MITRE MINING CORPORATION LTD (MMC) — Q1 2023 Earnings Call Transcript

Good morning and thank you for joining us to discuss our first quarter results reported earlier today. I'm John Doyle, the President and CEO of Marsh McLennan. Joining me on the call is 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 had a strong start to 2023. Our first quarter results were excellent and we are well positioned for another good year. Top line momentum continued as we generated 9% underlying revenue growth on top of 10% growth in the first quarter of last year. We had strong growth across most businesses, segments and geographies with underlying growth at Marsh, Guy Carpenter and Mercer accelerating compared to the fourth quarter. Adjusted operating income grew 13% versus a year ago, reflecting our strong growth. Our adjusted operating margin expanded by 150 basis points compared to the first quarter of 2022 and adjusted EPS growth was strong at 10%, building on 16% in the first quarter of 2022. In addition to delivering terrific results, we continued to execute on acquisitions. On April 1, we completed the merger of BT Super with Mercer Super Trust creating one of Australia's most competitive super funds with approximately 850,000 members and 63 billion of assets under management. I'm pleased with our performance, especially when viewed in the context of the volatile macroeconomic environment. The global economy has been contending with high inflation, aggressive tightening of monetary policy by central banks, some recent bank failures and the effects of geopolitical instability. We have a track record of resilience across economic cycles, and there are factors that support continued growth in our business. Although the outlook for real GDP growth continues to be under pressure, inflation remains elevated, driving higher insured values and loss costs. P&C insurance and reinsurance rates continued to increase as carriers priced to account for the rising frequency and severity of catastrophe losses, social inflation and higher reinsurance costs. Healthcare costs are trending higher and employers expect further increases in the years ahead. Labor markets remain tight in most major economies with 3.5% unemployment and nearly 10 million unfilled jobs in the U.S. and short-term interest rates are at the highest level since the financial crisis, lifting fiduciary income. Change and uncertainty create complexity as well as opportunity for clients. Marsh McLennan's leadership and capabilities and risk strategy and people help them navigate shifting landscapes. Turning to insurance and reinsurance market conditions, primary insurance rate increases persisted with the Marsh Global Insurance Market Index up 4% overall in line with the fourth quarter. Property rate increases accelerated to 10% and casualty pricing was up in the low single digit range. Workers' Compensation was flat and financial and professional liability insurance rates were down mid-single digits. Cyber insurance saw the highest increase in our index, although the rate of increase continued to moderate. In reinsurance market conditions remained challenging from January 1 through April 1. Risk appetite for property catastrophe reinsurance remains constrained. Reinsurers continue to push for structural changes and tightened terms and conditions. Limited new capital has entered the market to support property catastrophe risks. At April renewals, U.S. property cat reinsurance rates saw increases of 40% to 60% on average for non-loss affected accounts with higher increases for loss affected business. U.S. casualty reinsurance rate increases were more modest. In Japan, property cat rates were up 15% to 25%. The impact of rate increases on ceded premiums was mitigated by higher retentions. We continue to help our clients manage through these challenging market conditions. Now, I'd like to take a moment to provide an update on our recent strategic initiatives and highlight some of the steps we've taken. As we discussed last quarter, our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing capital and driving growth and value for shareholders. There are meaningful opportunities at the intersections of our businesses where our colleagues can deliver the benefits of our scale, data, insights and solutions that are highly valued by clients. In February, we named Flavio Piccolomini to lead Marsh McLennan for International and Pat Tomlinson to lead U.S. and Canada. Since then, we have also named additional Marsh McLennan region and country leaders. These leaders are driving greater client impact through enhanced collaboration, while at the same time maintaining the strength of the value propositions of each of our businesses. This deliberate focus on collaboration is already yielding benefits. Let me share some examples. Guy Carpenter Securities and Mercer Investments successfully arranged an insurance linked securities transaction for a major insurer to transfer earthquake risk. This type of win, the first of its kind in the insurer's market was possible because of the combined strength of Guy Carpenter's leadership in earthquake parametric structuring and Mercer's deep local investment and regulatory expertise.

