Marsh & Mclennan Companies, Inc. (MRSH) Q2 2022 Earnings Call Transcript

Welcome to Marsh McLennan’s Second Quarter 2022 Financial Results Conference Call. Today’s call is being recorded. Second quarter 2022 financial results and supplemental information were issued earlier this morning. They are available on the company’s website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and our most recent SEC filings, including our most recent Form 10-K, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today’s earnings release. I’ll now turn this over to Dan Glaser, President and CEO of Marsh McLennan.

Good morning, and thank you for joining us to discuss our second quarter results reported earlier today. I’m Dan Glaser, President and CEO of Marsh McLennan. Joining me on the call today is John Doyle, our Group President and COO; Mark McGivney, our CFO; and the CEOs of our businesses, Martin South of Marsh; Dean Klisura of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. Marsh McLennan’s second quarter was outstanding. Top line momentum continued to cross our business, extending our strongest run of quarterly underlying growth in over two decades. We generated robust top and bottom line results, topping tough comparables in the prior year. Underlying growth of 10% in the quarter reflects considerable strength across our organization. It represents the fifth consecutive quarter of 10% or higher top line growth, building on 13% growth a year ago. Adjusted operating income of $1.3 billion was a second quarter record and grew 8% on top of 24% in the second quarter of 2021. Adjusted EPS growth of 8% is notable given our 33% growth in the second quarter of 2021, costs related to our strategic talent investments and the rebound of expenses such as travel and entertainment. We also completed the highest level of quarterly share repurchases in over a decade, buying back $600 million of stock. Overall, our second quarter performance reflects the strength of Marsh McLennan, the relevance of what we do and the expertise of our colleagues. I’m pleased with the momentum of our second quarter results, especially when viewed in the context of a macroeconomic and geopolitical backdrop that has become increasingly tense over the course of the year. Entering 2022, the outlook was cautiously optimistic, reflecting expectations for above-average GDP growth. Fast forward to today and we hear more about the rising risk of recession, the highest inflation in two generations, geopolitical tumult, central bank hawkishness and bear markets in risk assets. We have proven to be a resilient firm and we are prepared to act as conditions warrant. However, in the current environment, we believe it is worth noting some nuances to the macro story that remain supportive of our growth. While the real GDP growth outlook has softened, the outlook for inflation has risen. These two factors have somewhat offsetting impacts on insurance premiums. Even if GDP growth softens as predicted, higher inflation will increase insured values and likely cause higher loss costs. Additionally, property and casualty insurance pricing conditions remain firm; we are helping clients navigate an environment where underwriters remain cautious about where and how they deploy capital and terms and conditions are tight in some product lines. Insurers also continue to account for the rising frequency and severity of catastrophe losses, the risk of social inflation and a firmer reinsurance market. Looking at the health benefits and workforce sectors, the U.S. labor market remains among the tightest employment environments of the past half century. Even if it has tempered at the margins, the U.S. unemployment rate is back to pre-pandemic lows and yet over 11 million jobs remain unfilled. And short-term interest rates are rising due to central bank tightening, which will be a benefit to fiduciary income. Importantly, we are in the business of risk, strategy and people; when the world is unsettled demand for our services rises. We are helping our clients adapt to this rapidly changing landscape and navigate long-term challenges as well as opportunities. We are increasingly harnessing the collective power of our firm to guide clients as they deal with issues such as geopolitical risk, the pandemic, cyber threats, global supply chain disruptions, capital markets volatility, climate change, tight labor markets and new ways of working. Even if a recession does emerge, Marsh McLennan is well positioned to perform through the economic cycle. Since we went public in 1962, we have grown EPS during all recessionary periods, most notably in the severe recessions that accompanied the global financial crisis and the pandemic in 2020. We have demonstrated our ability to manage the expense base in both good and tough times and run our business to grow revenues faster than expenses. We have reported adjusted operating margin improvement for 14 consecutive years. We also have a track record of delivering today, while investing for the future. This includes generating attractive financial performance, while at the same time investing in our talent and capabilities. Overall, I am proud of how we are executing and delivering for clients today and we continue to believe that over the long term demand for our advice and solutions will remain strong, given rising levels of complexity, volatility and uncertainty across the business landscape. With that, let me turn it over to John for his comments on the quarter.

