Watson Wyatt Worldwide, Inc. Q3 2008 Earnings Call Transcript

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 |  About: Willis Towers Watson Public Limited (WLTW)
by: SA Transcripts

Watson Wyatt Worldwide, Inc. (WW) Q3 2008 Earnings Call November 5, 2008 9:00 PM ET

Operator

If at any time during the call you require assistance, please press * followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Mary Malone, Director of Investor relations. Please proceed.

Mary Malone - Director of IR

Good morning, this is Mary Malone, Director of Investment Relations at Watson Wyatt Worldwide. Welcome to our conference call to discuss our results for the first quarter of fiscal year 2009. I am here today with John Haley, Watson Wyatt’s President and Chief Executive Officer and Roger Millay, our Chief Financial Officer. After some brief prepared remarks, we will open the conference call for your questions. Please refer to our website for this morning’s press release. Today’s call is being recorded and will be available for replay via telephone for the next week by dialing 617-801-6888, confirmation number 84454402. The recall will also be available for the next three months via the company’s website at www.watsonwyatt.com.

There are a few slides that accompany the financial section of our presentation, and you may log on to our website to obtain those slides. This conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding expected financial and operating performance. Any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. You are cautioned that these statements may be affected by, among others, the important factors set forth in our filings, that of the Securities and Exchange Commission and in today’s news release, and that consequently actual operations and results may differ materially from the results discussed in the forward looking statements. The company undertakes no obligation to update publicly any forward looking statements, whether as a result of new information, future events or otherwise, except as provided by Federal Securities laws. At this time I will turn the conference call over to John Haley.

John J. Haley - President and CEO

Thank you, Mary. Good morning and thank you for joining us today. I am pleased to share the results of our fiscal year ’09 first quarter with you. Our revenues for the quarter increased to 426 million, an increase of 6% over prior year. On a constant currency basis, our revenues increased 7% over prior year. Our segment revenue growth on a constant currency basis was quite good during the quarter – 6% in benefits, 21% in technology and administration solutions, 15% in the human capital group, 2% in insurance and financial services, and 9% in investment consulting. For the quarter, diluted earnings per share were $.82. This is a 6% increase over the prior year period of $.77 per share. The strengthening of the US dollar resulted in a $.02 reduction to our EPS. On a constant currency basis, diluted earnings per share were $.84, a 9% increase over prior year. Our EPS growth resulted primarily from our increase in revenues and the decrease in shares outstanding. The increase in non-operating items also contributed. The growth in our operating income is masked by the strengthening of the US dollar. On a constant currency basis, our operating margin was 12.3% for the quarter and our operating income resulted in $.02 more of earnings per share.

We had the strongest stable business and have performed well in these challenging economic times. While we would prefer to work in a good economy, we have been here before and are well positioned to weather this economic downturn. Our services are well aligned with changing market demands. We are a conservatively managed company with excellent cash flow and a strong balance sheet. Now, let’s review each of our segments, beginning with benefits.

For the quarter, benefits group revenues were 238 million, up 5% from the prior year and 6% on a constant currency basis. We experienced decreased demand for our services in North America, Europe and Asia Pacific. Growth would have been 1 point higher if we adjusted for the spin-off of the multi-employer retirement business in North America in February 2008. We have a large base of recurring services that our clients need in all economic environments. Additionally, pension plan sponsors across the globe face an array of complex financial risk and demographic issues. We expect demand for our retirement services will continue.

We think that the current financial crisis will highlight the relative pros and cons of defined benefit pensions and defined contribution plans. For employees, the predictable, mainly guaranteed income of pensions contrasts sharply with the day-to-day fluctuation of defined contribution plan account values, which are wreaking havoc on planned retirements. For employers, defined benefit plan sponsors have significant cash flow planning work to do as a result of the financial crises and the recent law changes. We expect significant dialog with our clients on these issues. Now let’s move on to the Technology and Administration Solutions group.

For the quarter, revenues were $48 million, up 18% from prior year and 21% on a constant currency basis. We performed better than we expected in both Europe and North America, primarily due to additional project work at existing clients. As this practice matures in North America and we have more clients in ongoing service delivery, our base of recurring revenue increases. When projects move from implementation into ongoing service delivery, we begin recognizing revenues and this provides growth over the prior period. We also achieved growth this quarter from additional project work at existing clients. As compared to prior year, we had more project work at existing clients, and less project implementation work. This change in the mix of work contributed to our high growth rate, because of the deferral accounting required for project implementation work. We had 164 projects and service delivery at the end of September 2008, up from 95 at the end of September 2007. At the end of September 2008, we had another 59 projects in implementation. We continue to have an excellent retention rate.

