威達信集團 (MMC) 2007 Q2 法說會逐字稿

Welcome to MMC's conference call.

The second quarter 2007 financial results and supplemental information were issued earlier this morning.

They are available on the MMC Web site at www.MMC.com.

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 the 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 2007 or subsequent periods 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 Web site, for additional information on factors that could cause actual results to differ materially from those express or implied in any forward-looking statement made today.

I would like to inform you that we are aware of static on the conference call and that we were unable to isolate prior to this start of the call.

As a reminder, today's call is being recorded.

I will now turn the call over to Mr.

Michael Cherkasky, President and CEO of MMC.

Thank you and welcome, everyone.

Thanks for joining us for MMC's second quarter 2007 conference call.

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

Joining us today is our Chief Financial Officer Matt Bartley, and Mike Bischoff, our Head of Investor Relations.

We're also pleased that Michele Burns, our CEO of Mercer Human Resource Consulting, is here as a guest speaker.

Also with us is Marsh's CEO Brian Storms.

I'm going to discuss key elements of the quarter and update you on the Putnam transaction, Michele will provide an overview of Mercer's performance, growth and strategy, and Matt will follow with some additional financial detail and more specifics on the Putnam transaction.

Then we'll all, including Brian, take questions.

Let me start by saying we're generally pleased with MMC's consolidated revenue growth.

Revenues grew 7% in the second quarter from $2.6 billion to $2.8 billion, or 4% on an underlying basis.

This included revenue growth of 16% for the Consulting segment and 2% for the Risk and Insurance segment.

We believe it's critical for MMC to grow our revenue.

I am stating the obvious.

But due to the operating leverage in many of our businesses, after we achieve a certain level of revenue, an incremental increase in revenue becomes very profitable.

So we have been investing in actions that will result in incremental revenue.

And we've made progress over the last 12 months, with more than 7% revenue growth year-over-year.

Profitability, on the other hand, varied among our operating companies, and was hurt by a shortfall in the Risk and Insurance segment.

I want to stress that while Risk and Insurance profitability is not at the levels we want or expect, the shortfalls are understandable and almost a predictable consequence of change and investment growth, and we're going to persevere.

We're going to adjust, but persevere with what, we believe, we are on the cusp of demonstrating, that this is a winning formula at Marsh.

At the same time, profits in our Consulting segment are growing at a very healthy rate.

I will discuss the issues of profitability in more detail when I address the results of each business.

Before I do that, I would like to briefly talk about Putnam.

As you're aware, last week we closed the Putnam transaction.

This is a very important step forward for MMC for a number of reasons.

First, it allows MMC to have clarity and focus as a professional services company in the risk, strategy and human capital space.

Second, approximately $2.5 billion of proceeds are available to MMC to redeploy.

Over the next year, we will repurchase at least $1.5 billion worth of our stock.

This is in addition to our recent repurchase of $500 million of stock.

We will also reduce our net debt by $1 billion and still have the financial flexibility to do selective acquisitions inside our existing businesses.

With our expected improvement in performance in '08 and '09, final payment to the compensation fund from the Spitzer settlement in the spring of '08, and the reduced cost of our restructuring in '08, we anticipate that our financial flexibility will improve in '08 and '09.

Matt will give you more details on cash flow and capital position.

Finally, the sale of Putnam substantially reduced MMC's risk.

We received an attractive price for an asset that might or might not have been fixed inside of MMC.

We wish Putnam and Great-West the best of luck.

Let me turn to the discussion of the individual businesses, and I'll start with Marsh.

Marsh revenue increased 2% from last year on a reported basis, and 2% on an underlying basis excluding MSAs.

This is a strong turnaround from the first quarter.

While not quite what we expected, it's solid progress over last year.

The revenue increase at Marsh was due in large part to a significant improvement in client retention levels.

Marsh achieved a 3 percentage point improvement in the client retention rate sequentially, which completely reversed the decline in the first quarter.

Year-to-year, we achieved an increase of 5 percentage points in retention rate.

Growth in new business also contributed to the stronger revenue picture this quarter.

Marsh's new business grew for the fifth consecutive quarter, led by 36% in Asia-Pac, 1% in the Americas, and 2% in EMEA, which resulted in global new business gains of 4%.

So revenue was better.

But, as I indicated, we had projected slightly better retentions and slightly higher new business sales than our actual performance.

On the expense side, Marsh continued to invest in growth in the second quarter, and our expenses reflected that.

Expenses grew $30 million, or 3%, in the quarter, driven largely by the cost of our growth initiatives.

These included our marketing activities, most specifically our advertising campaign, implementation of new training and development programs globally, investment in process improvements and higher recruiting fees from successful hiring efforts.

We believe these investments are critical to our future.

However, some of the investment expenses, like our recruiting costs, ran higher than we expected.

Of course, this is a clear example of when added short-term cost is an obvious long-term positive.

Additionally on the expense front, we had planned to take out certain expenses as we have begun to complete some of the technology and process projects that are so important to our future.

But a few of these processes have not been completed to our satisfaction.

So for the remainder of 2007, we will be running with some duplicative costs -- costs of the old process, costs of the new process.

This is in the range of $10 to $15 million.

We're still confident we will achieve those cost take-outs in Marsh in 2008.

Finally on the expense side, we see the opportunity in the middle market and consumer businesses as enormous.

We have been even more aggressive in hiring and putting in infrastructure then we had planned.

This also slightly negatively impacted our expenses in the quarter.

On overall profitability, it is worth noting that in the second quarter of 2006, we had $34 million of MSA revenue (company corrected after call).

In this quarter we have none.

In sum, we view the quarter in Marsh as mixed, yet the numbers belie how optimistic we are about Marsh.

We expect Marsh in the near future not just to be incrementally better, but start to accelerate forward.

Why are we so optimistic?

Why do we believe that in the near future Marsh will start to perform much better?

In Marsh, 2005 was a year of survival.

2006 was a year to stabilize and put plans and people in place.

2007 is a year to invest in growth.