Thanks, Dan, and good morning everyone. Our second quarter results were outstanding. We had 10% underlying revenue growth with momentum across the business and our adjusted operating income set a second quarter record. I’m pleased with our performance and grateful to our colleagues for the value they deliver to our clients, communities and shareholders. Before I discuss market trends and our performance, I want to comment on the ways in which we are harnessing the collective strength of Marsh McLennan. We are finding the intersections where we bring unique capabilities to serve our clients. Earlier this year, I mentioned that I was meeting with our colleagues to identify areas where we can have greater client impact as well as accelerate our growth. These conversations have yielded a range of ideas to drive innovation, deliver critical client solutions, become more agile and efficient and drive growth and value for shareholders. Year to date, we have generated a significant number of wins involving two or more Marsh McLennan businesses and every day we see more potential to succeed together. Let me share a few recent examples. Marsh and Oliver Wyman helped a regional healthcare client with a broad enterprise risk management strategy. Knowing Marsh has this capability, Oliver Wyman involved them in the engagement. The client was so pleased with the value the team delivered that a further opportunity was created for Mercer to consult on workforce issues. Marsh and Mercer engaged a higher education client in the United States about enterprise risk management. The client valued our expertise and ability to facilitate conversations about total risk across all lines of insurance. As a result, Marsh was awarded the property and casualty insurance program and Mercer secured the student health, travel and athletics business. The client has since engaged the joint team about expanding additional lines of coverage. Guy Carpenter and Oliver Wyman also came together recently to help a large U.S. insurer with strategic advice to reposition a core product. The successful collaboration is expected to lead to additional business and further opportunities to partner on future projects. These are just a few examples of the ways we are helping clients grow faster and become more resilient. Now let me provide an update on current property and casualty insurance market conditions. Rate increases in the marketplace persist along with continued concerns around the impact of inflation on loss cost and a tightening reinsurance market. The Marsh Global Insurance Market Index showed price increases of 9% year-over-year. This marks the 19th consecutive quarter of rate increases in the commercial P&C insurance marketplace. Looking at pricing by line, the Marsh Market Index showed both global property insurance and global casualty rates up 6% on average. Global financial and professional lines, excluding cyber, increased low single digits, while cyber rates rose nearly 80% in some geographies. As a reminder, our index skews the large account business. However, small and middle market insurance rates continue to rise as well, although less than for large complex accounts. Turning to reinsurance, Guy Carpenter’s U.S. Property Catastrophe Rate on Line Index showed increases of approximately 15% through midyear, the largest increase since 2006. Midyear renewals reflected one of the most challenging property markets in many years with pricing driven by inflation, escalating geopolitical risk and loss experience. Throughout the first half of the year, we saw some reinsurers take tougher positions on specific terms and conditions and shift portfolios to limit capacity in certain lines of business or geographies. We remain focused on helping our clients navigate these challenging insurance and reinsurance markets and the heightened risk environment. Turning to our performance in the quarter. As I noted earlier, Marsh McLennan had excellent results. In the second quarter, we had 10% underlying revenue growth with 9% in Risk & Insurance Services and 10% in Consulting. This is a fantastic result considering the prior year second quarter underlying growth was 13%. Bottom line results were strong as well with adjusted operating income growth of 8% in the quarter compared to 24% growth a year ago. Looking at Risk & Insurance Services, second quarter revenue was a record $3.3 billion, up 5% compared with a year ago or 9% on an underlying basis. Adjusted operating income increased 9% to a second quarter record of $1 billion and our adjusted operating margin expanded 40 basis points to 32.8%. At Marsh, revenue in the quarter was $2.8 billion, up 5% compared with a year ago. Revenue growth was 9% on an underlying basis and supported by strong renewal growth and new business. U.S. and Canada had 10% underlying revenue growth. This marks U.S. and Canada’s fifth consecutive quarter of double-digit underlying revenue growth. International was also strong with underlying growth of 9%. Latin America grew 14%, Asia Pacific was up 11% and EMEA was up 7%. Guy Carpenter’s second quarter revenue was $522 million, up 9% on an underlying basis driven by strong retention and new business as well as rate increases, which continued at midyear. Guy Carpenter has now achieved underlying revenue growth of 9% or higher in four of the last five quarters. In the Consulting segment, revenue was $2.1 billion and up 10% from a year ago on both a reported and underlying basis. This is Consulting’s fifth consecutive quarter of double-digit underlying revenue growth. Adjusted operating income increased 4% to a second quarter high of $369 million. The adjusted operating margin was 19.3%, down 20 basis points versus a year ago. Mercer’s revenue was $1.4 billion in the quarter, up 7% on an underlying basis. Career grew 17% on an underlying basis, a record since we began reporting this line of business. We continue to see robust demand for solutions linked to workforce transformation and compensation and rewards. Health underlying revenue growth was also excellent at 10% in the quarter, reflecting growth across all geographies. This quarter’s results continue to benefit from strong demand for our solutions, accelerating new business, higher retention, increased enrolled lives from a strong labor market and medical inflation. Wealth increased 1% on an underlying basis, reflecting modest growth in defined benefits which offset a modest decline in investments. Our assets under management were $346 billion at the end of the second quarter, down 12% from the prior year reflecting capital markets and foreign exchange headwinds. In May, Mercer announced an agreement with Westpac to acquire BT Super Trust and Advance Asset Management Australia. This will create a $45 billion Mercer fund helping more than 850,000 Australians invest for retirement. The transaction is expected to be completed in the first half of 2023. Oliver Wyman’s strong momentum continued. Revenue in the second quarter was $695 million, an increase of 16% on an underlying basis. This follows a 28% comparable in the second quarter of 2021 and reflects continued spend across all geographies. Overall, I’m proud of our second quarter performance, which demonstrates the continued momentum across our business, despite a more uncertain macro environment. Now I’ll turn the call over to Mark for further detail on our financial results and a discussion of our outlook for the rest of 2022.

