May 8, 2009
Executives
Mary Malone - Investor Relations John J. Haley - President, Chief Executive Officer Roger F.
Millay - Vice President and Chief Financial Officer
Analysts
Josh Vogel - Sidoti & Co. Ashwin Shirvaikar - Citigroup Paul Ginocchio - Deutsche Bank Andrew Fones - UBS Mark Marcon - Robert W.
Baird Shlomo Rosenbaum - Stifel Nicolaus Timothy McHugh - William Blair & Co.
Operator
Good day ladies and gentlemen and welcome to the Quarter Three 2009 Watson Wyatt Worldwide Earnings Conference Call. My name Lis, and I'll be your coordinator for today.
At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session at the end of this conference.
(Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms.
Mary Malone. Please proceed ma'am.
Mary Malone
Thank you. 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 2009.
I'm here today with John Haley, Watson Wyatt's President and Chief Executive Officer; and Roger Millay, our Chief Financial Officer. 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 13854491. The replay will also be available for the next three months via the company's website at www.watsonwyatt.com.
There are a few slides to the company's 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 regarding expected financial and operating performance.
Any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by 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. After our prepared remarks, we will open the lines for your questions.
As the number of people asking questions has been increasing, we request that you initially limit yourself to one question. You may get back in the queue if you have additional questions.
Now I'll turn the call over to John Haley.
John J. Haley
Thank you, Mary. Good Morning and thank you for joining us today.
As you know, these are tough times and while we achieve constant currency revenue growth and solid profitability, the third quarter of fiscal '09 was more challenging than we forecasted. Our reported revenues for the quarter were $470 million, a decline of 9% over prior year reported revenues, but an increase of 3% on a constant currency basis.
We achieved constant currency revenue growth in all of our segments except for the Human Capital Group and other, which is comprised of some smaller practice areas. The declines in the Human Capital Group and other category were significant and therefore our revenue is below our revenue is below our guidance and our own expectations.
In benefits, technology and administration solutions and investment consulting, a revenue growth was consistent with our guidance. Insurance and financial services performed better than we had expected.
On a constant currency basis, revenue growth during the quarter was as follows. 3%, in benefits, 13% in technology and administration solutions, 23% in insurance and financial services and 12% in investment consulting.
On a constant currency basis, the Human Capital Group declined 18% and the other category declined 27%. For the quarter, diluted earnings per share were $0.95, or $0.01 decline from the prior period $0.96 per share.
The strengthening of the U.S. dollar resulted in a 14% reduction to our EPS.
On a constant currency basis, diluted earnings per share were $1.09 or 14% increase over the prior year. Our EPS this quarter includes $0.03 of severance.
We have selectively reduced headcount in areas, where demand has declined significantly. We generally experienced good financial performance in areas, where we have a low established market position, mature relationships and annuity driven business.
We didn't perform as well in the areas, where we have smaller base or expanding geographically or relying on more discretionary projects. Our clients are facing tough times in making difficult decisions.
In that context, the initiatives that are compliance driven oriented reducing costs and risk have higher priorities. We continue to work with our clients to find practical solutions for these challenges.
Now let's review the segments. For the quarter, Benefits Group revenues were $248 million, a decrease of 7% from prior year, but an increase of 3% on a constant currency basis.
We continue to see good demand for our retirement services in the U.S. and the U.K.
Those demand for our retirement services in Continental Europe and for healthcare consulting was lower than expected. In our third fiscal quarter, we tend to do a lot of the accounting and financial reporting compliance work.
We have good growth in the U.S., but the rate of growth was lower than prior quarters. We have strong growth in the UK and in Latin America.
In the UK, we have two additional work base due to the timing of the public holidays around Easter, which fell in our fourth fiscal quarter last year. Our revenues declined in Asia Pacific and Continental Europe.
Our core retirement services grew at a greater rate in the overall segment. Healthcare consulting services declined.
While it is difficult to predict future results in these uncertain times, we expect that our core retirement services will continue to do well in the U.S. and the UK.
We have modest expectations for healthcare consulting and countries, where we have a smaller footprint. Plan sponsors around the world continue to seek advice on pension funding goals and plan design opportunities.
We expect to continue to work with our clients on these issues. Now let's move on to the Technology and Administration Solutions Group.
For the quarter, revenues were $44 million, down 1% from prior year, but up 13% on a constant currency basis. On a pre-deferral basis, constant currency revenue growth was 12%.
Constant currency growth was highest in the UK as the big client wins that we announced in the third quarter of fiscal '08 have all gone live. We've been busy working on the new client installations as well as our commitments to existing clients.
We've had less new client wins in fiscal '09 as we temporarily shifted focus to implementing our fiscal '08 wins. Similar to Europe, the U.S.
growth was driven by bringing online additional projects, which has been sold in previous quarters. The growth rate in the U.S.
has slowed as companies have deferred discretionary spending. Despite that, we continue to see opportunities as our value preposition of helping companies across a wide spectrum of administrative solutions remains well received.
We continue to have excellent client retention rates and a stable platform of revenues globally in this segment. We also have some visibility into the next quarter's results.
We expect a lower constant currency growth rate as new and new clients to go live and less discretionary project work commencing at this time. Although, we expect our growth to slow inline with the market generally, the administration services that we provide are of compelling preposition for companies looking to control costs and we expect to gain market share.
