Heidrick & Struggles International Inc (HSII) 2002 Q2 法說會逐字稿

Good morning. My name is [Kanisha] and I will be your conference facilitator today. At this time I would like to welcome everyone to the Heidrick and Struggles second quarter financial results conference call. Today's call is being recorded for opening remarks and introduction. I will now turn the call over to Ms. [Lynn MacKeu], Managing Partner of Investor Relations. Please go ahead.

Thank you. Good morning everyone and welcome to our conference call. Today, we will review our 2002 second quarter results and give you our initial [Indiscernible] on the third quarter. If you would like a copy of the related news release or any other materials, you may request them through the Investor Relations section of our website at www.heidrick.com. Featured on today's call are Piers Marmion, Chairman and Chief Executive Officer of Heidrick and Struggles and Kevin Smith, our Chief Financial Officer. The time for the call to last not more than one hour. Before we begin, I would first like to advice you that this call is being recorded and it may not reproduced or retransmitted without our consent. Second, certain matters in this call are forward-looking statements. We refer you to safe [harbor] language contained in our press release dated July 31, 2002, which was widely disseminated by the various wire services and other media. I would now turn the program over to Piers for an overview of the quarter just ended and our perspectives on current business conditions. Kevin will then discuss the second quarter results in greater detail. Piers.

Thank you Lynn and good morning everyone. Our results for the second quarter came in the upper end of our projected range. Thus we were able to make modest advances in our net revenue from first quarter levels. The revenue increase was particularly encouraging because we generated it with fewer consultants and in a continued weak market price. The North America business from [summed up] its base while [Europe's] anticipated decline with a little less severe than anticipated and [it was] also mitigated by the stronger Euro. Especially gratifying is that on the pro forma basis we earned a profit for the first time in a year. Here in the second quarter consolidated salaries and employee benefits expense declined 20 percent from a year ago. And G&A expenses 30 percent lower. This result validates the extensive corrective action we've taken over the past year to bring our cost base structure to an appropriate level. These actions have been painful in many ways to the organization but they ultimately were necessary to its long-term health. The firm now, I have to say, feels much more [Indiscernible]. Consultant turnover, which we define as consultants who leave us voluntarily to perform search work elsewhere remains low. And since the beginning of the year, we have attracted 15 strong performers to Heidrick and Struggles from our competitors.

We continue to upgrade our business. This quarter we have also continued to invest in the long term. We have taken the next step in advancing our technology platform through enhancements to our search system that had not been ruled out around the world. And the rollout of a world wide financial consolidation system will be completed by the end of the third quarter. Furthermore, I am pleased to tell you that we have hired a [CIO], who will be central to our future efforts in the important areas of knowledge management and technology, which will drive productivity enhancements. While we continue to monitor and adjust the elements of our business that we can control, of greater concern to all of us at the moment is the environment in which we are operating. As we all know the stream of news about corporate mismanagements and accounting scandals, has not only hammered the stock markets but also has the potential of pulling the economy down further as consumer confidence is badly shaken.