Thank you, John, and good morning. As Dan and John mentioned, our strong financial performance in the second quarter reflects continued momentum across our business. We saw another quarter of double-digit underlying revenue growth and meaningful earnings growth despite tough prior year revenue and expense comparisons. We generated GAAP EPS of $1.91 in the quarter and adjusted EPS of $1.89, up 8% from a year ago. This comes on top of adjusted EPS growth of 33% in the second quarter of last year. Operating income was $1.4 billion and adjusted operating income was $1.3 billion. Our adjusted operating margin was 26.7% in the second quarter, up 30 basis points year-over-year. John covered our business operating results, so I’ll cover some of the other aspects of our performance and outlook. Adjusted corporate expense was $62 million in the second quarter. Based on our current outlook, we expect approximately $142 million for the second half of the year. Foreign exchange was a headwind of $0.03 to our adjusted EPS due to the strength of the U.S. dollar against most major currencies. Year-to-date foreign exchange represents a $0.07 headwind, assuming exchange rates remain at current levels. We expect FX to be a headwind of $0.01 in the third quarter and $0.05 in the fourth quarter. Our other net benefit credit was $59 million in the quarter. For the full year 2022, we expect our other net benefit credit will be about $240 million. Investment income was $2 million in the second quarter on a GAAP basis and $3 million on an adjusted basis and mainly reflects gains in our private equity portfolio. Interest expense in the second quarter was $114 million compared to $110 million in the second quarter of 2021. Based on our current forecast, we expect interest expense to be about $118 million in each of the third and fourth quarters. Our adjusted effective tax rate in the second quarter was 23.7% compared with 24.4% in the second quarter of last year. The lower rate this quarter was driven by a decline in our underlying tax rate to 25% from 25.5% a year ago. Our tax rate in the quarter also included a benefit from favorable discrete items, the largest of which related to stock compensation. When we give forward guidance on tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume an adjusted effective tax rate of around 25% for 2022. Turning to capital management and our balance sheet, we ended the quarter with total debt of $11.8 billion. Our next scheduled debt maturity is March of 2023, when $350 million of senior notes mature. We continue to expect to deploy approximately $4 billion of capital in 2022 across dividends, acquisitions and share repurchases; the ultimate level of share repurchase will depend on how our M&A pipeline develops. Last week, we raised our quarterly dividend 10% marking our 13th consecutive year of dividend increases. In the second quarter, we bought back 3.8 million shares of our stock for $600 million reflecting our strong financial position and outlook for cash generation. Our acquisition pipeline remains active. As John mentioned, we recently announced Mercer’s agreement with Westpac to combine the BT and Mercer Super Trust in Australia. We are also looking forward to Mercer’s acquisition of Advance Asset Management from Westpac. We are excited about these deals and how they extend Mercer’s leading position in OCIO. Our cash position at the end of this quarter was $909 million. Uses of cash in the quarter totaled $1.1 billion and included $275 million for dividends, $232 million for acquisitions and $600 million for share repurchases. For the first six months, uses of cash totaled $1.9 billion and included $547 million for dividends, $273 million for acquisitions and $1.1 billion for share repurchases. Regarding the outlook for the rest of 2022, we remain on track for a terrific year. Our top line comps get tougher in the second half, and there’s greater uncertainty in the macro outlook. However, with our strong first half, we see underlying growth at the upper end of our full-year guidance of mid-single digits or higher. We also continue to expect margin expansion for the full year and solid growth in adjusted EPS. With that, I’m happy to turn it back to Dan.