Thank you, John, and good morning. Our first quarter results were impressive, showcasing ongoing growth momentum, significant margin improvement, and double-digit growth in adjusted EPS. Consolidated revenue climbed 7% in the first quarter to $5.9 billion, with underlying growth of 9%. Operating income reached $1.7 billion, and adjusted operating income rose 13% to $1.8 billion. Our adjusted operating margin increased by 150 basis points to 31.2%. GAAP EPS was $2.47 while adjusted EPS was $2.53, reflecting a 10% increase compared to last year. In risk and insurance services, first quarter revenue hit $3.9 billion, marking a 10% increase from last year or an 11% increase on an underlying basis. This performance represents the eighth consecutive quarter of at least 8% underlying growth in RIS, marking the strongest growth period in nearly two decades. Adjusted operating income rose 17% to $1.4 billion, with our adjusted operating margin expanding by 210 basis points to 38.6%. At Marsh, quarterly revenue was $2.7 billion, up 8% from the same quarter last year, or 9% on an underlying basis. This follows 11% growth in the first quarter of last year and shows acceleration from the fourth quarter. The first quarter's growth resulted from excellent client retention and strong new business acquisition. In the U.S. and Canada, underlying growth was 7% for the quarter, a solid performance despite ongoing challenges from reduced M&A and capital market activities. Internationally, underlying growth was robust at 10%, building on 11% growth in the first quarter of 2022. Asia-Pacific saw an 11% increase, EMEA grew by 10%, and Latin America also rose by 10%. Guy Carpenter generated $1.1 billion in revenue, reflecting a 7% increase or 10% on an underlying basis, driven by strong growth across all regions and global specialties in response to tighter reinsurance market conditions. In the Consulting segment, first quarter revenue reached $2 billion, a 1% increase from last year or a 5% increase on an underlying basis. Consulting operating income stood at $411 million, with adjusted operating income at $406 million, a 1% rise, despite facing continued foreign exchange challenges and a weaker quarter at Oliver Wyman. Our adjusted operating margin in Consulting was 20.3% for the first quarter, down 30 basis points. Mercer's revenue totaled $1.3 billion in the quarter, reflecting a 7% increase on an underlying basis. Career revenue grew by 12%, marking the eighth consecutive quarter of double-digit growth due to high demand in rewards, talent strategy, and workforce transformation. Health underlying growth also reached 12%, buoyed by robust performance in both employer and government segments, with momentum across all regions. Wealth grew by 2% on an underlying basis, fueled by continued strength in defined benefits consulting, although this was partially offset by a decline in investment management due to ongoing capital market pressure. Our assets under management were $354 billion at the end of the first quarter, up 3% sequentially but down 9% from the first quarter of last year due to market declines and foreign exchange, which outweighed positive net flows. Oliver Wyman's first quarter revenue was $687 million, remaining flat on an underlying basis, following a nearly 40% surge in revenue over the past two years. Recent sales efforts have shown promise, indicating potential for modest growth in Oliver Wyman during the second quarter. Foreign exchange acted as a $0.04 headwind in the first quarter. If exchange rates hold steady, we anticipate a $0.02 headwind in the second quarter and a mostly neutral impact in the latter half of the year. Regarding the restructuring program we discussed last quarter, we expect total charges of between $375 million and $400 million. To date, nearly $250 million in charges have been incurred, with expectations to incur most of the remaining costs in 2023. We aim to achieve total savings of around $300 million by 2024, with $160 million to $180 million realized in 2023 and the remainder in 2024. Our other net benefit credit for the quarter was $58 million, and for the entire year, we still expect this credit to total approximately $235 million. Investment income for the quarter was $2 million on a GAAP basis, or $4 million when adjusted, compared to $17 million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense for the first quarter was $136 million, up from $110 million in the same quarter last year, reflecting an increase in long-term debt and higher interest rates on commercial paper used for efficient working capital management. Looking ahead, we expect about $150 million in interest expense for the second quarter and approximately $575 million for the full year. Our effective adjusted tax rate in the first quarter was 25%, compared to 23.1% in the first quarter of last year, benefiting from favorable discrete items, primarily relating to share-based compensation, similar to the previous year. Excluding these discrete items, the effective adjusted tax rate was about 25.5%. For guidance on our tax rate, we do not factor in discrete items, which can swing either way. Given the current environment, it’s reasonable to project a tax rate between 25% and 26% for 2023. In terms of capital management, we ended the quarter with total debt of $13 billion, which includes $600 million in senior notes issued in March. Our next debt maturity is due in October 2023, with $250 million in senior notes maturing. Our cash position at the end of the first quarter was $1 billion, with cash usage totaling $876 million, including $296 million for dividends, $280 million for acquisitions, and $300 million for share repurchases. We anticipate deploying about $4 billion in capital throughout 2023 across dividends, acquisitions, and share repurchases, with the exact share repurchase level contingent on M&A opportunities. While the outlook for the global economy remains uncertain, we are optimistic about our business momentum, supported by favorable macroeconomic factors. I want to emphasize that while we anticipate margin expansion in the second quarter, it may be more modest compared to other quarters, due to ongoing talent investments made last year, timing of annual raises, and a resurgence in expenses such as travel and entertainment relative to last year. Overall, our strong start positions us well for a successful year in 2023, and we continue to expect mid-single digit or better underlying growth, margin expansion, and significant growth in adjusted EPS for the full year.

