Heidrick & Struggles International Inc (HSII) 2002 Q4 法說會逐字稿

Good day everyone, welcome to this Heidrick & Struggles 2002 fourth quarter and full year financial results conference call. As a reminder, this call is being recorded. For opening remarks and introductions, I will now turn the call over to the Chief Investor Relations and Communications Officer, Ms. Lynn McHugh. Please go ahead, ma'am.

Thank you. Good morning everyone and welcome to our investor conference call and webcast where we will review our 2002 fourth quarter and full-year results.

Featured on today's call or Piers Marmion, Chairman and Chief Executive Officer of Heidrick & Struggles and Kevin Smith, our Chief Financial Officer. We plan for our call to last no more than one hour. We're trying something new on today's call. For those of you joining us via the web will note that we are providing a supporting slide presentation to accompany today's verbal comments. You can follow along by using the online version or by downloading a set to print a hard copy.

For those of you joining us by telephone, if you have access to to your computer, simply go to our website, www.heidrick.com, and click on the web cast icon. If you don't have access to your computer, you will still be able to follow our review easily and in the spirit of continuous improvement, your feedback will be very welcome on this new approach.

Moving along, I would like to advise you this call may not be reproduced or retransmitted without our consent. Certain matters are forward-looking statements. We refer you to the Safe Harbor language contained in our press release dated February 20th, 2003, widely disseminated. The language is also on slide the of the web presentation. I will now opportunity call over to Piers for an overview. Kevin will discuss the fourth quarter and annual results in greater detail. Piers?

Thank you, Lynn and good morning everyone. During 2002, Heidrick & Struggles devoted a significant amount of attention to the structural transition of our firm. We substantially reduced our costs to scale the business more closely to current economic realities. But that is not the only headline for 2002. We are, in fact, proud of a number of notable achievements.

Let me highlight some of these. We were profitable in 2002 on a pro forma basis, despite a revenue decrease of over $100 million in 2001. We had more cash an our balance sheet at the end of the year than the beginning. We bolstered our consultant retention by improving the rate of payout to those who earn bonuses. We strengthened our management team further, the entire team has been restructured and relayed with a new CFO, CIO, new HR team and new leadership in every region of the world and finally we invested in some of the initiatives related to our long-term objectives.

I want to make it clear that our concentration has not just been about survival, but on winning in the long-term. Some of these investments including our complimentary leadership service offerings, account management training, 13 year experience hires, a joint venture in China to formalize and expand our commitment to that market and we also completed the globalization of both our search and financial management technology platforms.

Net revenue for 2002 was $350.7 million. This represented 23% decrease from the $455.5 million in 2001. Business confidence continues to be shaky, primarily because of widespread uncertainty regarding the geopolitical situation. However, despite the environment, we met the commitment we made to you earlier in the year to reach marginal profitability in 2002 and we accomplished this despite declining revenue expectations as the year progressed. Pro forma diluted earnings per share for 2002 were 5 cents, compared to a loss of 5 cents in 2001.

The 2002 fourth quarter net revenue decreased 11.7% to $78.2 million, the fourth quarter is typically affected negatively by holidays and the weak economies further magnified that impact. Pro forma diluted earnings per share were 9 cents, well above the loss per share of 27 cents in the fourth quarter of 2001.

As we told you in October, we took the decision to eliminate in the fourth quarter much of the excess search capacity remaining in our business. Europe has been our particular focus since its cost structure was clearly still too high for revenue levels. Of 236 positions eliminated, 156 were in Europe. We reduced the number of offices around the world to 52 from the 66 at the end of the September. We have now concentrated our resources around the people and around the places where we can sustain the successful economic model and build.

Since June of 2001, we have taken actions that when considered in their entirety are profound in scope, but they have been completely appropriate. We lowered our costs by more than $200 million, we have reduced our work force by over 40%, we closed, consolidated or converted to affiliates nearly 30 locations. Inevitably, in the course of this action, a sizable proportion of the management team's focus has been internal. It was necessary to instill greater financial discipline in the organization, and prune the trees to foster new growth. Now, barring a cataclysmic drop in the market, we have completed our large scale restructuring program, we have pared ourselves down to a base level of infrastructure to support or global operations and it's time to direct the lion's share of our energy at new clients and to revenue growth opportunities.

We intend to expand our presence at the senior level of client organizations so we are, therefore, placing the bulk of our available resources at the top of the market. We are positioning ourselves in the marketplace as one of the industry's premium providers of top-end search and complimentary leadership advisory services. This position can only be sustained if we continue to demonstrate an ability to deliver ever higher value. The alternative to this approach is to be price-driven, which would irreversibly commoditize our services.