Thanks Mark. Richard, we’re ready to begin Q&A.

And our first question online comes from Elyse Greenspan from Wells Fargo.

Hi, thanks. Good morning. My first question, I was hoping to just get some color on the impact of the new hires this quarter. I think last quarter you saw an impact in Guy Carpenter. Did that continue and did Marsh also see a benefit in the second quarter?

As I’ve said before, Elyse, good morning. At Marsh McLennan, we’re largely focused on building our capabilities and building our talent. It’s all about the talent. It’s not necessarily all about what kind of book of business or what kind of production that individual drives and how quickly they can get to know our distribution, our client base, and the prospects that we go after in the complexity of the world. There will be plenty of opportunities to get our talent engaged. Now having said that, last year we had a strategy to build our talent base for a variety of different reasons, and we arrived at that strategy. So it’s a little bit more acute in terms of how it translates to revenue, and obviously it’s revenue for us across the firm. John, do you want to give a little bit more detail about what you’re seeing from the new hires?

Sure. We’re very pleased with the hiring we did last year. As you know, we capitalized on our strong brand as an employer in the marketplace and some market dislocation. And it’s worked out exceedingly well for us. Our focus this year has been onboarding that talent and bringing them to a level of productivity. As we noted last quarter, Guy Carpenter’s impact from those hires was a bit earlier, as expected, than it will be at Marsh, but the talent we brought in has been very, very helpful at Marsh as well. We serve our clients in teams. One of the things that feels particularly good about this is the cultural fit of these new colleagues; it’s worked out very, very well. So we’re on target for productivity. We’re slightly ahead and we feel terrific about the investments we made.

I think it’s really important, John’s comment about serving clients in teams. That’s what we do. There’s not a number on an individual’s back of what they have to produce in a given timeframe. We’ve built the capabilities of the firm, and that is a lasting basis of increasing value that we provide to clients. Do you have a follow-up?