We believe everything we have been doing starts to come together for our benefit at the end of this year and in 2008.

What are those factors that come together in 2008?

First, we've stabilized the core of our Marsh brokerage business, and that's the institutional sector.

This sector is more competitive than ever before, but we are largely keeping our clients in this large risk sector, which is critical for Marsh.

At the same time, we've developed a highly segmented offering in both the consumer and middle market sectors.

We're confident that today we provide better service and better value than our competition does in this segment, and that wasn't so one year ago, or even six months ago.

After a tough two years, we have started to win in these segments.

We expect to see double-digit revenue growth in our consumer segment in the second half of 2007, and that by 2008, we will see material growth in the middle market segment.

By 2009 we expect to achieve hundreds of million dollars of growth in these two segments and material margin improvement.

Third, by the end of 2007, we will start to reap the benefits of the big technology investments we've been making in Marsh over the last 24 months.

These investments will give us a more efficient platform, better for our clients and cheaper for us.

And finally, we've turned the corner on attracting and retaining talent.

In the second quarter -- in this quarter, for the first time since October of 2004, we have attracted more client-facing colleagues than we lost.

In fact, we saw a tremendous decrease in the loss of client-facing colleagues to competitors during the first half of 2007, almost half the number we saw last year.

The retention of talent and the influx of new talent does not produce revenue immediately.

Of course there's a lag.

But in the next few quarters we will see these new recruits add value.

We believe that these investments will combine to produce not simply incremental improvement margin in Marsh, but an accelerating improvement that we expect to produce a 400 to 500 basis point run rate improvement over our non-GAAP 2006 margin by the end of 2009.

We expect to have a better second half of 2007 in Marsh, in particular in the fourth quarter.

And we expect our improvement to accelerate in 2008 and 2009.

We believe that any market share we might have lost in 2005 and 2006 in Marsh we can regain over the next few years.

Next, let me turn to Guy Carpenter.

Guy Carpenter is doing a very good job in very difficult market conditions.

There has been softening of reinsurance rates across the P&C lines globally.

Peak pricing for U.S.

coastal property catastrophe coverage occurred at last year's midyear renewals.

We have seen fairly significant price declines this year.

In addition to pricing declines, low loss ratios and strong investment returns in 2006 have considerably strengthened insurer balance sheets, leading to higher risk retention this year across all their lines of business.

Given these difficult market conditions, it's very satisfying to see revenue growth at Guy Carpenter.

This revenue growth was due to very strong new business, which increased 11% in the first quarter and 17% this quarter.

Our margins, however, have been reduced by lower reinstatement brokerage, our continued investment in hiring, and the expansion of our analytical and capital market capabilities.

While we expect tough market conditions to continue in the second half of 2007, we feel good about Guy Carpenter.

Mercer -- now turning to Mercer HR.

Mercer HR Consulting had strong operating performance for the fourth quarter in a row.

While Michele will talk more specifically to these results, let me give you some highlights.

In 2005, Mercer HR embarked upon initiatives that were essential to re-position it for growth.

Last year these investments started to bear fruit.

Specifically, over the last year, we have dramatically benefited from these efforts in Mercer's revenue, margin improvement and profitability.

Mercer has momentum in the marketplace and is delivering strong financial performance.

In the second quarter, Mercer delivered strong revenue growth, 12% on a reported basis and 8% on an underlying basis.

And Mercer saw NOI improvement and margin expansion of almost 200 basis points.

As Michele will discuss, Mercer has a significant opportunity to grow its existing business by aggressively going after new clients, expanding its capabilities, and focusing on geographic expansion.

It's a very good story, and I look forward to hearing Michele tell it.

In May we launched Oliver Wyman's brand for our former Mercer Specialty Consulting business.

The Oliver Wyman name has long represented excellence in management consulting to the financial services sector.

Now the Oliver Wyman name represents that same excellence in management consulting across a wider range of industries and functional capabilities.

Oliver Wyman is a jewel within MMC, and is a business that I'm very excited about.

Oliver Wyman has been winning in the marketplace and has built a strong platform for further expansion.

The revenue growth and the productivity level of Oliver Wyman is among the highest in its peer group, and the business has established a leadership position in several key market segments.

The strong demand for consulting services offered by Oliver Wyman continued for the fourth year in a row.

Revenue of $670 million in 2003 has doubled to almost $1.4 billion for the trailing 12 months ended in June.

This is a great story.

This has led to improved profitability, and we are confident that growth will continue.

Going into the third quarter, Oliver Wyman has good momentum and a robust pipeline.

We expect them to finish the year strong.

Putting our consulting business together, for the first half of the year we have seen revenue growth of 15%, NOI growth of 25%, and margin moving up 110 basis points over last year, and on what is close to be a $5 billion run rate business by the end of 2007.

And we expect our consulting performance to continue to improve, with a material growth in revenue and margin over the next three years.

This is quite an exciting story for us.

Kroll.

Kroll had a reasonable quarter, led by our technology business.

Kroll's revenues declined 4% on an underlying basis, but that is due to the $21.6 million in success fees, mainly from Enron and Krispy Kreme, coming in last year in the second quarter, versus roughly $7 million of success fees this quarter.

Other than that comparison point, the quarter was strong, led by 7% growth in the technology segment.

In fact, Kroll Ontrack had record revenue in the quarter and our background screening business had good growth.

With the continuing of cost discipline, expenses were down on a reported and underlying basis.

In the second half of the year we expect Kroll to perform well, with one caveat; the key challenge will be how quickly our restructuring business can replace the revenue from the completion of major assignments, like Federal-Mogul.

That may adversely impact Kroll's performance in the second half of the year.

Let me look at the Company just quickly in summary.

We're very pleased that we completed the Putnam sale, we are committed to repurchasing at least $1.5 billion worth of MMC's stock in the next year, we're encouraged by MMC's overall revenue growth of 7%, and we're delighted with the continued strength we're seeing in our consulting business.