We hope, the US in particular, is able to ride through these ruffles but our expectations, is that there will be little if any recovery in 2002 business [confidence]. [Indiscernible] boards, CEOs, management teams have generally have taken quite a beating recently. Most of you are familiar with the [Indiscernible] Act, as well as recent NASDAQ recommendations relating to corporate governance. And I would like to touch on what this means for us. As I sincerely hope we [Indiscernible] over the last nine months, this management team believes strongly in transparency. In terms of most recent [deregulations], or ones that are likely to follow. Heidrick and Struggles is already in full compliance in most areas. And in areas where we are not, we expect to be very shortly. Let me touch on three specific examples. First, in terms of officer certification of financial statements this is something we would do at this day very gladly as asked. Second, regarding the likely expensing of options. We do believe that options have a cost. The real issue of course is how to value them properly. We look forward to the appropriate governing bodies, reaching a consistent conclusion on this matter so that we can fall in line. Third, as we have said on numerous occasions we are working to reshape our board to include a majority of independent directors. They just work in progresses you know we made two key outside appointments earlier this year and we expect to have a majority of independent directors on our board before the year is out. Our compensation and order committees are already comprised solely of independent directors. Personally, and like most people I have been very disturbed that the reason that abuses of power by certain executives. We have tried to [Indiscernible] work with top quality executives each and everyday and we know such behavior is not representative of most management teams. Even though the shadow of doubt is spread very wide at the moment. This period will prove to be an important and necessary in flexion points in terms of the rigor of corporate proper control and the corporate world will move on healthier in time, even if recovery is slow at as a consequence. What do this new corporate government's environment mean for our business. We have not yet seen all the implications of the changes play out but is likely that more vigorous standards around the shape of boards and directors will increase the work we do at the top most levels of organizations. In the coming month, I believe we will see a pattern of change in the shaping of boards and leadership teams. The identification of potential board members and placing them will become more difficult, we already experiencing that. Finding more directors to show the greater accountability, will certainly limit the pool. Developmental programs for existing boards as well as for the next generation of boards will become more common and we expect to be part at this process. Scarcity of appropriate people to restore investor confidence means that we don't believe that the cost of management will actually go down despite pressure to the contrary although the way in which executives are paid will likely shift away from equity towards more cash. Returning to our own immediate future, our initial thinking for the 2002 third quarter is that net revenue is again likely to fall in the 85 to 95 million range. With heightened certainty created by the recent corporate controversies and political unrest in parts of the world we believe that it will be challenging in the short-term for the business environment to move forward in a really meaningful way. However, we do anticipate further improvements in our profitability as we continue to realize the benefits about cost cutting initiatives. Today, we estimate that third quarter diluted earnings per share on adjusted basis we will be in the range of 0.4 cents to 0.9 cents per dollar. As we told you, last quarter revenue generation is our top priority at present. Our leadership services offering which include executive assessments, interim executive placements and coaching are gaining acceptance internally and externally. The [Indiscernible] start up mode they represent only a small portion of our revenue but that potential to be more meaningful contributors either a longer term is very clear. In the quarter, we booked up first interim placements assignments in North America and we have numerous proposals outstanding for assessment and coaching services. The sales cycle is typically much longer in these solution-based services but just yesterday we signed a $700,000 agreement to provide search assessment and coaching as a total solution to a key content southern Europe. Interest in board of solutions is high even in this difficult economic environment. In fact I am pleased to note that in the first six months this year, leadership services are generated as much revenue as they did in all of last year. Our board services practice continues to be very strong and our CFO practice is also particularly active which is perhaps not surprising in this environment. Sequentially, on a worldwide basis, we also saw a little pick up in our consumer healthcare, industrial, and indeed the technology practice as well as professional services. In fact in North America, the healthcare industrial and technology practice increased by 10 percent or more. In Europe, financial services, education, and professional service practice will all out. On the [freeing] of revenue development, we continue to train select groups of consultants on key account managements. To date 40 partners have undergone a rigorous three-day program and more workshops are scheduled for the fall. As you know the transition to a greater relationship-based focus is a long term but important process for us. At the level of commitment and enthusiasm by the consultancy who have participated in the training so far indicate that we are on the correct path. And we are also beginning to see some successes in the client world as well. So creative, aggressive, cost effective business development efforts are going on around the world to help ignite revenue generations and win market share.

Let me tell you briefly about two cooperative wide marketing projects underway that will have high profile in the months ahead. These projects are expected to reinforce opposition as leader in the executive talent arena to enhance our brands and to increase our visibility. First, as part of our ongoing relationship with Business Week we Heidrick & Struggles we will have a total of 12 editorial advertisements in the magazine over the next 18 months that will focus on current and topical leadership issues. The first will appear on August 19 and we will explore the topic at building better boards. Second, is the publication of the new book from Heidrick & Struggles called leaders talk leadership which features a series of personal interviews and written essays from 50 the world must highly respected corporate leaders and scholars of leadership. It will be available in the book stores world wide late September. Our industry and functional practices will use both of these top leadership programs as business development tools with current and potential clients. Of course the best business development tool of all is quality work of satisfied clients. Quality continues to be differentiated for us and we infuse our commitment to it in everything we do. We have fortified our methods for tracking quality to ensure our reputation remain sterling.

I will conclude my remarks with two key points. First, although we expect the world to remain an certain price this year, we are confident in our ability to operate in such an environment profitability. And second, as I hope you know we have a steadfast dedication to operating our business with integrity and openness. And not just because of the current spotlight on governance. We are firmly committed these values. And yet we also know that integrity is not something that we can just claim. It will be our clients and our investors who will be the ultimate judges. And now I will turn the call over to Kevin.