Proposal activity has picked up and we're hopeful that the slowdown in growth will be temporary. Next, let me turn to the Human Capital Group.
For the quarter, revenues were $37 million, down 25% from prior year and down 18% on a constant currency basis. The slowdown in work in this segment is much greater than we had forecasted.
All regions and all service lines underperformed. The month of March was particularly poor.
In compensation, revenues declined significantly in the U.S. and Asia Pacific.
We saw modest increases in revenue in Canada, the UK, Europe and Latin America. We generally found the clients are interested in the thought leadership of our most senior associates, but the project work that typically utilized their less senior associates has substantially declined.
Data services proved less resilient than we had expected. Revenues declined in all regions.
Organization affected this as a small part of the Human Capital Group and its revenue declined as expected. As these projects are typically small, short-term and non-recurring, they are the most discretionary of our service offerings.
Within the Human Capital Group, we are focusing on the areas, where we have the critical mass and brand to compete. We are taking the actions necessary to reshape the practice and make it more profitable for the longer-term.
Now, I'll discuss the Insurance and Financial Services group. For the quarter, revenues were $31 million, up 2% from prior year and 23% on a constant currency basis.
Our third fiscal quarter was a seasonally strong quarter for this practice, because this is when we do annual valuation work for many clients. All regions performed well this quarter and the team was busy doing a combination of financial management work and special project work.
The merger and acquisition activity continued. We have several small projects this quarter in contrast to the one very large project that we had in the second fiscal quarter.
Insurers and financial services companies continue to review their capital requirements and there has been some additional project activity as companies look to raise capital in these difficult times. We have also seen some fall off in demand as company's deferred workers take projects in house.
In the near-term, we think the projects were created by the difficult times will more than offset any project cancellations, but the level activity is difficult to predict. And we expect a slowdown in the rate of constant currency growth.
Lastly, investment consulting reported revenues of $39 million for the quarter, a decrease of 10% from the prior year, but an increase of 12% on the constant currency basis. We had good growth in the UK, Europe, and North America.
We have seen an increase in our implemented consulting activities due impart to several expanded client relationships. We're also seeing an increase in strategy projects.
We are still urging clients to exercise caution in changing managers. While long-term effects of this global crisis will take some time to manifest, we are thinking ahead about winning strategies that will add value in an increasingly unpredictable and competitive marketplace.
Many funds are looking at their investments strategy and risk tolerance. We continue to be optimistic about the longer term growth prospects for the segment.
Wrapping up in areas, where we have low established market positions, we generally performed well. In these difficult economic times, it is very challenging to establish new market position.
We are committed to running sensible businesses within our segments and we will only make investments, where the future prospects were. We are also focused on reducing our cost structure and preserving our operating margins.
We will continue to stay to close to our clients to help them respond effectively to the economic crisis. Now I'll turn the cal over to Roger.
Roger F. Millay
Thanks John, and good morning to everyone. As you've just heard, we generally performed well, but we really face significant challenges in the Human Capital Group and the other category, which is comprised of some smaller practice areas.
For the quarter, we reported revenues of $417 million and diluted EPS of $0.95. On a constant currency basis, total revenues were $471 million, resulting in 3% growth of over prior year.
And also on a constant currency basis, our diluted EPS was $1.09, an increase of 14% over prior year. For the quarter, our operating income margin was 12.4%, a decline from 14.1% in the prior year quarter.
Excluding severance costs, our operating margin was 12.8% for the quarter. As John noted, several of our practices continued to perform quite well, but we do have profitability pressure in our more cyclical areas, particularly Human Capital.
We've had lay-offs in our under performing areas and we will also reduce headcounts through natural attrition and retirements. We will continue to face challenges and some of our segments will perform better than others.
The Benefits Group had a 33% margin for the quarter, consistent with prior year. The third fiscal quarter tends to be our seasonally strongest quarter with the highest margins.
We're still expecting full year margins consistent with prior year at around 30%. Technology and Administration Solutions had a 20% margin for the quarter, a decline from 22% in prior year.
We still expect margins for the year to be in the mid 20% range. Human Capital Group had a loss of $600,000 for the quarter, a significant decline from last year.
The loss includes approximately $500,000 of severance. North America generated positive income, but all other regions operated at a loss.
As John mentioned, the economic climate has resulted in a tighter, more competitive market. We are closely monitoring our loss generating offices and are downsizing underperforming locations.
Our longer-term strategy is to focus on those markets, where there is enough demand to support an office and there is affordable talent. We expect to have additional severance costs in the fourth quarter and therefore, our margins in HCG for the year will probably be in the mid to high single-digits.
While we expect to have another very tough quarter, we are committed to taking the actions necessary to have a more profitable and competitive Human Capital group for the longer-term. As John said, we are focused on markets where we have the critical mass and brand to compete.
Insurance and financial services had a 29% margin for the quarter, a significant increase from last year. All regions generated more income this quarter with the most significant increases coming from Europe and North America.
The margin improvement reflects the increase in revenues as well as the reduction of expenses from rationalizing our cost structure last fiscal year. We're increasing our forecast for this segment and expect margins will be in the high teens for the year.
Investment Consulting had a 27% margin for the quarter, a decrease from 37% last year. Margins were down at all regions as compared to prior year.
We think the long-term sustainable margin for this segment is in the low 30% range. Even though this is continued to be challenging economic times with volatile markets, we've seen an increase in demand and expect our margin will continue to increase.
