威達信集團 (MMC) 2006 Q2 法說會逐字稿

Welcome to MMC's conference call.

Second quarter 2006 results financial results and supplemental information were issued earlier this morning.

They are available on MMC's web site at www.MMC.com.

Today's conference is being recorded.

Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties.

In particular, references during this conference call to anticipated or expected results of operations for the remainder of 2006 and for 2007 are forward-looking statements, and MMC's actual results may be affected by a variety of factors.

Please refer to MMC's most recent SEC filings as well as the Company's earnings release, which are available on the MMC website for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

I will now turn the call over to Michael Cherkasky, President and CEO of MMC.

Please go ahead, Sir.

Welcome everyone.

Thank you for joining us for MMC's second quarter 2006 conference call.

I'm Mike Cherkasky, President and CEO of MMC.

Joining me today is our CFO, Michele Burns and Mike Bischoff, our head of Investor Relations.

As I said in the press release, we view our performance in the second quarter as mixed.

We are not satisfied with mixed performance.

It tells us we have more hard work to do.

But, we knew it was going to take more than 18 months to return MMC to the consistent high-performance we expect to achieve.

The second quarter was another step forward with better performance than last year but not as big a step as we had hoped.

Results in the second quarter were generally in line with our expectations, with some very positive trends and two notable exceptions: Mercer HR Consulting and Marsh, most significantly, Marsh Europe.

These two shortfalls do not temper our confidence that we are headed in the right direction or fundamentally change how we expect to perform for the rest of this year and in the future.

Compared to the problems we faced last year, the challenges we faced in the first half of this year are more easily diagnosed and are being fixed.

More significant and very encouraging are the positive trends we see in the rest of the Company.

Let me start with Marsh.

Looking back over the last 18 months, Marsh has accomplished a great deal and its recovery continues.

The quarter marks the third consecutive quarter of earnings and margin improvements for Marsh.

We also see a resurgence in new business development.

This has been the last aspect of our North American business that we are waiting to recover.

Global new business production is up 8% in the second quarter.

We are particularly encouraged by new business in the U.S., which increased 18%.

Marsh's international operations outside of Europe saw strong growth in new business development and Europe maintained its high level of new business production.

Marsh continued to work to stabilize its client base.

In the U.S. - a market which until this quarter we considered more at risk - has seen a year-over-year increase in retention rate over the last three quarters.

Unfortunately, retention rates in several markets within Europe were unexpectedly weak for Marsh.

Part of the weakness was a decline in commercial insurance premiums.

But most of our weakness was in retaining business in Continental Europe.

Overall, we expected a higher level of profitability from Europe in the quarter.

To improve our performance in Europe, we're putting in place some of the changes that have worked for us in the United States.

We've also made a number of management changes in Europe.

Most notably, Alex Moczarski, a 12-year Marsh veteran with 27 years in the industry and vast international experience, was named President and CEO in charge of Marsh's operation in Europe, the Middle East and in Africa.

Alex did an outstanding job as the head of Marsh's international specialty operations, which include Asia-Pacific and Latin America.

We're confident that Alex will be an outstanding leader in Europe, and he will accelerate Marsh's drive towards global integration, seamless collaboration, and efficient, scalable growth.

Overall, we are encouraged by the trend of Marsh's client retention levels in the U.S. and by the global increase in new business development.

As we continue this process, Marsh expects to move from underlying revenue being slightly down, as it was in the first half of this year, to flat to modest revenue growth in the second half.

We're also pleased that Marsh has hit significant savings targets under the two restructuring programs in the last 20 months.

Michele will give you more detail, but let me point out that we are realizing all the expense savings we had previously communicated to the investment community.

In sum, Marsh's primary focus over the last 18 months has been appropriately on the crisis that threatened Marsh North America.

We took the necessary steps to rebuild and grow our business primarily in the U.S.

The changes implemented, including enhanced client development tools, process discipline, coordinated placement and advisory hubs, consolidated P&L, renewed industry focus, and better client segmentation, have slowly begun to bear fruit, and we intend to accelerate these gains and use those best practices around the world.

Turning to reinsurance, Guy Carpenter had a strong quarter, with double-digit revenue growth.

Excellent growth in new business reflects the exceptional value the firm delivers to clients and its leadership position in the marketplace.

The quarter continues the strong trend of new business growth that Guy Carpenter has produced since the beginning of this year.

The July client renewals saw rates up sharply for both earthquake and hurricane coverage, while most other coverage remained flat to down.

The effect of the higher catastrophe rates was tempered by limited capacity as reinsurers attempted to diversify their own risk portfolios and our clients increased their risk retentions.

Obviously windstorm activity over the next two months will go a long way in determining future market conditions.

As we had previously indicated, Risk Capital Holdings reduced its revenues from $54 million to $28 million during the second quarter.

We anticipate roughly the same quarterly revenue levels for the rest of this year.