Thank Pierce. Good morning everyone. And thanks for joining us today. As Pierce said earlier on our operating results for the second quarter we are inline with out expectations and the guidance added at the end of the first quarter. But while we certainly encouraged by the progress we have made on realigning our cost structure, we want to make it clear that we are not satisfied with these results. And we recognize that we have more work to do in achieving our goal of double digit operating margin by 2004. With regard to the numbers for the second quarter on GAAP basis the reported loss was 19 cent per share. However, included in that number are couple of non-comparable items. The first item is $5 million right down over our investment in ETF group, a Europe based Venture Capital firm that helps emerging companies expand into international markets.

In the fourth quarter of 2001, we wrote down half of our $10 million investment in ETF because, therefore, fully of companies have been aversely affected by the downturn in the valuation of technology startups. Since that time we seen evidence of further deterioration in the value of the underlying investments. So we believe that it is appropriate to write off the remainder of our investment at this time. The second item is a net unrealized loss of approximately $1.4 million on our warrant [Indiscernible] portfolio. As many of you know we received warrants in addition to cash on small percentage of our search assignment. The warrants are generally recorded at fair value when we receive them. Most of our portfolio is comprised of warrants from technology sector companies both public and private. Some of those [Indiscernible] but our potential pre-tax P&L exposure was only about $3 million because 50 percent of the ultimate value of these warrants gets allocated to the consultants that bring them in. There is one other change on our net income statement that I would like to discuss briefly and that relates to the reporting of reimbursable expenses. We have recently adopted our Emerging Issues Task Force release No: 01-14, which requires that reimbursements with Out-of-Pocket Expenses be reported on a gross basis as both revenue and operating expenses. Historically, we have netted the reimbursement against our operating expenses. Personally I think it is silly to gross up revenue and operating expenses for reimbursable expenses that have no bottom line impact, but since I don't set accounting and reporting standards we have complied with the release. We have however shown these reimbursements separately in the revenue and operating expense sections of our P&L. Consistent with our past practice the income statement attached to the press release reconciles our [GAAP] results to our pro forma results so that our investors have a complete view of our financial fiscal position. We continue to believe that the pro forma numbers provide the best [apples to apples] comparison of our core operating results and as such they exclude the non-comparable items which are special charges in 2001, goodwill amortization in 2001 since we were no longer amortizing goodwill in 2002 in accordance with [positive] statement number 142, all realized and unrealized gains and losses on our warrant portfolio and the write down of our EPS investments that I talked about a moment ago. So then if you look at our core operating results the pro-forma earnings in the second quarter was $683,000 or 4 cents per fully diluted share. Let's now turn to our [Indiscernible] and run down the [Indiscernible] line by line and then I will circle back and provide more details by geographic regions.

Lets start with the revenue, net revenue for the quarter was $93.5 million a decrease of 24 percent from the second quarter of 2001 as weak economic conditions around the world continue to adversely affect our search business. All four geographic regions reported significant revenue drops versus the second quarter of last year. The impact of exchange rate fluctuations on the revenue line was a positive $1.6 million in the quarter, primarily due to the strength of the Euro. On a sequential basis net revenue rose about 2 percent over the first quarter due to increases from management search and leadership services. Worldwide revenue from management search was approximately $5 million in the quarter of which a little over half was generated in the U.S. Leadership services which consist of our interim placements and executive assessment and coaching services contributed approximately $4 million to second quarter revenue.