The segment margins that we've just reviewed are before consideration of discretionary compensation and other un-allocated corporate costs such as amortization of intangibles resulting from our acquisitions. Net income for the quarter was $41 million, a decline from $43 million in prior year.
Fully diluted earnings per share for the quarter were $0.95 as compared to $0.96 from the prior year third quarter. On the constant currency basis, diluted earnings per share for the quarter were $1.09.
Moving to the balance sheet, we ended the quarter with $118 million of cash and $40 million of debt. We expect to have the debt repaid by the end of the fiscal year.
We generated $80 million in cash flows from operating activities this quarter, and we will continue to generate strong cash flows this fiscal year. Our liquidity position is also very strong.
Now let's review our guidance for fiscal 2009. The slides posted in our website maybe helpful for following along in this section.
The revenues and diluted earnings per share that we report will continue to be affected by changes in foreign exchange rates. We also expect demand to continue to decline in the Human Capital group and the other category.
We are reducing our full year EPS guidance to a range of $3.35 to $3.40. This guidance includes up to $0.35 of foreign currency translation losses from the strengthening of the U.S.
dollar. We are bringing down our revenue guidance and we expect to report revenues in the range of $1.65 billion to $1.67 billion.
We don't know how exchange rates will fluctuate over the remainder of our fiscal year. This guidance anticipates that over the next three months, the pound maintains a minimum average value of approximately $1.40 and the euro maintains a minimum average value of approximately a $1.30.
This guidance assumes an income tax rate of 32% for the year and shares outstanding of approximately of $42.9 million for the year. Now, I'll walk through the revenue guidance for each of the segments.
Please note that the slides on our website show both reported and constant currency revenue guidance. Since constant currency is the better measure of underlying 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 5% growth in fiscal 2009.
We've narrowed the range as we are trending toward the lower end of our previous guidance. Our fiscal fourth quarter has less work days in fiscal '09 than in fiscal '08 due to the timing of the public holidays around Easter in UK and Europe.
Normalizing benefits for the multi-employer business that we exited in fiscal 2008, revenue growth would be 5 to 6%. In the Technology and Administration Solutions group, we're tightening our range and expect constant currency revenue guidance of 11to 12% growth in fiscal 2009 as we are trending toward the high end of our previous range.
In the Human Capital group, we're reducing our constant currency revenue guidance and now expect a 7 to 10% decline on a constant currency basis in fiscal 2009. In Insurance and Financial Services, we're narrowing the range and expect constant currency revenue growth of 13 to 15% for fiscal 2009.
Lastly, we are increasing our constant currency Investment Consulting revenue growth slightly to 9 to 10% in fiscal 2009 reflecting the increase in client activity. These are tumultuous economic times for everyone, and it is difficult to predict how certain parts of our business will perform.
We expect reported fourth quarter revenues will be in the range of 370 million to $390 million and reported diluted EPS will be in the range of $0.65 to $0.70. While this is a significant decline from last year, much of that drop is attributable to the strengthened dollar and the normalization of the tax rate, which was quite low in last year's quarter.
And of course, this expectation is also impacted by the challenges faced in our Human Capital Group. We expect to record approximately $4 million of severance expenses during the fourth quarter.
Also the fourth quarter diluted EPS may include up to $0.10 of foreign currency translation losses due to the strengthening of the U.S. dollar.
Fourth quarter revenue guidance by segment is presented on slide 4. In summary, many of our segments continue to perform well and those areas that are more cyclical, we are committed to running sensible businesses that provide value for the long-term.
John J. Haley
Thanks Roger. Now we'll take any questions that you may have.
Operator
(Operator Instructions). Your first question comes from the line of Josh Vogel from Sidoti & Co.
Please proceed.
Josh Vogel - Sidoti & Co.
Hey good morning, thank you. You guys obviously did a good job, getting margins back up and keeping them up in the Insurance and Financial Services Group, and I think you guided for...
was it high teens for the year. But as we look out to next year now, do you think...
does that includes the margin in Q1 as you look at to next year or should we expect it to be mid-to-high 20% range?
Roger Millay
I think, at this point, because we haven't given guidance on 2010, and we're just in our budget process. What we've said about the insurance practice is that this year of course, we've raised our margins above what we guided early on.
Early on, we said high single-digits and we were trying to get to, I believe it was the mid to upper teens in that practice. And I would say at that point, kind of over the longer-term probably the goal was still the same, although again we don't have specific guidance of point for 2010.
Josh Vogel - Sidoti & Co.
Okay. If I could just sneak in one, you just said the 4 million in severance expenses are included in your guidance for Q4.
Is that mostly going to hit up in the Human Cap Group?
Roger Millay
A good portion of that will be. There is...
we are taking actions around the company geographically and by practice, but a good portion of that will be in Human Capital.
Josh Vogel - Sidoti & Co.
Okay, great. I'll hop back in the queue.
Thank you.
Operator
Your next question comes from the line of Ashwin Shirvaikar from Citigroup. Please proceed.
Ashwin Shirvaikar - Citigroup
Hi. I just wanted to ask about operating leverage in the business and obviously you showed some level of operating resilience in this quarter by doing some cutbacks and so on.
But to what extent and what are the various other levers that you have there? If you were to have a, let's call it a flat to down revenue growth year in 2010, to what extent could you cut costs to keep margins?
