威達信集團 (MMC) 2008 Q1 法說會逐字稿

Thank you for holding, everyone, and welcome to MMC's conference call.

Today's call is being recorded.

First-quarter 2008 financial results and supplemental information were issued earlier this morning.

They are available on MMC's website 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 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 2008 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 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.

Now at this time I will turn the call over to Brian Duperreault, President and CEO of MMC.

Please go ahead, sir.

Well, good morning, and thank you for joining us to discuss our first-quarter results reported earlier today.

I am Brian Duperreault, President and CEO of MMC.

Joining me in presenting on the call today are Matt Bartley, our CFO, and Michele Burns, CEO of Mercer.

After I make some brief remarks, Matt will present our financial results, and Michele will share with you her insights into Mercer's strong performance during the quarter.

I would also like to welcome our operating company CEOs to today's call -- Dan Glaser from Marsh, Peter Zaffino from Guy Carpenter, John Drzik from Oliver Wyman, and Ben Allen from Kroll.

Also with us is Mike Bischoff, our head of Investor Relations.

They will be available to you during the Q&A portion of our call.

I would like to start off by saying it has been a very busy quarter for us at MMC.

I have been on the job just about 100 days, and we have accomplished a lot in this short period of time.

I would like to walk you through some of the specific actions taken since our last earnings call in February.

On that call I had been at MMC just two weeks.

I gave you my initial impression of MMC's operating and financial performance, and I said that while there are businesses at MMC that are doing well, the Company as a whole was not performing at acceptable levels.

We acknowledged that serious work would need to be done to fix the parts that are not performing.

These issues reside primarily at Marsh and Kroll, and I would like to quickly touch on these two businesses now.

In the first quarter, performance at Marsh began to show signs of improvement.

Marsh's first-quarter revenues increased 7% to $1.2 billion.

On an underlying basis, growth was 1%, a continuation of the positive growth we saw in the fourth quarter.

Global client revenue increased 2% on an underlying basis, and this was achieved in a pricing environment that showed significant declines in the P&C commercial insurance marketplace.

The strong new business results seen over the last two years continued as Marsh achieved a 10% increase in new business in the quarter on an underlying basis.

This growth was experienced in the US and Canada 13%, in EMEA 2%, Asia-Pacific was 44% and in Latin America 2%.

Client revenue retention also improved over the first quarter of last year, especially in the US and the UK, our two largest geographies.

This was in spite of pricing declines in the insurance marketplace, which were worse year-over-year and sequentially.

Another positive for Marsh was that while revenue grew 7%, expenses grew only 3%.

On an underlying basis, revenue increased 1%, while expenses declined 2%.

This decline was achieved even though Marsh's variable compensation increased by $30 million on a year-over-year basis.

The variable compensation increase primarily was due to a timing change of the accrual, which began in the third quarter of last year, as well as an increase in the amount of Marsh's bonus pool.

This increase essentially offset lower pension expense in the quarter.

Overall Marsh achieved significant margin improvement as its GAAP operating margin increased 350 basis points, and non-GAAP improved 250 basis points, compared with last year's first quarter.

As you know, the first quarter is typically the highest margin quarter of the year for Marsh; however, this type of margin improvement is what we're targeting for the remainder of the year.

While I'm pleased to see evidence of cost containment, we are continuing to implement vigorous expense discipline in Marsh in order to achieve even greater long-term margin improvement.

So, as we look at Marsh, we know we still have a lot of work ahead of us, but we are pleased that the actions we have taken to date are beginning to generate positive results.

Turning to Kroll.

When Kroll was acquired in July 2004, the plan was to combine it with other MMC operations and realize meaningful synergies.

That envisioned integration was never completed, however, and certain businesses of Kroll had been underperforming since that time.

As we reported this morning, we incurred a non-cash impairment charge of $425 million related to Kroll goodwill.

As I said in February, Kroll is a very complicated company.

During the quarter I began to peel back the layers at Kroll, and I've concluded that there are several lines of business that fit into the long-term MMC portfolio and others that simply do not.

Examples of businesses with long-term potential at MMC are Ontrack, which provides litigation support and data recovery services; background screening, which provides employment screening and identity theft services; and the business intelligence & investigations operation, which provides risk mitigation and response services.

These are the businesses I see as core Kroll, and in these businesses Kroll is a world leader.

To increase our focus on these operations, I named Ben Allen CEO of Kroll in March.

He is charged with realizing the growth potential of these core Kroll businesses and in maximizing their value to MMC.

As part of my evaluation, I also recognized early on that Corporate Restructuring would benefit from separate management.

As a result, the Corporate Advisory and Restructuring Group was carved out as a separate group now headed by Simon Freakley.

Therefore, for the first time this quarter, Corporate Restructuring is disclosed as a separate business within the Risk Consulting and Technology segment.

This business has not been a strong performer in recent quarters.

However, it is one that does better in times of economic uncertainty.

And given today's climate, we want this business to be well positioned to capitalize on any increase in the Corporate Advisory and Restructuring sector.

To that end, three distinct groups within this business are being combined into a single operation with global reach and scale.

Now let me discuss the rest of Kroll.

There are businesses in Kroll that do not necessarily fit into MMC's long-term growth plans.

Some examples here include Factual Data Corp, which among other things provides services to mortgage lenders and the Government Services business.

These are businesses that we have determined are not a strong strategic fit and may have greater value outside of MMC, and which, along with Corporate Advisory and Restructuring, drove the impairment charge recorded this quarter.

We will seek ways to divest these businesses in ways consistent with enhancing shareholder value.

Finally, an overall atmosphere of cost discipline is being instilled to improve profitability at Kroll, including selective staff reductions.