As pricing pressure has built in the market, we have seen many competitors bottom fishing for revenue and market share. I want to make it plain we're not going to do that, acknowledging that it may cost us in the short-term. In order to continue to enrich our proposition to clients, we must look at every avenue that enhances our skills and our attention to clients. The primary means of doing so is through training, through hiring, and through expanding our advisory capabilities, we are active on all three fronts.

Within our core business, executive search, we have created a more organized collaborative team to drive our share of board and CEO work. In fact, board searches conducted by the firm in 2002 increased by over 10% in 2001. Increasingly, many clients look to us for a suite of services extending beyond search. The firm can now evaluate and develop the talent already on board and help with the impact of management teams as well as placement.

In 2002, we targeted investments in our leadership services business to building awareness of our offering both internally among or consultants who represent us in the market, and externally amongst our clients. The early results are encouraging, revenue in 2002 from our leadership services business doubled from 2001, and our ambitions for 2003 are equally ambitious.

Our ability to support clients through a variety of related services is fundamental to forming broader, deeper relationships with them. These associations are not transaction-based, but rather ongoing partnerships. Although we already have these types of consultant relationships with many clients, we're beginning to institutionalize the process through account management training, new techniques in business development and knowledge management. Because of our concentration on serving the needs of top level executives, attracting and retaining the best consultants is more critical than ever.

Even during a reduction of our overall consultant base, we are in hiring mode. We will continue to upgrade our people and ensure that we're appropriately staffed in our key markets. Of course, retention of those consultants who contribute consistently to the firm is a priority. One reason we aggressively reduced research capacity is to ensure that our consultants can get competitive pay in this environment.

At the heart of all these actions is the need to create a fresh and positive culture built around values that are magnetic to the finest consultants, and values that cultivate an environment where exceptional type service is the norm. We are driving cultural changes by drawing on the best of our heritage coupled with new ideas.

Now, let me turn to the environment outside. In this fragmented industry, many competitors will not survive this downturn. We have seen evidence of this already in terms of bankruptcies and a sharp decrease in the 5,000-plus search firms that existed just two years ago. In such a environment, we believe the talent in the industry will continue to consolidate and opportunities to hire high-quality people, or perhaps acquire high-quality companies in the executive level leadership services base will likely increase.

We want to be able to exploit those opportunities selectively to aid in building our share of the clients senior leadership needs. While we're setting our sites on the long-term, we appreciate that your interest is in our short-term perspective as well. As you well know, every indication as to 2003 will be another tough year in the business world, everyone seems to be holding their breath regarding the geopolitical situation. In the United States particularly, we believe the concerns about the possible war with Iraq are suffocating business confidence at the time where there are bright spots in economic indicators and some guided optimism should naturally be returning.

At this point, we still expect revenue for 2003 to be flat to modestly down. We would anticipate the corresponding operating margins for that level to be in the 3 to 5% range, as we stated previously. While the prospective of war could hang over the early part of the year and impact business, we are assuming better revenue performance in the second half of 2003 than during the first six months.

For this first quarter of 2003, we currently expect revenues to be in the range of 75 to $85 million. The corresponding bottom line would range from a loss per share of 15 cents, to diluted earnings per share of 7 cents. As this illustrates, at these revenue levels, we're right around our break even point, every dollar of revenue has a greater than average effect on our operating profit, that is why the earnings range is so large. In addition, because of the timing and estimates surrounding how we must book bonus accruals, the correlation between revenues and bonus expense can be low in any given quarter. Kevin will talk more about this in his remarks.

But to be clear, if we need to take a loss in the short-term, because revenue is at a sub par level, we will. It would be irresponsible for us to cut further in reaction to what even in a depressed market is suppressed market behavior. We intend to protect our future. It is imperative that we emerge from this period stronger than ever, and not be whip sawed by very short-term pressures. Having fundamentally restructured ourselves, we will now invest albeit prudently in our people and those initiatives that drive both over the long-term.

Before I turn the call over to Kevin, I want to tell you about a management change that occurred earlier this month. David Anderson, who you know served as our Chief Operating Officer, and most recently as head of North America, has wanted to step out of management for sometime. He's taking a bit of a break at the moment but we expect him to return to build a high-level search practice. David has made large contributions to our success and he and we are looking forward to him being back driving client relationships.

