MMC
#Okay.
Let me hand off to <UNK> a little bit just to talk a ---+ give you a little bit more flavor on Oliver Wyman, which obviously over the last several years has been our fastest-growing operating company.
But we've said many times in the past it will be our most volatile operating company as well because of the nature of its business.
And then after <UNK>, we'll hand over to <UNK> and just talk a little bit about Brexit and what he's seeing right now within Mercer.
So, <UNK>.
Sure.
Let me give you some context before I go straight to the third quarter.
I mean, Oliver Wyman is a strong business and we're very confident that over time we can grow it at mid to high single-digits, as we've indicated consistently.
However, quarter to quarter there will be a fair bit of volatility.
And the reason for that is that the majority of our revenues are nonrecurring and we need to generate them as new business every year.
So in any one quarter, we can have very strong growth, like you've seen in first quarter of this year or through 2014; but we can also have some downside volatility.
In addition to that, we've had a few very strong years in Oliver Wyman, setting up some pretty tough comparables for us.
But in the third quarter, we will see a decline.
That comes primarily from our Financial Services business, which has grown even faster than Oliver Wyman overall.
And beyond Financial Services, we're feeling only a modest slowdown at this point across the portfolio, driven by the slower economic growth expectations, exacerbated a little bit by Brexit.
We still see very little to suggest this is any structural weakness, and the business still feels very sound.
So we're expecting the dip to be short-term, although it may take a quarter or two to work out.
Thanks, <UNK>.
<UNK>, you want to talk a little bit about Brexit and what you're seeing at Mercer.
Yes, sure.
I mean, I think there is a lot of continued uncertainty, of course, around Brexit and the short- as well as long-term implications of such.
In the early days, as you can imagine, there's a significant amount of discussions that are taking place with our primary clients around things like workforce planning, what's going to happen if migrant issues are resolved one way or the other, what potentially could happen in terms of the investment strategy going forward for pensions.
And all of that we are actively involved in.
Throughout those discussions you can imagine there's a bit of a slowdown in terms of their discretionary spend until the path is clearer and until we have an opportunity to propose some strategy on how to go forward.
But let me clarify that.
Increased uncertainty and market volatility will likely create some opportunities for us and as clients are going to look for advice, of course, to manage in that uncertain world and through the issues.
So in the longer term, we look to develop these solutions, to continue to meet these emerging needs.
And as I said, examples would be the potential changes in the flow of capital investments as well as in regulations with regard to workforce, benefits, and pension coverage.
<UNK>, you want to take that.
Yes, <UNK>.
Just a couple things.
First on the sensitivity: as we said in our 10-K, roughly 50 basis points of discount rate change will have a $35 million or so impact on earnings.
The reason we included the comments on pension is just because it is so topical.
We've gotten a lot of questions from investors, and it's hard to pick up a newspaper without reading something about it, given the low interest rate environment.
So we just wanted to share where ---+ how we're thinking about it right now and wanted to highlight what I just talked about, that we are less sensitive today to interest rate volatility than we were.
If you go back a couple years ago, we closed our largest defined-benefit plan in the UK, we closed our Irish plan, and we made the changes that we talked about to our US plans.
So we have less sensitivity, so that's a factor.
And remember what really matters is the interest rate environment at the end of the year.
So although we've seen a drop in rates here in the first half of the year, just in the US in the last couple of weeks rates have come back a little bit.
And asset values have actually come back off their post-Brexit lows.
So how we're looking at this, we're at the very beginning of our planning process, and as I said a few minutes ago pension expense is just one element of an overall expense base that we manage very actively.
We manage to deliver a great result.
So given where we are in the year, we can see this coming, we can plan under a number of scenarios.
And based on where we see things today, we expect we'll be able to limit the impact of pension volatility on earnings just as we have for the last couple of years.
Excellent.
Anything else, <UNK>.
Thanks, <UNK>.
<UNK>, you want to just take that one.
Yes.
As I said, <UNK>, in past calls, employers continue to look for solutions for long-term health trend reduction, and our Exchange is certainly one of those that we discuss actively.
We're really focused on that and continue to be extending the platform beyond enrollment experience, so it's a full-year platform for employees to consult with.
As mentioned in recent past, we see a lot of interest and a lot of discussions, but I would say that we're experiencing a softer conversion to sales than what we had originally anticipated for this selling season.
We'll see how it comes out completely at the end, but certainly a little bit slower than we expected.
Thanks, <UNK>.
Okay.
We're not going to break out MMA in any kind of formal way.
We have said in the past that our expectation was that it would grow faster than overall Marsh, and that we were comfortable that it was exceeding our expectations on that score.
And it did so again in the second quarter.
I would look at it this way.
That, one, just to reiterate, look over longer periods.
So year-to-date and rolling four quarters are more accurate ways of looking at margin expansion.
And even though we don't unpack pension, it's fair to say pension was a benefit.
But we would have had significant margin expansion in both segments even without contemplating the pension credit that we had.
So I would just look over longer periods as to where the likely run rate of expansion is.
I'll hand off to <UNK> in a second, but projects can be lumpy as well.
So from that standpoint, our capital expenditure over the last several years has been bounded in a $300 million to $400 million annual kind of spend; we're probably still in that area.
Some projects are complicated, and we always prioritize.