Looking at our expense lines consolidated salaries and employee benefit expense decreased 20 percent versus the prior year primarily due to the headcount reductions made during the past 12 months. As a percentage of net revenue salaries and employee benefits were 68.8 percent in the second quarter of 2002 versus 65.4 percent in the comparable quarter of last year. The good news this quarter is that our operating margin improved by more than 6 percentage points versus the first quarter, largely due to a 7 percent decrease in sequential compensation expense resulting from the staff reduction decisions we made in the first quarter. Having said that at nearly 69 percent the staff cost ratio was still too high and we recognize that we have more work to do on that front. Pro Forma general and administrative expenses, which exclude goodwill amortization in both 2001 and 2002 declined 31 percent in the second quarter to $28.2 million from $41.2 million last year. The reduction in G&A is primarily due to lower bad debt expense, decreased spending on the discretionary items like marketing, travel, internal meetings and lower rent costs resulting from our restructuring activities. On a sequential basis G&A was up slightly as expected due to cost related to our technology initiatives. So our pro-forma operating income for the quarter was $956,000 versus 1.4 million in the second quarter of last year. On a sequential basis our operating income improved by nearly $6 million from the first quarter on a modest increase in revenue and as Piers indicated earlier we anticipate seeing further improvements in third quarter despite the sluggish revenue outlook. Turning to the items below the operating income line interest income declined 73 percent versus the second quarter of last year due to lower cash balances and lower yields on cash, $144,000 non-operating expense line is comprised primarily of net foreign exchange losses. With regard to taxes our pro forma consolidated tax rate was 41 percent in the second quarter compared to a 43 percent rate in [Indiscernible] the decline and the effective rate is primarily due to the fact that we are no longer recording goodwill amortization much of which is not deductible. The pro forma net income for the quarter therefore was $683,000 or 4 cents per share on a fully diluted basis. Okay, let me now circle back and review of performance by geographic region. As a reminder we are now operating [Indiscernible]. Please contact [Lynn Michael].

In addition to our year-over-year comparisons, I will also talk briefly about the sequential change in geographic revenue and operating income, because those comparisons continue to be a more meaningful parameter of our progress in this environment. So then in North America net revenue declined 28 percent in the second quarter versus second quarter of 2001 to $52.2 million, primarily due to the continuing economic weakness in the US. All practice groups expect consumer reported lower revenue versus last year. Management search also reported significantly lower revenue from the previous year. Pro forma operating income, however, actually increased 34 percent to $9.6 million due to better capacity management, lower bad debt expense and better management of discretionary spending. On a sequential basis net revenue in North America was up 5 percent primarily because of improvement in management search. Operating income more than triple versus the first quarter of 2002 as a result of additional staff reductions and savings in virtually every G&A category. In Latin America the effects of weak US economy and the turmoil within certain countries in the region continued to hurt our results. Net revenue dropped 27 percent to $2.6 million. The operating loss widened to $1.2 million in the quarter versus the $378,000 loss reported in the comparable quarter of 2001. Approximately $500,000 of the second quarter loss relates to the cost of converting certain wholly owned subsidiaries areas in the region to licensees. On a sequential basis second quarter net revenue in Latin America declined by 11 percent to the reasons I cited earlier. The operating loss increased by $871,000 largely due to the $500,000 in licensee conversions cost that were recorded in the quarter. While we expect a third quarter loss in Latin America, we anticipate that it will be much lower than the loss in the second quarter. In Europe, second quarter net revenue was $32.9 million a 17 percent decrease from last year same period. On a local currency basis revenue decreased 20 percent year-over-year due to decline in all major markets. Europe reported an operating loss of $300,000 in the quarter versus operating income of $1.4 million last year. The decline in operating income year-over-year was primarily due to lower revenue and higher bad debt expense. Sequentially, Europe's net revenue fell 2 percent from the first quarter as the strong Euro mitigated some of the weakness we had anticipated in their performance. The operating loss improved to $300,000 from nearly a million dollar loss in the first quarter, primarily due to the lower G&A expenses. Net revenue in Asia-Pacific declined 22 percent to $5.8 million in the quarter. Foreign currency variances were not much of a factor. Revenue in all of the practice groups was down and operating income declined 53 percent to $432,000 primarily due to the decline in revenue. On a sequential basis Asia-Pacific's revenue increased 4 percent versus the first quarter due to an increase in leadership services revenue. Operating income however declined by approximately $200,000. Our corporate expenses in the second quarter were down 2 percent from a year ago as increased technology costs were more than off set by a reduction in corporate staffing and other expenses. Compared to the first quarter, however, corporate expenses increased by 3 percent because of the increase in technology spending. We expect third quarter corporate expenses to be relatively flat versus the second quarter. Moving on to some statistical information at the end of June the number of executive search consultants in the firm was 383 compared to 414 at the end of the first quarter of 2002 and 492 at the end of June 2001. The average number of consultants in the second quarter was 395. The number of confirmed executive searches in the quarter decreased about 9 percent versus the comparable quarter of last year, which is the smallest decline we have seen in several quarters. In fact, the number of confirmed searches actually increased year over year in North America. On a sequential basis the number of confirmed searches and the average fee per search were essentially flat. Okay, let me now turn to our balance sheet, which remains quite healthy. Our cash balance at the end of June was $85 million compared to $68 million at the end of March and above the 70 to $75 million estimates that we gave you back in May. The primary reason that our cash balance was higher than the estimate we gave you were that our restructuring related payments and our capital spending were lower than anticipated. Our cash outlay is related to restructuring activities were approximately $6.5 million in the quarter or nearly $5 million less than our initial estimate. We now expect that most of that cash will be disbursed over the next two quarters. Capital expenditures in the quarter were $1.5 million compared with $7.1 million in the comparable quarter of 2001. Most of the investments have been for technology spending. Our year to date capital spending has been only $3.2 million and at this point I would expect our 2002 CapEx to be in the range of 7 to $10 million which is well below our previous estimate of $15 million. So, we now expect our cash balance to be in the 90 to $100 million range at the end of the third quarter. Depreciation and amortization of intangibles other than goodwill was $3.7 million in the quarter versus $5 million in the comparable quarter of last year. Last year's number has been adjusted to reflect the elimination of goodwill amortization for comparability purposes. The breakdown of the $3.7 million expense in Q2 was as follows: Depreciation $3.2 million, amortization $500,000. We estimate that depreciation and amortization expense for 2002 will be approximately $16 million. So in closing let me reiterate some of what I said earlier. While we believe our results reflect evidence of progress, we certainly got more work to do. The second half of 2002 will not be easy. The economic environment remains very tough so managing this business continues to be a complicated balancing act. We must continue to compete hard for increased market share while ringing additional costs out of the business and continuing to invest in the people and the initiatives that we believe are crucial to the success of the future. What I can assure you is that we remain committed to our goals and convinced that the actions we are taking will make us a stronger firm in the long run, and with that we will open up the phone lines for your question. Operator.