John Haley
Well. I think Ashwin, salaries and benefits are our largest expense.
And so headcount productions are the most significant way for us to contain our costs. There are some other cost management activities that we can and are pursuing.
Some of the easiest ones related discretionary costs such as non-essential travel and certain internal meetings. We don't really expect to see much of our savings in FY '09, because the severance and the termination costs sort of eat up any savings you have.
But at this point, we are estimating the full year run rate savings from our current cost reduction activities are around $20 million.
Ashwin Shirvaikar - Citigroup
And $20 million does not include anything incremental that you would do with regards to variable compensation and so on, what's...
John Haley
Right, that does include anything additional that we could do there.
Ashwin Shirvaikar - Citigroup
Okay, thank you.
Operator
Your next question comes from the line of Paul Ginocchio from Deutsche Bank. Please proceed.
Paul Ginocchio - Deutsche Bank
Thanks, just looking at your benefits; in other words, a slight deceleration and probably splitting here. But I think couple of your competitors actually one shot, a slight uptick in growth.
The other was kind of stable. Just wondering if there is anything benefit that sort of stood out why decelerate particularly with...
I thought maybe some kind of benefit from the legislation change at the end of the recession. Thanks.
John Haley
Yeah, I think we... the U.K.
retirement practice, both the U.S. and the UK we thought to perform reasonably well here.
UK retirement practice probably had double-digit growth due to the additional workdays and not probably bit of the additional double digit growth. There is probably due to the additional work days and some additional work related to the economic client.
The U.S. retirement had a mid single-digit growth rate and that was higher than the overall segment, the healthcare brought that down somewhat.
But outside of the U.S. and the UK, the retirement practice also didn't perform as well as those two basic anchor positions that we have there.
We thought this was reasonably good performance considering what was going on with the economy and it's consistent with what we see with most of our competitors.
Paul Ginocchio - Deutsche Bank
Thank you.
Operator
Your next question comes from the line of Andrew Fones from UBS. Please proceed.
Andrew Fones - UBS
Yes, thanks. I wanted to ask about the guidance, just across the board, you're cutting kind of the revenue growth in terms of what you're expecting for the fourth quarter.
You mentioned earlier in your comments that you are seeing regulatory work holdup. But more discretionary elements of your business have fallen off.
And in terms of this guidance for the fourth quarter, is there... are you anticipating any kind of discretionary spending or have you taken a very kind of cautious look.
I'm just surprised that the magnitude of their cuts in the revenue and the guidance for the fourth quarter?
John Haley
Just a couple of reactions there. One is, you look at the insurance practice as we've said in the past given the project nature of that practice that's more difficult to predict, and we tend to be cautious on predicting new incremental activity in that practice.
I think in the technology segment, where we've talked the last couple of quarters about the potential for reduced discretionary spending, I think the results are coming in the way we had projected and the guidance does incorporate that trend to continue. I think that's a pretty solid trend that we've seen there.
I think in other areas, what we've tried to do in the guidance is really reflect the trends that we see, and you can't say that there is no possibility for upside. But I think it's a pretty much consistent with trend as I said.
I guess on the discretionary side, that's not project related. Again the guidance incorporates the trends we're seeing in HCG that's the practice that's most cyclical and most impacted by discretionary spending and the guidance just incorporates the trends that we are seeing, so...
Andrew Fones - UBS
And then just kind of finally, if we see kind of demand, kind of stabilize at the levels you are anticipating here in the fourth quarter next year. Do you believe that the cost cut...
the severance that you've announced for the fourth quarter should be sufficient to maintain margins across your businesses at the levels you've historically said, these businesses should outperform.
John Haley
No, I think. What we're doing into as I mentioned in the call is that we're committed to maintaining our operating margins, and as Roger said, we're just going through right now with some of our projections for FY '10.
But what we're focused on is a businesses to take the actions that we needed to keep our operating margins constant.
Roger Millay
Yeah, and the only thing I'd add to that is again going back to HCG, which is the biggest story for the quarter, because that is cyclical. So the upturn on the top line end of margins back to where they were a year ago and that practice is dependent on the economy to a great extent, and we're taking cost out.
Andrew Fones - UBS
Right.
Roger Millay
But certainly maintaining margins there is very difficult.
John Haley
Yeah, what I think is to the overall business we are committed to maintaining those, and we're not worried so much about a particular quarter or not, but to get to the right long-term operating level.
Andrew Fones - UBS
Okay, thanks. That was helpful.
Operator
Your next question comes from the line Mark Marcon from Robert W. Baird.
Mark Marcon - Robert W. Baird
Good morning. I was wondering if you could a little bit about just the tone from your clients and to what extent do you think the recent performance particularly in HCG, just kind of due to a little bit of shock in terms of what happened across the global economy and to what extent do you think the path for cooperation would be?
John Haley
Yeah, so each client has really their own potentials, their own little story. So, it's hard to generalize too much.
But I do think... when we solve the stories about the U.S.
economy shooting more than people had thought in the first quarter as business spending being down being large part of that, that looks pretty consistent with what we've seen in HCG, where a lot of people just sort of stop some discretionary spending on that. We believe that that's the kind of thing that we've picked back up as the prospects for our clients get better, and it's the way we've seen it happen in the past, I mean was notably in the early 2000.
