Watson Wyatt Worldwide, Inc. F3Q08 (Qtr. End 03/31/08) Earnings Call Transcript

May. 8.08 | About: Willis Towers (WLTW)

Watson Wyatt Worldwide, Inc. (WW) Q3 FY08 Earnings Call May 8, 2008 9:00 AM ET

Executives

Mary Malone - Director of IR

John J. Haley

Chief Financial Officer, Vice President

Chairman of the Board, President and Chief Executive Officer

Carl D. Mautz

Analysts

Ashwin Shirvaikar - Citigroup Global Markets

T.C. Robillard - Bank of America Securities

Jeff Meuler - Robert W. Baird

Brandt Sakakeeny - Deutsche Banc

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter Watson Wyatt Worldwide Earnings Conference Call. My name is Danyel and I will be your coordinator for today. At this time, all participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Ms. Mary Malone, Director of Investor Relations. Please proceed.

Mary Malone - Director of Investor Relations

Good morning. This is Mary Malone, Director of Investor Relations at Watson Wyatt Worldwide. Welcome to our conference call to discuss our results for the third quarter of fiscal year 2008. I am here today with John Haley, Watson Wyatt's President and Chief Executive Officer and Carl Mautz, 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, 85045287. The replay will also be available for the next three months via the company's website at www.watsonsyatt.com.

There are few slides that accompany the financial section of our presentation. You may log onto 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 facts maybe 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 with 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 - Chairman of the Board, President and Chief Executive Officer

Thank you, Mary. Good morning and thanks for joining us today. I am very pleased to share the results of another strong quarter with you. Our revenues for the quarter increased to $458 million, an increase of 16% over the prior year. On an organic basis that excludes the impact of acquisitions and foreign currency movements, our revenues increased 6% over the prior year.

On a constant currency basis our segment revenue growth was very strong in four of our segments, 20% in Benefits, 14% in Technology and Administration Solutions, 18% in Human Capital Group and 25% in Investment Consulting. Insurance & Financial Services continues to perform below our expectations with 1% constant currency growth.

For the quarter, diluted earnings per share were $0.96. This is a 26% increase over the prior period of $0.76 per share.

Margin, net income and earnings per share increases are all driven by the strong revenue growth. Our forecasted rate of $1.95 for the British pound was slightly less than the actual exchange rate of $1.99 for the quarter and therefore $0.01 of our EPS increase over guidance is due to exchange rate differences. We continue to see solid demand in the marketplace and we are optimistic about the growth opportunities for our business.

As you can see from our results, our business is performing well in the current economic environment. We continue to see that our diverse portfolio of services combined with our global presence is providing a solid business platform even in a slowing economy.

Now, let's review each of our segments beginning with Benefits. For the quarter, Benefits Group revenues were $268 million, up 21% from the prior year and 20% on a constant currency basis. Strong demand for our services in all geographic regions resulted in solid growth. Europe's growth also benefited from our acquisitions in Germany and The Netherlands. Excluding acquisitions and currency movements, organic growth was 6%. This growth is even after the spin-off of our multi-employer retirement business in North America.

As we mentioned in last quarter's call, we think this segment is impacted more by changes in the legislative and regulatory framework than by changes in the macro economic environment. We continue to assist our clients with implementation of provisions from the Pension Protection Act. Congress continues to work on technical corrections and clarifications to the act. The timing and full scope of this next piece of legislation are not clear. However, we think our clients will continue to face changes resulting from the Pension Protection Act through their 2008, 2009 plan years.

Pension accounting continues to be an area of focus for both the Financial Accounting Standards Board in the U.S. and the International Accounting Standards Board. The accounting for pensions and other post-employment benefits is complicated and require significant use of judgment and estimation. The changes will probably be significant and affect the measurement of liabilities, the timing of expense recognition and the presentation of financial statements. Although the discussions have started, we expect it will be several years before the changes are enacted.

We recently published the results of a retirement plan design survey that covered 300 U.S. employers, each improvements sponsored a defined benefit plan since 1996 and have at least $100 million of pension assets. While there has been a shift over the past ten years from the traditional defined benefit pension plans to define contribution in hybrid define plans, our survey shows that the majority of plans sponsors that maintained defined benefit plans today have made a formal decision to stay committed to them. The fact is defined benefit plans remain the most efficient way of delivering retirement wealth to employees and for helping companies manage their aging workforce.