We are also performing well in Europe and have excellent retention there, too. Virtually all of our revenues in Europe are from ongoing administration work. We have a stable platform of revenues in this segment and there is some visibility into our growth. As companies continue to take a hard look at how they administer their benefit, retirement management and compensation programs, we expect additional growth opportunities will arise. The administration services that we provide are a compelling proposition for companies looking to control costs, improve employee engagement and productivity, and free up the HR function for more strategic efforts.

Next, let me turn to the Human Capital group. For the quarter, revenues were $50 million, up 16% from prior year and 15% on a constant currency basis. This is the only segment where we benefited from the movement in foreign exchange rates. As compared to prior year average exchange rates, the Euro appreciated and the British Pound depreciated. In this one segment, we have more Euro denominated revenues than Pound denominated revenues. We experienced growth in both Human Capital consulting projects and data services. Demand was especially strong for compensation work. Executive pay remains under scrutiny and demand for our services should continue. The Human Capital group has been our most cyclical segment in the past, but our services have become more governance and compliance focused. This is also our most geographically diverse segment, and we expect to grow in all geographic regions. This segment performed well in the first quarter, and we expect it will perform well for the remainder of the fiscal year.

Now we’ll discuss the Insurance and Financial Services group. For the quarter, revenues were $28 million, consistent with prior year and a 2% increase on a constant currency basis. Our clients in this segment have been the hardest hit by the current financial crisis. We view the current situation as a mixture of good news and bad news. In the short term, we think the turmoil will create opportunities for us, but we also expect that some clients will defer or cancel projects due to cost constraints. We have already started work on one very large project and there are several other projects on which we are proposing. As of now, we expect to meet our original forecast for the year. We can’t overlook the fact that there will probably be significant restructuring within the insurance and financial services industry over the next few months and years. There is some uncertainty as to the eventual outcome, but we think that we are well positioned to respond quickly to the needs of our clients. We expect most of the project work in the next couple of quarters will be transaction related work.

Lastly, Investment Consulting reported revenues of $42 million for the quarter, an increase 5% from prior year and 9% on a constant currency basis. This is the segment that has been most impacted by the current financial crisis.

There continues to be a demand for our services, but the lack of liquidity and unattractive pricing have delayed our ability to execute certain projects. Also, at this time, some of our best advice affects our ability to earn immediate revenues. We’ve recently been advising our clients not to change managers and to defer making certain types of investments. While advice not to do something can be extremely valuable, it is not usually revenue generating. But we do what is in the best interest of our clients, knowing that this will serve our business well for the future. Many of our clients are looking at their investment strategy and are considering what to do when the markets settle. We continue to be optimistic about the longer term growth prospects for this segment, but it’s growth will be more moderate for this fiscal year.

Given the turbulent markets and our more moderate growth expectations for this fiscal year, we are deferring planned head-count increases as appropriate on a market by market basis, until we see clear signs of additional growth momentum.

Wrapping up, we performed well despite the challenging economic times. The most important thing we are doing is staying close to our clients. We are cautiously optimistic about our growth opportunities for the remainder of this fiscal year. Now I will turn the call over to Roger.

Roger F. Millay - CFO

Thanks, John. Good morning to everyone. As you’ve just heard, we’ve experienced good growth in our first fiscal quarter. For the quarter we reported revenues of $426 million and diluted EPS of $.82. On a constant currency basis, total revenues were $431 million, resulting in 7% growth over last year. On a constant currency basis, our diluted EPS was $.84, an increase of 9% over last year. The Benefits group had a 27% margin for the quarter, and increase from 25% last year. The margin improvement over prior year was driven by North America. Benefits tends to have even higher margins in the back half of the fiscal year, we are still expecting full-year margins consistent with prior year, in the high 20% range. Technology and Administration Solutions had a 27% margin for the quarter, and increase from 21% last year. The increase is due primarily to the additional project work in Europe and North America. The deferral accounting required for systems implementations in North America makes it challenging to predict the margins within this segment. We still expect full year margins will be in the low to mid 20% range, and probably slightly lower than fiscal 2008.