In looking at the Risk and Insurance segment overall, excluding noteworthy items and stock option expense, our margin for the first six months of 2006 was 18.5%, compared with 15.7% in 2005; this despite $43 million less from Risk Capital Holdings and a reduction of about $30 million from MSAs.

That's progress.

As I mentioned, for the remainder of this year we are expecting flat to modest revenue growth at Marsh, a continuation of Guy Carpenter's strong results, and additional savings from our restructuring program.

It remains our goal to have the Risk and Insurance margin, excluding noteworthy items and stock option expense, in the upper teens for 2006.

Turning now to Kroll, we are pleased with the second quarter in terms of both revenue and profitability.

The technology business, which represents half of Kroll's revenue in the quarter, performed well.

We are particularly pleased that Ontrack, Kroll's legal technology and electronic discovery business rebounded, not only in revenue but also in profitability.

Visibility into Ontrack's business pipeline is encouraging.

Corporate advisory and restructuring had a particularly strong quarter, which included success fees from major restructuring assignments.

We believe a combination of revenue enhancements and cost savings should lead to increased profitability in the second half of the year for Kroll.

Kroll appears to be back to what we expected as we entered 2006.

Moving on to consulting, Mercer Specialty Consulting has had double-digit revenue growth over the last three years, and that strong performance continues in the second quarter.

Mercer Oliver Wyman was up 19%.

In strategy and operations, it was up 11%.

Mercer Specialty enters the second half of year with a strong backlog in all lines of business, reflecting a clear demand for its thought leadership, its experienced advice for senior executives, and its consulting services in the field of financial services, risk management, strategy and operations, and economics.

Mercer Specialty has become a premier, go-to global solutions company.

Under the new leadership of John Drzik, we have high expectations for future growth.

Mercer HR Consulting was a disappointment in the quarter.

Its results fell materially short of our expectations.

That said, underlying revenue growth for the quarter was 4%, and 6% up year-to-date.

That year-to-date performance is a major positive and is the most significant growth in the last three years.

This growth is due in part to success in our traditional consulting practices, such as human capital and investment consulting, but also reflects some excellent progress in bundling our products and services in our outsourcing practices.

The profitability for the quarter was undermined by disproportionate expense growth.

As I've said previously, we are investing in Mercer HR for the future.

Some of this quarter's cost increase reflects that investment.

For example, our investment in Mercer Global Investments and Mercer HR Services promise an appropriate level of return in the future.

We will continue to spend in support of Mercer HR's future growth.

What we're not satisfied with - and what we are working very hard to address - is the increase in expenses that will not produce a return in the future.

So what are we doing?

We are making sure our staff utilization is at the appropriate level for our business.

We are looking at Mercer HR's structure to ensure that we are organized efficiently; that the proper infrastructure and resources are in place to support our lines of business; and that we are standardizing process to eliminate duplication.

Mercer HR's management team is in the midst of this review.

I believe that Mercer's HR performance will improve by the end of this year.

Looking throughout our Consulting segment, we believe that Specialty Consulting will continue to perform strongly and that the revenue enhancements and expense control measures we're implementing in the HR area will improve profitability.

Now, turning to Putnam.

Putnam met expectations given the market conditions in the quarter.

Net outflows were $6 billion, but that includes a single $2.8 billion withdrawal associated with ending our alliance with an Australian partner.

Adjusting for the loss of these alliance funds, institutional net flows turned positive in the quarter, reflecting increased sales both sequentially and year-over-year - the best sales performance in over two years.

As a result, Putnam's management believes we will have diminished outflows in the third quarter, marked by positive institutional flows, and net neutral flows by the end of the year.

That will be real progress.

With that, I will turn it over to Michele for more discussions on the second quarter.

Michele.

Thank you, Mike.

Good morning, everyone.

Let me first walk you through our second quarter results compared with the prior year.

Then I will discuss how we have looked at the financial performance of our operations, update you on our restructuring activities, and then give you an overview of our financial position.

In comparison to a year ago, our operating profit is up 15% and our net income is up 4%.

EPS from continuing operations in the second quarter of '06 was $0.31, including $0.05 of net expenses from noteworthy items, which were largely related to restructuring activities.

Looking at last year's second quarter in the same manner, EPS from continuing operations was $0.30 including $0.12 of net expenses from noteworthy items.

Several items make the comparison of this year's second quarter with last year's second quarter difficult.

First, in last year's second quarter stock option expense was not included in our results since we did not adopt FAS 123R until July 2005.

We incurred stock option expense of $27 million in the second quarter of 2006.

Also, the sales of investments from Risk Capital Holdings were significantly below those reported in last year's second quarter.

In the second quarter of '06, revenues were $28 million, compared with $54 million in the last year's second quarter, a decrease of $26 million.

These items, as well as the higher tax rate, adversely affected comparisons for the second quarter of '05.

Taking this into account, we have made progress over the past year.

However, we were disappointed that we did not make more progress in this quarter.