When companies don't provide their employees with plans that amass sufficient savings for retirement, they struggle with the problem of hidden pensioners, employees to stay on the payroll because they can't afford to retire. One of the biggest changes for the future could be the resurgence of hybrid defined benefit plans, which offer features of both defined benefit and defined contribution plans.

Companies are becoming more aware of the trade-offs between cost, risk and workforce management and we anticipate this strong demand will exist around the globe for our retirement services.

Our healthcare consulting practice had another strong quarter. While this is still small part of our overall benefits practice, it is experiencing solid growth and we expect revenues of approximately $75 million in fiscal 2008. With healthcare cost still rising at twice the rate of inflation, healthcare reform continues to be a hot topic. All three major party presidential candidates have issued proposals for health care reforms. While the proposals reflect the fundamental philosophical and political differences between the candidates, all three candidates claim their proposal will result in higher quality healthcare, greater transparency about treatments, cost and outcomes and improved use of information technology. The ultimate outcome for healthcare reform will be decided until after the election.

Our research shows that most U.S. companies do not support a single payer healthcare system or State Legislature mandating coverage. Instead they prefer relying on private sector solutions. Despite their frustration with rising costs, U.S. employers believe they can do better job managing costs in meeting the needs of the workers than the government can. While companies continue to monitor legislative activity, the reform proposals are having little but no influence on company's decision to make healthcare program changes. The issues facing our clients are real and they continue to demand our consulting expertise and exploring alternatives.

Now let's move on to the Technology and Administration Solutions Group. For the quarter revenues were $45 million, up 14% from prior year and 14% on a constant currency basis. Our revenues in North America continue to increase as the number of pension administration and health and welfare outsourcing assignments in ongoing service delivery increase. We had 121 projects in service delivery at the end of March 2008, up from 76 at the end of March 2007. You will recall that we don't recognize revenues until projects move into ongoing service delivery, which is after project implementation.

At the end of March 2008, we had another 56 projects in implementation. From our perspective, the number of projects available for bid has not been impacted by the economic downturn. As our brand continues to strengthen in this practice, more opportunities are available to us. We have participated in more requests for proposals this year that have a lower win percentage. We continually refine our service offerings and remain focused on profitable growth.

You will recall that we had strong sales last year. Our researchers continue to be very busy in part by certain clients' with systems already in service delivery. Our clients in ongoing service delivery comprise approximately 85% of our reported revenues in North America. We continue to be pleased with our renewal rate that is in excess of 90%.

In Europe, our retention rate is excellent, among the best in the marketplace. We've also had tremendous success with many new clients. We won both first-generation outsourcing clients as well as clients who previously worked with our competition. We are increasing our market share and growing nicely. We continue to believe that we have compelling technology and outsourcing offerings that suite the markets we serve. We expect good profitable growth opportunities will be available regardless of the economic environment.

Next, let me turn to the Human Capital Group. For the quarter, revenues were $49 million, up 19% from prior year and 18% on a constant currency basis. We experienced growth in both human capital consulting projects and data services. Increased demand for executive compensation and sales force compensation as well as merger integration projects all contributed to our growth. This growth exceeded our own expectations and we continue to be optimistic about demand in the current economic environment.

There continues to be strong demand for compensation consulting, especially executive compensation. Our multi-year studies at 1000 large U.S. companies find a consistently strong positive relationship between realizable pay and performance.

The alignment created by today's executive pay model significantly improves corporate performance and plays an integral role in generating the most productive economy in the world. However, there are certain elements of executive payment that have come under attack. These elements include some severance and golden parachute payments and large executive pensions. We assist companies with correcting any elements of the executive pay model than are not working optimally. As the election season heats up, we expect executive pay will come under increasing scrutiny.

Properly designed pay for performance programs motivate managers to excel and drive the economic growth. With the continued scrutiny of executive pay, we think many companies will seek assistance with designing the fundamental incentives of their executive pay programs.