We had a period of some uncertainty and decline there, and then new prospects picked up, HCG did very well. So, this is the kind of thing we have to think about in terms of running with business to make sure.
We're prepared to need our clients need as prospects get better to make sure that we don't take some major reactions to just a quarter or two, but also make sure that we continue to run profitable business.
Mark Marcon - Robert W. Baird
Great. And can you talk a little bit about the...
what you are seeing in terms of pension legislation and what you think that may end up doing in terms of future demand as it relates to the actual real work?
John Haley
Yeah, we actually don't think, we're going to see any additional legislation related to pension funding in the near future. We did get some IRS guidance issued in late March, which provides significant short-term relief to most plan sponsors, and we think that guidance decreases the likelihood of any additional legislator funding relief in the near future.
Mark Marcon - Robert W. Baird
And what do you think the longer term outlook is there?
John Haley
Well. Longer-term it's hard to go by...
longer term, there's always some pension legislation that's coming about, but I wouldn't... there is nothing that I would I could point you to say I expect legislation in this particular areas as appose to some other one.
Mark Marcon - Robert W. Baird
Okay. Thank you.
Operator
Your next question comes from the line of Shlomo Rosenbaum from Stifel Nicolaus. Please proceed.
Shlomo Rosenbaum - Stifel Nicolaus
Hi. Thank you very much for taking my questions.
In the Human Capital Group, the loss I just want to ask you if you could give me the exact dollar amount that was severance in the unit and what the loss I mean with other severances just I am trying to get to?
John Haley
I believe... for the fourth quarter?
Shlomo Rosenbaum - Stifel Nicolaus
Yes.
John Haley
The loss was about $600,000 and the severance was about 500,000.
Shlomo Rosenbaum - Stifel Nicolaus
So, what was the severance in the whole year? I'm trying to figure out where was all the other severance going?
John Haley
You mean...
Shlomo Rosenbaum - Stifel Nicolaus
I mean in the quarter
Roger Millay
...for the quarter?
Shlomo Rosenbaum - Stifel Nicolaus
Yeah.
Roger Millay
It was spread around as I said earlier, kind of in other geographies and other practices. So, that was really a smattering.
There were one of the reasons that you see a small amount in HCG this quarter is because we did have some severance in Europe and some other practices during the quarter that magnitude, the dollar magnitude generally is higher than in some other geographic areas. So again, it's spread around practices and spread around geographies.
Shlomo Rosenbaum - Stifel Nicolaus
What was the total number for the quarter of severance?
Roger Millay
It was $3 million.
Shlomo Rosenbaum - Stifel Nicolaus
So, in the hardest hit group, you only had 0.5 million in severance and you had other groups, where you had higher levels of severance, is that correct?
Roger Millay
That's correct.
Shlomo Rosenbaum - Stifel Nicolaus
And is there anything cyclical going on within the Benefits Group? I mean if you go historically into last downturn and this group also was impacted and I believe that had something to do with M&A work that resulted in some tension work later on in the cycle.
Is there any of that happening right now?
John Haley
No, I think Benefits is about where we had expected. It's right within the range we had expected.
We talked about Benefits as being a mid-single digit revenue growth practice; and in fact, if we adjust for the multi-employer business that we sold on the constant currency basis, we're right around 5% here.
Shlomo Rosenbaum - Stifel Nicolaus
Okay. I'm going to try and squeeze one last of housekeeping thing.
Can you walk us through the affiliated income there and what kind of expectation should we have for that line moving around over the next few quarters?
John Haley
Yeah, the biggest piece I guess of the volatility in that line is the insurance affiliate that we have, PCIC and that does bounce from year-to-year and quarter-to-quarter. We also, I believe added a bit this quarter from the income that we're getting from the retained interest in the multi-employer sale that we made a year ago.
Shlomo Rosenbaum - Stifel Nicolaus
Okay. Thank you very much.
Operator
Your next question comes from the line of Tim McHugh from William Blair & Company. Please proceed.
Timothy McHugh - William Blair & Co.
Yes, just quickly following up on that prior one. Can I maybe ask what you might be assuming for that line as we go onto the fourth quarter in your guidance?
Roger Millay
Again, I think it's... the assumptions generally are pretty modest.
And that's one of the reasons I think we do occasionally have surprises there, because it is unpredictable and bounces up and down. I quite honestly don't have a specific number for affiliate.
Timothy McHugh - William Blair & Co.
Okay. And then the Human Capital Group, you mentioned in your comments that March was particularly weak.
Can you maybe give a little more color on that relative to the overall quarter's performance and as that is the growth rate you're implying for the second quarter... I'm sorry, for the fiscal fourth quarter really a continuation of those March levels.
Are you assuming if it gets worse from even March or better than that?
Roger Millay
Yeah, let me just mention a little bit about this. I think that when we were looking back at the end of calendar '08, and we were looking at the drop in economic activity, one another thing we thought we might see in the beginning of calendar '09 so that, our third fiscal quarter was a drop in HCG in the Human Capital activity.
And indeed one of the surprises we had was that January and February didn't drop as much, but then we saw March dropped a great deal from the January, February level. So I think we were surprised that it didn't occur sooner and then it was a very dramatic drop when it occurred.
We've taken the March level and projected actually down from there to get to our fourth quarter projections.
Timothy McHugh - William Blair & Co.
Okay, thank you.