Now, in addition to focusing on Marsh and Kroll, we're taking additional actions to appropriately position MMC both in the current operating environment and for greater success in the future.

At Guy Carpenter we face increasingly difficult market conditions.

Performance in the quarter was weaker than expected with significant rate decreases across most classes of business and a decline in net new business.

We, therefore, moved quickly to take steps to reposition Guy Carpenter in the current environment and to improve profitability.

First, shortly after I arrived in February, I appointed Peter Zaffino as CEO and Britt Newhouse as Chairman.

Peter and Britt have significant history within not only the insurance industry but also within Carpenter.

Second, under this new leadership team, we moved quickly to reduce costs.

Over the past several weeks, Carpenter's new management has taken actions to restructure its business across geographies.

In the second quarter, Carpenter is reducing its global workforce by over 300, or more than 10%.

The anticipated cost is approximately $30 million with annual savings of $40 million.

These reductions are being done with great care and precision, so they do not affect Carpenter's strength and client capabilities.

Michele will be discussing Mercer in detail in a few minutes.

Overall Mercer continued its recent trend of strong revenue and operating income growth.

With regards to Oliver Wyman, which makes up the rest of the Consulting segment, underlying growth slowed to 6% from the double-digit growth we have seen over the past four years.

This slowdown primarily is due to a weakening of demand from U.S.-based clients adopting a cautious stance in the face of a weak US economic environment.

Indeed, strong demand persists from clients outside the US.

In light of continued macroeconomic uncertainty, Oliver Wyman is vigilantly managing its expense base to align it with the emerging revenue picture.

And finally, at the corporate center where we have seen marginal improvement in the run-rate costs over the past several months, I have commissioned a review to examine all corporate functions and determine if they are appropriately sized and structured.

These are some of the detailed actions that have taken place at MMC so far and during the short period of time this year.

Our work is ongoing.

I also continue to gather more information each day about MMC.

I have traveled extensively in the United States visiting with employees, our major shareholders and with current and perspective clients to discuss what MMC can do for them.

The intelligence and feedback I gleaned from all these meetings has been invaluable.

While there is a lot of work ahead of us, I'm convinced that MMC has tremendous potential that can be realized to the benefit of our clients, our shareholders and our employees.

And with that, I will turn it over to Matt to present our financial results for the quarter.

Thank you, Brian.

Good morning, everyone.

Let me start by giving you some additional information regarding the Kroll goodwill impairment assessment and charge that we announced in this morning's press release.

The Q1 decision to make organizational changes within the Risk Consulting and Technology segment to reorganize the reporting units within the segment was a triggering event under the accounting rules applicable to goodwill.

We performed an interim assessment of the segment goodwill at quarter close, determined that the goodwill was impaired and as a result, recorded a non-cash impairment charge of $425 million or $0.81 per share.

As noted in the release, this charge has no impact on tangible equity or on our debt covenants and, of course, as just indicated, is non-cash.

This amount represents our best estimate of the goodwill impairment at March 31.

We will be completing the more comprehensive step two phase of the assessment in the second quarter to determine if any further adjustment is required.

The second step will likely result in some refinement in the goodwill impairment charge, either an increase or a reduction in the level of goodwill impairment, and we expect to reflect any further adjustment in the second-quarter results.

Now let me take you through MMC's first-quarter operating results, excluding this charge.

Earnings per share was $0.41, including income from discontinued operations of $0.01, reflecting the sale of a Marsh claims administration operation in Brazil.

That compares with $0.47 in the first quarter of 2007.

Noteworthy items, which are highlighted on page nine of the press release, totaled $49 million in the quarter, excluding the goodwill impairment charge.

These expenses are primarily restructuring charges from previously disclosed and ongoing cost reduction initiatives at Marsh and at the parent company, at corporate.

In total, we look at our results from operations for the first quarter of '08 on a non-GAAP basis to be $0.46.

The difference from last year's first quarter can be largely attributed to a decline of $43 million in revenue at Risk Capital Holdings, or approximately $0.05 of earnings.

Before I continue my discussion of segment results, let me make a few comments about a number of enhancements and additional disclosures that we show in this morning's press release, and will show going forward.

We have added information regarding the revenue breakdown of certain components of MMC's segments.

For example, we have expanded Marsh's geographic breakdown, reflecting the manner in which Marsh manages its global insurance broking operations.

Similarly we now break out Mercer's revenues into consulting, outsourcing, and investment consulting and management, reflecting the way Mercer differentiates its client services in the marketplace.

We also provide the component parts of Mercer Consulting -- retirement, health and benefits and the other consulting lines.

And within the Risk Consulting and Technology segment, we have expanded the revenue categories of Kroll to include litigation support and data recovery, background screening and risk mitigation and response, as well as breaking out separately our corporate advisory and restructuring group.

To help you with your modeling, we have reclassified 2007 quarterly revenue to match our current revenue reporting format as you can see on page 12 of the release.

Also, we now disclose the currency impact, the effect of acquisitions and dispositions and underlying revenue growth for each of the categories I have just discussed.

We have also broadened our disclosure on how we view the business through non-GAAP measures.

We show the calculation of non-GAAP operating income and margin for each of MMC's segments and the reconciliation with and to reported operating income and margins.

Taken together, we believe these enhancements provide additional and helpful clarity on our quarterly results.

Now turning to the general financial picture and the segments.

In the first quarter of 2008, MMC's consolidated revenue rose 8% to $3 billion against varying marketplace conditions, driven by solid growth at Marsh, in the Consulting segment and from parts of Kroll.

On an underlying basis, revenue growth in the first quarter was 2%.

Excluding Risk Capital Holdings from each period, underlying revenue growth year-over-year would have been 4%.

Turning to our segments.