Thanks, good morning. I had a question just on the increased cost saves from the restructuring, so a pretty big increase in that target. I'm wondering, John, if maybe you could just talk about the sources of those benefits and if this is all we, if there's anything more that we could expect potentially in the future?

Sure. Thanks David and good morning. So, as I mentioned in my prepared remarks we're excited about the opportunities at the intersections of our businesses. We're being more deliberate and focused on areas of collaboration, and that's creating both revenue and expense or efficiency opportunities for us. I shared or spoke about the news about Flavio and Pat's appointments, so I'm excited about that and the other regional leaders and country leaders that we put in place to really capture these opportunities for us. So, but from an efficiency point of view, they're in similar areas to what we talked about on the fourth quarter call earlier this year. It's in the area of talent, of course, and re-skilling and moving talent to important growth opportunities. And I would point out we are reinvesting as well, although the savings we talked about, that's net of reinvestment, beyond people, it's technology and real estate, and so it's our best estimate at the moment. But again, we're going to continue to look for opportunities along the way.

Hey, good morning. So I had a question on organic growth and the acceleration you reported in the first quarter in the RIS division. Just wondering to what extent results benefited from sort of one off type timing of business type things, or were there other factors that you think are more sustainable in nature?

Yes, sure Jimmy, and good morning. You know, I was very pleased with the start to the year, as you noted, and I pointed out in my prepared remarks, it's an acceleration from our growth in the fourth quarter. You know, I talked about some of the macros that are supportive of growth, not just in RIS, but in our business more broadly. But I also want to point out we've invested in talent in growth areas. We've deployed capital in markets that we think have strong growth fundamentals. And we've also been quite focused all throughout the company in investing in our sales operations capabilities, in tools as well. There's nothing really one-off about what happened in the first quarter. And we feel good about, feel good again about the revenue growth. Maybe I'll ask Martin to share some details and then Dean, to give a little bit of more color of where we saw some of the strong growth in RIS in the quarter.

Thank you, John. I'd be delighted to, yes. We're very pleased with the strong organic growth at 9% in Q1, which is on top of the 11% posted in Q1 2022. Our strongest quarter last year, and better than the full year growth of 8%. Solid growth is across International 10%, APAC at 11% EMEA 10%, LAC at 10%, U.S. and Canada at 7%. And as expected, the U.S. and Canada results were once again impacted through tough comps and transactional risk and elevated M&A, SPAC and capital markets activity at the beginning of 2022, when the overall 9% growth in the quarter was on top of 11% in Q1 2022. The specialty growth was good. Credit specialties, construction, aviation, and marine cargo, easily offset the drop in M&A growth. Renewal growth is very strong in U.S. and Canada, fueled by the new business we put on in 2022 and stronger client retention and reduced loss business which is very pleasing. So we feel very good how we're positioned. We're very good about our talent, the capabilities in the business and the consistency of the performance across the book and over a number of courses.

Thanks, John. Similar to Martin, we're very pleased with Guy Carpenter's 10% underlying growth in the quarter. Again, following 11% growth in the first quarter of 2022, we had very strong growth, consistent growth across all of our regions globally. And despite significant headwinds in the ILS capital market impacting retrocession placements, our global specialty team had a very, very strong first quarter. Certainly our results reflect tightening market conditions and restrictions in capacity, as John noted, but I think demand for our advice and solutions remains very, very strong in a very challenging environment for our clients. We think the marketplace will be a pricing tailwind moving throughout 2023 and beyond. And keep in mind at Guy Carpenter, we hired significant talent in the marketplace the last three years, and that showed up with record new business levels in 2022 with very strong momentum into the first quarter and beyond.