The shortfall in operating income from our expectations was about $40 million and almost equally split between Marsh and Mercer HR Consulting.

As Mike indicated, we are aggressively addressing both of these areas.

We were expecting growth in operating income from Guy Carpenter, Kroll, and Mercer Specialty Consulting.

We are pleased these operations met or exceeded our own expectations.

Based on the decline in Putnam's average assets under management, from $190 billion in the first quarter of '06 to $185 billion in the second quarter of '06, Putnam performed as expected.

Now, let me add a little more color regarding Marsh's restructuring efforts through the end of the second quarter.

This restructuring is substantially complete.

We were pleased that the savings from these efforts have exceeded our original estimates.

When we began implementing the plan, targeted annualized savings for $375 million, slightly exceeding expected costs.

As we've worked through this process, we've continued to refine our restructuring activity, identifying a number of additional opportunities.

As a result, both annual savings and the costs are higher than our original goal.

Annualized savings will exceed $400 million.

Marsh realized about $320 million of savings through the end of the second quarter.

Over $80 million of incremental savings will be realized over the remainder of this year, with a small portion benefiting 2007.

Total expenses from our restructuring activities have slightly exceeded $400 million.

We continue to look throughout the Company to identify areas where we can capture additional efficiencies and expense reductions.

For example, we're looking at areas such as real estate, information technology, and procurement, as well as corporate functions like human resources and finance.

This remains a high priority for us.

Examples of specific benefits that we expect to realize from this review include the consolidation of Marsh's worldwide data centers as well as increased savings from global purchasing programs.

As we continue to fine-tune our organizational structure, we will continue to report on our progress.

Finally, let me say a few words about MMC's financial position.

Liquidity and cash flow remain strong.

During the second quarter, we reduced debt from $5.4 billion to $5.2 billion, and in June, we funded the second installment of $255 million for restitution to policyholder clients.

We will fund the final two installments in June of '07 and June of '08, each in the amount of $170 million.

Total net debt, which is total debt less cash and cash equivalents, was $3.9 billion at June 30, essentially the same as the end of the first quarter.

And, net debt over the last year declined by $340 million.

This speaks to our improved financial position over the past year.

With that, I would like to turn it back to Mike.

Thank you, Michele.

Now I would like to open it up to questions.

(OPERATOR INSTRUCTIONS Alain Karaoglan with Deutsche Bank.

Good morning.

Mike, every time we've met you have also impressed on me that it is always all about maximizing shareholder value.

Given where the stock price is and given the fact that in the first quarter Kroll had -- was disappointing.

It has recovered now.

In the second quarter it is the European insurance operation and Mercer Human Consulting profitability.

Although I didn't see it in the earnings number should the Board and you consider corporate transactions in order to unlock the values that are in these operations to either splitting the Company or selling pieces of them?

Wouldn't each segment be better off and more tightly run and the results if they were separately publicly traded?

Than protected under Marsh Mac umbrella?

I don't think so.

I certainly don't think so.

Listen, I think it is our responsibilities to consider all of the different opportunities to maximize value.

I think it is still too early in the recovery process for us to discount what we think is there's substantial advantages of being one company.

I think that they are both synergistically on the sales side and I think they are on the expense side.

I think that while we say this is a mixed quarter and we have some disappointments and I think that we are, clearly -- this is the first quarter of the six that I have done that I will tell you that I am disappointed that we didn't do better.

Because of what our own expectations were.

But having said that, we are going in the right direction.

It is the pace of the change which this quarter was not what we had hoped it was going to be but as long as we keep going in the right direction and we keep thinking that we can, in fact, perform to the expectations that we have in the near future, we are going to continue to do that.

So I think it is too early for that.

And I think that there's greater shareholder value with this as one Company.

So if you think that there is more shareholder value as one Company, Mike, could I ask if you could share with us the financial metric that you want, that the Board wants management to achieve and the ones -- both in the short-term, medium-term and long-term so that -- you mentioned this is the first quarter that you were disappointed but I think so that you can manage expectations better going forward?

You know it's always a philosophical issue about what kind of guidance you give and how much you give.

We think that in this particular period of time where there is some bumpiness, we just need to continue to work.

We manage our business not on a quarterly basis but really on a daily, weekly, monthly basis, to see where we are.

We need to continue to do that.

We need to do those things that will give us the return over a period of time from where we were.

And we don't think it is in the best interest of our shareholders to go into some kind of metrics and announce those.

We just don't think that that is in our shareholders' interest.

If we did we would but we don't.

We do want to be as transparent as we can.

We think we are being as transparent as we can - to the extent that if we think we can give you more information we will.

But we don't think that giving guidance is in our shareholders' value.

That's guidance but financial growth and metrics that you aspire to.

Whether either on return of equity or return on capital margins because, obviously, Mike you must be disappointed by the stock price performance over the past 18 months as most shareholders are?