Marsh continues to be a business that we will invest in for the future growth, and we expect to see an accelerating return on our investment there.

We have confidence in what we're doing and our future.

With that, I'm going to turn it over to Michele, Mercer's CEO, to discuss the exciting things going on within her operation.

Thanks, Mike.

I'm grateful for the opportunity to talk about Mercer today, which some have described as a hidden gem in the MMC family.

I would like to briefly talk about our recent overall financial performance, highlight the businesses within our portfolio, and talk about the positive future we see for Mercer.

As Mike already noted, Q2 was another good quarter for Mercer.

We grew our revenue 12% and posted a substantial increase in net operating income and an almost 200 basis point increase in margins.

Importantly, this was achieved through good performance across the board, with all regions and businesses posting increased revenue and NOI versus prior year.

Building on the strong first quarter, our year-to-date results are also compelling, with revenue up 10% and NOI and margins up as well.

We've now achieved four consecutive quarters of year-over-year revenue growth and three consecutive quarters of year-over-year NOI growth, while continuing to deliver strong cash flows.

This momentum is the result of our strong portfolio of businesses, which I would like to talk about next.

One of the strengths of Mercer is its diverse capabilities.

We've supplemented our traditional core consulting in recent years with investments in outsourcing and asset management capabilities, and those investments are beginning to create real shareholder value.

We bring these capabilities to bear in four strategic areas for our clients -- retirement and investments, health and benefits, talent, and benefits outsourcing.

The retirement and investment business area consists of three distinct businesses -- retirement, investment consulting and asset management.

This portfolio gives us the ability to advise on and implement solutions across the spectrum of our clients' assets and liabilities in a very unique way.

As a group, they represent 39% of our revenue, and revenue increased 13% for the quarter compared to prior year.

Our market-leading retirement business continues to evolve, most notably with our continued commitment to developing centralized service centers to increase efficiency and allow our consultants to focus on our clients' strategic issues.

Our results in retirement have been particularly strong this year in the U.S., in part due to the Pension Protection Act, which continues to fuel strong demand and provide expanded opportunities.

Our investment consulting business continues to grow rapidly and profitably across all regions, with double-digit revenue growth year-over-year and solid new business.

This growth will continue as the business enhances its capabilities in important areas such as alternative investments.

Our investment in asset management is showing real promise.

Assets under management globally in our fund-of-managers model were $16.4 billion at quarter end, up from $10.5 billion a year ago, and the pipeline remains strong.

This is translating into very strong revenue growth and improving economics.

Perhaps the most important development in the retirement and investments business is our renewed emphasis on bringing these capabilities together to provide seamless advice and solutions to address our clients' pension needs.

This is a particularly compelling proposition as clients seek comprehensive asset and liability solutions as an increasing number of pensions are frozen or terminated, with billions and even hundreds of billions of dollars in play.

We believe we have a unique offering in this area given our leading advisory role in the retirement and investment consulting space, coupled with our ability to implement the advice via asset management.

We will continue to actively pursue that growing market.

Next I'd like to talk about our health and benefits business, which represents 25% of our revenue.

Healthcare is, clearly, a major part of our clients' employee value proposition and cost structure, and will continue to grow in strategic importance as clients are faced with rapidly rising healthcare costs.

We were pleased that the second-quarter revenue growth of 9% represents a continuation of the revenue growth we experienced over the last year.

Client retention continues to improve and we've seen strong new business as well.

We also continue to leverage our relationship with Marsh, both as a distribution channel in the U.S.

middle market and via joint ventures around the world.

Our outsourcing business, representing 23% of our revenues, continued its positive trend of revenue growth, up 17% versus the prior year.

The underlying growth is driven by success in U.S.

total benefits outsourcing, or TBO, where we have been consistently winning assignments that include multiple elements of defined benefit, defined contribution, and health and benefits administration.

At the same time, we've been able to minimize client losses.

The business continues to transform into a more standardized, scalable operation, while increasingly leveraging low-cost processing centers.

Going forward we expect to see continued revenue and profitability improvement as we focus on implementing our new TBO assignments.

Our talent business, which represents 13% of total Mercer revenue, is another area that is increasingly relevant to our clients' C-level executives.

The ability to identify, attract, develop, reward and retain talent across the organization is truly strategic in the current "war for talent" environment.

For the quarter, revenue was up 8% versus prior year, despite the conflict of interest concerns raised across the U.S.

market that have led some of our clients to bifurcate board and management executive compensation assignments.

In summary, we believe our portfolio of businesses, coupled with our market share leadership and our roster of over 25,000 clients, including 90 of the Fortune 100, offers a great platform for future growth and profitability.

We have seen significant growth, and we expect this to continue.

We cannot, however, become complacent.

Our markets are dynamic, clients' needs are changing, and we have room for improvement in how we operate.

In particular, we are focused on maximizing the value of our portfolio in several ways.

First, focusing and differentiating the way we go to market with more sophisticated market segmentation and more rigorous account planning and targeting.

Second, enhancing our innovation and solutions capability by managing our products and services in a common framework, and facilitating better bundling of our capabilities into bigger, more important solutions.

Third, implementing a more standardized global client service model through methodologies, pricing models, off-shoring and resource management.

And finally, investing in and developing our most important asset, our people, with more emphasis on training and performance-driven rewards.

If we can achieve these goals, we will continue to deliver value to our clients at the highest level, while performing for our shareholders.

As our investments in asset management and outsourcing generate meaningful scale and profitability, and we enhance our consulting core, we expect to grow our top-line, while targeting continued margin improvements.

Thanks again for your time.

Now I will turn it over to Matt Bartley, MMC's CFO.

Thank you, Michele.

Good morning, everyone.

I plan to discuss briefly a few selected financial topics before we take questions.

First, a recap on second-quarter results.

Earnings per share from continuing operations amounted to $0.25 in the quarter, compared with $0.24 last year.

In addition, Putnam, which represents almost all of discontinued operations for the second quarter, contributed $0.06 to EPS, compared with $0.07 last year.