Now I'll discuss the Insurance and Financial Services Group. For the quarter, revenues were $31 million, up 2% from the prior year and 1% on a constant currency basis. We have fewer larger projects in Europe this fiscal year than in past years and therefore our growth has been lower than expected. In Asia, this practice is performing well and experiencing strong growth. Our revenue ramp up in the U.S. continues to be slower than the initially anticipated. As we look ahead, we expect fiscal year 2009 to be a year of recovery. The practice leadership team is working on a thoughtful disciplined business plan for modestly growing revenues and for bringing the cost base in line with the planned revenues. We will give more detailed guidance for fiscal 2009 on our next call in August.

Lastly, Investment Consulting had another great quarter. For the quarter, revenues were $43 million, up 27% from the prior year and 25% on a constant currency basis. We continue to see strong demand for all of our services, particularly advice on investment strategy. The sub-prime mortgage crisis in the United States and a weakened U.S. dollar have caused market turmoil worldwide. With continued volatility predicted for the near future, investors, including pension funds, face a perplexing landscape. Plans sponsors that have taken steps to optimize the returns or reduce risk through their investment strategies whether by hedging diversification or better deals on fees are better positioned and those are still thinking about it. The current market will be challenging for many investors and we expect strong demand for our Investment Consulting services to continue.

Wrapping up, we are optimistic about our long-term prospects and we'll keep an eye on short-term market conditions. We believe we are stronger than any time in the past given our market focus, operating discipline and global footprint.

Now, I'll turn the call over to Carl.

Carl D. Mautz - Chief Financial Officer, Vice President

Thank you, John and good morning to everyone. As you've just heard, we completed another exceptionally strong quarter led by robust revenue growth and strong margins. Our revenues for the quarter were $458 million and our operating margin increased to 14%, an all-time high for us. We continue to focus on profitable growth.

The Benefits Group had a 33% margin this quarter, an increase from 30% in the third quarter of last year. Our third fiscal quarter tends to be our strongest quarter in the Benefits Group and therefore our margins next quarter will probably be a bit lower. We're still expecting the full-year margins in the high 20% range.

Technology and Administration Solutions had a 23% margin, an increase from 21% in the third quarter of last year. We're expecting a full-year margin in the 20% range.

The Human Capital Group had a 19% margin this quarter, an increase from 14% in the third quarter of last year. We achieved margin improvement over the past, the prior year quarter in each of our geographic regions. We expect our full year margin will be in the high teens.

Insurance & Financial Services had a 5% margin this quarter, down from 21% in the third quarter of last year. As John mentioned, we are taking the steps necessary to get our margins back into the mid teens.

Margins in the fourth quarter will probably be depressed but we expect to be back on track in early fiscal 2009. Investment Consulting had a 37% margin this quarter, an increase from 34% in the third quarter of last year. This price continues to grow profitably and we expect full-year margins in the 30% range, the mid 30% range.

The second margin 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.

We still expect our full year operating income margin to be in excess of 12%, in spite of increase in non-cash amortization from the acquisitions. Last fiscal year, our operating marketing margin was 12.1% and we are anticipating several basis points higher this fiscal year.

Net income for the quarter was $43 million, up from $34 million in the prior year. Fully diluted earnings per share for the quarter were $0.96 per share as compared to a prior year third quarter earnings per share of $0.76.

Moving to the balance sheet, we ended the quarter with $158 million of cash and $111 million of debt. In April, we repaid $91 million of debt. We expect to have the debt repays before the end of fiscal 2008.

We also used $25 million to repurchase shares during quarter, $15 million of which relates to our $100 million share repurchase. Remaining $10 million was used to repurchase shares that will be issued to our stock purchase and stock compensation programs.

We expect to complete our $100 million share repurchase during the first half of fiscal 2009. Our business will continue to generate strong cash flows.

Now let's review our guidance for fiscal 2008. The slides posted on our website may be helpful for following along in this section. For fiscal 2008, we are increasing our revenue guidance to $1.72 billion to $1.73 billion and we are increasing our diluted earnings per share guidance to $3.29 to $3.32. Note that our forward-looking guidance for fourth quarter of fiscal 2008 continues to be based on an exchange rate of $1.95 to the U.S.... to the British pound.