We certainly take note of it and any time any shareholder loses what they've invested with us and trusted us, that's a disappointment.

But we both - Michele and I - have been around companies for a period of time and you need to do the things that are the right things for the company and not just the short run.

That is what we're doing.

We really are focused on a period of time.

We have gone through three phases here with this Company.

First was to get over the crisis phase.

Second was the stabilization phase and now it is the growth phase.

We think that we are in this growth phase and we had a couple of disappointments this quarter, but as I said, none of those disappointments are things that affect the long-term prognosis of this Company.

David Small with Bear Stearns.

Good morning.

The first question is, Mike, could you just share with us what the substantial benefits are that you just mentioned of being one company in particular?

Maybe you could help us understand the cross -- how the cross selling is working between the different business units and then I just have a follow-up to that.

I think that when you look at virtually every aspect of our business, putting aside Putnam, because Putnam - we have obviously made a determination to hold Putnam as a holding company would hold something.

But the other five companies in some more extent and some less extent have interactions with each other.

When we go out to a client who has just recovered from a major storm we go out as Marsh.

But we also go out and help them with security as Kroll.

We help them with recovery and restoration of their computers systems as Kroll.

We help them with finding people in their HR issues to re-establish their business as Mercer.

We help them with understanding what the risk proposition is and restructuring their business as Mercer Specialty.

Those are things that we think are a value proposition that have enormous opportunities for us in the future as we become more seamless and more integrated.

But there are growing pains.

We saw them in Europe this last quarter.

As you try to integrate the Company, as you try to make it seamless there are going to be issues taking those silos and moving them together.

So we understand the cost but we also are absolutely confident in the opportunities in the future.

Now that really is just the revenue side.

On the cost side there are fairly obvious things that we are in the continued process of doing.

Of having real estate that is more efficient.

That purchasing IT and the other things which are done not as an individual company but done efficiently.

So we think that there are calculable and we've calculated them internally about what those benefits are.

And we are confident that we are going to get those in the relatively near future.

Could we just move on to operating margins in the risk, in the brokerage business?

Year over year, your margins are up there about 200 basis points each quarter.

That would take you to about midteens margins for 2006, not the high teens you were talking about earlier.

So what is going to happen in the back half of the year that would change that and on that same -- along those same lines it does look like even with the restructuring you have done, your expense per employee in the Marsh business is considerably higher than it had been.

It has not come down commensurate with how much revenue has come down.

So I guess could you help us understand -- do you think that the business, the Marsh business has been rightsized enough?

We think that the incremental growth is about 280 basis points and our view is that it's - as we indicated - taking out certain of the things that you traditionally take out, it's at 18.5.

So that is where the combination of Guy Carpenter and Marsh and Risk Capital Holdings, it is about 18.5.

It is one of the issues we look at very closely.

We are not looking to grow this Company's revenue without growing its profitability.

I mean it has been one of those objects of faith here that we are focused on things that drop to the bottom line or if they are not going to drop to the bottom line, initially, will in a predictable period of time.

We think that we will have neutral to some growth in Marsh;

Guy Carpenter will grow and we still think that there will be upper teens.

Is the issue specifically about Marsh?

We are always looking to see how we can be more efficient and how we can do it better.

We think this Company has made enormous progress and that progress is reflected in the continuing growing margins in the Marsh business for the last three quarters which we continue to expect to grow.

Can it, in fact, continue to get better?

We absolutely think so.

Both starting to grow revenues which we think can happen in the second half of this year, for the first time in six quarters, but also on the cost side.

We don't think that that is over.

You can only do so many things at once.

We think that most specifically in technology.

We've invested a lot of time and effort.

It started to roll out in July.

More of it will roll out in August.

Those things will start to come online and we will become more efficient throughout the rest of 2006 and, most particularly, in 2007.

Can I just finish with asking you a question on the numbers?

I know you talked -- could you just help us understand the growth rate for the risk and insurance brokering division for U.S., Europe, and maybe rest of world to help us understand to see more clearly the weakness in Europe that you are describing?

I don't think we have broken that out traditionally.

Mike, have we broken that out?

No.

We haven't done it traditionally.

We will take a look at it.

We do want to make sure that, I know this is -- we really did focus on it.

I will make sure that Mike is available to take your call.

I'm not sure we will give it to you but he will talk to you about it.

Thank you.

Tom Cholnoky with Goldman Sachs.

Good morning.

I was just curious, a couple things.

Number 1, you mentioned the cross sell.

Other companies have mentioned that and actually quantified the impact of cross sell on revenues.

And I'm wondering if you could give us some sense of the impact of cross sell?

As you look at a client and how much incremental revenue are you generating from some of these clients on the cross sell basis?

I am embarrassed to say that we can't.

We don't have the systems that allow us to do that efficiently.

It's mostly by stories and getting examples about this.

We think that this is something that is important to us to be able to quantify and we would certainly hope to be able to do that in the future.