Yeah, thanks. My follow-up: you kicked off the call discussing the potential impact of a recession. You also highlighted that inflation could be a benefit as well as the still-good commercial pricing. So if we do enter into a recession, whether that’s later this year or in 2023, is that an environment when you think about those moving pieces that Marsh McLennan can still continue to hit that mid-single digit organic growth target?

I’m not going to give guidance about our revenue next year or later. I will say it’s important to note that in all past recessions since 1962, we grew adjusted EPS and we know how to run a business in good times and bad times. We’ve proven to be a very resilient firm. There is certainly uncertainty about the economic outlook and geopolitical risks. But there are factors that tend to support our growth: strong demand for our services in difficult times, inflation which can increase insured values, higher interest rates which benefit fiduciary income and profitability, and a firm insurance market with tightening reinsurance on the property side. We feel good about where we are positioned now. Historically, the more discretionary parts of our business—Oliver Wyman and Mercer Career—tend to be impacted the quickest in downturns; together they’re about 16% or 17% of the firm. However right now their performance has been remarkably strong and their pipelines remain solid. So the red flag is not up yet, but we watch it carefully.

Maybe one more thing to add: our revenue line is also exposed to medical inflation. I noted that in my prepared remarks, but medical inflation is also a tailwind for us.

That’s a good point. Next question, please.

Our next question online comes from Mr. Robert Cox from Goldman Sachs.

Hey, thanks for taking my question. So my first one: I wanted to ask about the environment and noting that some notable companies have come out and said they’re being more cautious with respect to hiring and maybe slowing spend on professional fees. Are you seeing any of that impact on your runway for project-related work? I guess particularly with respect to Oliver Wyman?

I’ll hand off to Nick in a second, but Oliver Wyman’s performance has been very strong. Pipelines still look good. They’re getting a lot of looks across different areas—from efficiency plays to growth plays. Nick, could you give us a bit more?

Thanks Robert. We’re delighted with the continued progress across all four of our regions; we’ve been in double-digit growth and the pipeline looks robust in all four. We have 12 different industry practices; the majority of those have been in double-digit growth, led by energy, healthcare and life sciences, retail banking, automotive and manufacturing, and private capital. We’re seeing broad-based demand across organizational effectiveness and operational efficiency work, as well as restructuring, finance and risk. There are quite a few countercyclical offerings in our portfolio. Over time we believe mid- to high-single digit growth will be the through-the-cycle average, and it’s obviously been faster recently. The pipeline still looks good, as Dan mentioned.

Robert, on the question about hiring caution among clients, it’s been a very tight labor market, particularly in the U.S. Companies are focused on how to attract and retain colleagues and they engage Mercer regularly on that. Regarding our own hiring last year when we had 6,000 net hires, the timing is, in retrospect, pretty well-suited to the environment we are in today. We have gone back to a more normal pattern of hiring—it's not caution as much as recognition that we had a large degree of hiring last year. Our hiring pace this year is consistent with 2017-2019 on a CAGR basis. So it’s back to normal on the hiring front. Do you have a follow-up Robert?

Yes. With respect to those hires in 2021, there are tailwinds for the brokerage business right now. Are those tailwinds enough to have that talent base hold their own in a recessionary environment, or would you look at that and say this could be a margin headwind?

We’ve grown our margins in good times and in bad times. Philosophically, we run the business to grow revenues faster than expenses, and that makes margins go up. The underlying level of growth has a big impact: the higher the levels of growth, the more ability we have to support margins. Tighter growth would make it more difficult, but we’re a company that can perform in good times and bad. Recessions are part of the economic cycle; we don’t fret over them and we don’t plan around them excessively. We’ll run the business and deliver fine results while continuing to invest.

Our next question comes from Mr. Jimmy Bhullar from J.P. Morgan.

