Was going to be that much in the cards and are we are coming in very consistent with your original plans coming into the year.
Cause I think that will bring us back into the future two or more.
Alex to postpone capital Madison, whereas we've said to you before you know the.
The dividends are a priority dividend relatives a priority.
We put we put acquisitions ahead of sharing purchase and we put share repurchase ahead of building cash on the balance sheet. So 2021, maybe a more than normal pattern for us where you see more of a balanced approach.
Thank you.
Next question please.
Our next question comes from my account so I can be W. Your line is open.
Thanks, Good morning, I don't know if I'm overthinking, this but if you're expecting full year organic rose to be flat overall does that imply that the fourth quarter would have to be worse in the third quarter.
I mean, I think what we were talking giving you our outlook on the top line where.
Basically say Oliver Wyman will remain under pressure Mercer, we'll have a modest decline for the year and probably a quarter. So mercer is continuing.
In the category.
Low single digits negative growth and that all right.
At March Ngai Carpenter will grow in the fourth quarter.
In total although partner would feel more pressure, but RIS as a segment would grow so so I would jump to the conclusion that the top like all that different than what we've been operating of what we did 0.2 is that hour.
Significant levels of expense reduction that we've seen in the second quarter sequentially, a little bit less expense reduction in the third quarter will be less expensive reduction in the fourth quarter and so our expenses will rise.
At a faster pace than than what it has in the rest of the year, but we still expect expect our expense growth in the fourth quarter to be a negative note.
Okay. No. That's helpful understood one of the things done that you mentioned early in the call was strategic hires.
As an example of recovering expenses and I'm, hoping you could talk about that a little bit in terms of the context in terms of I'm sorry in terms of whether that will be something big enough for us to notice.
From our perspective on the outside.
It's not going to be big enough to notice in our credit space. I mean, you look at it we've got nearly 80000 people around the world and if you take a normal you're probably looking at about 10% colleague turnover, which means got engaged.
And people that are going to be coming in for the organization in any given year. So even if we have significant levels of strategic hiring strategic recruitment.
We would absorb it in a regular expense space, so you're not going to see a pop and expenses as a result of that I mean and.
And and a quarter of your mind, but over the course of a year it wouldn't turn it off.
Okay perfect. Thanks, so much.
Thank you for our next question comes from nine to know that some sense.
<unk> okay.
Thank you good morning, and thanks for Sweden me in here.
I guess my my first questions just trying to connect the dots you know I.
Expenses are down nicely this year.
It sounds like you saw spectrum revenue pressuring 21, just you know as as we're still dealing with the Covid environment.
I I would think that would potentially create some expense pressure your over your into 21.
And could you you've managed expenses very very well over the years. So I guess, how how how do you deal with that particular here over your pressure.
According to the next year.
Yeah I mean.
First of all expense growth as a function of revenue growth, we expect our bargains to be up in 2021 for the 14th consecutive year. We expect 2020 wants to be a decent year relative to 2020, because it should just general economic environment shouldn't.
Be better and there should be better health outcomes as well so.
As I mentioned, we're learning to live with the virus more from that perspective.
Time is our friend a little bit so I'm optimistic I think we're all optimistic about 2021.
And performance and will control our expense space of revenue.
Within the overall company.
We look at Ris's, having large amounts of nonrecurring revenue great strategic positioning.
At some point consulting will come back strong whether it's a 2021 or not it's too early to talented it certainly not going to be early in 2021 that we see a massive bounce back because of the the overall environment, but we're we're optimistic I mean I look at this year, we've done better on the top and bottom line and <unk>.
It gives us a great foundation, we are working now to position ourselves for a good 2021, and we're ready to get to it.
Got it.
And then my second question is specific to March if I look sequentially from first quarter second or third quarter. What what are you seeing in terms of overall retention rates, an overall new business generation.
Are you seeing improvement in the new business, maybe and can proving retention rates.
Any color you can also on that would be helpful. Sure.
Had up to John John was dig in there.
Sure Ah client retention is a very strong it's been been strung throughout the entire year and it's better than than than prior year. We had a very strong new business quarter in the first quarter. So we get off to a very good start to the year and then the second and third quarter.
Uhm.
A new business is down slightly year over year, but but again given the external environment. You know very very pleased with the outcome and it's not down you know across the board. So for example, MMA groups, new business nicely and in the third quarter. So so I'm encouraged by by Howard navigating economic challenges.
And I guess, specifically the one on sequential changes because I got that year over year, it's gonna be you're gonna see some pressures, but I'm just curious as to how it's a all can sequentially. You know I don't have those numbers in front of me, but they are you know our quarters or even throughout the course of the year. So I do think that year over year is a is an important.
An important metric.
Clearly we're we're we're we're we've seen more stress on the new business front is in a couple of areas right. It's as you I'm sure would expect construction infrastructure related things transaction risk rep to mourn teeth, Uhm type business, where you know the economic slowdown but.
To lift lesser I'll put in less opportunity for us, but but again I think there's a flight to quality and the more recurring business.
We've seen pick up hopefully.
I also think the way to look at it you are on it.
That new business is relative to other companies veteran install it's just not as strong as it was last year given the overall environment, but still the amount of a new business that then marches winning it's significant.
I think that an hour 10 call back okay.
Yes, I would now like should I call back already banned guidance, President and CEO of marching Mclennan companies Frank closing remarks.
So thank you. Thank you for joining us on the call. This morning in closing I want to thank our 76000 colleagues for their hard work and dedication as we work through these challenging time I also want a snack our clients for their continued support I look forward to speaking with you all met quarter. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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Mmm.
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