Not in the immediate future, not our first priority in our technology.

But it is something that is important for us to do.

So the answer is I can't.

Well in the future obviously it would be helpful to the extent you can get there.

But I understand.

I guess a broader question is in looking at it and I apologize for the analogy, but I can't think of a better one it seems as though obviously Marsh was kind of like an out of round balloon if you will.

And you are trying to get it so it looks back to the way it should.

And Kroll in the first quarter bumped out a little bit.

You got that back in shape in the second quarter and all of a sudden Consulting and European brokerage bumped out.

I mean what are the risks that we go through or what are you concerned about in the next couple of quarters that could cause this balloon if you will to be out of round again if you fix the European stuff and the consulting?

It seems as though we get these little kind of, as you say, bumps in the road.

Are these bumps going to constantly be there or not?

It's a diversified company and I think the diversification adds a great amount of strength because in diversified companies you rarely have everything -- and I'm going to use your analogy, round.

You always have something that is a little out of round.

Having said that, I think that in the recovery process we have less margin for error.

We don't because of some of the changes in the business model in Marsh, because losing MSAs because you really have limited capital to buy back stock.

You don't have the margin of error that you might have had in this Company earlier.

As that all starts to change, I think our cash position starts to get better quarter by quarter, certainly in 2007.

I think that you get more predictability and reliability and I think it starts to settle down instead of being quite so bumpy.

I think that this is the normal process.

I don't like it;

I wish I were really working hard to flatten that out but I think it is the normal process.

I think when it gets back to being relatively round, we will be able to have something that balloons out and still be able to perform to the expectation of the street.

Thank you very much.

Larry Greenberg with Langen McAlenney.

Thank you.

I would like to go back to the Risk and Insurance Services margin but talk about it a little bit more in terms of seasonality.

Last quarter you were asked about seasonality and I think you said that it is much diminished than it had been historically.

Taking out the noise I calculate this second quarter was about 500 basis points lower than the first quarter.

Is that consistent with your thinking or have you rethought the current seasonality in the book?

First thing, there clearly is when you look at all of it, there is some seasonality.

If I said that there was none, I shouldn't have said it that way.

No.

You didn't say that.

You said it just is down significantly from historical levels, I think.

And just to make sure that you get my view about this, clearly the first quarter in the reinsurance industry -- the January renewal season -- is the biggest renewal and so there is real seasonality there.

The July renewals are big also; but the second quarter is not as vigorous and the fourth quarter is much less vigorous in that business.

So that is where you really get your profitability.

I think historically, in the fourth quarter in Guy Carpenter, we struggled to break even with that business in that quarter just because of seasonality.

So in that business there really is seasonality.

In our European business in the brokerage business there is more seasonality than there is in the North American business with again January being a disproportionate month.

July is a pretty big month too but the second quarter is not as vigorous.

The North American business has less seasonality than either of those - the reinsurance business or the European brokerage business.

What we have seen in Marsh, specifically, was measuring it apples to apples with the quarter in 2005 which is basically the same is that it causes us to say we're disappointed in our European - mostly our continental business.

Mostly a couple of countries.

And that is disappointment.

But we are pleased with the North American business specifically because our margins are up, our new business sales are way up and our retention is up over 2005 in the second quarter.

So that is where we are coming from and why we are saying what we're saying.

You refer a lot to new business but we really don't know what new business represents in terms of total revenue.

Can you give us some color on that just to give us some idea of how much new business really moves the needle?

We haven't historically.

And we'd have to think about it with some depth about whether we do.

Except to say that it is very material.

I think for all businesses; it certainly is very material in the Marsh business for us.

Material as a percentage of total revenues.

As a percentage of total revenue it is very material.

You don't have perfect retention, obviously.

No one does.

We need to replace that with new business and so, our new business is new and expanded business.

It is very material.

To safely say it's hundreds of millions of dollars over the year, it is certainly safe for me to say that.

Thank you.

Jay Cohen with Merrill Lynch.

Thank you.

In your comments, you said that for the first half of the year contingents were down by $30 million and I had the first half '05 contingents at about $71 million, suggesting first half this year about $41 million; and I seem to recall in the first quarter about $5 million.

I'm getting to, like, $36 million contingent commissions in the second quarter.

Is that correct?

I think your math is very good.

I can't tell you it's absolutely spot on.

But, boy, it is good.

So I look at these margins and in the quarter if you take the contingents where assuming contingents go away was more like 11.9%; and then for the first half, if you take out the contingents and the option expense because that doesn't go away, it was more like 16.3?

I haven't done that math but I will tell you that you've got the math about what the contingents are.

I think you can do that math.

I think it is fair to say that, in the first half of the year, we have $30 million less of income from MSAs and what was it? $46 million less from Risk Capital Holdings.

So for us taking out the $76 million or $70 [something] million and still having our margin going in that sector from 15 something to 18.5, we are pleased with that.

So that is what we've looked at.