John Haley
Actually, just to the earlier question on other in affiliate, I believe baked in our guidance is slightly lower level of affiliate income for the fourth quarter than in the third quarter and also just to clarify on the on the multi-employer income that's coming in... that's coming in on the other line rather than the affiliate line.
Timothy McHugh - William Blair & Co.
Okay, thank you.
Operator
Your next question comes from the line of Tobey Sommer with SunTrust Humphrey. Please proceed.
Unidentified Analyst
Good morning this is Frank in for Tobey. Cash flow was pretty strong during the quarter, wanted to get your perspective in terms how you are looking at asphalt (ph) repurchases, acquisitions and uses of the cash going forward.
And then if I could squeeze in a quick, could you disclose the amount of U.S. versus non-U.S.
exposure on the Human Capital Group you mentioned. U.S.
had some positive trends there.
John Haley
This is John; let me take the first part of that.
Roger Millay
Sure.
John Haley
In think one of the things that we like being in a strong cash position as Roger mentioned, we expect to repay any debt we have during this quarter and our liquidity position is very strong. Generally we've taken the position that we would prefer to do acquisitions, and we're always on the lookout for doing acquisitions that will make some sense.
I think we are... when we look at acquisitions, we tend to be focused on ones that are good cultural fit and ones that are good strategic fit, and we're less focused on maybe trying to get some bargain basement prices on things.
I mean we don't want over pay, but we're not necessarily ones that are sort of bottom feeding on some of those. So we are continuing to look for acquisitions the same as we had in the past, and we're glad to be in a position, where we could look at doing that.
If we don't see something like that in the past, we've looked at things as to whether we might return money to shareholders by doing a share repurchase we did one last year. I think it was in February of last year, we commenced one and did that throughout most of 2008.
We don't have any plans for one right now, but it's always something that we would think about.
Roger Millay
On the second question... sorry.
Revenue for the Human Capital Group is about 50% little under 50% in U.S.
Unidentified Analyst
All right, great. Thanks very much.
Operator
We have a follow up questions from the line of Paul Ginocchio from Deutsche Bank.
Paul Ginocchio - Deutsche Bank
Great, thanks. Just wondering if there was, how you can size or is any impact on the market rally recently in the investment consulting division, and is there obviously an effect into your guidance and anyway to sort of size that force?
Thanks.
John Haley
Yeah, I'm not sure how sensitive that is to the market value. We think we saw the pickup in some of the investment consulting activity, a little bit before.
Then clearly the events of calendar 2008, when we had the big market shock, also gave a shock to activity in that area. But it's not sensitive to the daily ups and downs of the market.
Paul Ginocchio - Deutsche Bank
Mainly just two quick follow-ups and I thought in the back half of the year, some of the degradation in that growth rate was because of some of your funds and demands of fees or piece by piece like that.
John Haley
I see what you're saying. Yes, and there is...
to some extend, our revenues are... it's less than 20% of our revenues are sort of performance or asset based.
So there is some impact to that. But I think that's not the biggest part of the change.
Paul Ginocchio - Deutsche Bank
Great, and then it sounds like from your earlier comments that you're still advising managers not to change pension slots not to change managers yet; is that correct?
John Haley
I think what we're telling them is to is to go slow on this to evaluate carefully what's going on. This is a market that has seen a lot of changes and they should just do anything very carefully.
We're not recommending necessarily making wholesale changes.
Paul Ginocchio - Deutsche Bank
So, I just... holding on that, is it true that when you start recommending making changes that would have a positive impact?
John Haley
It could. I think the point...
so what happens is, we have this enormous change in the market in calendar 2008. And one of the things that you people might think is that we would immediately go out and recommend that that everybody go and chase the manager from ones that lost the money further with the others.
But what we've said was... let's step back and look at this overall and let's plan sensibly for the long-term.
I am not sure that we are going to go out and recommend wholesale changes to anybody. We're going to recommend that they evaluate it manager-by-manager and see what fits in with and what the investment philosophy is.
Paul Ginocchio - Deutsche Bank
Thank you.
Operator
We have another follow up question from the line of Mark Marcon from Robert W. Baird.
Mark Marcon - Robert W. Baird
I wanted to focus a little bit more on coming from longer-term outlook. I was wondering first of all, John, you mentioned, you want to maintain the margins.
What margin levels were you specifically referring to in terms of... are you thinking about the '07ish kind of levels, the '08 kind of levels.
Where are you thinking in terms of operating profits in terms of both, and I know it's a full year as opposed to next few quarters?
John Haley
No, I think if we just step back and look at this, in '07, we had pretty good margins. They've had some years where they have been trending up.
And we said, we still thought long-term that was probably some incremental improvement we could get year-to-year. But in '08, we had of course quite an extraordinarily good year.
We believe that we can... the '07 with some small incremental improvements or probably some good long-term estimates for what we can do.
Mark Marcon - Robert W. Baird
Okay. And then can you talk a little bit about...
obviously, this is unusually difficult environment. Can you talk a little bit about what you would think would be a conservative point-of-view with regards to the long-term growth rates within the individual divisions.
John Haley
I think the benefits, which we had talked about being in the mid single-digits in 4 to 6% is the kind of longer-term growth rate, maybe even 4 to 5 units (ph). That would...
I think that's still a good long-term wait for that. If I look at the investment consulting, we've talked about that as a business that we think has some more years of some higher growth, and I think we still expect to see that to grow at least in the 10% or higher range for the near term.