In total, then, reported EPS from net income was $0.31 in Q2, unchanged year-over-year.

Noteworthy items, detailed on page 11 of the press release, totaled $30 million in Q2, compared with $56 million last year.

These noteworthy items have been trending downward over the past two years.

Excluding noteworthy items, second quarter EPS amounted to $0.35 this year, compared with $0.36 last year.

And, as noted, results for Q2 2006 included $34 million of market service revenue worth about $0.04 per share last year.

Turning to the Putnam disposition, its impact on Q3 results, and use of proceeds, we are pleased that the acquisition of Putnam by Great-West Lifeco closed last Friday, August 3rd.

In our Q3 2007 results, discontinued operations will include two items relating to Putnam -- Putnam operating results through August 2nd, which we expect will contribute approximately $0.02 to Q3 EPS, and, of course, gain on the sale.

As disclosed and discussed, net proceeds to MMC from the disposition of Putnam amount to almost $2.5 billion.

We are pleased that the MMC Board has authorized a $1.5 billion share repurchase program, which we plan to begin executing as expeditiously as possible.

In the current share price range, share repurchase is an efficient use of our capital, and $1.5 billion translates to a significant percentage of shares outstanding.

This authorization is separate from and in addition to the $500 million share repurchase amount that the Board authorized in May and that has now been fully executed.

I'll come back to that share repurchase shortly.

Aggregating the programs, we plan to return $2 billion of capital to shareholders through share repurchases.

The Putnam proceeds will also enable us immediately to reduce debt by $1 billion.

And even after giving full effect to our announced share repurchases, we will be well-positioned to adjust MMC debt levels over time to anticipated growth in earnings and in operating and free cash flows, and to utilize our enhanced financial flexibility, our increasing debt capacity for further capital management actions over time as appropriate and as advantageous.

Now a word on our previously announced share repurchase program.

This $500 million program was initiated as an accelerated share repurchase back in May.

As noted then, it was totally independent of the Putnam transaction, and was supported both by improved operating cash flows across MMC businesses, and by reduced calls on MMC's financial capacity for settlement payments, restructuring costs and long-term pension obligations, all of which needs had required substantial funding in recent years.

The program was completed on July 26, and total shares repurchased under the program were 16 million.

Due to the timing of the accelerated share repurchase, effected midway through Q2, average diluted shares outstanding declined only 4 million, from 562 million in Q1 to 558 million in Q2.

A more substantial effect of that share repurchase will be seen as the number of average shares outstanding declines going forward as the full effect averages in.

Note that the ending shares outstanding at the close of Q2 were 542 million.

And of course, the larger share repurchase program announced today will further reduce the number of shares outstanding, and significantly so, over the coming year.

Next, let me update our revenue and earnings targets originally identified and described at our Investor Day last December.

MMC remains fully committed to the revenue and profitability growth initiatives underway across businesses and throughout the organization.

We continue to expect compound revenue growth of 5% over the next two years.

Through the first six months of 2007, EPS excluding noteworthy items was $0.87, compared with $0.86 last year, this year's number reflecting a delay in the expected improvement in Risk and Insurance Services profitability.

And we assume that the challenging conditions now prevailing in the primary and reinsurance marketplaces will continue.

In the second half of 2007, as we have previously noted, we project modest dilution from the Putnam disposition.

We currently expect EPS growth to resume next year as the benefits of actions taken this year in Risk and Insurance Services are realized, as the profitability of our consulting businesses continues to grow, and as the impact of capital management actions taken to date and announced today flows through to earnings.

And we expect an acceleration of earnings growth in 2009.

From the end of this year through 2009, we are targeting compound EPS growth in the mid-teens.

Finally, let me close with one last note on balance sheet and cash flow.

Our financial position and our liquidity are stronger than they have been in several years.

During the second quarter we funded a $500 million accelerated share repurchase program, as well as the third installment of our settlement obligations under the New York AG agreement.

The final installment, as Mike mentioned, is due next year.

Our net debt increased by less than $400 million during the quarter.

Remember that there is seasonality to our cash flows.

We tend to be users of cash in the early part of the year, and strong generators of cash in the second half.

Even excluding the impact of the Putnam proceeds, we expected to have the capacity both to reduce net debt throughout the balance of the year, as was the case in recent years, and to take capital management actions.

And we see that underlying free cash flow continuing to increase even adjusted for Putnam.

With that, let me turn it back to Mike.

Thank you, Matt.

Thank you, Michele.

Now we will take questions, and I know you all will remember Brian Storms is on the line.

So we'll take your questions now.

Thank you.

(OPERATOR INSTRUCTIONS).

Keith Walsh, Citigroup.

First question for Brian.

Just thinking about the middle market, I think you said last quarter you reallocated about 1500 employees and 12,000 clients.

Can you just give us a little more color on how this is progressing, specifically on new business and client retention?

Then I have a follow-up for Matt.

Those numbers are really accurate; that's exactly what we did.

The segmentation effort in the middle market has been, probably, the most challenging thing that we've done to Marsh in the last 24 months, because it's really required us to look at virtually all aspects of our business, both from the segmentation of people and clients, but technology and operations and all of our processes.

But I think the thing we're most encouraged by in the second quarter, and in fact year-to-date, is how successful we've been at recruiting, really, top talent in the middle market.

That's been more positive than even I would have anticipated.

Our ability to not only attract back Marsh colleagues that left in '05 and '06 in the middle market, but to attract some of the top talent from some of our stronger regional competitors, was really, really inspiring, if you will, in the second quarter.

We brought in close to 36 new people alone in the second quarter that are really aggressive client-facing people.

So that has been a real positive.

The retention challenges that we've had in the last two years have not entirely been in the middle market, but largely in the middle market.

Our experience year-to-date has been quite strong in the large risk space, which people generally refer to as our core.

But our challenge had been in '05 and '06 in the middle market, where we saw the bulk of our revenue loss.

That's what stabilized in the first half of this year and is beginning to turn.