Please remember that the margins in our second quarter of fiscal 2008 were higher than normal due to additional project work in North America. Human Capital group had a 14% margin for the quarter, up slightly from 13% last year, driven by Data Services. We expect margins will be in the mid to high teens for the full year. Margins vary somewhat in our different geographic regions and a change in geographic mix could have a slight impact on the overall margin.

Insurance and Financial Services had a 3% margin for the quarter, a decrease from 5% last year. Margin improvement in Europe was offset by lower margins in North America and Asia Pacific. We still expect margins will be in the high single digits for the year. Investment Consulting had a 30% margin for the quarter, a decrease from 35% last year. Margins were down in both North America and Europe, as compared to prior year. We’ve had significant hiring plans for fiscal 2009 in this practice, and we’ve made most of those hires to support our past growth and to position ourselves for future growth. We’ve made some hires to bolster our research capabilities and some that are client facing. For fiscal 2009, margins may drop below 30% into the high 20% range.

In fiscal 2009, our costs increased to include the talent and skills needed for the long term, but our revenues incorporate the negative impact of continued market turmoil for the remainder of the fiscal year. We continue to think that the long term prospects are good for this practice. The segment margins that we’ve just reviewed are before consideration of discretionary compensation and other unallocated corporate costs, such as amortization of intangibles resulting from our acquisitions. For the quarter, our operating income margin was 12.0%, a decline from 12.8% in the prior year quarter. The quarter over quarter decline is due to the decrease in investment consulting margins and the strengthening of the US dollar.

Net income for the quarter was $35 million, up from $34 million in the prior year. Fully diluted earnings per share for the quarter were $.82 as compared to first quarter earnings per share of $.77. On a constant currency basis deluded earnings per share for the quarter were $.84. Before moving to the balance sheet, I want to mention that we’ve reformatted our headcount disclosure to be more consistent with how we report headcount internally. Also, we incorrectly reported our June 30 headcount, and that’s been corrected in today’s press release. Moving to the balance sheet, we ended the quarter with $67 million of cash and $105 million of debt. You’ll recall that we typically have some borrowings during the first quarter, due to the seasonality of our business. We expect to have the debt repaid by the end of the fiscal year. We also used $74 million to repurchase shares during the quarter. We have now completed our planned $100 million share repurchase.

Our business will continue to generate strong cash flows this fiscal year. Our liquidity position is also very strong. We have an additional $195 million available under our line of credit that we don’t expect to need. We drew under our revolving line in September with no issues. Our bank deal matures in 2010.

Now let’s review our guidance for fiscal 2009. The slides posted on our Web site may be helpful for following along in this section. On a constant currency basis we are confirming full year guidance of revenues in the range of $1.85 billion to $1.90 billion, and deluded earnings per share in the range of $3.72 to $3.79. Constant currency is calculated using prior year average exchange rates. The revenues and deluded earnings per share that we report will continue to be affected by changes in foreign exchange rates. We certainly don’t know how exchange rates will fluctuate over the remainder of our fiscal year. After considering the volatile foreign exchange markets and our company forecast we expect reported revenues will be in the range of $1.75 billion to $1.81 billion. And reported deluded earnings per share will be in the range of $3.50 to $3.57. This is the same EPS guidance that we provided in the September analyst meeting.

Generally speaking, a little less than half of our business is in Europe, and a 10% drop in the pound and the Euro will result in about a 5% drop in our EPS over the remainder of the fiscal year. The UK is about three quarters of our European business, so changes in the pound affect our results more than changes in the Euro. We continue to be cautiously optimistic about fiscal ‘09. We’re not seeing any real signs of a slow down in the business, but the signs of economic concern are all around us.

Now, I’ll walk through the revenue guidance for each of the segments. Please note that the slides on our Web site show both reported and constant currency revenue guidance. Since constant currency is the better measure of underlined business performance, I’ll focus my remarks on the constant currency guidance. Let’s start with benefits.

Our benefits constant currency revenue guidance is 4% to 6% growth in fiscal 2009. Normalizing benefits for the multi-employer business that we exited in fiscal 2008, revenue growth would be 5% to 7%. We’ve increased the low end of the range based on our results for the first quarter, and our sense of the business pipeline.