Our revenue guidance of $1.72 billion to $1.73 billion represents an increase of approximately 16% over fiscal 2007 revenues. Our guidance by segment can be found on slide 3. Our Benefits revenue guidance is increasing to 18% to 20% growth for the fiscal year. This guidance includes an organic growth rate of approximately 5% to 6%. It is important to remember that this growth is after the previously announced exit from our multi-employer retirement business in North America. The exit of the multi-employer retirement business will have more of an impact on fourth quarter than initially anticipated.

The seasonality within our Benefits Group changed this year due to the Heissmann acquisition. Heissmann's strongest quarters are our second and third fiscal quarters during which Heissmann earns approximately 60% of its annual revenues. Therefore our third fiscal quarter is now our strongest revenue quarter in Benefits.

Our guidance for the Technology and Administrations Solutions Group remains the same. We are still expecting further 40% growth for the year.

We are raising our guidance for the Human Capital Group and expect 11% to 13% growth for the year. This full-year guidance indicates that growth in the fourth quarter will be lower than in the second and third quarters. This trend is consistent with the seasonality that we experienced in this practice last fiscal year.

We are revising our forecast for the Insurance and Financial Services Group down to around breakeven with little over 2% revenue growth.

We are increasing our guidance for Investment Consulting and now we expect growth of 28% to 30%.

Our diluted earnings per share for fiscal 2008 are expected to be in the range of $3.29 to $3.32, a 27% to 28% increase over fiscal 2007. This guidance assumes a 33.4% tax rate for the year and weighted average shares outstanding of $44.5 million for the year. We expect fourth quarter revenues to raise from $415 million to $425 million and diluted earnings per share to range from $0.74 to $0.77. Fourth quarter revenue guidance by segment is presented on slide 4.

In summary, our fourth quarter guidance reflects the seasonality of the business. We are not seeing any negative impact on the business from economic environment and we continue to be optimistic about the future.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Thanks, Carl. Now we will take any questions that you may have.

Question and Answer

Operator

[Operator Instructions] The first question will come from the line of Ashwin Shirvaikar with Citigroup. Please proceed.

Ashwin Shirvaikar - Citigroup Global Markets

Hi, John and Carl.

Carl D. Mautz - Chief Financial Officer, Vice President

Hello.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Hello, Ashwin.

Ashwin Shirvaikar - Citigroup Global Markets

Nice quarter again. I like how we can count on you guys to --.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Thanks.

Ashwin Shirvaikar - Citigroup Global Markets

Can you... the question is on Benefits, can you get into, it was a solid quarter, but some of the details on how non-U.S. demand is sort of shaping up? I mean pension change in the UK is slightly older than in the U.S., is that still a good driver? Also in the Netherlands and Germany, how are the acquisitions that you made performing?

Carl D. Mautz - Chief Financial Officer, Vice President

The acquisitions are performing very well with strong revenue growth. I'd remind you about the comment on seasonality for Heissmann where the December and March quarters are the strongest. Another thing that drove a little bit of the growth in Europe and in the branches' results this quarter, you will recall that we had a little bit slower quarter last... in the December quarter because of the vacation impact in the UK at the end of December. And that pumped up January a little bit. So as to the legislation, I think we anticipate that that will continue to drive demand in the UK and in the U.S., not so much impact at least in the warehouse in the Netherlands or in Germany. But those... the demand there has been strong and the growth has been very nice, actually a little bit better than we anticipated when we did the acquisition.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

What I would add to that, too, Ashwin is that we don't expect that the coming accounting changes that I referenced in my prepared remarks are something that will be of interest to define benefit plans around the world. It's not just FASB in the U.S. but it is also the International Accounting Standards Board, which is looking at these things.

Ashwin Shirvaikar - Citigroup Global Markets

Right. The International Accounting Standards impact that fast I guess earlier in Europe than it is here, right?

Carl D. Mautz - Chief Financial Officer, Vice President

Generally it does, yes.