As Mike said earlier, the real benefit of this effort is going to really start to show through in the later part of this year, and then really show through in 2008, as that business has now stabilized and we are returning to growth.

It's all about people.

It's all about putting the right people that have the right products and formulas in place.

And we are committed to the middle market more than, I think, at any point in Marsh's history.

We're really excited about what's going on in the middle market, and the growth potential there is just enormous for us.

Thanks.

And then for Matt, just looking at brokerage margins, I appreciate the solid improvement in U.S.

revenues this quarter, but at what cost to margins?

When we look at the levels, how should we think about the levels of investment spending trending going forward?

And when do these $1 billion of savings, I think, you guys have achieved over the last several years begin to flow through the bottom-line?

Brian and I can both answer some of this.

Let me start by saying the margin improvements that we expect to see in Marsh have not fully been reflected yet.

We expect -- we anticipate, we expect we will require that there be margin improvement.

Now, as I identified here and as Mike identified, there was some spending necessary to push growth, in the middle market particularly, that we saw in the second quarter.

Some of that spending, as Mike indicated, is the success of our recruiting efforts, which are, obviously, critical to our success in this space.

Some of that will fall away.

And we expect to see margin improvement over time in Marsh as the full effect of those initiatives plays through.

Clearly, the challenging revenue environment is having an effect, but everybody is confronted with that.

What we need to do is to be diligent about keeping the expense line down and capping it, and we'll see that as we go forward.

Let me just also add one thing if I can, and I think this is really important to understand about what we're doing.

Mike said something earlier that really reflects our reality.

2005 and 2006 were really about saving and restructuring.

You know about all the costs that have taken out.

You also know the challenges we had on voluntary turnover.

We didn't really start making investments in growth until the early part of 2007.

And we talked about that in December on investor day.

Unfortunately for us, I guess, and that's just the way life goes, we've also made large investments at a time when the market has become exceedingly soft and, as you know, hyper-competitive.

But it doesn't change the fact that we need to make these investments.

We need to aggressively recruit client-facing people.

We felt strongly that we had to reposition our brand in view of what we went through in 2004, and we invested heavily in that.

And that's what we've been doing.

We also continue to invest heavily in training and development, which we think is critical to continue the transformation of Marsh.

We'd like to have a different market environment; we can't change that.

But we've got to keep our heads down and keep investing in these growth initiatives.

We're going be smart about it for the balance of the year.

We're well-calibrated to the market conditions going forward.

But we've got to stay the course on this if we're going to really project -- be able to execute on the things that we forecasted into '08 and '09.

So, that's sort of where we are on the expense side.

The one thing I would just add is that we try to be very specific.

We expect a 400 to 500 point margin improvement in Marsh in 2009 over '06 GAAP.

We absolutely do expect it.

We think it will -- this is a recovery; it's not incremental; it's a kind of a recovery story, and that '08 and then '09 will be much better.

Keith, we identified specifically the marketing costs, the costs of recruitment, and the costs of training, because those are costs that we can control.

Jay Cohen, Merrill Lynch.

You had mentioned you expect to see a 400 to 500 basis point improvement in Marsh's margins.

Can you tell us from where what the base is you were looking at in '06?

Do you want me to step in here, Mike?

Yes.

I didn't hear the last end of that question.

I'm sorry.

We don't break out the Marsh margin, although what we are signaling to you is that we recognize that the Marsh margins, which are embedded in Risk and Insurance Services -- and there is some complexity or noise in the Risk and Insurance Services margin because of what flows through from Risk Capital Holdings -- but we're signaling to you that we are still at a point where the growth from the 2006 base in the Marsh margin has not been as dramatic as we know it will be.

Now, what are in place today are exactly the actions that will permit that, both on the technology side, on the people side, the front-end-facing side.

So the growth is coming off of a still depressed margin, because we have not seen the operating margin increase as dramatically '06 to '07 as we had hoped year-to-date.

But we don't break out that particular component.

When you talk about improvement, it's nice to know what the base is, but I understand it's not being broken out.

The follow-up is, on the Kroll side in the second half, you had mentioned an engagement, I think, with Federal-Mogul that you had last year.

And I wasn't aware of that.

Could you talk a little bit more about that, and, if you can quantify it, what the hurdle is that you have to get over in the second half?

We actually had a series of really major engagements that was formed out of the earlier 2002, 2003, 2004 period of time.

And we all understand that the economy and some of the credit markets had been until very recently really strong.

You didn't have the kind of large restructurings or bankruptcies.

That has, in the last month, changed.

And I will just note that it was just announced, I think, today that we at Kroll received the restructuring of American Home Mortgage Corp.

So it can happen overnight; it can change, but it's a very lumpy type of business, with big assignments that drive really big margins when you get them.

And there can be tough times.

I guess we're expecting now it to be more of a normalized marketplace where there are opportunities, which, again, that's an example of what we just got.

Did you mention that there was a specific sort of revenue hurdle that you had to get over in the second half because of Federal-Mogul?

Last year in the second quarter, we earned 21.6 or $21.8 million in success fees in Enron and Krispy Kreme specifically, versus $7 million, which is a more normal rate, this year.

But there were a series of automotive and financial industry and asbestos-related bankruptcies that really tailed -- or have tailed off and are coming to an end this year.

And if we didn't pick up new major assignments, it could have a material impact on the second half.

The good news for us is just today, we look like at least we've picked up one important assignment.

Is there any way to sort of quantify the success fees in the second half of last year the way you did for the second quarter, so we know what --

We may be able to; I just don't have it on me.

If you could call Mike Bischoff, maybe he could help you out with that.

Matthew Heimermann, JPMorgan.

A couple quick questions.

First, you talked about wanting to start the share repurchase program as soon as possible, but also had comments about it taking up to a year.

What are your thoughts in terms of the form of that repurchase and how quickly you could ultimately complete it?

We're anxious to start, as indicated.

We want to keep some flexibility with how we execute.

We are very sensitive to price.

We want to be opportunistic about this.

In the current price range, as I indicated, we think that the shares are a good buy.