In the technology and administration solutions group, we’re increasing our constant currency revenue guidance to 7% to 10% growth in fiscal 2009. The increase reflects the mix of work in our pipeline in North America, and the progress of our new client installations in Europe.

In the human capital group we expect constant currency revenue growth of 9% to 12% in fiscal 2009, which is consistent with our previous constant currency guidance. In insurance and financial services, we still expect fiscal 2009 to be a year of recovery for this practice, and we’re keeping our previous constant currency guidance. We expect constant currency revenue growth of 4% to 7%. Lastly, we’re revising our constant currency investment consulting revenue growth down to 10% to 13% in fiscal 2009. This downward revision to our guidance is due to the delays in executing projects on behalf of our clients, and assumes that market conditions continue to be difficult for the remainder of our fiscal year.

These are tumultuous economic times for everyone. Despite this environment, we continue to expect to achieve constant currency revenue growth in each of our segments. We expect reported second quarter revenues will be in the range of $422 million to $432 million. And reported deluded EPS will be in the range of $.75 to $.79. On a constant currency basis, we expect second quarter revenues to be in the range of $456 million to $466 million. And deluded EPS to be in the range of $.82 to $.86. Second quarter revenue guidance by segment is presented on slide four.

You’ll recall that the second quarter fiscal ’08 was a good quarter for us, and provides a tough comparison for second quarter of this year. We had really strong margins in the second quarter of fiscal ’08 in our technology group from some project group around the implementation of the Pension Protection Act and in our human capital group from the timing of some of our data services work. Consistent with the prior year, we expect to generate more than half of our earnings in the second half of the fiscal year, and we expect the third quarter to be our strongest quarter.

In summary, we continue to believe that we’ll deliver strong earnings and cash flow results for the year in the local markets of our business across the world. However, the stability of our underlying business is somewhat masked by the changes in foreign exchange rates. I have to say that it’s hard see that we’re getting full credit for this earnings and cash flow resilience in our current valuation.

Carl D. Mautz - VP and CFO

Thanks, Roger. Now we’ll take any questions that you may have.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. If you wish to ask a question please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please dial star followed by two. Questions will be taken in the order received, and please press star one to begin. And your first question comes from the line of Andrew Fones of UBS. Please proceed, sir.

Andrew Fones – UBS:

Thanks, yes, I had a question about your full year guidance. Going through the margin guidance that you mentioned I think you said that you were looking for slightly lower margins in investment consulting and also the HCG group than you had given previously. And you’ve also lowered the growth expectation for your highest margin, business consulting business. Despite that you’re maintaining your EPS guidance, so should we assume, from this, that you’re now anticipating slightly lower discretionary compensation expenses? Do you think?

Roger F. Millay – CFO:

I think you had several questions in there, but as you know, I think, and as everyone knows, we mark the discretionary compensation level to growth and earnings per share, or net income, so those will move in tandem. In terms of the guidance overall, we have maintained our guidance, and as I think I’ve said in my remarks, we ran scenarios and we recognized that FX rates were a little bit lower than when we met at the analyst meeting, but the puts and takes of different practices as well as looking at the momentum of costs, we’re maintaining guidance. So there is a mix in there, as you said, some are down but also some are up.

Andrew Fones – UBS:

OK, thanks. I also just kind of wanted to ask a little bit on the technology business you’ve mentioned in the past. You’ve won a lot of large projects in Europe. I was wondering if you could give us kind of an update of when you expect those to kind of impact revenue and what the margin impact could be? Thanks.

Roger F. Millay – CFO:

Well, I think actually those projects started to come in in a small way this quarter, and I think the expectations were laid out for the year. They will come in across the year. One of the elements of the margin changes in that business for this year is that we do continue to incur costs to ramp up those projects, and again they’ll come in as the year goes by. So the maturation of those projects in incorporated in our guidance.

Andrew Fones – UBS:

OK, and can I ask what the impact of those costs on the margins this year?

Roger F. Millay – CFO:

I don’t have a specific number on the cost impact of those specific ramp-ups.

Carl D. Mautz - VP and CFO:

Andrew, can I just clarify something too? I think in the first question you asked Roger you were suggesting that we had said that the human capital group would have declining margins this year, and actually we’re not suggesting that.

Andrew Fones – UBS:

No, I think it sounded as though it was slightly lower than your prior guidance and you said mid to high teens and I may be wrong but I thought your old guidance was high teens.