Risk and Insurance Services operating income was $240 million, a decline of $19 million or 7% compared with last year as profitability improvement at Marsh was offset by declines in operating income at Guy Carpenter and the falloff at Risk Capital Holdings.

The non-GAAP margin for Risk and Insurance Services was 17.9% in the first quarter of '08, compared with 20.2% in Q1 of '07, reflecting again the minimal contribution from Risk Capital Holdings in the current period.

Excluding Risk Capital Holdings from both prior and current periods, non-GAAP margins for Risk and Insurance Services would have been 17.6% in Q1 '08, versus 17.4% in Q1 '07.

Now let's turn to Marsh specifically.

First-quarter revenue at Marsh increased 7% to $1.2 billion.

On an underlying basis, growth was 1% led by our international operations, which grew 3%.

These growth rates include the effect of fiduciary interest income, which declined fairly significantly due to lower short-term interest rates.

Consequently, client revenue, not including fiduciary interest, increased 2% on an underlying basis.

As Brian indicated, Marsh also generated strong new business in the quarter.

Underlying growth in new business was 10% in aggregate and follows new business growth of 8% in the fourth quarter of 2007.

This is the eighth consecutive quarter of new business growth for Marsh.

At the same time, the effects of cost discipline are also evident, both entire control over discretionary spending and in tight controls on headcount.

In fact, in the period there were about 150 headcount reductions at Marsh.

And, as to discretionary spending, there were declines in the first quarter in T&E, meetings, marketing and advertising and facilities and equipment costs.

Obviously this is the beginning of a process, but we're already starting to see some of the benefits of that tighter control flowing through to margins, and we expect to see these savings continue through the course of the year.

A lower-level of expense was achieved in the quarter, even though Marsh's variable compensation accrual increased by $30 million compared with prior year.

This increase primarily was due to a change in the timing of the accounting accrual, which began in the third quarter of last year, as well as including an increase in Marsh's overall bonus pool.

The higher variable compensation accrual was essentially offset by lower pension expense this quarter.

The combination of modest underlying revenue growth with stronger expense discipline improved Marsh's operating margin 350 basis points on a GAAP basis and 250 basis points on a non-GAAP basis, compared with last year's first quarter.

This represents the strongest margin performance by Marsh since the third quarter of 2004.

Turning now to our reinsurance broking operations.

As you know, marketplace conditions continue to be very difficult.

Reinsurance rates have continued to decline, and we expect to see this trend continue through the rest of the year.

Strong underwriting results by insurers and reinsurers have led to higher risk retention by Carpenter's clients, on top of continued competitive pressure on reinsurance premium pricing.

This environment was particularly aggressive in the US for property catastrophe coverage, where Guy Carpenter has a substantial market share.

These conditions, coupled with a reduction in net new business, contributed to reduced profitability at Guy Carpenter.

Additionally Carpenter's results in Q1 include about $5 million associated with the departure of its former CEO.

As Brian discussed, we're implementing a restructuring program to improve the profitability picture at Guy Carpenter.

As we look forward, we see significant improvement in Carpenter's new business pipeline.

However, due to the seasonal nature of reinsurance renewals, much of this new business development will not be realized until January of next year.

Briefly, on Risk Capital Holdings.

The $43 million decline in first-quarter 2008 revenue, which is very high margin revenue, negatively affected EPS by about $0.05.

In the second quarter, due to declines in the market value of publicly traded securities in our Risk Capital Holdings investments, we expect to see revenue from RCH potentially be negative.

Now let's turn to Consulting.

Consulting had strong first-quarter performance, with growth in both revenue and operating income.

This was led by Mercer's Q1 revenue performance of 16% growth on a reported basis and 9% underlying.

This is the highest quarterly growth rate in underlying revenue Mercer has experienced since the fourth quarter of 2000, which is particularly impressive given the current economic environment.

At Oliver Wyman, reported revenue was up 13%.

Underlying growth slowed from the performance we have seen over the past four years to 6%, reflecting client caution surrounding the US economic environment in particular.

So, while our consulting operations performed well on the top line given macroeconomic uncertainty, we are selectively implementing plans to reduce expenses in recognition of uncertain current economic conditions.

Turning now to Risk Consulting and Technology.

The non-cash goodwill impairment charge I discussed earlier affected only the Risk Consulting and Technology segment.

I will now review the results of this segment, excluding that charge.

As Brian discussed, our Risk Consulting and Technology segment includes both Kroll and now separately, Corporate Advisory and Restructuring.

In Q1 total revenue for the segment increased 10% to $259 million.

Underlying growth was 3%.

Operating income decreased from $26 million in the first quarter of 2007 to $18 million in the current period, excluding approximately $3 million of restructuring costs.

In the first quarter, Kroll's reported revenue was up 14% to $220 million.

On an underlying basis, revenue increased 5%.

Litigation support and data recovery had good growth in the first quarter, with revenue up 32% on a reported basis and 7% underlying.

This increase was derived from its legal technology business, both on an organic basis as well as aided by an acquisition in late 2007.

Background screening's revenue decreased 2% in Q1, primarily attributable to the mortgage screening business.

This was partially offset by growth in identity theft services.

Risk mitigation and response had strong revenue growth in Q1, up 14% on a reported basis and 11% underlying.

This was driven by the business intelligence unit, which had solid growth across all geographies.

However, despite Kroll's revenue growth, its profitability was lower, primarily due to the mortgage screening business.

Briefly on the Corporate Advisory and Restructuring Group, where revenue was down 7% in the first quarter.

As economic conditions have become more challenging, we have seen an increase in the demand for our services in the US.

This was more than offset by declines in Europe, however, which has not yet seen this same ramp-up in demand.