Ashwin Shirvaikar - Citigroup Global Markets

Okay. And then a question on the Insurance segment, what will it take to improve performance, what kind of steps are you taking? Is it layoffs or rightsizing or you just need more sales people?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Right now, what we are doing, we don't by they way, I should just mention one thing, we don't have any evidence that the lower than expected growth is due to any kind of an economic slowdown on anything like that. We've been focused on expanding the practiced practice geographically both in Asia-Pacific and in the United States and developing our financial modeling software products, [inaudible]. If we look back on it, in hindsight we think we probably needed to focus more on business development in our established markets, particularly in the UK where we have already have very strong markets. This is largely a project-based practice and we did continually on the pipeline there. So, we're going to be focused on getting our revenues up or going to look to make sure that we have our cost base in line with that, but we are... we'd like to grow this practice to profitability.

Ashwin Shirvaikar - Citigroup Global Markets

And once you do that, say for example, for 2009, maybe not for full-year but as you get into it, can you get back to the high-teens margins that you had in that unit once?

Carl D. Mautz - Chief Financial Officer, Vice President

We're targeting for next year, probably in the mid-teens, a 15% range on the way back to stronger improvement in the future. I think we are just going to be cautious without having an overly aggressive plan so that we can grow this... gradually maintaining our profitability as we go.

Ashwin Shirvaikar - Citigroup Global Markets

Okay.

Carl D. Mautz - Chief Financial Officer, Vice President

That's really the tenure of what the team is telling us.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

But I think this is not something we expect to see turned around in another quarter.

Ashwin Shirvaikar - Citigroup Global Markets

No, that's understood but over a course of a few quarters if you can get to mid-teens that will be fabulous.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

No, Carl maybe a little more optimistic than I am on that as to how fast we will get there, but I think we have to look at all elements of this. We got to look at the cost base, we have to look at how we grow our revenues additionally.

Ashwin Shirvaikar - Citigroup Global Markets

Okay, great. Nice quarter. Thanks.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Andrew Fones with UBS. Please proceed.

Unidentified Analyst

Good morning. This is actually Jim Watson [ph], I am filling in for Andrew this morning. I had a question about the Tech... you said the number of projects available hasn't been impacted by the slowdown. Is that true, I guess, across the board from in your perspective or are you seeing any targets of weakness with in the industries?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

We are not seeing a slowdown in the number of RFPs that we are having the opportunity to respond to. We have, as I noted, our associates are quite busy. We're focused on profitable revenue growth. Some of these proposals get to the point where we don't see the profitability we want, we back off of them. But we're not seeing an economic impact with would cause us to believe that technology spend increase, for example, is slowing down.

Unidentified Analyst

Okay. And you mentioned that the win rate might have kept [inaudible]?

Carl D. Mautz - Chief Financial Officer, Vice President

The comment just I made earlier that fundamentally we're aimed at profitable projects to get to the point where the pricing is more aggressive than we think is in line with what we want to do, we back off of it. Our associates are busy, we're providing with strong revenue support on existing plans, those plans and projects are going well. So, we are just going to look for just wherever we can make the kind of money we think we should.

Unidentified Analyst

Okay. That makes sense.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Let me try and put this in a little bit of perspective, too. We, as you know, we don't recognize the revenues during the systems implementation. So, decline in the wins doesn't immediately impact our revenues. In North America, 85% of our revenues there come from ongoing services that we provide to clients. So as the number of systems in service delivery grows then the systems implementations become an even smaller and smaller part of the overall North American practice. If we got a long period where we got some field wins, we could see a potential for decline. But, we see this is probably being more than offset by providing additional services to existing clients in North America and by the growth we had in Europe. So we'll give you exact guidance for fiscal 2009 on our call on August. But, we feel pretty good about the overall structure.

Unidentified Analyst

Okay, and I guess in terms of how many months of work is there the pipeline, do you have... what's your estimate there?

Carl D. Mautz - Chief Financial Officer, Vice President

We certainly have enough work in the pipeline to maintain our growth rates through fiscal 2009. The sell season goes on. year around we'll report on that as we go but as John suggested, we are quite optimistic about that at this point.

Unidentified Analyst

Okay. And one last one. Can you tell me how much revenue and expense was capitalized for Tech and for the other businesses in Q1?

Carl D. Mautz - Chief Financial Officer, Vice President

I should be able to tell you that. You will find it in the... you said Q1, do you mean Q3?

Unidentified Analyst

I am sorry, Q3.

Carl D. Mautz - Chief Financial Officer, Vice President

You'll find that in...