The union capital, the short-term obviously were projecting that things are going to get... we're going to see more shrinkage coming-in in the short-term, but if you're asking about what the long-term rate is, I think the rate around 9-10% is something that we think is a good longer term rate for growth there.
I think insurance, we would probably say the same kind of thing that we expect somewhere around 9 to 10% is a good longer term growth rate for that. And we would look at our administration as probably closer to benefits about the mid single-digits.
So I think if you step back and you look at what we might have done a year ago in terms of what we would talk about as long-term growth rates, and then I'm really emphasizing long-term here, I'm not talking about what's going to happen over the next year or so. But if we look at the long-term growth rates, they're probably not that different.
I think the only one that might be a little more moderated would be the investment consulting.
Mark Marcon - Robert W. Baird
Okay. And in terms of Human Capital, I mean in a challenged environment, what would you aspire to get the margins to?
John Haley
Well, I don't know is the answer to that right off hand. And the key here is that with Human Capital, what we need to do is go and look at things specifically and see weather we think the imbalances we have are short-term or long-term.
We really deliver some long... with some short-term imbalances.
Mark Marcon - Robert W. Baird
Sure.
John Haley
We think there is the right opportunities. As we've going through and being doing some of this, we found things that we think are longer term imbalances and that's where we're acting on immediately.
Mark Marcon - Robert W. Baird
Okay.
John Haley
So I think it really to, we have to do a fuller look at that, but that's the criteria we will use to distinguish.
Mark Marcon - Robert W. Baird
Great, thank you.
Operator
Your next question comes from the line of Ashwin Shirvaikar from Citigroup.
Ashwin Shirvaikar - Citigroup
Hi, I just wanted to return to the answer that you had given to my question on what kind of savings you can get from cost cutting and various other things and you had started with a $20 million savings number, which is I think is roughly $0.30 EPS, which it seems to me that should be efficient to overcome modest single-digit shrinkage plus the impact of I guess your pension related headwind in fiscal 2010 and still give you very modest EPS growth. I don't want to put, I know you don't have 2010 guidance out there.
Don't want to put words in your mouth but could you run through or some of the... at least the puts and takes qualitatively as we think about nearer term?
People are worried about fiscal 2010, what might to do? Could you provide more color?
John Haley
Sure. I think Ashwin, let me just say this: I think we had agreed with the overall sort of channel of what your remarks are there.
I'd emphasize though what you just said over larger set, we are actually in the middle right now of doing our FY '10 planning. So, we can't tell you anything specific about that.
But overall, when we started looking at the kind of cost reductions we have here, they seem like they were in a kind of cost reductions, but for the most part should get us towards balancing what we say as perhaps some increases, we could get an increase Benefits expense for things we could get... we could have some revenue declines.
Overall, they look like their order of magnitude about right, but we haven't got into the final balancing. That's one of the reason though we said earlier also that we were looking at trying to maintain our margins, because we think that this is a pretty good way towards balancing any revenue losses or cost increases we have.
Ashwin Shirvaikar - Citigroup
That's fair. But once you take that into the cash flow impact.
Can you talk then about the cash flow impact and are you likely to given the performance this year likely to have similar kind of variable comp sales as you had in good years? The last couple of years, you're like to start off with a negative balance if you go on your...
essentially on your credit line; it drilled down the credit line and so on. If you could take it from margins and EPS, which looks like flat to slightly up is a good starting point, take it to cash flow and explain.
John Haley
Yeah. I think, well I'll let Roger talk about cash flow.
Let me just deal with the variable comp issue. Over the years, we try to look at these and say in general, we've like our net income and our variable comp to be growing at about the same rate.
Now they don't grow the same rate necessarily every quarter-to-quarter or do that in times when we had some... we've had times, where we've grown the variable comp faster than the net earnings and we've got times, where we've actually grown the net income faster than the variable comp.
But on average we try to get them to be growing at about the same rate. I think that's still a philosophy.
We'd like to try and do that, but in specific quarters or specific years, we might depart from that. Talk about the cash flow.
Roger Millay
Yeah, Ashwin I might say some things on cash flow that sounds like kind of blend and generic. But our expectation is, it is a good cash flowing business and we expect that to continue in the scenario that you pose it with slightly growing earnings.
Cash flow in general should pretty much follow. So, in terms of what we do with the credit facility and free cash and then to the earlier question of how we would think about what to do with free cash.
I mean, I think all those things would be in relatively the same balance as they are right now, so...
Ashwin Shirvaikar - Citigroup
And you're not seeing anything out of the ordinary with working capital with clients, elections and things like that.
Roger Millay
No. I mean there are...
this is the time where you see more kind of anecdotal kind of one off, receivables pressure, but there is nothing systemic that we're seeing that impacts out of our cash flow.
Ashwin Shirvaikar - Citigroup
Okay, thank you.
Operator
Your next question comes from the line Shlomo Rosenbaum from Stifel Nicolaus.
Shlomo Rosenbaum - Stifel Nicolaus
Hi, thank you very much. I just wanted to ask you to go over what's the healthcare consulting work?
You said that it was at week in the quarter. If you could just describe a little bit more about what was going on over there and what was driving that?
Roger Millay
I think in general, healthcare was down. I don't have a lot of anecdotes or details on that.