We'll obviously look to take more at this range than less.

We're anxious to pull in as many of the shares as we can this year.

But we do want to be flexible, both about how we approach the share repurchase program -- that is whether we execute another ASR or opportunistically enter the market -- and maintain some flexibility about when we go in in size.

Obviously, there are other market participants out there, and we don't want to fully disclose how we're going to proceed with such a large quantum of share repurchase.

I guess, Michael, I was wondering if you could talk a little bit about what type of -- you mentioned incremental revenue growth could drive a lot of potential earnings in the future.

But given the expense spend that we've seen this quarter, could you just give us a sense of what is -- what type of incremental revenue is significant at this point?

I guess that's where I'm struggling with, especially in the context of the 400 to 500 basis points improvement on Marsh.

I think it has to do with different businesses.

Some incremental business in Oliver Wyman is not -- it's good, and it helps, but it's not as good because there we need to be -- it's very clearly related to billable hours.

So it is important, it's always helpful, but it's not a -- it's not a real enormously difference in margin.

But that's not true in many areas of Marsh.

For instance, the commercial area.

Consumer area.

We talked about the consumer area is an area that, we believe, in the second half of '07 we will have double-digit margin improvement -- excuse me -- double-digit revenue growth.

There, that is a lot of processing that goes into it, and you start to have real margin growth as you start to get those -- that scale.

I think, Michele -- Michele, you can talk about some of your areas which have some real -- as you get incremental revenues, some real margin improvement.

Certainly.

Across our business there's opportunities for margin improvement.

I think specifically, if you think about scalable businesses, you can look to MGI, which is the asset manager; you can look to our outsourcing business, which as we add scale it drops more or less directly to the bottom-line.

We are still making some investments there.

But nonetheless, our growth this year is showing great benefit.

Within our consulting businesses, we have a number of products that, once you build a product, the sale is scalable completely.

And similarly in our communications business.

So really across the portfolio, there's a certain amount of those businesses that are not strictly fee-for-service revenue.

And we focus on also the bundling of those to improve that revenue and margin appreciation.

Just finally on Marsh, we think there's going to be hundreds of millions of dollars in '09 growth in that consumer and middle market.

And with that, those are businesses that it really will be a really substantial margin.

Brian, you want to add something?

We have said this several times, so let me provide just a little even more clarity on that.

Because Mike is talking about a business that, historically, Marsh hasn't spent a great deal of time either building or talking about, and that's the consumer business.

And just for clarity's sake, the consumer business is about taking insurance-related products, not quite as traditional as our large risk business, and marketing those services and products through sponsors -- branded companies, large corporations.

And that consumer business is very scalable.

That's run out of centralized processing centers like Des Moines and San Antonio and Austin.

And it allows us to leverage the core of this company.

This is a business that allows us to go back to our largest institutional clients and provide them with a portfolio of services that heretofore we hadn't really offered at Marsh.

That business is showing tremendous growth and tremendous promise in terms of our pipeline.

There's a lag from the time that you retain or you launch one of those relationships and when you book the revenue, but it's substantial growth.

This is a highly scalable, leverageable business.

It's got double-digit revenue already today, and double-digit margins already today in a business that we are going to grow exponentially.

So when Mike talks about incremental growth at Marsh in particular, we're really talking about this consumer business and, increasingly, the middle market business.

And you're going to see that leverage really starting to come through as we enter into 2008 and beyond.

David Small, Bear Stearns.

Could you guys help us understand at this point how much of the roughly $1.2 billion in expected restructuring benefits have you realized?

And then I just have a follow-up for that.

I'm sorry --?

You had -- if you take all of the announced restructurings over the last two or three years, if you add up the announced -- the expected restructuring benefits, they come to about $1.2 billion.

So I'm just trying to understand how much of those expected savings have you guys now realized.

The first two restructurings, which we refer to as the '04 and the '05 restructurings, have been fully completed and all of those savings are now in the run rate.

It is only the last restructuring in September of '06 that had a number of components to it.

The first component of that, the first phase, was about $165 million of savings which we have achieved.

Those are in the run rate.

So we've now picked up everything from the first two restructurings on the order of $900 million, and then the $160 million or $165 million from the announced restructuring in September of '06.

Now, the last piece of the restructuring from September of '06 are the more difficult infrastructure savings across operating companies and behind operating companies, those will continue to be pushed.

They take time to achieve.

We need to be intelligent about how we proceed, because they also cost money to achieve.

They'll take time, and we indicated that those would not hit the full run rate until the beginning of '09.

But we continue to push those forward as well.

I'm just trying to put that all together, because the risk -- I believe most of the restructuring benefits hit the Risk and Insurance division.

And margins this quarter were down from '05 and '06.

So, should we understand that you have invested all of the restructuring savings plus some into the -- into that business?

The first thing that you have to do is adjust for the MSAs, because the MSAs have a distortive effect on margin, which we tried to highlight here.

But the answer is no, that not all of those savings have been spent back at all.

We have also in this quarter some particular expenses which we have identified, which are expenses that are driving in particular the middle market growth, but also the strategic initiatives across Marsh.

But I think if you look at the overall expenses in Marsh, you will see that we have kept them relatively flat over time since we have taken these costs out.

Even if you look at the expenses -- the GAAP expenses for the quarter and the year, you'll see that while we are identifying the particular drivers of expense in the quarter, generally we're running at flat expenses.

On an underlying basis we're down 1% for the first half of the year.

So the saves are in there and have flown through, and they have created an expense baseline that, we believe, we can keep very flat at this point, which goes back to the prior question, which is how much revenue growth do you need to see in Risk and Insurance Services in order for it to flow through to margin?

What we're trying to be clear about is any revenue, any top-line growth, is going to flow right through to margin.

We're at a point now where the expense base is really locked, and there will be variability quarter to quarter around that, but over time it is very flat, so that if we can get revenue improvement either because the market comes back, which we don't really expect, or because our initiatives can permit us to take share in middle market, or take share in the large risk space, all of that should flow through to margin.