In terms of operating income, the Corporate Advisory and Restructuring Group operated at a loss of approximately $1 million this year compared with operating income of $5 million in last year's first quarter, and a loss of approximately $3 million in the fourth quarter of last year.

Quickly on corporate expenses.

In the first quarter, they ran at $61 million.

This includes approximately $9 million for rationalization of London real estate and $7 million in severance.

Additionally there were $8 million in items primarily associated with the change in CEOs that will not impact the Company in subsequent periods.

So, on a normalized basis, corporate expenses ran at about $37 million in the first quarter.

Excluding the impairment charge, which had no tax benefit, MMC's consolidated effective tax rate was 30.6% in the first quarter of 2008, primarily due to the geographic mix of our earnings.

The effective tax rate on ongoing operations is projected to be in the range of 30% to 32% for the remainder of the year.

As indicated in the press release, we received an additional 10.8 million shares of common stock in the first quarter, completing our $800 million accelerated share repurchase program, funded back in August of 2007.

In total, we repurchased 32.1 million shares from this program at an average price of $24.94.

Including our earlier $500 million ASR program, we have repurchased 48 million shares of common stock since last May.

On the cash front, cash and debt, we ended the first quarter with $1.3 billion in cash.

As you know, our cash utilization is typically greatest in the first quarter, primarily due to the funding of bonus payments.

Additionally, we used cash to fund $250 million of debt that matured in February.

Our cash generation typically accelerates in the second half of the year, we expect that again this year, and we do not have any additional debt maturing until June 2009.

And one other call on our cash that remains this year, is our final New York Attorney General settlement payment of $170 million that will be made in June.

Net debt, which best represents our capital position, was $2.3 billion at the end of Q1, a significant decrease from $3.5 billion in the corresponding period last year.

The capital management activities we have completed over the last three years represent a significant de-leveraging of MMC's balance sheet, which leaves us at a current debt position that is very comfortable and gives us excellent financial flexibility.

With that, let me turn it over to Michele for an update on Mercer.

Thanks, Matt.

I'm grateful for this opportunity to talk about Mercer today.

I would like to use the time to cover our overall operating results, provide some insight into the businesses within the portfolio and share our positive view on the future.

Since the last time I spoke to this group, we've continued to make great strides at Mercer.

Coming on the heels of a successful 2007, Q1 was another good quarter.

In fact, it marked the 10th straight quarter of year-over-year growth in revenue and the sixth straight quarter of bottom-line growth.

Cash flows continue to be strong as well.

Revenue grew 16% compared to prior, with each of our businesses posting significant gains in all regions growing.

It is particularly gratifying to see strong growth across the board, which speaks directly to the health of our portfolio as individual businesses and in the aggregate.

One question you are likely to raise is our sensitivity to overall economic and equity market conditions.

Our results show that we can grow despite these challenges.

This is due in part to the diversity of our revenue streams, which include a blend of recurring consulting engagements and commissions, project-based fee arrangements, stable participant-driven outsourcing arrangements and the increasing importance of revenue streams tied to assets under management.

An example of the stabilizing effect of this diversity is that while equity market declines have a negative impact on our Investment Management and outsourcing revenue, market declines often create increased demand for our investment consulting business.

In fact, our clients evidence an increased need for many of our services in challenging times.

This is not to say that a prolonged or severe downturn will not impact us, but we see continued strength in our pipeline across our businesses and regions.

As you would expect, we are carefully monitoring our revenue streams and operating metrics to ensure we keep our cost base in line, but we remain cautiously optimistic that we can continue to post solid growth.

As I have talked about before, one of Mercer's significant advantages is the portfolio of offerings that gives us diversity: diversity in the solutions we bring to market, diversity in business models and geographic diversity.

That is why I would like to draw your attention to the change we have made in how we are reporting our revenues.

Starting this quarter, we will report along the same divisions we use to differentiate ourselves in the marketplace -- consulting, outsourcing and investments.

This change will allow us to speak to the investment community the same way we speak to our clients and will create clear distinction between the three pillars of our portfolio.

It will also serve to highlight the growing importance to both our strategy and our results of having outsourcing and investment capability, which we feel are integral to serving our clients and our shareholders' needs.

And the exciting growth you will hear about when I discuss each of these pillars will bear out how well our unique portfolio is resonating in the marketplace.

I will start the review with our consulting line, which includes our traditional areas of retirement and health and benefits, as well as a suite of businesses and business models dedicated to areas outside our benefits core.

Combined, these consulting businesses account for 71% of our revenue and grew 14%.

As the world's largest actuarial business, our retirement business continues to grow with $313 million of revenue in the quarter or 34% of our total.

We had a particularly strong quarter in the Americas.

This is due in part to continued impact of the Pension Protection Act, but like our other regions, we're also benefiting from the increasing diversity of our retirement offering, which addresses an evolving marketplace.

Many of these new offerings are geared toward helping clients manage the shift within the defined benefits landscape or the increasing importance of defined contribution schemes.

These are often delivered in tandem with our investments or outsourcing capabilities or both.

This bundling is another indicator of the power of our portfolio.

In addition, in Europe we showed our commitment to this business this quarter by acquiring Hoefer, a leading German retirement firm.

This acquisition builds on our strength in the important German market and will allow us to bring our full range of services to Hoefer clients -- within Germany and around the world.

Our health & benefits business posted revenues of $220 million in the quarter, 24% of our total.

We all know that health care costs are and will remain a major business issue.

This is true in both mature economies, as well as in developing ones.

As such, we continue to grow around the world.

Our largest market, the US, continues to show very good new business production and retention with an emphasis on sales beginning to pay off.

Our other consulting lines represent a broad mix of businesses and revenue models that go beyond our benefits pedigree.