We are pleased with that ability to respond to something that we do see as gradually going away.

There are going to be ups and downs with MSAs over the next year, and they will slowly dwindle and one quarter they will have them and the next quarter they will have much less.

When you initially talked about high teens margins in this business, I guess for this year, were you including some MSAs and were you including the option expense?

We were not including the option expense.

We were including some levels - a reasonable level of MSAs.

Yes.

The option expense is not going to go away.

That will continue?

That's true.

It is just to try to look at it historically, and maybe that is not a good measurement in the future.

Jay, to be fair, when Mike indicated that goal, it was in March of '05 and the industry was not required to expense stock options and so it is consistent with our rhetoric over the last 18 to 20 months.

The other thing I would add is that your calculation - while you are welcome to do it on MSAs, these are revenue dollars.

They don't drop down just to operating income.

We have issues with regard to bonus, where we have investments based upon our revenue.

We are cognizant of all of these issues and so that is why Mike said he would not do the calculations the way that you did.

But we certainly provide all this information.

Thanks for the clarification Mike.

Meyer Shields, Stifel Nicolaus.

Good morning.

Can you talk about the marketplace realities in Europe that are translating into lower client retention?

I think it is really continental Europe.

We actually did quite well in the UK; and we have made a couple of management changes in both Italy and France which were where we had the most difficulty.

And I think it had to do with, in part it has to do with just not getting it right and there were other countries we didn't get it right in.

In part it had to do with this Company is moving to an integrated, hopefully, a relatively seamless model.

That's something that is hard to do.

When you've had businesses that have been built historically by acquisitions and they have their own way of doing things, trying to say, "We are going to do it in a more consistent way," causes some tension and some issue and we've had some of those.

To say that we are going to report finances same way.

We're going to do compliance the same way.

We are going to go to clients the same way.

Again those are the right things in the long-term but it is not easy to do.

And I think that some of that caught up with us in Europe over the last quarter, certainly.

Does that mean that clients aren't getting the service that they need and that's why they are leaving?

Or producer defection?

I'm not sure I understand exactly what it is that is causing it.

I think it's probably a people issue.

I think it's people who are focused on the changes in our structure and not as focused on going out and working with our clients.

I think that is really overwhelmingly the issue.

Some of the things that we've done so well in the United States, to in fact indicate the value proposition we don't have online in Europe.

One of the things we clearly have been hurt in Europe with is pricing where people have come in and taken our business by undercutting us substantially in price.

We haven't been willing to be as competitive about that and what we have to do is convince our clients why they should stay with us even though we are a higher price.

And it is a value proposition.

We think it is a whole range of risk solutions that we provide and we are not actually as capable or haven't been as capable of doing that in Europe, as we have been in the United States.

But we have great confidence that Alex Moczarski understands the issues.

We've changed leadership in both France and Italy.

We got people who we think understand how we need to do it, how we are going to do it on a global basis and those are issues that we think we've addressed and over a period of time, we will get to where we are honestly in some other areas of the world.

Okay.

And if I can turn to North America for a follow-up.

On the first quarter call Brian Storms talked about having significant pricing power.

How long did that take to play out?

I don't remember it exactly what Brian said about that.

I think that it is always important for us to make sure that we are doing everything we can for our clients; and I think one of the hallmarks is doing it for our clients and not for us.

That's why we structured the way we structured.

That's why we put in the compliance the way we put it in to use the buying power of MMC and Marsh to get the great deals for our clients.

So I think it that is what he was talking about.

Bill Wilt with Morgan Stanley.

Good morning.

I just wanted to confirm a response to an earlier question that management doesn't think it is in the best interests of its shareholders to provide financial guideposts.

Not earnings guidance but forward-looking financial guideposts to gauge performance?

It depends what we mean by guideposts.

We clearly don't think that we should provide specific earnings estimates on a quarterly basis.

We clearly don't think that, particularly in the position that this Company is in as it recovers, is something that we think we should do.

We certainly do note some of the disconnect between us and what has been the estimates.

I also would point out that this quarter, if you go back to what Michele said, I don't think there was such a disconnect to what we hoped to do and what was out there.

So we don't want people to misapprehend where we are in this recovery and the speed of recovery.

So to that extent that -- gee, we need to do a better job of communicating about where we are going.

Having said that, we still don't want to give specific EPS estimates in the future.

Understood.

Wasn't referring to a specific EPS, but I guess moving on to a part two just also confirming of past comments.

Would it be fair to say that you -- that Marsh doesn't have any -- currently have any technological ability to gauge cross selling?

I think you referred to going by stories and anecdotes.

Its technology is very limited. "None" is probably not fair to the organization, but "rudimentary" is.

It doesn't bring together all of its clients in one area.

It will, very shortly, start to have a one-client coding or at least in most of the major businesses have one client coding which will start to allow you to start the process of understanding what you are doing; and how you are selling into those clients.