And we're well-positioned to get that.

One last clarifying question.

In past conference calls you've said that the margin seasonality that we saw in '04, '05 and '06, where margins declined sequentially throughout the year, should not repeat itself, that that was kind of onetime issues in those years.

Is that still your expectation, that that margin seasonality in the Risk and Insurance business (technical difficulty)

Yes.

That moderation is continuing.

Another aspect of that is the fact that as we continue to grow globally, there is not the same sort of seasonality geographic region to geographic region.

And that has a moderating effect as well.

Meyer Shields, Stifel Nicolaus.

Can you give us an update for the commission components of your revenue base within insurance brokerage?

First of all, are you getting higher commissions from the insurance carriers?

And secondly, what you're thinking now about supplementals.

Just let me say a couple of things about this whole issue of pricing, because, obviously, it's one of the most discussed topics in the industry.

First, we are completely committed to transparency, as we've said many times before, not only here in the U.S., but around the world.

We made that policy decision and have been focused on that, and I think we've put together a very, very rigorous program to monitor that all around the world.

We have renounced contingent commissions everywhere in the world, and I think you all know that.

This whole discussion of supplementals has gotten a lot of attention.

We've taken the view on that that supplemental commissions that are specifically related to volume concerns are not in the best interest of our clients or Marsh, and we have not allowed any of our businesses to compete in that area.

But what we have done, and as I flagged in the first quarter, is we've been in active discussions with our clients and with the industry, and in fact have just entered into an amendment of our settlement agreement with New York authorities that now for the first time since 2004 will allow us to charge or accept payments from insurers for specific services that we provide for our clients.

We are in active discussions with the markets about that.

This is a completely different form of revenue from supplemental compensation, and I am fairly confident that in the next several weeks, if not within the next month, we're going to have a very public statement about what we intend to do in relation to that amendment to our settlement agreement.

So going forward, we're very optimistic of what the impact of that could be, but we're not going to get into a disclosure today on the specifics of that.

In terms of our commissions, our business around the world is about 50/50 today; half our business is commission-driven; the other half of our business is fee-based.

I think it's fair to say that we're all facing the same experience in the business today.

All of our pricing is under pressure.

Every part of our business -- and that's true for all of our competitors -- is contested.

It's a very, very aggressive market on pricing.

I think we've maintained pretty good pricing discipline in our business this year, and I think you'll continue to see it for the remainder of the year.

But can you talk specifically about whether the insurance carriers are boosting commissions?

Are boosting commissions?

Yes.

No; the insurance companies are not boosting commissions at this point in time.

With the capacity that we're seeing in the marketplace today, which is enormous, and with the softness in the market, the last thing that we're seeing is an aggressive pricing approach on the part of the insurance carriers.

So, no; we're not seeing that.

Second question.

This is probably not the first time that margins in the insurance brokerage have been a little disappointing, I guess, compared to Street expectations, and, based on your language in the press release, to internal expectations as well.

Can you talk from a management perspective about what the ramifications of that are?

I think for us, these are always difficult calls.

When you're doing these kind of changed management that we're doing, you're trying to balance the changes that we have with the necessities to perform in a way that gives your investors confidence in the future.

So those are always tough calls.

But we have made the calls because we believe the way we have, which is to continue in a responsible, thoughtful way to do the things that, we think, are going to win for us in the near future, and making those investments.

So, yes; it is not what we expected or hoped for.

The revenue wasn't quite what we hoped for, and the expenses were a little higher than we'd hoped for.

And when you combine it, it's not the profitability that we had hoped for.

But we're in the context of MMC.

So one of the things we have to continue to go back to is we have great -- other great companies.

We're doing other things that, we believe, will give us the time, the necessary time, to make sure that we're -- we've fixed Marsh and it's going to be the world-class that it's always been.

And that's we're committed to, and we think that '08 and '09 are going to prove us out.

So we're just going to -- not without adjustments.

We're going to make some adjustments.

I think in the fourth quarter most significantly, you'll see little improvements in the Marsh numbers because of some of the adjustments we're making now.

But fundamentally, we're staying the course.

And we believe this is a winning formula and we will win, and we think that the rest of MMC will allow Marsh to do the right stuff.

And we're doing it.

Dan Farrell, Fox-Pitt Kelton.

Just another question on the margins.

I was wondering if you can just give a little more detail.

You talked about advertising, marketing, recruiting, all of those costs being higher than the normal rate.

Can you kind of quantify, are they running 50% higher?

Are they double?

Is there any way you can kind of quantify what you think the actual drag was to the margins from this?

Is it 50, 100, 150 basis points?

Any color like that would be helpful.

I'll let Brian jump in here.

But it, clearly, is -- we identified the $30 million in there.

You want to break down what the $30 million was composed -- some of the actually specific numbers?

There were really three specific categories that you saw in the second quarter.

I know it's been said already, but I want to reiterate that if you look at our expenses year-to-date, they're down about 1%.

So the anomaly was indeed in the second quarter.

And that's specifically when we either completed or launched a couple of these major initiatives.

The advertising, which by now, I'm sure, most of you had a chance to see, really launched aggressively in the second quarter.

That was roughly around $17 million.

And the balance of that spend was in training and recruiting.

We had -- to be quite frank, did not have the ability in '05 and '06 to be aggressively recruiting people.

We started ramping that up.

And in fact, I think I recall saying in the first quarter that we actually had hired two national recruiting firms to work with us here in New York to help us identify the producers, particularly in the middle market and in the risk space.

And in fact, the fees to those recruiters were over anything that we had forecasted.

That was the bad news.

The good news was we were very, very successful at recruiting a lot of talent.

So it was advertising; it was training and recruiting.

We're going to modulate that, obviously, as we go forward for the remainder of the year, particularly in the advertising and the branding campaigns.

But we are going to continue to be aggressive on the recruiting side.

We are now quite confident in our ability to attract the talent that we want.

So we're going to be very careful on the advertising.