At this time I would like to [Indiscernible] want to ask a question press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

[Indiscernible] maintained are wholly owned [Indiscernible].

Positions in all of the crucial markets in North America, Mexico, Brazil and we have an office in Miami; we have an office in Chile. What we have licensed off is some of the markets that we continue to believe but non-crucial in North America.

Okay thanks.

We are now and off in the second quarter and North America was a bit stronger sequentially quarter of the quarter, Europe was a bit weaker as we said and July has been a sort of [sales] [Indiscernible] month, you know the impact of the stock market is clearly been felt on [search] activity in the US and you lose a lot of [Europe] in this summer for vacations as I said July was sort of sales [Indiscernible].

So it sounds like you are not feeling any better about the range than you did going in to the last quarter.

Well we started to see clear signs of a pick up in North America [Randy] in the early stages of Q2 but I think with what's happened to the stock market over the last few weeks activity has once again slowed down a bit in North America and as I said Europe continues to lag the US in terms of its recovery. So we continue to see weakness there.

Okay and what were the bonus [Indiscernible] in the second quarter.

The toll of all is expense in the second quarter was $15 million and that covers all bonuses that's producer bonuses, staff bonuses, management bonuses, etc.

Okay and then just the clarification question here, what initiative did you remove from your original capital standing plan.

I think it's been primarily we have scaled back some of the technology initiatives and we have really cut back on real estate initiatives in a big way.

Okay and a final question here. Look at the margin in the view [afterwards] was very strong, very high, I mean if this should we be looking as you continued to show improvement or when you show improvement in North America, should we be looking for a much higher than peak margin in that segment going forward or we are in front of some significant investment once we start to see the [ramp] there?

No. I mean, look we had a 1 percent operating margin in the quarter and as we have said before we want to get to a double digit operating margin which means that margins have to improve across the board.

Okay, very good, thank you.

Your next question comes from [Kelly Slam].

Thanks, I apologize, this is almost the exact same question that he just asked, but I wanted to see him can answer it in a difference way I mean could you [Indiscernible] and tell us exactly what is the month to month [Indiscernible] was May better than April, or June better than May and July better than June by region.

By region?. I don't have it in front of me by region but what I can tell you is that April was better than May, June was better than May but below April as I said it its' kind of choppy and July is sort of [Indiscernible] at this point. We don't have all numbers in yet for July.

Okay.

Kelly, we are measuring things on a three month rating average as the market is choppy week-to-week, month-to-month we find that's more helpful.