Roger F. Millay – CFO:

I think that’s what I referred to in the mix of geographic regions may have a little impact. I mean, we don’t see that as a big change, but…

Andrew Fones – UBS:

OK, so it sounds like it’s a small change. And a kind of final question, I wanted to ask about the insurance business. You saw a kind of acceleration in business that looks like you expect further acceleration as you go through the year. If you could kind of talk about what’s driving that, thanks.

Roger F. Millay – CFO:

I think what we see with the insurance, we had a 2% revenue growth this quarter, but we expect to see some more transaction related business in the quarter, I mean in the remainder of the fiscal year. We do think there will be some consolidation in this industry. Now, as we mentioned in the prepared remarks, we also think we may see some projects delayed or deferred in this segment also, but we think the transaction related work will probably be a little more significant. We have one very large transaction related project which we’ve already started work on.

Andrew Fones – UBS:

OK, thanks very much.

Moderator:

Your next question comes from the line of T.C. Robillard of Bank of America Securities. Please proceed.

T.C. Robillard - Bank of America:

Great, thank you, good morning everyone. I just wanted to just dig down a little bit more into the margin side. I know that on a reported basis it’s going to be difficult because it’s a combination of revenue mix as well as FX issues. But am I coming away thinking from your prepared comments, that if we look on a reported basis you had on a year and year 80 basis point loss on the Ibit margins. It sounded like 30 basis points was FX related, which means 50 basis points came from the investment consulting group. Am I understanding correctly, that just 10% of your revenue base at that margin, on a year on year basis coming down was all of the Ibit difference?

Roger F. Millay – CFO:

I think the way you’re looking at it is, you know, there are a lot of influencing factors that go in there. But as I said in the remarks the investment consulting and FX – the 30 basis points that you referred to – are the two big drivers.

T.C. Robillard - Bank of America:

OK, and so as we’re going forward then it just looks based off of your guidance, at least as I’m looking on the second quarter, you guys are expecting a much more rapid year on year decline. And I understand in that second quarter last year had some unique items that made it artificially high, but it seems to me – and this is just kind of a rough cut – are we expecting kind of further deterioration just in kind of core margins? On a constant currency basis, excluding any of the fluctuations in FX?

Roger F. Millay – CFO:

I don’t think we see anything significant, I think we would have pointed it out if there was. So I think we expect to be around this range for the year. Also, just to point out that the second quarter is the lowest margin quarter for the year.

T.C. Robillard - Bank of America:

And then, to switch over to the technology group, it looked like you guys had a sort of large increase in new project signings. If you just kind of take the conversions that you had, versus the sequential increase in implementation projects. Can you give us a sense as to where you guys are seeing some good success on new wins, whether it’s geographic or any other way you can kind of break that down?

Roger F. Millay – CFO:

North America has been doing well in terms of, again, the types of projects we’re able to recognize revenue up front and it's compensation and reward related projects.

T.C. Robillard - Bank of America:

And is this similar, are you still saying in terms of your new signings, big signings that you guys have pointed out over the last several quarters, that a lot of your new signings tend to big bigger in terms of revenue opportunity. Is that the same or was this more of a larger number of rather smaller signings?

Roger F. Millay – CFO:

I think for the most part it's smaller type projects.

T.C. Robillard - Bank of America:

Okay, and then, just lastly and then I'll jump back in the queue. Any thoughts on further buy backs now that you guys have just given away your stock [ends] and the fact that you've completed the $100 million that you originally announced?

Roger F. Millay – CFO:

We haven't had any definitive conclusions on that. But we'll continue to look at it as time goes by. But, as you say, from a pure stock price point of view, it's attractive now. But there are other factors we'll be considering.

T.C. Robillard - Bank of America:

Okay. Thanks guys.

Operator

Your next question comes from the line of Paul Geo, CEO of Deutsche Banc. Please proceed.

Paul Geo - Deutsche Banc

Thanks. I just have questions about the insurance and financial services division. I'm just wonder if any of your bigger clients, particularly AIG or some of the other financial services companies that are out of business now, if they're in your [clientage]?

That project, is it related to one of the headline mergers that we have recently seen? Thanks.

Roger F. Millay – CFO:

We're not in a position to talk about who that project is for or what it relates to.