In general, we sense that perhaps clients were... their activity around healthcare is kind of more project oriented and then perhaps a little more discretionary that clearly impacted us.
We think that that's still an area of good prospects for us. As healthcare changes come in, we believe that we will benefit from that.
I don't know that we saw any specific kind of systemic pressures there that we think are indicative of a longer term outcome, it's just a little more volatile and kind of cyclical segment.
Shlomo Rosenbaum - Stifel Nicolaus
Can you give me the magnitude of the year-over-year impacts on healthcare?
Roger Millay
Again, it's a pretty small part of benefits. I don't have a number.
I think it was a single-digit kind of decline I think. And from a revenue point-of-view that might mean for the quarter 1 million or $2 of revenue...
million or 2 million of revenue.
Shlomo Rosenbaum - Stifel Nicolaus
Okay. Thanks a lot.
Operator
Our next question comes from the line of Andrew Fones from UBS.
Andrew Fones - UBS
Yes, thank you. I had a follow up to my question about revenue guidance.
And I think you guys reached number of HCG already, but I was wondering if you could tell us at least directionally where growth stood in March on a constant currency basis perhaps relative to where you've guided so. Have you guided in terms of fourth quarter growth inline with March above or below just across the other businesses?
Thanks.
Roger Millay
I don't know when you say across the other businesses, you lost me a little bit. But I think your question of first quarter guidance for HCG, we used March as the benchmark and projected that trend generally into the fourth quarter.
Andrew Fones - UBS
Sorry, my comment on the businesses was, I think your guidance was HCG previously. I was wondering if you could do that for the other businesses.
Roger Millay
For the other four segments, trending of March, well. Again, I'll have to say, I think this was the question I tried to answer earlier when I kind of highlighted insurance, I think that's really the only practice that we didn't project the third quarter trends into the fourth quarter again because it's so project related and we had this M&A type influence.
We're just a little bit more conservative there I think otherwise, I cant specifically talk to March, but generally we took what we saw in the quarter and as the quarter developed and used that as the benchmark for the fourth quarter.
John Haley
Yeah, I think the only thing I would add to that is that implicit of what Roger is saying is that for the other practices, March wasn't necessarily all that distinguished January and February.
Roger Millay
Right, that's right.
John Haley
The only thing that came into play a little bit is this issue of Easter in the UK. And Easter in the UK added a couple days of revenue to some of our businesses, and we didn't project...
we normalize for that and then did our projections.
Roger Millay
Absolutely right.
John Haley
And then that it seems like a funny thing to talk about Easter, but actually the impact of whether that falls in the third or fourth quarter is a big impact. We discussed last year on the call, I think when we were talking about the third and fourth quarter results as to where that falls.
Andrew Fones - UBS
Yeah, it sounds as though benefits could be hold enough. If I might, organic numbers of benefits constant currency in the quarter is about four.
I think you said five, but it was and you said us about 2% impact from Easter, either 2% benefit from Easter. So we just in for about, it doesn't look like you've seen any kind of demand fall off from the 13 to the fourth quarter.
John Haley
I'm not sure how much Easter was. It was a couple of days, where things in the UK, and so the overall...
one of the reasons that we have might have had a slightly higher number for benefits was... it's a question of whether or not we adjust for the multiemployer business.
Roger Millay
Right.
John Haley
That adds a percent or two.
Andrew Fones - UBS
Okay, thank you.
Operator
Here from Robert W. Baird, your next question comes from Mark Marcon.
Mark Marcon - Robert W. Baird
Can you talk a little bit about what your clients are seeing from pricing perspective? Are you getting pressure to reduce your fees and how are you responding?
John Haley
Well, I think pricing is always competitive, and we continue to see that now. But I don't think there is anything that say a big systemic change that we're necessary seeing there.
The issue tends to be around whether projects are gone forward and that's what's ahead of us.
Mark Marcon - Robert W. Baird
Yeah, so it's more on the project as opposed to you'd like just you sharpen your pencil.
John Haley
Yeah, I mean it's always competitive when it's probably a little more competitive now than it had been. But that's not where we see the issues.
Mark Marcon - Robert W. Baird
Okay. And then can you just...
in terms of your experience, how long do you think if we go back to last downturn and comparing and contrasting the environment today to that period, how long do you think that could be before HCG normalizes?
John Haley
These things are always hard to say. I'm probably more optimistic in front of the others.
This may surprise you. But I actually think that, I think from when we start to see a real pick up, it might only be a quarter to two.
So we'll have... I think there would be a wide divergence of opinion I think within the firm if you would ask people out.
Mark Marcon - Robert W. Baird
Okay. And when you're saying a pick-up, do you mean GDP or do you mean employment?
John Haley
Well, a lot of what we do with HCG tends to be related to labor force mobility. And so, when we see that happening, that's always a good sign for us.
Some of the downturn some of the projects and the way the projects are cut here seem to be more related though to just the GDP fall-off and cuts in business spending generally. So it's probably a combination of those.
I think we will certainly see some pick up in HCG once GDP picks up. And I think once we get employment and labor force mobility, we'll probably continue to see more.
Mark Marcon - Robert W. Baird
Great, thank you.
Operator
At this time, I show we have no further questions in queue. I'll now turn the call back over to Mr.
John Haley for closing remarks.
John Haley
Okay. Well, again thanks very much everyone for joining us.
We look forward to reviewing our fourth quarter results with you in August.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Have a great day.