Since February we have seen an increase in the three-month rating average of confirmations.

Okay.

Gradual, and as you know we think it is too early to state that there is a definite trend, but there has been a sense of improvement.

Okay. And then a different question, [Indiscernible] consultant accounting can you tell us what it is now versus the end of the quarter and may be elaborate on light of the fact [Indiscernible] order, give us many more details on hiring plans or you know reduction plans or you know, you got some plan?

Well. That count was 383 at the end of the quarter. I don't have a better count than that. I wouldn't expect that it would change very much since the end of the quarter. As Piers said earlier, you know we continue to work to bring on capable people from other firms, but that is clearly an upgrade process. So to the extent that we hire in research consultants, we are taking out and almost at the same time.

Just to put some color on that to date we have added 27 individuals through our [free earnings] ranks, 15 have come from outside which compared to six our people were new to search who bring new industry skills and we also made a select number of probations. But despite those additions, the overall number has reduced. We are very performance-minded at this moment, and the exact number of consultants in the firm will depend on individual performance as we go forward.

Okay. Thanks a lot.

Your next question comes from [Bret Mandersel].

Good morning guys.

Good morning.

Assuming [Indiscernible] revenue for the rest of the year on a quarterly basis to get you a double digit operating margin targets, do you assume kind of flat SG&A levels with most of the improvement coming from salaries or should we be looking at different way? Thanks.

Well. I think in order for us to get the double digit operating margins and most of the improvement is going to have to come out of the [Indiscernible]. I think the G&A expense would improve marginally, but I don't think there is a lot of improvement there in order to drive us to double digit operating margin and indeed the real expense is in the salary line.

Will that come through mostly salary reductions or lower bonuses?

No. It will come about from better management of capacity will come about from better leveraging the organization when the revenues pick up, those are things that will have to happen in order to us to get to where we need to be.

Okay great, may be one of the question. Can you comment on the mix of business in the quarter between Board-level position, C level and then other? Thanks.

Not sure, I have that, any hard facts on that. Piers do you want to give some color on--.

I think Board and C-level continued to be somewhere in excess of 60 percent. We saw as you heard from the figures a small research [instead] management search which had been terribly weak in North America in Q1. And but that the lower end of the market continues to be weak and you know we haven't seen the full impact as I mentioned earlier of the more rigorous comforts governance environment, but we sense greater demand in the board area. How long that will take to see through fundamental changing our statistics or the shape of our business or the mix I don't know.

Your Next question comes from Mark [Smartien].

Hi good morning and congratulations. I think there was a perfect result given the operating environment.

Thank you.

I wanted to ask about the margins in North America, again a little bit. Were there any swings in terms of bonus accruals, I mean when I take a look at this quarter, the previous quarter, and then fourth quarter of last year, there seems to be some swings with regards to you know if you look at the actual expenses for North America, when we looked at Q1 relative to Q4, we accrued more for bonuses. Was there a swing in North America in terms of the bonus accrual?

No. There really wasn't, the accruals have been fairly steady this year.

Ok so it is basically in line with what you incurred for Q1.

Yes.

Alright, so where was the major improvement in North America from the expense side.

Well as we said there was further head count reductions in the US following the decisions that we made in the first quarter and that we [put forth in] in the first quarter.

There were further reduction on the SG&A funds in virtually all categories there was lot of [Indiscernible] debt expense.

Can you elaborate a little bit on that?.

On the [Indiscernible] debt.

Right.

Yeah, we have continued to chase these receivables hard -it the primary focus of ours.

Did you averse some previous [Indiscernible] there or?.

No

What is the bad debt expenses or percent of [Indiscernible] now?

Hang on we will try to get back on this.

[Indiscernible] the other thing to remember is last year a this time was when we are going through - very challenging time where he bad debt expenses that was extremely high

Oh yeah, I know it.

Even that you know a bit of easy comparisons [Indiscernible] concerned as well.

Ok.

While I can tell you that our reserve is 15 percent of our total outstanding [Indiscernible] balance. The expenses about little over 1 percent of revenues.

That is been pretty consistent Q1 and Q2.

Yes

Mark Smartein Ok, great.

Is it your expectation that in the US I mean can you maintain those operating margins in the US for balance of the year if you kept same sort of revenue [run] rate?

Yes we have to as I said earlier you know our goal is to get to double digit operating margin and in order to get there margins have to improve across the board.