David had a number of responsibilities that are being taken by others. Joie Gregor, one of our top consultants, and former manager of our New York office has been named President of North America, teaming with her is Bonnie Gwin, both will keep their substantial consulting practices. Mike Franzino, leader of global financial services practice, has taken over responsibility for coordinating practice activities and global key account management program. He, too, will remain very active in the market.

These actions represent the final step to reaching our objective of eliminating several layers of management. The management in place today around the world are exceedingly strong team, one exceptionally qualified to lead our battle for top-end market share and win. And now, I will turn the call over to Kevin.

Thank you, Piers and good morning everyone. As Piers said earlier, 2002 was an extremely challenging year for the search profession and for our firm as well. But it was also a year of significant progress for our organization. As you'll see as we work through the financials this morning, we were able to significantly reduce our cost structure during the year, enabling us to achieve marginal profitability for the year despite a revenue decline of more than $100 million from 2001.

Okay, let's now turn to slide 5 and review the financials beginning with the fourth quarter results. Net revenue in the quarter was $78.2 million, a decline of 11.7% from the fourth quarter of last year. Excluding the positive impact of foreign currency translation, the revenue decline was 15%. As we've said before, our typical Q4 season amount was magnified by the weak economy in 2002. Two of our industry practices, healthcare and professional services, did post increases over the fourth quarter of 2001, but those increases were more than offset by declines in other practices, particularly financial services and technology.

On a GAAP basis, the operating loss in the fourth quarter was $23.4 million, a $27.1 million improvement over the comparable quarter of 2001, due to the reduction in our cost structure and lower special charges. The net loss of $20 million and the loss per share of $1.10 were both significantly better than the comparable numbers for the fourth quarter of 2001.

Slide 5 shows the reconciliation of our GAAP results to the pro forma results for the fourth quarter. On a pro forma basis, our operating profit was $1.9 million in the fourth quarter of 2002, compared to a loss of $7 million in 2001. That improvement clearly reflects the progress we made during 2002 in better aligning our cost structure with our revenue run rate. Pro forma net income in the quarter was $1.7 million, compared to a net loss of $4.9 million in 2001. Pro forma diluted earnings per share were 9 cents, a 36 cents improvement over the 27-cent loss in the fourth quarter of 2001.

Slide 6 shows the reconciliation of our GAAP results to the pro forma results for the years 2002 and 2001. As you can see, our net revenue was $350 million, a 23% decline versus 2001. On a GAAP basis, the loss per share for the year was $2.22, compared to a loss of $2.28 in 2001. On a pro forma basis, the diluted earnings per share were 5 cents in 2002, compared to a loss of 5 cents in the prior year.

Let's now turn to Slide 7 and look at some of the other important lines on the fourth quarter income statement, all on a pro forma basis. Fourth quarter salaries and benefits decreased 8.3% to $52.9 million, due to the reduction in head count over the past 12 months, and lower incentive accruals. Salary and employee benefits as a percentage of revenue increased, however, to 67.7% in the fourth quarter of 2002, from 65.2% in the comparable quarter of 2001, primarily due to the decline in revenue.

For the year, salaries and employee benefits decreased 20% to $242 million. As a percentage of net revenue, salaries and benefits were 69.1% in 2002, compared to 66.5% in 2001. The salary ratio is clearly too high, and the actions we have taken in the fourth quarter should bring it down a bit in 2003, but the increase in the salary ratio is primarily a scale issue and we're unlikely to see a meaningful improvement in the ratio until the top line starts growing again.

We have been very aggressive in reducing both fixed and discretionary costs on the G&A line. In the fourth quarter, G&A expenses were $23.3 million, 38.4% decrease versus the comparable quarter of 2001. Lower bad debt expense, lower rent, resulting from office closings and consolidations, tight control on discretionary categories such as travel, and the success of our centralized purchasing program in the United States, all contributed to the improvement. G&A as a percentage of net revenue was 29.8% in the fourth quarter, compared to 42.7% last year.

For the full year 2002, G&A declined 31% to $106.9 million, for all of the same reasons I cited for the fourth quarter decline. As a percentage of net revenue, G&A was 30.5% in 2002, a marked improvement from the 34% in 2001. I won't spend much time on the other items on this slide. Interest income declined in the fourth quarter and for the full year because of lower interest rates and lower average cash balances, and as you can see, our loss from the warrant program was significantly lower in 2002 than it was in 2001.

Our tax provision for the last two years has been a bit complicated due to the mix of profits and losses in different countries the timing of those profits and losses, and various other structural issues. The important points for you to know regarding our taxes are: First, because of the losses incurred in the past two years, during 2002, we recovered $25 million in tax refunds. And second, we do not expect to pay U.S. taxes in 2003 because we will be in a carry-forward loss position.