Examples include our survey and data business, our human capital capabilities, and our unparalleled ability to help clients navigate the broad employee-related issues in the M&A arena.

As a group, these businesses generated $126 million of revenue in the quarter, 13% of our total.

As we continue to develop data, capabilities and expertise to meet our clients' needs for solutions to their most complicated and strategic employee issues, we expect strong continued growth.

Following consulting, outsourcing is the next biggest pillar in our portfolio, with $188 million in revenue, which represents 20% of our total.

Growth for the quarter was 17% with the largest contribution coming from the US.

This excellent performance is directly linked to our success in the total benefits outsourcing or TBO market, where we continue to win in the marketplace by combining and simplifying administration across the defined benefit, defined contribution and health & benefits areas.

This growth translates to improving economics as we increase our operating efficiency and add scale.

The investment pillar consists of our investment consulting and investment Management businesses and accounted for 9% of our revenue.

Year-over-year growth was 31%, driven by increased demand in investment consulting and growth in assets.

Our assets under management grew from $14.7 billion on March 31, 2007 to $19.8 billion on March 31, 2008.

Investment consulting achieved growth in excess of 20% in both the Americas and Europe, continuing a longer trend of outstanding results.

The main driver of the asset growth was the traction we have achieved in the US market and increasingly in Europe, with the value proposition of comprehensive investment management services, utilizing implemented consulting and multi-manager strategies.

Together these two businesses allow us to bring a continuum of advice and solutions to meet our clients' needs within the retirement arena and beyond.

Going forward, we remain optimistic about the future for Mercer and see opportunities for success in both how we compete in the marketplace, as well as within our own four walls.

First, as you have heard, we believe our diverse yet complementary portfolio will continue to allow us to lead in the marketplace.

We will continue to build our intellectual capital and bring these solutions to market organically, because we believe there is continued opportunity for market share gains for players who can deliver best of breed global solutions.

Where it makes sense for shareholders and clients, we will also pursue external capabilities that further expand our solution set and global reach.

We also see opportunity to invest in how we operate as a business.

We're building more of a sales culture backed by dedicated resources, as well as firm-wide tools and processes.

We will extend our capability to deliver world-class operating metrics so we can better understand our economics at a project and client level, and we will continue to look for opportunities to seek operational efficiency with the retirement service centers and our broad new captive offshore capabilities based in India serving as an example of our commitment.

Because of these opportunities, we believe that we can continue to grow and take market share over the next few years, while improving our margins at the same time.

The past year and a half have shown that Mercer is a gem within the MMC portfolio, and we intend to continue building on that success.

Thanks for the time to speak with you today.

I will turn it over to Brian.

Thanks, Michele.

Okay, I think it is time now for questions, so we would like to hear from you.

(OPERATOR INSTRUCTIONS).

Larry Greenburg, Langen McAlenney.

I was just wondering if you can talk a little bit about the seasonality in your business.

Last year the first-quarter margin was 20ish on an adjusted basis, and the second through fourth quarters fell off very significantly.

And I know there was a lot of messy stuff in those numbers, but given everything that has happened in the last couple of years, it is hard to really track what the true underlying seasonality in the business is.

I was just wondering if you could chat about that a little bit.

And then secondly, can you just go through how foreign exchange impacted earnings and if possible margins in the various segments?

Okay, Larry, listen we will do foreign exchange afterwards and let's do seasonality first.

And I assume you're really talking there about Marsh and Carpenter?

Yes, exactly.

Well, Dan you are here.

The way seasonality works at Marsh, our largest international region is Europe, and a great deal of Europe's renewals, particularly in countries like France, are in the first quarter.

And so we tend to see the revenue come in from those locations early first quarter and the expenses live with us for the rest of the year, and that is why you see a bit of a falloff as we go through the year.

Yes, Peter is here from Carpenter.

Peter, yours is even more seasonal.

Right.

The treaty business typically tries to match with fiscal years of our clients' insurance companies and the predominant amount--more than 60%--comes up for January 1 and will flow through the year.

So in Carpenter's case, if you missed the first of the year, you've got a difficult year ahead of you.

So that is what we faced, although we look like we're moving into a better year starting next year.

Okay, Larry, now let's do foreign exchange.

Larry, let me make a general observation first because we have obviously a fair amount of data.

With the diversification of the businesses and geographies, we generally see that while there is some quarter-to-quarter variability in the impact of foreign exchange on our results and--just as a digression--obviously, when you look at the revenue, you see the impact pretty clearly in the first quarter this year, and you can assume that that is matched relatively fairly with what is happening on the expense side.

While we see variability quarter-to-quarter, the diversification of these businesses has historically resulted in not significant net impact either way from a Forex perspective on annual results.

Some up, some down.

So we feel we've got to bear that.

Now obviously in a quarter like the last one, like this one, the first quarter--where the Euro strengthened significantly against the dollar, although interestingly the pound did not--we got a little bit of assistance in the quarter, but we expect to retrade that or for that fall out and dissipate over the balance of the year.

So I would say the best way to look at these businesses is to accept the fact or recognize that we are likely not to have substantial Forex impact on a net basis hit us.

It pretty much washes out.

That has been historically the case.

Meyer Shields.

(multiple speakers) -- data perspective, but Brian, if you would look back at the $845 million of contingents or MSAs that were given up immediately post-Spitzer, do you have a sense now as to how much of that you have recovered or how much is still left?

How much is recovered?

Do you mean in terms of getting revenue in a different way?

Yes.

Well, that is an interesting question.

I'm not sure I have the answer to that, frankly.

It is pretty complicated because that was just one -- that was an earnings stream that disappears, and so how do you make up that kind of earnings stream?

You have to get it through normal commission and fee income.

You trace it back to '04.