John J. Haley - Chairman of the Board, President and Chief Executive Officer

It is in the 10-Q.

Carl D. Mautz - Chief Financial Officer, Vice President

It is in the 10-Q itself. You'll find that under --

Unidentified Analyst

Okay.

Carl D. Mautz - Chief Financial Officer, Vice President

Cost capitalized... and that's in the model. We have to go to the right page, you know. Just give me a second. In the third quarter, it was just about $5 million. It runs between $5.5 million and $4.5 million.

Unidentified Analyst

Okay, okay. Thanks very much.

Carl D. Mautz - Chief Financial Officer, Vice President

Yes.

Operator

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

T.C. Robillard - Bank of America Securities

Good morning, guys.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Good morning.

Carl D. Mautz - Chief Financial Officer, Vice President

Good morning.

T.C. Robillard - Bank of America Securities

Just, I'm going to stay true to my form here and I am going to push you John on your conservativeness. The margins look like they're going to take a little bit more of a dip in the fourth quarter sequentially, just backing into your top line and bottom line guidance. Clearly, you guys have a fantastic track record of delivering above your number and we know that there're some conservative side to that. I just want to make sure that there is nothing unique going on in the fourth quarter in terms of some costs or some ramp ups or anything that we should be taking into account?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Okay. Well, since Carl is the who is the expert on conservatism, I can handle this. Well, I think the broad answer is there is nothing special going on in the fourth quarter really but you can talk to, if you would.

Carl D. Mautz - Chief Financial Officer, Vice President

Let me hit that summary part and then come back and talk a little bit about detail. We were actually concerned of putting our forecast together that there might be someone concluding that we were seeing some economic impact or something else unusual going on in that business. The fist quarter has been driven simply by our normal seasonality and let me just go back to a couple of those. This is a business that has a cost structure and the near term it's pretty constant. When revenues are very strong as they were in the third quarter, you get a tremendous lift to margins and we have been slow just a little bit as we expect they will in the fourth quarter from our normal seasonality, you see the margins reflect that. Going back again the retirement business, the benefits business, we're seeing coming off of a very strong third quarter, which is very strong in Germany. The benefits business seasonality now is that the first quarter is not as strong as that part of business. So that will drive some margin change. We're a little concerned about Financial Insurances and Financial Services that will be part of it. And don't forget that the [inaudible] multi-employer business is hitting the margins in the fourth quarter, a little more strongly frankly than we thought about in the... when we thought in the third quarter, it's a little bit more concentrated. So those are certainly the drivers that I noted as I was summarizing the forecast coming from the practice directly. And we will see...

John J. Haley - Chairman of the Board, President and Chief Executive Officer

But, I think in overall, in terms of putting this together when we were looking at our fourth quarter estimates, we have Benefits and Investment Consulting about where they were, about where they will be for the whole year. We have HAS [ph] and HCG about where they were in the first quarter, which is a little bit lower than second and third quarter. And then insurance is down but these are not... there are not... they are reasonably related to what we have seen during the year.

T.C. Robillard - Bank of America Securities

Okay. And then as we look going forward, I mean it sounds as if the strength of the business, everything you guys are seeing in the visibility of your pipeline and as you're looking at your cost structure, your product mix, things like that, it appears that we should be able to see consistent margin improvement on a year-on-year basis as we go through next year as well, I mean, just kind of the normal business efficiencies. Is that a fair way to think about things?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Yes, I think that is a fair way to think about it. We think that quarters can be reasonably volatile and we need to be careful about looking at them. But we have been talking about having slight improvements in your margins year-over-year and we think we can continue to do that for few more years anyway.

T.C. Robillard - Bank of America Securities

Okay. And just I wanted to circle back to the insurance practice and actually from my standpoint, you actually had a little bit better quarter than I was expecting as for as margins went. Is this something even though you guys still have a lot of moving parts there and there's still a lot of runway left before we see the lift in margin. Is that something we can expect that to at least remains profitable? I know you guys had an impact last quarter but is that something where 5% going up over the next year or so is a good way to think about it?

Carl D. Mautz - Chief Financial Officer, Vice President

I would look beyond Q4 of this year and anticipate that we'll start to see some turnaround. I think the team is going to be cautious about that and we will try and give you some exclusive guidance as we come into the August call.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

We don't think it's... I guess to give you a little more, we don't think the revenue is going to be going down and we don't think it's going to be negative in terms of margins.