Okay, on Slide 8, we have provided a number of details related to the $25.4 million special charge. About 12 million of the charge was for severance, approximately $11 million was related to closing or downsizing offices, and the rest was for the write-offs of goodwill and other intangibles. As we told you last quarter, the majority of the actions taken were related to our European businesses. Of the 236 positions eliminated worldwide, 156 were in Europe, 47 were in North America, and the rest were in other regions in corporate, included in the total were 37 executive search consultants, and 24 management search consultants. We have now closed or consolidated an additional 14 locations since September, and we are now down to 52 offices worldwide.

Slide 9 shows the anticipated cash outlays related to the special charges we've taken since June 2001. As indicated, approximately 80% of the fourth quarter 2002 charge will result in cash outlays. The fourth quarter cash outlay for restructuring activity was approximately $6.3 million. We anticipate using approximately $21 million in cash during 2003, and an additional $18.5 million in 2004 and beyond, for restructuring activity. The long tail on the cash outflows relates to rent payments we are obligated to make on vacant properties until we can sublease them. The timing of these outflows is dependent on our ability to sublease the space.

Slide 10 shows some key statistics related to our executive search business. Confirmed executive searches in the fourth quarter of 2002 declined 9% versus the fourth quarter of 2001. For the year 2002, the number of searches fell 20% from 2001. Fees for search in 2002 were $80,300. The 2001 average fee for search number of $87,400 was unusually high because of the fix of searches in our financial services practice. During 2001, we had some placements with extraordinary compensation package that has skewed the average.

To put this statistic in perspective, fees for search have grown at a 6% compound annual growth rate over the past five years. Also included on this slide is average and quarter-end executive search consultant head count information. We ended December with 337 consultants, down from 376 at the end of September and 432 at the end of 2001. The average was 262 in the fourth quarter, an 391 for the full year. By the end of the first quarter of 2003, we expect our executive search consultant count to be approximately 325.

Slides 11 and 12, show comparative revenue by industry practice and geographies for 2002 and 2001. Looking first at slide 11, the industry practice mix, you can see that not surprisingly, the technology practice declined as a percentage of our total revenue in 2002, while the practices with the best relative performance year-over-year, industrial, consumer and healthcare, now represent a higher percentage of our revenue. From a geographic standpoint, the change in mix was minimal. North America represented 55% of revenue in 2002, conceding two percentage points to Europe which represented 36% of 2002 revenue. Asia Pacific and Latin America remained steady with an aggregate of 9% of revenue.

Okay. Let's now review the pro forma results of our geographic segment in more detail. Slide 13 shows the results for North America. As you can see, fourth quarter revenue declined 10.4% to $44.8 million, while the operating income increased 65.4%, to $10.8 million. In the quarter, the industrial healthcare and professional services practices all reported double digit revenue gains versus 2001. But those gains were more than offset by declines in the financial services and technology practices.

The North American operating margin in the quarter, was a loss of 24.2%, due to lower bad debt expense and significantly lower discretionary spending. As we've said before, that margin is not sustainable over the long-term because our North American business will be investing in some of the programs Piers talked about earlier that are vital to our future success.

For the year 2002, net revenue declined 24.8% to $194 million. Revenue increases in our consumer and professional services practices were more than offset by declines in all of the other practices. Despite the decline in revenue, operating income in the region improved 36.1% to $33.7 million. North America's operating margin for the year was 17.4%, compared to 9.6% in 2001. With regard to consultant head count, as you can see, the count came down by approximately 20% over the course of 2002, to 174 at year-end.

Slide 14 shows the results of our Latin American operations. Latin America continues to feel the pain of economic and political instability in many parts of the region. Revenue was $2.4 million in the fourth quarter, a decrease of 22% from the comparable quarter of 2001. The operating loss did improve, however, to 127,000 from nearly 700,000 last year. For the year 2002, net revenue in Latin America fell 24.2% to $11 million. The operating loss for the year was $2.8 million, versus a $2 million loss in 2001. The consultant count in Latin America was reduced by 26% in 2002, and now stands at 17.

Let's now move to the European results on Slide 15. As most of you know, Europe was our biggest challenge in 2002. In the fourth quarter, net revenue in Europe decreased 11.6%, to $26.9 million. The weak U.S. dollar benefited their results in the quarter. On a local currency basis, net revenue declined 20%, as all practice groups reported declines in the quarter.