Hey, good morning. First, following up on your comments on the pricing environment: are you seeing any changes on the part of your clients in response to higher pricing, both on the primary side and also in reinsurance?

John, why don’t you take that?

Sure. Jimmy, a little bit of background, and I’ll ask Martin and Dean to share observations around the current marketplace. As I said earlier, prices are up in both insurance and reinsurance. Insurers and reinsurers remain concerned about elevated catastrophe losses over the last several years, including secondary perils. They’re spending time better modeling and understanding those perils—there’s concern about inflation, both core inflation and social inflation, and higher frequency of large losses. Insurers led the turn in the market several years ago and now reinsurers are pressing on pricing and terms and conditions. Retail pricing remains up. Martin, maybe you can share some observations next, and then Dean can talk about reinsurance.

Thank you, John. Pricing is strong in the second quarter, which is challenging for our clients as the question noted. Rates continue to moderate though in the course, which is good news for clients. Financial and professional lines rates are up 16%, driven by cyber; property is up 6%, casualty up 6%—those are the real drivers. It’s difficult to see inflationary impacts fully embedded in rates yet, although it’s possible that rate increases would have been faster in a normal inflationary environment. Clients have options: we manage some captives and they’re able to retain more risk in their captive to deal with those issues.

In terms of reinsurance renewals, the first half as John noted was the most challenging property market we have seen in a number of years. U.S. property catastrophe rates increased about 15% on average through the first half—the largest increase since 2006. The midyear renewal was particularly challenging as property catastrophe capacity was constrained globally, with particular difficulty in the U.S. and London wholesale market. Macro influences impacting reinsurance include rising inflation, uncertainty from the Russia-Ukraine war, climate change concerns, continued increases in global catastrophe losses and reduced retrocession protections. That said, demand for our advice and solutions remains very strong as clients try to manage volatility on their balance sheets and seek strategic advice on systemic risk—climate, cyber, ESG and secondary perils. Everywhere we look, we see wildfires, convective storms and floods throughout the world. Our clients are asking us to build tools to help manage through that volatility.

Thanks, Dean.

And as a follow-up, there’s been concern in the market about Oliver Wyman and consulting with an economic slowdown. Obviously you’re not showing that in your results. What’s driving the momentum there and what’s your outlook as the economy slows a little?

We’ve talked over many years about how Oliver Wyman tends to be our fastest-growing segment over long stretches. We’re very pleased with their results: 16% on top of 28% from the year before is strong. Nick, how do you see things?

Broad growth and a robust pipeline are driving momentum. We prepare offerings for the questions that change as the cycle changes. The pandemic created different market conditions across sectors—some sectors have struggled while others have boomed. Overall, we see no slowdown in the pipeline to date.

Martine, can you talk about Mercer generally and Mercer Career specifically?

Thank you, Dan and Jimmy. We see a strong pipeline in the Career business, particularly career services. The pandemic accelerated change around the way we work and we see labor shortages; currently we don’t see any slowdown or evidence of it. We are cautious in looking at potential red flags, but the conditions in the market right now generate questions that our expertise can help clients answer.

Thank you.

Our next question on line comes from Mr. David Motemaden from Evercore ISI.

Hi, thanks. Good morning. Dan, you mentioned you’re prepared to act as economic conditions warrant. Could you elaborate on some of these actions and how far away you are from putting them in place? What are you looking for in the environment before you start to take some of these actions?

There are several things we are working on across short, medium and long-term horizons to become more efficient: technology modernization, real estate rationalization, different ways of working, and operational excellence. We’re still in the early to mid stages of creating operational improvements that deliver higher levels of client service at lower internal cost. We avoid getting too cautious too early. The business is performing well; we invested through the pandemic and in 2021 and we continue to invest. We are still hiring, though at a pace more similar to 2019 than the surge in 2021. Most of our costs are identifiable: compensation and benefits, technology, premises, and travel and entertainment. The levers are available to us. We also have a very large variable compensation pool driven by profitability—much larger than years ago because our profitability is higher—giving us flexibility to protect shareholders if we hit headwinds on growth. So we don’t plan around macro scenarios excessively; we run the business and adapt as needed.