There was a significant drop-off.

Our margins have suffered as a result from that period forward.

So it is slowly building up, but we clearly have not made it back.

I mean they clearly have not made it back.

That is one of our issues, you know.

If you really look at this, Marsh, in particular, one of our biggest issues, of course, is our revenue.

And we've got to find ways of getting a better revenue movement within the Company.

I don't know, Dan, do you want to add anything to that?

I think it sort of highlights the unlevel playing field that we have in the insurance marketplace, which is inherently unfair.

You have got one situation where certain players are held to a standard in which there is full disclosure and no contingencies, where the rest of the market participants operate in a world of no disclosure and full contingencies.

I would think that over time that has to work itself out.

And in terms of a follow-up, I think, Brian, you mentioned that Marsh headcount was down 150 in the quarter.

Obviously the last couple of years, there's a lot of involuntary departures from management's perspective.

Can you break down that 150 between how many people you want -- you terminated and how many people are left that you want to keep?

Yes.

Okay.

Well, we are talking about terminations, and Dan, I think wants to take that one if you don't mind.

Sure.

I mean, one, on an overall basis, the 150 departures in the first quarter were all managed by us, and so those were an actual reduction in force.

When I look at turnover overall, actually we are at historical levels now.

So I do not view employee departures as an issue for Marsh.

In fact, I cannot hire all the people who want to join.

So on an overall standpoint, we've got the right base of colleagues to handle the business we have and to win in the marketplace.

David Small, Bear Stearns.

Just two quick questions.

Can you just clarify a little bit on the Guy Carpenter margin compression?

You kind of alluded to it in your commentary, but maybe you could give us a little more meat there.

Okay, sure.

I will start and let Peter answer.

The compression is really rate.

We're talking about a declining rate level across the board, and I would say internationally in particular.

So it is really a direct result of what we do as we take our commissions from our clients.

But Peter, do you want to add to that?

Yes, we have a large property catastrophe book that is overweighted in the US.

Rates are coming off stronger in the United States, and therefore, it has affected our overall results in the first quarter probably a little bit more than if there was an even weighted average rate reduction across the globe.

And we have had a little bit of a shortfall in new business in the first quarter, and that has really been the impact with the compression of margin.

Can you just give us a magnitude of how much margin compressed?

And then on the FX question from earlier, I just was not clear.

Did FX impact the margin in the risk and insurance business?

Okay.

Let's do the FX question.

While there it is variability quarter-to-quarter--and David, I just want to reemphasize the broader picture--so we will see some variability quarter-to-quarter, and given the pretty significant move in the Euro in this quarter, we got a little bit of assistance across our businesses this quarter.

Not from all currencies, but in the Euro jurisdiction, yes, we got a little bit of help, and we expect that to dissipate over the course of the year.

And looking back over the last couple of years, what is giving us that sense is as I look back historically, I see that net net, again across businesses, we pretty much wash out on the FX line.

Okay.

So, David, we do not quote the margins, but I just do want to emphasize that because of the situation with this year, we had to do something about the expense level, and we want to restore our margins, and that is the way we will restore them.

Bill Wilt, Morgan Stanley.

A question for Brian.

Could you talk about the meetings you've had with clients; I guess I am thinking specifically of risk managers.

What concerns have they raised?

What has been the nature of the discussions?

Just some color.

And then related to that, have you lost any significant clients since joining and what has been your analysis of any of those situations?

Well, I'm just really glad you asked this client question.

You know, because I had -- I went to RIMS, just got back, and I assume everybody knows what it is.

But just for clarification, it is where the risk managers get together.

They are our clients.

And they come from all over the world, and I met them every half-hour, you know.

Morning, noon, and night.

So it was really a lot of fun, and I never thought I would say I had a lot of fun at RIMS.

But I actually had a lot of fun at RIMS.

And Marsh I thought did an extraordinary job, so my hat's off to you guys listening.

Did an extraordinary job.

But back to the clients, so yes, I sat down with them.

It was an interesting theme, consistent theme.

One, great loyalty, amazing loyalty.

Through thick and thin, some of them had specific problems.

I cannot tell you -- I cannot think of one that was complaining about service.

In fact, it was the other way around.

I mean they love their service.

They are a little concerned about what we're going to do to the organization.

They do not want to lose the level of service that we provide them.

And I think Dan will repeat this.

But almost every one of them said, look, whatever you do, don't touch my team.

The group that is taking care of me, leave them alone.

They are -- you know, they are great.

And I said that is terrific because that is what I see, and I think we have got great people.

So that is not our problem.

And clearly our clients are not our problem.

Loyalty and service.

What is our problem?

We do not make enough money, and I told them that is where you come in.

You know, we need to get more money from you guys.

And they take it I think with the right attitude.

So if I had to worry about things that we could fix around here, I could have worse problems than that.

We have great people, great service, great loyal clients.

We have just got to work a little bit on that matching of expense.

I'm sure there's things that we do that they don't need.

We're going to fix that, and the level of service we will have to work on to get it at the right level.

And we need to work on our revenues.

But the client's concern is, "Please keep up the quality of service you are providing me." That and the other thing is they are very happy.

I think it was the happiest group I have run into.

Dan, do you want to add anything to that?

Sure.

Just in terms of a professional services business, you will win clients and you will lose some clients, and that is a steady state of the business.

We have not lost any clients recently of any materiality.

In fact, our new business results -- as you know, last year we had very strong new business, almost $900 million of new business throughout the year.

We have set ourselves a hardy target for this year, and we're on track with similar or even above that level of performance.

So our new business results prove that we're winning in the marketplace, and we are gaining a lot more clients than we are losing by a long stretch.

Thanks for that.