The fourth quarter operating loss of $3 million was a slight improvement over the $3.3 million loss in the fourth quarter of 2001, but still very disappointing. It is further evidence of the need for the restructuring actions we took in the quarter to bring the region's cost structure in line. Europe's profitability should improve significantly in 2003. For the year, Europe's net revenue was $124.4 million, a decrease of 20.1% from 2001. Excluding the benefits from foreign currency translation, revenue declined 23% year-over-year.

Healthcare was the only practice to report a year-over-year increase in revenue. Because the revenue decline was not accompanied by the necessary realignment of the cost structure, Europe generated a loss of $3.2 million in 2002, compared to operating income of $5.5 million in 2001. The good news is that the new management team in Europe has taken decisive action to reduce the cost structure and that should improve the performance of the region in 2003. Consultant head count in Europe was reduced by 26% in 2002, to 116 at year-end.

Slide 16 shows the results for the Asia Pacific region. Fourth quarter net revenue in Asia declined 18.2% to $4.1 million, and they operated at essentially break even in the quarter compared to a loss of $400,000 in the fourth quarter of 2001. On a full-year basis, net revenue fell 22.5% to $21 million. Operating income was $1.5 million, a 26.1% decline versus 2001. The region's operating margin was 7.1% in 2002, down from 7.5% in 2001. Asia is another region where we expect to see margin improvements in 2003. The year-end consultant count in Asia Pacific was 30, a decrease of 14%, versus the prior year.

Our final slide, slide 17, shows some balance sheet and cash flow information. We end the year with $110 million in cash, slightly above the September 2002, and year-end 2001 balances. The ending cash balance was a bit higher than we anticipated due to lower than expected payments for restructuring activity, higher than expected receivable collections, and the timing of certain incentive payments. We expect to have approximately $70 million on the balance sheet at the end of March, after paying the remainder of the 2002 bonuses, and covering the restructuring-related activity in the quarter.

Regarding the cash flow items, depreciation was $3.3 million in the fourth quarter, a $26.8 million decrease from the fourth quarter of 2001. For the year, depreciation was $13.2 million, down from $17.6 million in 2001. Amortization of intangibles was $503,000 in the fourth quarter, and $2.1 million for the full year. All periods exclude amortization of goodwill. For 2003, we expect depreciation and amortization to be in the 14 to $16 million range.

Finally, capital expenditures were down substantially from the $6.4 million in the fourth quarter of 2001. For the year 2002, capex was $5.2 million, compared to $24.1 million in 2001. For 2003, we expect capex to be in the five to $7 million range.

Okay. Let me now circle back to the outlook for the fourth quarter that Piers provided earlier and try to provide some additional insight on our estimate. Many of you may be wondering why the projected earnings for the first quarter of 2003 would be so much lower than the fourth quarter 2002 number, if the revenue is essentially unchanged. The primary reason for the variance is the timing and level of bonus accruals. As a reminder, we accrue bonuses quarterly based on full-year revenue and profitability estimates.

One of the accounting complexities in this business, particularly over the past couple of years, has been trying to accurately forecast our revenues and related incentive accruals. In both 2001 and 2002, our full-year revenue was significantly lower than our expectations at the start of the year. Consequently, the incentive accruals that were booked early in those years, particularly in the first quarter, were, in retrospect, too high, relative to the full-year revenue run rates. The adjustment to bring the incentive accruals back in line with the actual revenue run rate significantly benefited the third and fourth quarters over the past couple of years. Accordingly, the incentive accrual of $3.3 million in the fourth quarter of 2002 is significantly lower than the likely accrual for the first quarter of 2003.

And finally, as I said at the outset, we made significant progress in realigning our cost structure during 2002. We have some more work to do, but we believe that the heavy lifting is behind us. We are currently in the process of taking some additional expenses out of the business, but we anticipate that by the end of the first quarter, we will have reached what we consider to be our base cost structure for 2003. Unless the bottom completely falls out of the economy, we don't anticipate any further large-scale restructuring activities. As a global organization, we have a certain amount of infrastructure that is necessary to support the business. At our present revenue level, those infrastructure costs are under leveraged and it will require revenue growth to see significant improvements in our margins.

We, like every other firm, are balancing the need to keep the business healthy during these uncertain economic times, with the need to invest in the people and programs that are critical to our long-term success. At the end of the day, we have to focus on the longer horizon, while remaining mindful of our commitments to margin and cash flow improvements.

With our premier brand, strong balance sheet, and enviable roster of consultants and clients, we believe we have the opportunity to emerge from this difficult environment, whenever it may end, in the best position of anyone in our industry. And with that, we'll open it up for your questions.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1 if you'd like to ask a question, the first question is from Randy Mill, Robert W. Baird.