T.C. Robillard - Bank of America Securities

For forth quarter?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

No, I was speaking for next year.

T.C. Robillard - Bank of America Securities

So should we be thinking about possibly negative margin in the fourth quarter for the practice?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

I wouldn't say negative margin. You could see some modest revenue reduction in quarter-over-quarter however in the fourth quarter.

T.C. Robillard - Bank of America Securities

Okay. And then just as far as anything unique in terms of your other expense when you give your segment breakdown and you're breaking down part of the non-segments items? There was... I mean it looks similar as to what it was in the fiscal third quarter last year. Just can you remind me why you have... tend to have a big expense in... other expense in the third quarter?

Carl D. Mautz - Chief Financial Officer, Vice President

The other expense in the quarter, which is still within... you're looking at the capital within operating...?

T.C. Robillard - Bank of America Securities

Yes, I'm looking at when you gave... when you give the breakdown of segments, I think it was like negative $10.8 million.

Carl D. Mautz - Chief Financial Officer, Vice President

Those are largely the expense side of our pass-throughs such as situations we are operating as a subcontractor if you will for our clients particularly doing printing or fulfillment note purchasing and that's normal seasonality.

T.C. Robillard - Bank of America Securities

Okay. Just wanted to make sure there was nothing unique there.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

No.

T.C. Robillard - Bank of America Securities

And then just lastly, just to tie in on, you were very clear in your prepared remarks and even during the Q&A about not seeing any of the economic slowdown. I mean I think that speaks for itself in the Human Capital fees. Can you remind us what the most cyclical piece within Human Capital is? Is it the... it's not the data piece, is it the fee, the capital or the consulting, excuse me?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

We have three broad pieces. We have compensation, we have the organizational effectiveness and we have the data services and the organization effectiveness is probably the most sensitive.

T.C. Robillard - Bank of America Securities

And I am assuming that you guys, there is nothing to call out there that that still continues to do well.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Well, I think in the last quarter's call, one of the points we made was that we were probably better positioned in this practice overall than at any time in the past in terms of potential downturns and the kind of... the kind of work we have now is more repeat business. It's more reliable and still think that. And as we look in third quarter here, we really haven't seen any evidences of the slowdown.

T.C. Robillard - Bank of America Securities

And it's different because you have a higher executive comp exposure and things like that or --?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Yes, and the executive comp work we do is more... it's more a business that is done every year.

T.C. Robillard - Bank of America Securities

Gotcha. Okay, great. Thanks for the comments, guys.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Thanks.

Operator

Your next question is from the line of Jeff Meuler with Baird. Please proceed.

Jeff Meuler - Robert W. Baird

Hi, it's Jeff Mueller from Baird. I was wondering if you could give us a sense for how much work your clients still need to do related to the PPA for plane year 2008 and then how much you would expect it to step down in 2009, barring that technical corrections which I think are still in converse to get passed? And then finally just how significant those technical corrections would be?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

I think it's really hard to estimate. In fact we actually don't... I mean, this is one of the things we dealt within the other quarterly calls. So, we don't keep track of our work for clients as to whether it happens to be PPA work or not. So, we couldn't even tell you even looking back over the last few quarters how much of it was PPA work, let alone, what they will be doing in the next quarter. So, I would say this, I think there was probably right after PPA came up, a little bit of revenue bump from having done some extra work for that, but most of the PPA work is sort of in maintenance mode now and we are continuing it. We do think that we'll get some revenue bump when they get technical corrections out. But, again, we really couldn't forecast that at all.

Jeff Meuler - Robert W. Baird

Okay, thank you. And then on the acquisition front, I was just wondering what are the geographies are you targeting and then on the healthcare side would you consider an acquisition or are you looking to hire more aggressively there given that there looks to be some catalyst coming out?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Yes, Meuler, see first on the acquisitions, I think we are interested in continuing to look for high quality acquisitions and if we can find them we are certainly in the market for them. And we are always looking, we are looking now. There is nothing that we are targeting. Back about two or three years ago, we felt that we needed to have more significant operations in both Germany and The Netherlands. That was something that was a missing part of the global network. We don't feel that way about any particular geography right now. There're some we are looking at and we might get into but there is nothing where we feel a burning need to get into it. So, we'll be looking for the right opportunities there. In Healthcare, I think if we could... we'd be open to finding the right kind of acquisition to do that. I'm not sure that there're a lot out there that certainly would be good for us. At least it would be of any size to do that but it's the kind of thing we're certainly open to.