The best projects are the ones that are done well, and so that creates a little bit of a gating mechanism which has an impact.
But, <UNK>, do you have anything else to add.
Yes, the only thing I would add, <UNK>, I wouldn't read too much into the slow start this year.
It's more just timing of starting some big projects, mainly on the technology side.
So we had $325 million of CapEx last year.
We'll probably be a little bit less than that; but I still expect up in the high $200 million, $300 million range for the year.
It's a good question, although we certainly wouldn't preannounce anything on a quarterly call.
Yes, but I don't know if you would or not.
But ultimately what you're saying could very well happen.
There could be opportunities in parts of the world based upon uncertainty, whether it's caused by Brexit or other factors.
Clearly macro factors have a role to play in M&A and in continuing M&A.
It's too early in looking at Brexit to see whether there's truly any new opportunities that are going to result from Brexit.
But suffice to say that your basic premise of we're relatively comfortable at our level of leverage now, and that our level of leverage preserves the capability for us to capitalize on opportunities if they may appear sometime in the future, is accurate.
We think we live in a pretty uncertain, volatile world.
And in uncertain, volatile world and difficult conditions, they may be the best opportunities that you ever see.
And we certainly want to preserve the ability to capitalize if they so appear.
Next question, <UNK>.
<UNK>, you want to take that.
Yes.
Again, we could ---+ if we spoke about the US and Canada Division, going into each of its components would take a lot of time and we don't break them out.
There's a lot of businesses.
We have an MGA, we have a technology business, we have Canada, we have the core of Marsh.
There's a lot of businesses in MMA that comprise of the Division.
I'm not going to really comment too much on the next couple of quarters.
Don't think that we will be in the same situation that we are in the second quarter.
Again, each one is different and the prior-year comparables are different.
And each component of the US and Canada Division has a bigger percentage of its participation depending on which quarter.
So again, I just wouldn't over-read into what happened in the second quarter as a trend or that you're going to hear a similar story as we get to the back half of the year.
Yes, I wouldn't think so.
Again, I don't think we have that level of granularity to know what's in a client's mind.
I do believe that it's fair to say, Brexit or otherwise, that many of our clients believe that we are living in an age of risk and uncertainty, and that risk and uncertainty creates a dampening enthusiasm for projects and for investments.
So that has had an impact over the last number of years, I think, on not only our growth levels but on GDP worldwide.
But there was no negative or positive spike that we could actually see as a result of early-stage thoughts about Brexit.
Thanks, <UNK>.
I'll just say it's always funny comparing ourselves back into time.
We are such a different Company than what we were back in 1988 that I am loath to create those comparisons even though we write them into our script.
I would say we're better than at any time in our history.
Because when I look back in 1988, if you look at total RIS it was $1.3 billion of revenue.
So we are multiple times larger and more diverse geographically, line of business, quality, etc.
So this is the new world.
I don't set margin targets.
<UNK> doesn't as well.
We don't believe in them.
We believe that there's something about the human brain that looks at a target as something to reach and then draw back from.
So I would not put any hurdle out there as to what this business could do and how it could perform.
I do know that I'm quite confident that the leading factor in how we will do over time is organic growth.
And if we have good levels of organic growth, we will have good levels of margin expansion, period.
If we don't have that organic growth, then all of our annual and multiyear search for efficiency ---+ obviously that never ends.
We have found different ways of running this business through structure, through delayering, through technology, through better levels of client connectivity to create more ability for us to service clients on an efficient basis.
And that creates a margin benefit to us go-forward.
But do you have any other question, <UNK>.
Okay.
I think we have time for one more question.
Yes, well, it's a question that I'm used to.
Because when I was joining the business in 1982, I was reading articles about brokerage disintermediation that had been written in 1978 and considering: Should I actually join an industry that looks like it's going to go the way of the dodo bird.
The reality is, in an increasingly complex world, the need for advice rises.
These were once transactional businesses; now they are principally advisory businesses with transactional capability.
Big, big difference.
So I would say the broad level risk of disintermediation is quite low.
That's not saying that there's not ways of creating distribution that we as a Company have to be very focused on, whether it's digital, whether it's online, whether it's worksite.
There's different ways of getting to our client base, and we have to be very open to the idea.
And clearly in some parts of segments I feel you'll have multichannels, right.
Whether you look at motor or homeowners or maybe even small commercial, you'll end up having multichannels, which means brokers, there will be direct, there will be affinity.
There will be many different avenues for clients to be satisfied.
The key is: What's the client's experience.
Who provides the best level of comprehensive client experience.
And a little bit less about what the capital behind it is.
It's more about experience.
I would just end with the thought as well, because I recently took a trip to a country which was always very much a nonbroker market which is beginning to turn more and more to a brokered market.
The reality is that more parts of the world have become brokered, because the terms and conditions and the pricing are better in markets in which brokers are active than in where brokers are not active.
So I feel pretty comfortable that we're positioned well, but not secure in our position in the market.
We have to always find ways of doing things better or else, yes, we will get disintermediated ---+ perhaps by another intermediary, but we always have to stay on our toes and do things better.
I think that's it, operator, where we can end the call, because I know we're beyond our hour.
I just want to thank everybody for joining us this morning.
Specifically thank our clients for their support and the faith they put in us, and our colleagues for their hard work and dedication in serving our clients.
Thank you very much.