Good morning. I wanted to talk about a couple things real quickly here. One, what was the accrual level in the fourth quarter? And what's your expectation for Q1?

Well, the accrual in the fourth quarter, Randy, was $3.3 million, and again, you're getting a benefit in Q4 for the over accruals that occurred earlier in the year.

Right.

And the -- we expect that the accrual in Q1 will be -- it really is a function of what the revenue will be, but it will range from, I would say, about $11 million to, call it $15 million, somewhere in that vicinity.

Okay. Okay, that makes sense. And North America, margins were obviously very strong in the quarter. I'm just wondering if the current level has much room for upside as things start to get better, or if, you know, we're just benefiting from sharply lower bonus accruals as well as, you know, some initiatives that just took place in the year?

Well, the fourth quarter margin of 24% was driven by, as we said, lower bad debt expense and lower discretionary spending,, really wasn't driven by lower accruals in the case of North America, year-over-year. The full-year margin North America was 17%, which is what -- kind of what we expect the margins to be on a longer term horizon. We said, we think high teens is about where they should be.

Okay. And one last question then: Given strong balance sheet here and your improving visibility, we'll call it, to the cost side, should we expect share buyback to enter the picture here over the next --

Yes, you should. We have an authorization from the board to repurchase up to another 550,000 shares. And we will be in the market in the window period.

Okay. Thank you very much.

Next we'll hear from Mark Allen, SunTrust Robinson Humphries.

Good morning, guys. Looking at your average consultant count for 2002, 2001, just doing the arithmetic on that, it looked like your average revenue per consultant was right around the $900,000 mark. And I guess this question is to ask if this is a correct way to look at it: Now that you have projections for kind of flattish revenue and a greatly reduced consultant count, that would imply your revenue for consultant this year is going to go up about 20%? Is that --

That's fair.

That's about right. We would expect it to, on average, be around the 1.1, 1.2 million mark.

I think the arithmetic would be around 1.1. And my question is: Going back and looking at prior, you know, peak cycles in the business, where have you maxed out, I guess, in terms of revenue per consultant? In other words, you know, at the $900,000 level, what are you running as a percent of the potential capacity. The revenue per consultant peaked in 2000 at about $1.3 million per consultant. So 30% that have level last year?

Yes.

And final question: Can you give us the total employee count, total employees 2002 versus 2001 at year-end?

Hang on. We can give you that. We just have to find the appropriate page.

Okay. And just a similar question comes of office count. I think you gave us a lot of detail, Q4 versus Q3, and I was just trying to get a sort of year-end to year-end.

Not sure if we have the year-end to year-end office count.

For this year?

For office count. Mark, the first question about employees, about 1,400 employees at the end of 2002.

Okay.

Versus about a little over 1,800 at the end of 2001.

Okay.

And then in terms of offices offices, as Kevin said earlier, we are down to 52 now, that's come down at the end of December, at the end of the December we were actually at 60.

Okay. You were at 60 at December '02. What was that December '01?

I don't know if we have -- I can tell you the number of offices peaked in the first quarter of 2001, and we had about 83 locations at that point.

Okay. So did you also reduce the square footage of some of the offices? In other words --

Yes.

Would the square footage be down more than the office count?

Yes, we did. In many cases where we had excess capacity in the form of square footage in offices, we've been able to partition off some of that space and sublet it.

Good luck this year. Thank you very much.

Thank you.

Thank you.

Wachovia Securities securities, Mark Marcon has the next question.

Good morning.

Good morning.

I'm wondering, can you tell us what your bad debt expense assumptions are for '03 and how does that compare to all of '02?

Bad debt assumptions for '03 are 1% of anticipated revenues, and the full year bad debt number for 2002 was about $1.9 million. So it would be a little less than 1% of revenue.

Okay. Great. And can you give us a little bit of color in terms of, you know, how the quarter trended for you, you know, in terms of October, November, December and kind of what you're seeing in January in terms of confirms?

We have seen a better trend in January than in November and December. And January's an unpredictable start, but it started reasonably and if we look at search confirmations, we saw search confirmations of just over 400, 430 in October, a little over 300 in November, and around 300 in December.

And then what did that move up to in January?

We don't have a final count for that, but it's an improvement.

Actually, Mark, February so far is trending better than January.

Trending better than January. What we detect, however, is that there is an unnatural suppression in North America. Our international markets have really done quite well, and but North America seems to be waiting by the switch a bit.

Uhm-hmm. Okay. Would you normally expect, from a seasonal perspective, do you normally expect a fairly decent bump in Q1 relative to Q4? I mean, obviously this is not a normal year.