Jeff Meuler - Robert W. Baird

Okay. And then not to jump the gun on you Carl. But John, is there any update on the CFO search, where are you on that progress?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Well, we've hired an outside search firm. We have a committee composed of five people; myself and Carl, Babloo Ramamurthy, our Head of our European Operations, Gene Wickes is the Head of our Benefits Operations and then Steve Mele, our Head of Human Resources and the five of us are interviewing... are going to be interviewing all the candidates and then making a decision about whom we want to hire. At this point, we're interviewing candidates this month and we'll see how that goes. It's obviously more important to get the right person than to try to act too quickly.

Jeff Meuler - Robert W. Baird

Understood. Thanks for all the time and congratulations on another great quarter.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And your next question is from the line of Brandt Sakakeeny Deutsche Banc. Please proceed.

Brandt Sakakeeny - Deutsche Banc

Thank you. Hi, John and Carl.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Hi, Brand. How are you doing?

Brandt Sakakeeny - Deutsche Banc

I'm doing great. Thanks. Let's see... first off, I had a bad connection, so I hope this hasn't been asked earlier. But did you give out any attrition metrics so far in terms of turnover or anything else?

Carl D. Mautz - Chief Financial Officer, Vice President

We haven't.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

No, we didn't and I'm not sure we have anything right off hand on that.

Brandt Sakakeeny - Deutsche Banc

I guess, broadly, can you just talk to sort of cost of hiring and how is the labor market do you feel like. You have enough of a talent pool to hit the headcount targets and are you seeing any change in attrition levels one way or the other?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

No, I don't think, we're noticing any big changes in attrition levels one way or the other. And then I guess if you... if there really were to be a slowdown hypothetically that might make your attrition levels go down somewhat. But, we haven't seen any... I don't think we've seen much change. We're continuing to be out in the marketplace looking to hire people. We want to be careful about bringing people on, we want to make sure we have enough work for them. But we're not seeing anything one way or the other, Brand.

Brandt Sakakeeny - Deutsche Banc

Okay, great. And then just an update on balance sheet, may be excess cash needs, I know I always ask this but just wondering if there is a change?

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Yes. I mean, what's our... our projection is we're going to end the year with about, what $70 million in cash, Cal?

Carl D. Mautz - Chief Financial Officer, Vice President

Yes, in cash and the debt repaid. The share repurchase... the $100 million share repurchase is probably going to now stretch into a little bit to the first half fiscal '09.

Brandt Sakakeeny - Deutsche Banc

Okay.

Carl D. Mautz - Chief Financial Officer, Vice President

But we'll pay down the debt and continue that effort.

Brandt Sakakeeny - Deutsche Banc

Carl, how much do you have remaining on your authorization on the share repurchase authorization?

Carl D. Mautz - Chief Financial Officer, Vice President

At March, we had about $75 million, $78 million.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

$77.4.

Carl D. Mautz - Chief Financial Officer, Vice President

Thank you. John, always has the right [inaudible]. We've done a little bit of repurchasing since then, so it's down a little from then.

Brandt Sakakeeny - Deutsche Banc

Okay. Great. Perfect. That's all I have. Great job in the quarter.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Yes.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Well Brandt that $77.4 million was what we had left at the end of April. So we had used $22.6 million.

Brandt Sakakeeny - Deutsche Banc

Okay. Thanks, John.

Operator

At this time there are no more question in the queue. I would now like to turn the presentation back over to Mr. John Haley for any closing remarks.

John J. Haley - Chairman of the Board, President and Chief Executive Officer

Okay. Well. Thank you all for joining us on this call. We look forward to reviewing our fourth quarter results and our fiscal 2009 guidance with you in August.

Operator

Ladies and gentlemen this concludes your presentation. You may now disconnect. Have a great day.

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