You're not going to see those sort of numbers in the third and fourth quarter.

And we're going to continue to train our people, but a lot of the training is completed in the first half of this year, so that's going to turn down in the second half of the year.

We're going to be as thoughtful as we can on recruiting, but we do want to take advantage of the opportunity to continue to stock up client-facing people, particularly in the middle market.

But you're not going to see that in the third and the fourth quarter the way you saw it in the second.

And again, I reiterate; you didn't see that on a year-to-date basis.

Our expenses are about 1% down.

The only thing I would just want to clarify is, I think, you're going to see more of a difference in the fourth quarter than in the third.

In the third quarter we still have some run rate things that are absolutely flowing through, and we don't want to and we can't turn off.

So you'll really see the bigger difference in the fourth quarter.

Great.

Just one follow-up.

On the higher recruiting fees, you're making a big push into the middle market.

And you said you're using national recruiters.

Can you talk a little more about that?

Is that a kind of traditional way to access the middle market?

I would have thought that maybe it's more kind of through your own local offices, word of mouth, things like that.

But it's a conscious decision I guess you're taking to actually use professional recruiters there?

These recruiters are working in concert with our 65 local offices.

But to be very clear with you, the way in which we're approaching the middle market, the changes that we made to Marsh in terms of our products, our operating structures, we want to have, quite honestly, a consistent message going out to the market in terms of our recruiting efforts.

And in fact, that's been a more successful way for us to do it.

It also allows us to target people in the industry.

And what these recruiters have been able to do for us is to be able to go out in all of our competitors' organizations and look for those people that, we think, are the types of people that can help us build this middle market.

So we've been very, very targeted.

The supplemental local offices, obviously, the work gets done at a local level.

But we're going to continue to do this because it's worked very well for us in the first half of the year, and we want to stay with it.

We're going to take two more questions.

[Amanda Lynam], Goldman Sachs.

Just one quick question.

You had mentioned that you'll reduce debt by $1 billion.

Were you talking about just letting the '08 and '09 and other maturities mature without refinancing them, or do you mean that you're going to repurchase some debt early prior to maturity?

I was speaking specifically to what we'll do in the immediate term there in order to fund some of what -- we had repaid the maturity in July, which was the second of the two $500 million maturities due this year.

And in order to fund that and the $500 million of accelerated share repurchase last -- effective in the quarter, we went into the commercial paper markets, and we're sitting on about $1 billion of commercial paper, which is an easy outlet for the proceeds that are coming in from the Putnam disposition today.

So that's what we'll do immediately.

Over time, I was also trying to be very clear that we're going to adjust our leverage.

We will absolutely be adjusting our leverage position in recognition of and consummate with where our earnings and financial metrics are.

But, yes; we've set ourselves up to absorb that cash and be efficient about our debt paydown.

Scott Frost, HSBC.

Just wanted to make sure, following on that -- roughly, sources and uses -- $1.1 billion of cash on hand, $2.5 billion of Putnam proceeds, uses, $2 billion of share buybacks, $1 billion of CP paydown, reg settlements and, I guess, the Feb '08 notes paid down with internally generated funds.

Is that close enough to what you guys plan to do?

The only thing I would add is that we do believe that there are opportunities to continue to invest in the growth of this company through tuck-in or acquisitions inside of our company, which we will continue to do and look for.

One of the reasons we're using the money right now the way we are, among the variety of reasons, is the pricing has been really, really high, but we think that may change.

So we think with the cash flow that we'll generate, we may have some smaller opportunities to do things in that area.

One follow-up.

You've made some comments about the balance sheet debt capacity, etcetera.

Is there a leverage metric to which you are trying to manage?

And if so, what is it?

That's a very fair question.

The answer is no.

And that's because we have talked to the agencies, we have talked extensively to the agencies about the fact that because we're not balance-sheet-heavy, a pure leverage metric is not appropriate for our organization.

So, all of our metrics and our financial flexibility is predicated upon, really, the coverage ratios.

So you can look to our earnings and our free cash flow, which continue to improve, free cash flow even more than earnings as the calls on some of our capital fall away, and that is what is permitting us over time to increase our debt capacity.

It's not a leverage ratio.

I guess that's what I mean.

What measure -- when you look at earnings and free cash flow, how is that going to be measured in terms of the debt you have to determine how much more you can borrow?

That's the kind of metric I'm kind of talking about.

If there were a -- I wish there were a simple metric.

But unfortunately, in our discussions with the credit constituencies, and also as we look at this ourselves, it is a number of metrics that get measured.

So we do look at our free cash flow, we look at our interest cover, and we definitely look at the level of earnings increase, the growth in earnings over time.

So we're both looking at a current ratio and we're looking at projected ratios in our discussions around our debt capacity.

And all of those are indicating that our debt capacity is now coming back, particularly after we have the ability with the Putnam proceeds to take debt down so dramatically.

In the context of investment-grade ratings here, that's been consistent.

Is that still the case?

Yes it is.

Yes.

We still believe that it is important to retain an investment-grade credit rating for these businesses.

In closing, I want to just say that many of our shareholders urged us to use the proceeds of Putnam to buy back shares.

We listened, and we concluded it was the right thing to do.

And with the support of our board, we're doing just that; we're buying back $2 billion worth of shares.

Many of our senior leaders and our colleagues across the world have urged us to invest in our company.

We listened to that, and we concluded that was the right thing to do, and we're doing just that through an array of investments in hiring, training and new products.

Many of our clients have urged us to use innovative solutions to help them face the dynamic changes that they're facing in the world.

We listened to that, and we concluded that was the critical thing for us to do, and we're doing just that, all the while leading the industry in transparency.

My colleagues and I have a sense of urgency and purpose.

We are excited about our prospects and are committed to meeting and exceeding the expectations of our stakeholders in the future.

I thank you, Michele, Brian, Matt.

Thank you all for listening.

Talk to you soon.

Thank you.

Once again, that will conclude your conference for today.

We do thank you for your participation.

Everyone have a wonderful day.