You know, obviously it's, in this environment, it's a function of the economics. Normally, you get a little bit of a bump coming out of Q4 into Q1, but as we've said, I think the economic overhang continues to be problematic.

If you look at it, Mark, versus the beginning of 2002, January, I think for most search firms came out of the gate very strongly but then February sort of tapers off. There just really hasn't been any pattern here at all.

I appreciate that. I'm trying to get a sense for what you would normally, since we haven't had normal in a long time.

We do expect a modest improvement in the first quarter over the fourth.

And can you give a little color, Piers, in the opening you talked a little bit about price competition. Are you seeing that from the Russells and Spencers and Korns of the world or from smaller firms?

From absolutely everyone.

Really?

Yes.

Can you give us a degree of magnitude?

No, because I think it's very episodal. But certainly the -- at the lower levels, low-level searches, competition is vicious. And we're seeing not all of those firms, but some of them actually doing entirely contingent work, quite clearly at the lower levels buying market and then anything beyond that. We're seeing some very aggressive cost-cutting by some firms more than others, but truthfully, everyone and I'm also sure that, you know, as a global operation with hundreds of people in the market, we have our occasional moments that don't make us proud either.

But I do believe that we are holding firmer than anyone else else and part of this also has to do with how we define our market going forward. There were some claims made by competitor that we were losing market share and I think that is absolutely not what we see. However, we are defining our market differently. The market we want to dominate is the top end. We have pulled ourselves away from the lower end of the market, and we've shrunk our market in terms of its definition and we're going after the premium piece, much less price sensitive, and we're walking away from deals that are unsensible.

And truthfully, one of the reasons, I think, our H debt profile has changed is that our [INAUDIBLE] portfolio is upgraded, we're working for better clients, being more sensible about who we work for, and generally upgrading the business. That is not true for everyone we're competing with. When it comes to boutiques, we're seeing some signs frankly, almost of desperation.

Got it. And then switching over to the bonus accruals, if it's 11 to $15 million for the first quarter, we could take that to mean that for the full year you're estimating it's going to be anywhere between 44 and $60 million.

Yeah, that's a pretty good approximation. Again, keep in mind several things, number one, we have less consultants on average. I mean, the average consultant count for 2002 was 391. We should be running at about 325 for 2003. So you've got less consultants producing approximately the same amount of revenue. So the bonus accruals are going to be higher. We have traded off variable cost for fixed cost in this environment. But we're still holding to our assumption that we will improve the revenues to -- I'm sorry, the margins to between three and 5% on roughly flat revenue.

Okay. What should we use for a tax rate?

Good question. You know, pro forma tax rate is 41%.

41%. And what -- you mentioned in the U.S., you won't pay any taxes, but what do you think you'll ultimately end up paying, if you end up somewhere in the middle of your range?

If -- what will we pay in taxes?

Yeah, are you going to pay taxes overseas?

We pay some taxes overseas, we have got a lot of our foreign subsidiaries or operations are actually branches with the U.S. companies, so they will get a tax benefit. The tax payments in 2002 should not be all that significant.

Great. Thank you very much.

Sure.

Moving on, we'll hear from Chris Gutek, Morgan Stanley.

Good morning everyone.

Good morning.

A couple questions to follow-up on the last line of thinking, Piers, I guess I'm curious what percentage of the company's revenues right now would you say would be coming from the middle market from lower level searches that you would intend to walk away from? I'm going to get some sense how much of a negative that would be.

It's tiny. I think you can tell by our average fee the level at which we're predominantly operating. I would say that we would occasionally for key clients go down below the normal levels for strategic hires who may be not high salaried. But, look, I think we're talking about now that we have essentially walked away from the leaders online business. We're talking about, you know, 5% which may be functionable, so to speak.

Okay. If I could follow up on the pricing pressure issue, what is the nature of the pricing pressure you're feeling for the senior C-level searches, meaning is it a reduction on the percentage being charged, making the final payment contingent, is it a combination of things? If you could comment how this would compare by historical standard, back in the early '80s, in terms of pricing pressure.

In terms of the roster of pricing alternatives, you probably covered them. It covers everything from expense charging to capping fees to elements that are contingent and it is less severe at the upper end. You know, the most important searches are inclined to be less price-sensitive, but even now we're seeing attempts by some other firms to go in on price and seek that advantage. So the winning proposition is to have the best knowledge and have the best team and we just have to concentrate on that.