Do you feel like you have the right internal data to make the decisions on client profitability, or is that a focus for you?

Yes, I mean client profitability is an important measure, but it is almost like you need to be optimized to really run your business on a client profitability basis.

So I'm running the business based upon geographic profitability office by office, and we use our Mtime system to evaluate within the round where we are on an individual account basis.

But I'm not using that as a way to drive the business.

I'm actually using it as a pricing of services component, and we're driving the business based upon geography.

Brian Meredith, UBS.

Two quick questions.

First, Matt, the variable compensation, $30 million, is it going to be similar in the second quarter as well to that kind of adverse year-over-year comparison?

No, the answer is no, because the adjustment as it plays through, there will be a little bit of that lingering because as we indicated on the call, the adjustment for accounting purposes happened in the third quarter.

So, by the third quarter, Brian, we should be tracking relatively -- there should be little-to-any real discrepancy.

There will be a little bit in the second quarter, but actually we do, yes, we will have a carryover of some recovery that we need to make in the second quarter.

So the second quarter, yes, will have a little bit of a discrepancy that we will have to cover.

Third quarter not.

Okay.

Great.

Obviously in the fourth quarter like the third.

Right.

And then the second question is, Brian or Dan, I think I heard that you said that at Marsh right now with respect to people and headcount you are kind of right-sized.

So the question I have going forward is, where are the margin improvements going to come from at Marsh Inc.?

You obviously had a nice 250 basis point expansion.

I'm sure that margins are not at an acceptable level yet for your purposes for where you think they should be.

Where else are they going to come from?

That is a good question.

I'm not sure that Dan said that he was comfortable with the level of headcount.

And both of us I think are saying the same thing, which is there is more work to be done.

Our margins are not near where they need to be, not even close.

And that is hard slogging, and Dan is in the middle of that with his team.

So no, we do not feel comfortable yet with our levels.

Keith Walsh, Citi.

Thanks for the new disclosure.

Very helpful.

First question for Peter.

When I think about Guy Carpenter's revenue decline, it's very different than your competitors at Aon and Willis.

They are also experiencing a tough pricing environment.

What specifically -- you know, you talked about new business -- but what about retention?

If you could talk about that year-over-year and then I have a follow-up.

As I said before, we feel like we are weighted a little bit more when you compare our competitors to the US, and that is where we're down because of pricing coming off from the US.

Our new business shortfall has had an impact.

And for January 1 we did lose a couple of clients.

They were isolated incidents, but nonetheless it certainly had an impact on our first quarter results.

And then facultative, which is an area where we had some turnover in 2007, had an impact on the first quarter, but believe we have the right strategy going forward on that.

Okay.

And then for Brian, in past comments you have said you are a builder and you may make transactions.

Can you effectively integrate acquisitions when Marsh still needs a great deal of management attention, and why not use the excess cash you have right now to buy back stock, especially if the earnings power is not showing through right now?

Well, thanks.

No, that is a good question.

I mean you have to get a company in the right position to accept a new company into it.

There is no question about it.

I would not contemplate making a major acquisition within Marsh at this point until Dan feels comfortable with having the operation running at the right level.

However, that does not mean that you cannot bolt things on.

It is a big world out there.

There is geography that we want to continue to expand in.

The operations internationally are actually pretty good.

And those integrations would not affect by any measure what would be happening in other parts of Marsh.

So we do not want to miss the opportunity of continuing to build out our capabilities where the world's insurance market is growing.

That would be crazy.

And there are other parts of MMC.

So if we would say Marsh is not quite ready for an acquisition, that does not mean there are not other parts of MMC that are not ready for an acquisition.

So the use of our funds is something that we weigh very heavily, and what is the best use of that for shareholder value creation?

And I prefer to build out the businesses and put money where we believe great success can be achieved.

That would be my first priority.

Clearly if there are no things that we can do, then we use the capital management tools available to us, primarily share buyback.

Okay.

Why don't we take another question?

Jay Cohen, Merrill Lynch.

Two questions.

Why were the consulting margins down from the year earlier quarter?

And then secondly, back to the insurance services, the margins at this unit are still significantly lower than the major competitors.

And I'm wondering, Brian and Dan, I guess, have you been able to pinpoint -- the problem is we do not have a lot of disclosure from anyone what the real expenses are broken down.

And so it is difficult to say, why are MMC's margins or the insurance margins that much lower than the others?

I'm wondering if you guys having looked at this very carefully come up with two or three kind of key factors in driving that difference and then the consulting margin difference.

Okay.

Let's -- margin questions.

First on consulting.

So we really have to break that down between Michele and John, between Mercer and Oliver Wyman.

So Michele, you want to start and then maybe John can pick up?

Sure.

I will just give a general comment that generally in the segment that revenue slowed in the segment more quickly than expenses could be taken out.

In addition, I would highlight that in the Mercer portfolio we had revenue decreases due to global market declines into assets under administration and assets under management.

Those kinds of revenue decreases dropped the margin directly dollar for dollar in the short run.

John, do you want to pick it up?

Sure.

In Oliver Wyman the principal reason was the first one Michele mentioned, which is that the revenue growth decelerated in the quarter relative to where we expected it to be.

And so the expenses did not decelerate as fast.

But we're taking measures now to align the expenses for our revenue projections for the rest of the year.

Okay.

So let's move to the insurance side, which would be principally Marsh.

So you want to do that, Dan?

Sure.

I mean first I think on the revenue side, apart from some mild mix of business issues between whether employee benefits is in one of the competitors versus not and those kinds of issues, or whether someone has more of a commission basis because they are in smaller markets than larger markets.

So there will be some mild mix of business issues, but really on the revenue side, there is no real difference in the marketplace between how we are compensated.

So it really points to expenses.