So, I think we've tended to have relationships with a wide variety of players in the insurance market though, and as you know we're quite strong in those markets in both Europe and Asia Pacific, and so we do have a wide variety of clients.

Paul - Deutsche Banc Securities

So, if [recording drop] we shouldn't expect any, although you made comments earlier but, There's only been a couple of insurance companies, maybe just one in the current business. It doesn't sound like it's something you are concerned about.

Roger F. Millay – CFO:

No. I think we're concerned about how the financial crisis has hit the insurance companies and we are somewhat concerned about some retrenchment in this area as we've mentioned in some projects by insurance companies.

But we also think that combined with that, we will see some increasing consolidation in that market. And as there's consolidation, there's a lot of wok for us on transaction related projects. So I think we see some parts of what we do perhaps decreasing or being deferred. But we see some parts perhaps increasing.

Paul - Deutsche Banc Securities

Great, Thanks. Let me ask you another question about the guidance. I have estimated about a $0.12 hit just from your September 17 guidance from the currency. It's moved against you 8% since your September, 17 [versterday yet].

You're not changing your guidance. But you're [konsekrensing] guidance goes up $0.02.

It just doesn't seem to make sense to me. Is there some difference between them? Because it seems that, the FEX hit on September 17 is bigger than you're implying between your two guidances.

Roger F. Millay – CFO:

Yes. We did struggle with this because FEX has been bouncing all over the place. But again, as I referred to earlier, what we've really been doing over that last few days is running various scenarios of where we expect operations to come out and where FEX has been, and in those scenarios, our range held.

Paul - Deutsche Banc Securities

Following up from that, it sounds like underlying upgrade X currency is maybe bigger than the $0.02 that's it's implying. At least that's what my calculation…

Roger F. Millay – CFO:

And the $0.02 you're referring to; we held our constant currency guidance. So,

Paul - Deutsche Banc Securities

Right. So I would expect your currency guidance to come down more with the FEX. It didn't.

Roger F. Millay – CFO:

It didn't. That's what I'm saying. Again, as we ran scenarios of where FEX was and what we expect out of the operations for the rest of the year, we held the range.

Paul - Deutsche Banc Securities

Great. Thank you.

Operator

You next question comes from the line of Ashwin Shirvaikar of Citigroup. Please proceed.

Ashwin Shirvaikar - Citigroup

Thanks. Congratulations, guys, especially keeping your guidance. Obviously that's a good thing.

Roger F. Millay – CFO:

Thanks Ashwin

Ashwin Shirvaikar - Citigroup

Given the market performance is there any heightened attention to pensions this year, both in terms of new potential business and [do you expect] lame duck congress when it comes back to push through in eight weeks to pension...

John J. Haley - President and CEO

Yeah, there are three areas that I would point to, generally. One is the, we mentioned in the prepared remarks the relative attractiveness of defined benefit pensions versus defined contribution pension plans, and this kind of an environment shows some of the reasons why some plan sponsors and some employees prefer defined benefit plans; the stability that you have during a crisis like this. So, I think there will be some work to think about what role and what mix they should play in an employer’s portfolio of plans.

There are also issues around funding and accounting expense and even investment policy that will arise from the volatility in the markets, and it is one of the reasons why we have continued to see a lot of work in the benefits business and we expect to continue to see a lot of work for the remainder of the fiscal year. And then, finally, some of the provisions of the Pension Protection Act would require contributions that are higher in the short run than may be advisable, and I think there are a number of actors who have encouraged congress to think about those provisions and take a good hard look at them when they get back, and I expect that that will be going on.

Ashwin Shirvaikar - Citigroup

OK, moving to the cash flow performance, and outlook. Would you expect the cash flow for 2009, the operating cash flow, to be better than 2008, especially after the extenuating variable compensational?

John J. Haley - President and CEO

We had for fiscal 2008, if I am remembering the numbers correctly, a very strong free cash and operating cash flow performance and higher than the prior couple of years, so I don’t think we are saying that we are going to have more, I think there were some things that related to some of the acquisition activity in ’08 and ’07 that made that made ’08 a strong year. So, I don’t think we’re seeing more, we’re seeing a good cash flow year. I think that the guidance that had been given for just cash balances for the year was $195 million and we are holding that and we expect, as we said, a good cash year still, even though free cash, not gone up from regular operations, but free cash to be probably a little bit lower than it was in ’08.