But it is something that we are in the process of fixing.

But the answer is, it's very rudimentary right now.

And is there a timeframe you can offer over what you expect to go from something very rudimentary to something that you would -- one would normally associate with an organization such as Marsh Mac?

No;

I think that without giving a specific -- shouldn't give a specific guideline because I don't know it all specifically; but I know with some of the stuff that we're doing, it is still going to take a year or more.

Mark Lane with William Blair & Co.

Good morning.

Two quick ones.

Number 1, can you tell us the trend in U.S. client retention the second quarter versus the first quarter?

Same?

Better?

Worse?

It's not as good as it was in the first quarter.

It is substantially better, materially better than it was a year ago in the first quarter -- second quarter of 2005.

And the thoughts on the slippage sequentially?

Again one of the difficulties that I am learning about this business is that quarter to quarter, it's not something that necessarily computes.

That you really do have to use a year-to-year basis and that is the best basis to look at it, because they just have different characteristics.

If there was something I could say was discernible I will tell you the increase from this second quarter to the second quarter '05 about doubled what the difference between the first quarter and the second quarter.

So it is a much more substantial increase than it is the difference between the first and second.

Do you think you're competitively disadvantaged competing for middle market business in the U.S. because you are not collecting contingent commissions?

Are you losing business because regional brokers that are collecting contingent commissions can effectively underprice you and present a cheaper price to the client?

Yes.

I do.

I just want to make sure that people don't think that is what is this quarter about.

I think this quarter is, we didn't get it right in Europe but is there a competitive disadvantage?

Yes.

But we've got so many competitive advantages that we look at that.

No one has the expertise and the scope and the global reach and no one has the other MMC companies that Marsh has.

We are winning business in North America because of Mercer Oliver Wyman and Kroll and other businesses.

They become part of the strat planning in the go-to-market strategy.

So, yes.

That is something that is not a positive factor for us but not something that we can't overcome.

Thanks.

Keith Walsh with Citigroup.

Good morning.

Mike, I just want ask, following up on the client retention, what is the average price - is it lower or higher to achieve that retention first off?

Secondly for Michele, could just give us an idea of the cash flow the Company has thrown off?

What's the excess cash net of obligations and if there is excess cash why aren't you buying back stock right now?

Michele, why don't you go first?

For the first six months of the year the cash flow of the Company is negative as a result of the restitution payment as well as we paid bonuses in March.

So if you put those two together we have negative cash flow for six months; but that now turns quite positive for the last six months of the year.

So our cash flow is cyclical, usually year in, year out, will be cyclical as a result of the bonus payments that are accrued all year but paid in March.

So you'll see that next year again, because we have a restitution payment as well as the bonus payments.

But for the last two quarters you can see significant cash flow production.

As to your second question, I think we talked about that a little bit.

We've got a significant amount of cash on the balance sheet.

Having said that we have a significant repayment liability in 2007 for some debt that we are basically holding in abeyance, if you will.

So the way I look at the excess cash, I would not at this point in time say that we have excess cash.

We are making modest investments where necessary and in internal areas like technology and external areas, where it's appropriate, quite modestly and we are basically paying down debt and meeting obligations regarding all of our debt service, as well as accelerating debt paydown we're capable, so $300 million of debt paydown in the last 12 months.

And that is the strategy right now for the Company.

To your first question if I understood it, is it about what we are seeing is the pricing in the commercial lines?

What's the price -- like are you guys lowering prices to retain clients?

I think that fundamentally we are looking at client profitability.

So it is on a client profitability basis.

We are not competing to have high-profile clients because we just want to have the name.

I think that that is not what we are doing.

We are looking at client profitability.

For us, it really is to make sure that -- for what Michele was talking about.

We need cash.

We need to, in fact, be profitable.

We need to change the cash flow and the margins of this Company, we are changing them gradually.

So this Company is not going out and competing on price to retain revenue.

We are just not doing it.

I would tell you I think that some are.

I don't think the two largest ones are.

Just a follow-up on that.

If I remember correctly I thought you guys were working on the technology to really measure, effectively, the client profitability.

How are you pricing if you can't measure that profitability accurately?

The old-fashioned way.

With people who have 28 years of experience and having a feel about what sounds good and looks good.

So it's the old-fashioned way and that will end by the first quarter of next year.

We'll actually have in place we think a terrific client profitability system in Marsh.

But we are still doing it the way we historically did it.

We are going to take two more questions.

Jon Balkind with Fox-Pitt.

Good morning.

Just a couple of quick questions.

One, a nitpicky question on Kroll.

It looks like their corporate restructuring business did well.

And I was just wondering what the success fees were in the quarter and how that compares to Q1 or history?

In other words how meaningful was it in the quarter?

And then, two - in terms of the strategy and I think I'm getting this right, your major strategy for the business is to integrate the five discrete businesses outside of Putnam.

I'm just wondering obviously from your comments you are way behind in technology there and that is going to be a focus.