Thank you very much for the question, Jimmy. We've known it was coming. I think as I was looking back over the transcripts, it's four or five quarters, I've had the question about economic uncertainty and growth. And you can see from the business headlines, it's a tougher environment for consulting firms right now. We have flat underlying growth. We have added some size through excellent acquisitions. Even at that level, I'm confident that we continue to gain share. It's a fragmented market. It's falling back from the peaks of the last couple of years. And we signaled in Q4 a slowing in our sales as our clients and probably a little bit us as well, paused after a torrid two years and we were taking stock, they were taking stock. In our clients' cases there was that economic uncertainty that you've highlighted. And add on top of that, the regular drumbeats of deal-driven revenues in our private equity practice and across our industry practices also remains depressed. I'm extremely confident for the future. We continue to be selective to support clients in significant transformations around the world. We have growth in a range of our businesses. Our India, Middle East and Africa business, where we had a good acquisition last year is growing strongly. Our top sectors are the public sector, automotive and manufacturing and energy, so quite broad-based. Our top brands and innovation business, our economic consultancy mirror are in robust health. Our digital practice continues well. And as I've said before, we've been preparing for more countercyclical offerings in our nascent restructuring practice. Although it's small, it's growing strongly. So we generally guide that through the cycle, we expect mid- to high single-digit growth. But last year was obviously much higher than this. We're now in the slower part of the cycle. But as Mark said, we are currently expecting modest growth in Q2.

Yes. No, thank you, John and indeed, we're very pleased with our results, 7% overall and following a 6% Q1 last year, it's across all the regions. And I would say, there's the current macroeconomic environment is really supportive of the services that we bring to market. Our inflation and interest rate, volatile capital market, well-funded defined benefit plans, tight labor markets, demand for digital health services, new ways of working. And we've made quite a lot of investments as well in clear strategy, client segmentation, much more focused their investment in talent, in digital tools and intellectual capital. And therefore, I would say that these market conditions, combined with the clarity of our strategy, our investment, are conducive to this kind of growth. The pipeline that we see, the sales that we are entering Q2 with is strong, and we have good visibility in the next quarter and probably a little bit over. Of course, we're always monitoring the macroeconomic conditions, as we've discussed with Oliver Wyman. But over the years, we've also invested in diversifying our portfolio towards faster growth elements and more recurring businesses in the portfolio. So it looks solid for continuity in the year.

Hey, good morning. I hope the questions, I don't have less yield, but I wonder, I'm curious about any comments on the U.S. Federal Trade Commission proposal to get rid of noncompetes. One of your peers commented publicly that they were against that. Any color? Did you guys make a comment and do most? Is it correct that most producers in the U.S. do have noncompetes in their contracts?

Yes, thanks Mike. I don't think there's a lot to report on here. We, of course, are always monitoring any potential regulatory changes or possible impacts on our business. We're certainly very well aware of the FTC proposal, and we've offered feedback through a number of different industry channels. We think Marsh McLennan is an employer of choice in a very competitive industry. We see a healthy environment for sure. And there really aren't noncompetes in businesses for our producers. And if you read the trade press, you'd see a pretty active market for talent. It's a market that we're a net winner in, but nonetheless, there's an active market and talent moving around throughout the industry.

Hi, thanks and good morning. My first question is on the savings program. Can you give us a sense of how much of those 160 to 180 hit your results in the first quarter? And I'm also interested in getting a breakdown between RIS and Consulting? And also, can you give us a sense of the pacing for whatever cedes are left and how that should hit results for the balance of the year?

Yes. We haven't provided specific details, but I will do my best to assist. Regarding the impact in the first quarter, we took significant action in the fourth quarter of last year, which was reflected in the amount of charges. It seems reasonable to assume a gradual distribution of the 160 to 180 throughout this year. As John mentioned earlier, this estimate accounts for reinvestments, which will contribute to our bottom line. We haven't specified the distribution across our businesses, but you can refer to the proportion of charges mentioned in some of our disclosures to make a rough estimate. Therefore, a consistent spread of the 160 to 180 through this year is a sensible approach.

Hey, thanks for taking my question. I was hoping to drill into the retirement business and just any comments on how the economic backdrop may be impacting the business in providing any benefits?

Sure, Robert. Thanks for the question. Maybe I'll ask Martine to unpack some of the investment in Mercer Wealth results overall. Martine?