I mean it is impressive given that your -- you know at the highest level since Q3 2000 [Indiscernible] good just wanted to see if there is so more upside there with regards Europe you mentioned that you have not seen all the benefits of the potential savings from the restructuring over there, which we except in Europe going into Q3.

Well there are additional head count reductions to come out in Europe and there are structural openings that were looking on as well. You know, Europe unlike the US. Europe is not ---our margins market and so the historically the margins in Europe had been lower than they had been in North America, [the spread] it has gotten little bit larger now because the US has recovered a bit. Europe has not really yet seen back to recovery, but we have done a number of structural things as far as this year we [Indiscernible] some of the new market locations that we are loosing money. We have trimmed the work force, but there is more work to be done.

Any idea in terms of what the potential savings would be in Q3 for Europe -- based on what Europe.

I would say this we except them to be profitable in Q3. It has been running at loss for the last two quarters and we would except that would reverse in Q3.

Great. What would you except your cash balance to be at the end of, you know, let's say you end up during, you know things basically stay flat for the balance of this year in terms of revenues, where would you except your cash to be at the end of Q1 2003 after you pay out the bonuses?

I think what we have projected is about $85 million for the end of Q4 and then will be another probably significant bonus payment in March of 2003. I am going to give you a guess of about $50 million at the end of Q1.

And you are actually running a little bit high in terms of cash relative to your previous projections.

Yes. A part of that as I said was the reductions in Cap spending that we have that was held back and part of it is the timing of the restructuring [Indiscernible] those would stretch out in Q3 and Q4.

Ok and final question can you give us the assumptions that would [Indiscernible] the lower end of his guidance and $85 million and 4 cents and [Indiscernible] in terms of you know just roughly speaking in terms of salaries and benefits and G&X.

And that is right [Indiscernible] but I think was what essentially what you would see is 85 million of revenue and roughly the same cost structure that we had this quarter which would drive it down [Indiscernible] cost structure than we had.

Yeah, we make the adjustment on the salaries and benefits right. G&A would pretty stabilize. Okay, terrific thank you very much.

Your next question comes from Chris [Indiscernible].

A couple of follow-up questions. First in terms of cooperate expenses. I think you were pretty clear in the call of the investments and the technology that we have been seeing and we will be seeing in the third and may be fourth quarter, [Indiscernible] explaining why your cooperate expenses has entirely come down. Could you explain how you expect those technology cost to rule off as [Indiscernible] what the cooperate expenses would look like in 2003 if it continues toward the [week] economic recovery.

The expenses should come down in 2003 part of the reason that in 2002 is the fact that we have made in technology investments we had consultants in here working on the roll out of some of the enhancements to our search system as previously described earlier and you know they all [come] chiefly and so as those consultants roll off and they are just starting to roll off now we should see lower cost going forward

More precisely, but if you did not have those consultants in place and once you have done with the [Indiscernible] technology project what would a more typical run rate look like on a quarterly basis.

I really cannot tell you we obviously not gotten into a budget cycle of 2003 we have got some analysis with you on that front in terms of really some of the things that we are doing at corporate today and you know whether those make sense to continue [Indiscernible] it will be a while yet before we have a feel through what the [Indiscernible].

Chris, I think it is important to make it plain that technology investments and knowledge management investments is not a project that finishes and predicating how much we will spend, it is actually judgment call at this point, because we have to pace our expenditure according to the means of the business and until we know what those are we don't know what the expenditure is going to be, you know, as I said, have just appointed a new CIO who will be formally announced in the next few weeks and that person is not in [Indiscernible] yet and so the budget is both we most likely will look at the investment over a three year period and we will prioritize certain pieces of it and regard those as a fundamental cost of doing business and we will bring forward or delay other pieces of it depending on the health of the business. So it's a [Indiscernible].

Okay, thank you though it's a very good clarification. A couple of questions on the balance sheet, the investment line is clear is that all related to [Indiscernible] and it sounds that a reasonable chance that could be written down?

The 6 million of [Indiscernible] yes that's the entire [Indiscernible] as I said our potential P&L exposure on that is a little under $3 million [Indiscernible].

Okay, secondly the goodwill is about $52 million, what the current thinking in terms of potential write down of that goodwill?

We are not anticipating any write downs at this point.

Okay finally the $10.2 million other assets, what is included in that?