Roger F. Millay - CFO

And then finally, Ashwin, you asked about the effect of discretionary compensation, and let me just remind you that our policy is to try to increase discretionary compensation the same way that net income increases. So we saw a 2% increase in net income this quarter, so we had a 2% increase in discretionary compensation.

Ashwin Shirvaikar - Citigroup

Ok, Roger, thank you.

Operator

Ok, our next question comes from the line of Mark Marcon of R.W. Baird, please proceed.

Mark Marcon - Robert W. Baird

Good morning, can you say specifically what your affect assumptions are for going forward, Pound and Euro?

Roger F. Millay - CFO

No, because as I’ve said, just given how much affects has been bouncing around, the approach we took this time was we did run scenarios and we don’t have one specific assumption.

Mark Marcon - Robert W. Baird

Can you say what the range of assumptions would be in?

Roger F. Millay - CFO

Well, I’d just say that we were doing all this work last week, so we considered that the pound was around $1.60 and the Euro was around $1.30 and we were considering where our rates were at the time, certainly, when we ran these scenarios.

Mark Marcon - Robert W. Baird

What I am trying to understand is whether or not you were assuming some sort of mean reversion from a shorter term perspective or whether some of your scenarios actually included the current spot rates.

John J. Haley - President and CEO

Yeah, our scenarios did include the current spot rates

Roger F. Millay - CFO

And they did include going back a little too.

Mark Marcon - Robert W. Baird

So, even some further deterioration?

Roger F. Millay - CFO

No, no, the other way.

Mark Marcon - Robert W. Baird

OK, so parity or going back to $1.20 in terms of Dollar/Euro was not in the scenario, but moving back

John J. Haley - President and CEO

Say a buck 40ish for a dollar Euro or a buck seventy-five, for a dollar pound was included.

Mark Marcon - Robert W. Baird

In summary, we’re not saying that we would still need $1.75 or $1.40, which is what we talked about in September. But we are saying that we consider down to where rates were last week and that they could be in between there or who knows.

It’s hard to predict.

John J. Haley - President and CEO

Also Mark, that’s why we gave it the sensitivity because honestly, we could all take views as to where rates are going but given that you know what our percentage of income, foreign income, and particularly in Europe, the pound piece and the Europe piece, we can all run scenarios off of that.

Mark Marcon - Robert W. Baird

And can you talk a little bit more about what sort of, I guess when we think about this administration change that’s coming, what do you see are going to be some positive in terms of being helpful to the business and what are going to be some of the potential challenges?

John J. Haley - President and CEO

I think the headline I would give Mark is that change is usually good for our business, and if I were to look at two areas that I think there will be a lot of change that would be hot areas topics for change within the next year would be health care and executive compensation.

Mark Marcon - Robert W. Baird

Yep.

John J. Haley - President and CEO

I think there will be a lot of proposals to look at the health care system in the United States, that was certainly one of the big issues in the election, I think the proposals are really all around continuing to use the employer-based system that we have in this country, which I think is good for the kind of consulting we do. So I expect to see a lot of interest from our clients there and executive compensation for obvious reasons will continue to be a hot topic.

Mark Marcon - Robert W. Baird

What do you think on the benefit side just in terms of the pure pension side of it, do you think we’re going to see some amelioration of some of the more onerous portions of the PPA?

John J. Haley - President and CEO

Well, I don’t, I think Mark, I’m always hesitant to predict whether we’re gong to see legislative change or not. I can tell you with certainty though that there are groups that are pushing Congress to consider that, I’ve already seen some letters that people have written asking them to think about some amelioration.

Mark Marcon - Robert W. Baird

And then can you discuss what you think about what your sense is with regards to your clients specifically on the pension side, how they’re balancing their need for help because markets across almost every asset class have varied more widely than what most people would have generally modeled. And what the implications are there relative to their concerns about needing to not spend as much. Can you discuss that a little bit in terms of the pure pension side?

John J. Haley - President and CEO

Yes, what we’ve seen so far is the recognition that these are big important issues and the most expensive thing they can do is to get them wrong. So we’ve seen our clients turning to us for the advice and looking to get this right and to get it figured out so I think that’s why we had a pretty good quarter in benefits this last quarter and we’re not really seeing any slowdown in that and we’re projecting a pretty good remainder of the fiscal year for benefits for the same reason. I think some of our retirements fees of course are paid by the trusts anyways but it doesn’t effect the employer’s bottom line but even beyond that I think employers want to get this right.