Yes. No, my pleasure to do so. Thanks for the question, Robert. It was a good quarter for defined benefit business. And basically, the market condition, the volatility, there's a lot that we can do to help clients navigate through these changes. And I'm pretty proud of the team that has been quite innovative and proactive in addressing these challenges. With the rise of interest rate, even though the asset side of the pension plans are depressed through equity, we've seen a great improvement in the funding of these plans. And when the funding of these plans become better a lot of our clients looked for ways to divest the liabilities and assets to insurers. So we're seeing activities there in the buyout space, and that has fueled the DB Consulting business. So that being said, of course, the DB segment itself on the market is in structural decline. So underneath this, you'll continue to see this. But in the meantime, with the volatility, it does require quite a lot of work, and we're happy to help clients through these times. The other side of that equation in retirement is also the investment side. On the Consulting side, again, we were very busy helping through the volatility, the decline in equity, et cetera. And our OCIO business, which is directly related, we're taking basis points up of the value of assets as a way to pay for the services we render and of course, when the value of assets are depressed, our revenue goes down. But we have net flows into that business. It's a business that has very good long-term growth through net flows through return. It's just been a more difficult period over the last year and a half. We're seeing still quarter-over-quarter like year-over-year headwinds, because the decline in market really started later in Q2 and then through Q3 last year. So that pressure on the year-over-year basis should ease out at current if the current AUM value stay at current level, we should see that starting to turn around in Q3.

Good morning. Thank you for taking my questions. I have two questions, both related to margins. First, building on Meyer's initial question, you've achieved three consecutive quarters of over 200 basis points of adjusted margin improvement in RIS, which is quite impressive. At the same time, it seems that fiduciary income contributed about 230 basis points to margins this quarter, and cost savings likely contributed another 100 basis points. So it appears there were some offsets in RIS. Can you elaborate on that?

I don't think of it in terms of offsets. I'm pleased with the margin expansion in the quarter. We're very disciplined about how we manage our cost base. We're not trying to optimize margins in any given quarter. We're trying to strike that balance between delivering strong results today and ensuring sustainable growth and investment in the capabilities that our clients need for the future. I'm very pleased with our start to the year from a margin perspective.

Hey, good morning. I have two quick questions. I think, Martin on Marsh mentioned a bit of a headwind still from the robust IPO and M&A markets in the first quarter of last year. Maybe could you help us size that headwind in the first quarter? And then next quarter, maybe some color on sort of the tailwind of not having it there, I mean I had heard from some competitors that you had a 5% dampening effect on organic revenue growth last year. So just curious if you could help us size that at Marsh?

Yes. We're not going to size that, Andrew. We talked about it a bit in the fourth quarter. It was a bit more of a headwind in the fourth quarter than it was in the first quarter, but it remained a headwind for us. Again, we're pleased with the growth overall. Capital markets are just one input to the overall macro environment and then, of course, what we're doing to execute and to expand our growth. But I mean, you can look at the big data and get a sense of when obviously M&A activity started to tail off and IPO activity. And while it won't be as much of a headwind, it gave us projecting a major rebound in the market over the course of the next quarter or two as well.

Thank you. I have a couple of questions. First, I would like to explore Oliver Wyman further. Mark, you mentioned that sales activity seemed to have improved slightly in the second quarter, which is encouraging. I assume this is due to the strong financial services practice at Oliver Wyman, possibly reflecting some impact from the current banking crisis. Additionally, are you noticing any slowdown in corporate spending, and could that be a reason for your cautious outlook on potential developments in the future?

Thanks, Brian. Look, we have a little less visibility into the pipeline at Oliver Wyman. That's historically been the case with that business. But as Mark pointed, recent sales activity has been better. We appreciate the advertisement on our FI practice. We have a great team of people there. But Nick, maybe you could add a little more color.

Yes, thank you, Brian. It's a very good question. I think what we've really seen is uncertainty more than economic decline. A lot of what we do is a matter of choice. But John made a comment with respect to Mercer earlier, that some of those choices become harder not to take right now. There's lots of questions changing, lots of important problems to solve. I think a number of our clients, particularly in the U.S., have been pausing because of the uncertainty. We don't necessarily see that as a big downward step. But they're not quite sure if they're investing for growth or they're investing for cost. And to some extent, the financial services or the banking turmoil extends that period of uncertainty. But we're extremely proud of our market-leading financial services practice in Oliver Wyman. We are, of course, very engaged in that global banking situation, whether that's supporting banks on the management of their funding, deposit and interest rate risks; working with involved factors in the sale and purchase of assets; preparing some of the restructuring that will no doubt be coming. And when we think in the medium to longer-term, that will continue to fuel the growth of that excellent practice.

All right, thank you, Andrew, and thank you all for joining us on the call this morning. In closing, I want to thank our over 85,000 colleagues for their hard work and dedication. I also want to thank our clients for their continued support. And thank you all very much. I look forward to speaking with you again next quarter.