Yes [Indiscernible].

Okay.

Your next question comes from Mark Allen.

Hey congratulations guys on getting back the profitability.

Thank you.

There was actually, I picked an article in the press just yesterday talking about the difficulty of attracting new directors to board and also been describing some board members are willing to resign because of concerns about the personal liability and I just worried what your dialogue with clients tell you. Are they actively rethink in the shape of their board so they starting to have issues with, you know, directors resigning and also what is your fees structure for a board member search versus a C-level executive search?

I think there will be a lot of speculations around the dynamics of board activity, but the truth is, I don't think any true pattern yet has emerged in terms of the number of people who will resign. I mean there will be incidents obviously or indeed the difficulty of attracting people to boards because of the accountability, I think it is early days; it hasn't really washed through yet. I think we will see a lot of articles over the coming weeks and months, many of which would be based on relatively limited information. I mean, talking to some of our most active [Indiscernible] at board level yesterday, we are [feeling] an uptake in demand, we are finding it more difficult to persuade people to look at opportunities, the due diligence that candidates will put in organizations through before taking up an appointment is much more extreme and that for the cycle is much longer and may well take weeks. So some of the characteristics that article such as the one that you mentioned yesterday point to are apparent but it is early, actually to tell how they are going to play out.

In your fares your fee structure for board charges, how is that structured?

The board search works for outside directors is generally a flat fee and relative to executive appointments is actually relatively low, but it is where we build critically important relationships, build our brand, and its there for high values to us and to clients. It is also too early to say whether fee structures will change as a consequence of the work becoming more demanding. I wouldn't want to speculate on that on the at that moment, but we have no changes planned.

And then, just [Indiscernible] is there a question related to the operating leverage in the business. If, right now, yes, you are running in the low $90 million revenue level or say hypothetically a $10 million uptick in quarterly revenues, could you, may be just can walk us through what are the, you know, essentially the variable, you know, incremental variable cost on $10 million in revenue and how much would that translate into your incremental operating profit?

Well, it is difficult to do that. There are number of factors in there including who produces the revenue, which consultant produces it. Because if it is produced across the board, you get more drops to the bottom line. If it produced by our top producers than lots a it will fall to the bottom line because of their incentives. We have progressive incentive schemes where the more you produce the more you, less the more they make and then there is the issue of discretionary spending, you know, how much [VD] cost or to generate that [Indiscernible]and so it is very difficult to speculate. I would say that, it is clear that we are looking to better leverage the organization as we move forward and we are looking at all aspects of the business in that regard.

And a final question. In your new service lines, the assessment, and you know, management business, [Indiscernible] your question how is that being received by clients? Is the sales process you mention, I think, appears it is a longer sales cycle on the solutions aspect of it, but is it more convincing the client to use the service or is it more convincing them to use you for that service to be following?

I think, what is encouraging is that a lot of clients do want to talk about different ways of enhancing the impact and effectiveness of that senior management leadership [Indiscernible]. Well if they may not want to talk, actually just about executive search it is a more consultative process. The projects of wide scale evaluation are significant in terms of corporate management commitments. On the one hand, they can be fairly significant in terms of cost and they are very frequently decisions to the, if you like structural to the long term planning of the business and therefore they frequently have to go up for board approval and those things protract the sales cycle. But the impression that we are getting from the market is a very positive one, and lot of our clients are extremely [Indiscernible] pleased to realize that we can do this and it has our professional [Indiscernible] on it and that we can do it around the world and support them with consistency. So the brand promises an important element of this. We only have one channel into our clients and that is our partnership and so the partners, many of them are being trained and bought on stream and they pick this up at a different pace depending on who they are and how open to change they are, but were encouraged by the signals that we see.

Thank you and good luck in the second half.

Thank you.

The next question comes from Dan [Dittler].

You have taken my call, just couple of quick questions. In your revenue guidance for the third quarter, how much are you anticipating favorable impact from currency translation, will be similar to the second quarter?

Yeah, we don't certainly anticipate currency benefits from quarter to quarter.

Okay and then one quick followup, what was your office count at the end of the quarter, if you happen to have that with you?

It is about 65 and I don't whether we have the [Indiscernible].

69.

Okay, great, thank you very much.

Okay.

That is all the time we have today. Thank you for participating in today's conference call. You may now disconnect.

Thank you.