You talked a bit about the training changes you may or may not have made.

Compensation changes to foster this.

And then if the strategy doesn't work or the pain you have to endure like you saw in Europe persists longer than you expect does this hurt the overall value of the Company if you had to affect a restructuring at some point in the future?

Let me just do that one first, then the last point.

One of the things that was always the strategy here, as we came in, was to preserve and reconstitute the great brands of this Company.

If in fact you have great brands with great market position with great global reach with great clientele, and you preserve that, you preserve your value.

That was always the strategy.

The initial strategy was to preserve the great brands of this Company.

We think we've done that extremely well.

We don't think that anything we are doing is doing anything but in fact enhancing those brands.

So this is not something that is an "either/or" and that you either have to make a decision now or you forever lose it.

We don't believe it is that way.

We think, in fact, everything that we're doing is in fact over the middle and long-term going to create great shareholder value.

We are confident it creates great shareholder value together.

We are changing the technology.

We are, in fact, changing the training.

We have new training programs that are rolled out this September.

Even with all the pressure we have for profitability we are rolling out tens of millions of dollars of new training because we are going to invest in those key things that make a difference for us in the future.

We are investing in Mercer in some of the things that, in fact, are going to have a wonderful ability to cross the human capital world.

So we are doing those kinds of things and we are not backing off of that.

And no, we don't think it, in fact, in any way impairs the value if you, in fact, were to have a different strategy.

In fact, we think it enhances that value.

As to the specific Kroll question, these success fees are extremely lumpy.

There is a consistency of their business in that they get success fees.

They get success fees one quarter, and they won't get them the next quarter.

But they are very consistent at getting success fees.

It is just not predictable where it goes.

It is a smaller piece of the Kroll pie as Kroll has gotten bigger and bigger.

This quarter it is absolutely a material element of it.

We wanted you to know it was a material element but as I said, we are confident that in the second half of this year where we don't see success fees we are still going to see improved earnings and improved expense control and better margins.

So that tells you that, yes, it was material, but it's not going to impact us the second half of the year.

And one quick follow-up.

In terms of the senior management team's comp for this year, is that based primarily on an EPS or a margin target or how does the Board look at senior management top?

It is different.

For me, it is EPS and it is over a three-year period of time.

So it is recognition that the Board wants to in fact have a great company this year but wants to in fact have a great company when the three years are up.

I think that with different managers, it is different things.

It's, certainly, Brian Storms - there's some component which says it is MMC-based and then there's a component which is Marsh-based, margin-based for his comp.

Also some of it is shorter-term and some of it is longer-term.

So it is trying to have an appropriate plan with a focus on creating a balance but certainly looking at the middle and longer-term.

Thanks.

Mike Holton with T. Rowe Price.

Good morning.

I want to touch on two things that you have said, Mike.

Cherkasky, that is.

Going back to the guidance issue, I actually think it is in the best interests of shareholders that you all are a bit more granular in terms of sharing with us more of your expectations, because you have said numerous times you thought this quarter was taking a step forward.

You're making progress.

And yet your stock is down 7% and at the same price it was that in 1998.

So I do think there is a disconnect and would appreciate you all working harder on that.

Then, the second thing and here is the question, also, in terms of helping shareholders out on days like this when you are reporting earnings, it would be a huge assistance if you actually had heads of the business units on the phone call to provide a little bit more detail toward some of the questions that are being asked over the course of the hour.

And I'm curious as to whether you would make them available going forward?

We did in the first quarter.

We had Brian on and actually it is my pattern, if you knew about Kroll, that we rotate them through to make sure that there's some granularity about it.

And so I absolutely hear that and we began, because it was the biggest business, we wanted to do that with Marsh.

We will in fact do it.

I don't think in an hour you can possibly have all of the people available.

It just gets too unruly, but I think you can have the biggest businesses and you can rotate them through.

I also am committed to having an investor day so that you have the ability to meet them.

And we think they are an impressive group.

I heard the advice.

I appreciate the advice.

Boy, we are with you.

We don't want to in fact have people have surprises either.

But I also will tell you we don't want to disappoint and I'm not going to stand here or sit here and say that we, in this quarter, we didn't have a couple of things that were not what we had hoped that they would be.

But I hear what you're saying.

I think that we are headed in the right direction.

I think that we've said in the fourth quarter talking about the year that we were looking to get better.

We are better.

We were better in the first quarter.

We were better in the second quarter.

Are we as much better as the market had hoped or we had hoped?

I think the answer is clearly not.

But we are headed in the right direction.

We are going to continue to get better - we're confident about that.

We will work even harder to give you greater visibility.

And, as I said, we are still confident about where we are going to end up and we appreciate your hanging in there with us.

So thank you very much.

Look forward to talking to you soon.

Ladies and gentlemen, this does conclude the MMC second quarter 2006 financial results conference call.

You may now disconnect and have a pleasant day.