I mean I would think there's a few different things that my team and I are driving toward.

One, we think that the centralized costs of Marsh are significantly higher than what they should be, and we're very focused on that.

And I'm quite comfortable that as we move through the year, we will find ways of dramatically impacting the centralized costs without influencing or impacting client service at all.

And so we are focused on that.

I also think that when I look at our salary and benefits as a percentage of revenue and our technology spend as a percentage of revenue, I think those are both too high from where they need to be.

So I would think that those are the primary factors in what we are focused on.

Alain Karaoglan.

Two questions and essentially they are follow-ups on Jay's question.

Brian, do you have timing in terms of your vision or where you think you ought to be able to achieve margins that you would be happy with?

And related to the comment by Dan, is it a question of cost-cutting, or do you have to take market share on the revenue side in order to get to where you want to get, and do you think you can do that?

And then I did not understand the answer on the consulting margin for Mercer.

The revenues were up significantly, but operating income was up a lot less than that.

Okay.

Well, we will leave the Mercer question for last, and Michele can do that.

The timing on the margin improvement, well, you know, you and I both want this thing fixed as quickly as possible, and that is what we're trying to do.

Time is not on our side.

We know that.

But I just do not want to give a specific timeframe and so I'm not.

But I will tell you that it weighs on us, and we are working as quickly as possible.

I tried to outline that we are -- we have been taking actions in this place, and so it's not like we're sitting around.

But bear with us.

We're moving on this thing, and we will get these margins in the right order as quickly as we can, doing it the right way so we do not disrupt this company.

Cost-cutting, etc.

versus getting market share, Dan, do you want --?

Yes, I mean you know it is really simple.

We have got to improve our margins significantly.

You can grow revenue and you can cut expenses, and you can do that in different measures.

I mean I definitely think there's a revenue story here and that we are beginning to grow again.

It is tough in the market environment that we are in where in our commission businesses rates are coming off significantly.

But we cannot really lament that because that is good for our clients.

So I do not want to have our brokers with any sense of doing anything, but getting the absolute best deal in terms of conditions they can and as they do for our clients.

So it is what it is.

But I do think that there are many things that we can do on the revenue side.

For example, with Brian and my insurance company background, we look at segmentation in a much different way than the typical brokerage firm.

And we're going through the firm right now looking at various segmentation strategies.

And I think that there is revenue there to mine our existing business more than what it currently is.

So it is not just increasing market share.

I also think that, as I mentioned before, there is an unlevel playing field, which I think over time will level itself out in one way or the other.

Our enhanced commission strategy is in early stages, but it is developing, and it will lead to improved revenue performance at some point in time.

We're looking at placement hubs in the United States, which will help us on the cost side, but it would also help us on the revenue side as well because there would be pretty significant efficiency gains for certain insurance companies, and we should be able to develop some sort of arrangements with them to share in some of the efficiency gains that they will see.

So I do think that there is a revenue story to be had, which will marry with the hard look at expenses that we will take throughout this year.

Okay.

And then last, Michele.

In terms of margins, the margins you are looking at, you've referenced operating income, are for the segment.

So in both of our businesses, revenues did grow -- disproportionally grew this time in Mercer.

The margin represents both of us, and I think we answered the question as to the revenue drop as opposed to the ability to take expenses out in commensurate there, too.

Okay.

Let's do one more question.

Thomas Mitchell.

If you look in the insurance brokerage business, if you look at the broad picture of a continuing not vicious but sort of a gentle but relentless rate decline for the property and casualty companies, and then line that up with the value of things that your clients are insuring and what is happening as a trend with those, what do you think the outlook over, not the next two or three months, but maybe the next two or three years would be for the size of the pie, the total market for insurance brokerage services: Growing?

Stable?

At risk of going down?

How do you see that picture?

OK, well, there's a couple of things here.

One, I think you have to look at the rating environment for insurance companies only impacts our commission business.

Alright?

So a big chunk of our business, about a 50% chunk of our business, is on a fee basis, and it is not impacted by the rating environment.

And the rating environment is pretty clear.

The insurance business is a supply and demand business, and when insurance companies make a lot of money, then it tends to attract additional capital and rates begin to come down.

And once rates start coming down, they tend to keep going down until certain insurance companies actually lose money and withdraw capital.

And so we are in that part of the cycle.

It is a cycle that repeats itself.

I have been in this business 26 years.

I have been through it several times, and the one thing I can tell you is the faster we come down, the faster we will go up.

I would not describe it as necessarily gentle.

It has been quite aggressive in parts.

That is good news for our clients, and it is actually probably good news in terms of the faster of the descent, the quicker of the ascent.

So in terms of timing of that, it all depends on losses.

If you tell me what the losses are going to be, I will tell you when it happens.

The only thing I would add to that, Dan, is just in terms of market share issues, it is a big world out there.

If you look at our growth rates, our international growth rates in Marsh continue to be good on an organic basis, stronger outside the US than in the US, and therefore, we do not want to overlook the fact that this is a changing world.

The global economy is alive and well, and we're in the middle of it.

Anyway, thank you.

I just need to wrap up here if I could, operator, and just say, just to give you a closing comment.

We took initial steps this quarter to build a foundation for sustainable growth.

It is a start.

It is only that.

I did not take the job to be a caretaker or oversee incremental improvements and results.

We don't have immodest ambitions.

We stated simply, our objective is to build the premier professional services firm in risk, strategy and human capital and generate a compelling return for all our stakeholders.

There is a lot of work we have got to do, but the journey has begun, and I look forward to reporting back to you in three months.

So thank you, everybody.

Thank you, ladies and gentlemen.

That does conclude today's conference call.

We appreciate your attendance, and have a wonderful day.