Mark Marcon - Robert W. Baird

On the investment consulting type, can you give us a little bit more color with regards to some of the points that you raised during the analysts stay with regards to whether or not the structured products still work and also just the performance fees, what the implications are there or what we’re seeing.

John J. Haley - President and CEO

I think, first of all, the structured products still work and in fact, we see demand from our clients from wanting to look at the structured product and do them. We just don’t see as many deals getting done in the market though it’s an issue of not so much appetite but whether those deals can actually get done and one of the things we don’t have a good view on yet is how long these might be deferred for, are these deals that instead of getting done today might get done in three months or six months or are they deals that might get pushed back a year or so may never happen? And as a result of that, I think we just don’t have a real opinion on that one way or the other. In terms of performance fees, we earned some modest performance fees last year, I think we had not projected that we would have those this year but we would have those not in our original guidance to begin with.

One thing I should mention is in terms of what portions of our fees are based on assets under management, and that’s below 20% of our investment consulting fees.

Mark Marcon - Robert W. Baird

Okay. Great.

John J. Haley - President and CEO

And that was the question I think I got to ask the investor day and I didn’t have the exact number but I think it’s under 20%.

Mark Marcon - Robert W. Baird

Super. Thank you.

Operator

The next question comes on the line from John Fogel, of Sedody and Co. Please proceed.

John Fogel- Sedody and Co

Thank you for taking my call. Good morning. I apologize, I jumped on a little bit late, so if I repeat anything I’m sorry, but I see that headcount ramped up in the investment consulting group and the growth slowed there dramatically from what you put up in 2008, and I was curious, should we expect to see some growth as time goes on?

John J. Haley - President and CEO

Maybe you can clarify after I’m done if I answered the question about acceleration but what we said in the prepared remarks about the growth in investment consulting is that the headcount grew to both satisfied needs from past growth as well as to a position for future growth and that at this point we have taken a pause on that and are evaluating that in light of current conditions and so in terms of the big ramp that you saw over the last year again, we’re going to dictate any future increases based on where we see the market going and opportunities going because again, as you say, our expectations of growth have come down.

John Fogel- Sedody and Co

Right. Okay, thank you I had missed that. Now how long does it usually take an associate to get fully ranked ?

John J. Haley - President and CEO

It probably depends on the level at which they’re coming in and even the line of business that they’re moving into. I think the investment consulting is one that, it for some of our more junior associates, it may be taking 4-6 months before they’re fully ranked. One of the things we’ve done in the investment just to be clear is we added a lot of capabilities to our research team, particularly in new asset classes. So that’s a good part of what we were doing there, we’re making sure that we’re getting part of the performance we’d like in the future there.

John Fogel- Sedody and Co

Okay. Great. And just shifting gears a little bit I believe on your last conference call you mentioned that you didn’t expect to borrow to have to pay out bonuses to pay in Q1, when you look out to fiscal 2020. Given your current cash flow trends, do you still see this as possible?

John J. Haley - President and CEO

I think there’s been no change in our view of potential cash needs going out that far.

John Fogel- Sedody and Co

And I think if we look at the long trends that we see, yes, we would still be on target for that.

John J. Haley - President and CEO

But then again, that will be subject to other potential decisions that happen in the meantime, so stay tuned to that as well….

John Fogel- Sedody and Co

Right, for example if you did some acquisitions or something…

John J. Haley - President and CEO

We get another share repurchase that would influence that.

John Fogel- Sedody and Co

Right. Actually, that leads into my last question. I was just curious how many shares you bought back in the last quarter and what the average cost was?

John J. Haley - President and CEO

What was it? It was about a million three shares I think …

Yes. About a million three

John Fogel- Sedody and Co

Do you have an average cost?

John J. Haley - President and CEO

And the average cost was a bit over $54 dollars.

John Fogel- Sedody and Co

Ok, great. Thank you very much.

Operator

(Operator Instructions) You have no questions at this time.

John J. Haley - President and CEO

Thank you everybody for joining us and we look forward to reviewing our second quarter results with you in February.

Operator

Ladies and gentlemen, thank you for participation in today’s conference. This now concludes the presentation. Now you may disconnect. Have a great day.

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