That makes sense, thanks. A follow-up on expenses and margins: the first half was supposed to have tougher comps but you posted modest margin expansion of 20 basis points. Should we expect a tick up in margin in the back half because some tougher comps abate? Were there one-offs this quarter or in the first quarter that might shift to the back half?

We’re pleased with modest margin expansion year-to-date—especially after hiring 6,000 people net last year. Most of the growth benefit is in our future rather than the past. As we look to the back half, the headwind from comp related to prior hiring begins to abate, and the growth benefit continues. We don’t give margin guidance by quarter, but we do give it by year and expect margins to go up this year. We focus on growing the top line and profitability; margins are an outcome of growing revenue faster than expense. The back half will play out, and we expect to deliver a strong year.

Our next question online comes from Weston Bloomer from UBS.

Hi, good morning. Thanks for taking my question. First, on free cash flow growth: growth was okay in 2Q but H1 was a little lower, looks like mostly due to higher comp. How should we think about free cash flow growth in the second half? Any notable headwinds or tailwinds?

We try not to focus on free cash flow growth in a particular quarter because it can be volatile. Over longer stretches we’ve delivered double-digit growth in free cash flow and expect to continue to deliver strong growth. The early part of the year is our seasonal low for cash generation because of variable comp payouts and there’s a tough comparable: our variable comp pools were up substantially last year. That has been a drag early in the year. The second quarter was up 8%. Our outlook for cash generation remains strong.

My second question: on capital allocation and the higher repurchases in the second quarter—was that due to a lower share price or fewer M&A opportunities or richer multiples in M&A? Can you expand on the M&A environment from a multiples perspective and where you see opportunities? How should we think about repurchases versus M&A in the second half?

Multiples have generally increased over the last few years and we must be diligent in evaluating private companies and what’s sustainable. Our pipeline is good. The Westpac announcement for Australia has cash out the door next year, not this year. We don’t have a budget for acquisitions; they occur when they occur. Acquisitions are core to our competency. If we have a year light on acquisitions, buybacks will be stronger. We favor repurchases over building cash on the balance sheet. First call is dividend—our dividend was increased 10%—then acquisitions, and then share repurchase ahead of building cash. The first half favored share repurchase but that doesn’t mean the second half will; we’ll see how it plays out.

Our next question comes from Katie Sakys from Autonomous Research.

Hi there. Thank you so much for taking my question. I had a question about your guidance on foreign currency headwinds, which seems rather moderate despite currency moves. Could you give further color on your confidence in the modest EPS impact you’ve guided to, particularly in the third quarter? Is it a matter of timing of recognition of international revenue or mix, or perhaps Marsh’s recognition of international revenues in USD versus local currencies?

When you look at our guidance for the full year, the $0.07 in the first half and $0.06 across the back half are meaningful impacts and track with our 10-K disclosure of what a 10% move in the dollar against major currencies means. For the third quarter, there is a modest impact and that is what we modeled assuming rates stay where they are today. Because of dollar placement activity in London, a weak pound actually acts as a bit of a hedge against a strong dollar relative to other currencies. That pound impact is most significant in the coming third quarter and provides a partial offset. As we get to the fourth quarter, that benefit abates, and we see the $0.05 impact in the fourth quarter.

Got it, thank you. As a quick follow-up, are you expecting any margin tailwinds from foreign currency in the back half?

Generally not significantly; most of our margin is driven by our operating performance.

I’d now like to turn the call back over to Dan Glaser, President and CEO of Marsh McLennan for any closing remarks.

Terrific. I’d like to thank everyone for joining us on the call this morning. I want to thank our 83,000 colleagues for their commitment, hard work and dedication to Marsh McLennan. I look forward to speaking with you all next quarter. Goodbye.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.