You know, Chris, making comparisons to what happened a decade ago, some of the same pressures, yes, of course, it's difficult to make sort of a scientific comparison. But this is a, if we look at what's been going on in North America, it's a long recession we're talking about, and a seismic shift when compared to the previous industry declines we saw. As a consequence, the impact is that much more severe.

Okay. And then final question: It looks like the company has a significant opportunity to save some cash by subleasing these offices, office space that's been vacated. I guess I'm curious to what extent are you having success doing that, and what is assumed based on the estimates for cash outflows that you've articulated here?

We've had mixed success, Chris. We've been able to move some properties. Some are tough in this environment, you know, we've got space here in the Sears Tower a tough sell, space in the high-tech. corridor in California. We've got space in the high-tech. corridor in Boston.

These have been difficult to move and so the reserves have been set based on continuous discussions with the brokers about what the market is like, what the anticipated vacancy periods will be, what the anticipated sublease rates are that we should expect, and we've continuously updated those reserves as time has moved forward.

Great, thanks.

Sure.

Operator?

We'll take our next question today from Kelly Flynn of UBS Warburg.

Hi this is Andrew for Kelly Flynn. You did a great job explaining how the variable salaries and employee benefits will change from Q4 to Q1, I was wondering if you could explain if there's any additional costs to come out on the fixed side there?

No. We've, as we've said during the course of the presentations this morning, we have significantly scaled back our cost structure.

We now believe that we have scaled it back to the point where we have a cost structure that makes sense given the global infrastructure, you know, given the fact that we're a global firm. We don't expect any more large-scale reductions. We will continue to evaluate people, as we've said, this is a performance-based culture. We will continue to make selective hires and those will largely be replacements. But we don't anticipate anymore large-scale restructurings.

So, should I assume that the cost-cuts made at the beginning of the fourth quarter?

No, no, in fact, most of the cost cuts made in conjunction with the fourth quarter restructuring were made late in the fourth quarter.

So, there will be some additional impact in Q1?

Yeah, we'll see some pickup in Q1, that's correct.

Could you quantify that?

No, it's very difficult to quantify that, Andrew, I'm sorry, because there are so many variables there.

One of the things we talked about back in October was, you know, we expected savings and the actual savings came in the restructuring of about $22 million. Obviously, with the improvement we're expecting in the operating margin, some of that will drop to the bottom line, the real focus for that was to be able to reinvest in some very important long-term programs for the business. A lot of savings will go back in the business in 2003.

Okay. Thanks, and then perhaps if you could just put some color around your revenue guidance for the year, what you're expecting there in terms of kind of the economy?

Well, we've said for the year, revenue would be flat to slightly down. And we are, at this point, we are holding to that guidance.

Okay. Thank you.

We think it will be a little bumpy in the first half, as we said, but we're expecting a pickup in the second half.

And we'll now hear from Arne Resner with CJS Securities.

My question's been answered.

Okay.

Moving on to Dan Ditler of Lehman Brothers.

Thank you, a quick question regarding your corporate expense line, it obviously declined significantly. Is the level sustainable as a run rate in '03?

Yes, we think so.

Great. Thank you.

Sure.

We'll fake a follow-up from Mark Marcon, Wachovia Securities.

If for one reason or another just global macro economic pressures, et cetera, we end up staying around, you know, let's say an $80 million run rate per quarter or $320 million for the year, if that occurred, how would the bonus accrual change?

I mean, I know it's going to -- it's obviously going to vary, but you're going to be break even at $80 million because you're assuming, you're accruing for bonuses that would get you to, you know, somewhere between 340 to 350 in revs. As things progress, if that didn't occur, and let's say we kind of flat-lined here in terms of quarterly revenues, where would profitability come out under that sort of scenario?

I think you're essentially looking at about a break even scenario, perhaps a slight profit.

Wouldn't we have a profit? Because I mean, right now you're accruing for a much better revenue.

You would have a profit, but it would be modest.

Yes, modest profit and you would then scale back your incentives because we would not have achieved our revenue goals for the year or our profit goals for the year.

Okay. I was just trying to get a sense for how modest the profits would be.

Again, I think you're looking at a small margin on that scenario.

Kind of like a 1% EBIT?

Yeah, one to two.

Okay. And can you expand on, Piers, the point you made about potentially making an acquisition, I'm assuming you probably wouldn't do that until you started feeling comfortable that your business was actually picking up, or am I -- am I wrong in that assumption?

I think we're talking about the overall environment, I think you may, you know, as the recession continues to bite, you may see some pieces begin to move in the industry. And in the adjacent pieces to the industry, which are in the very fragmented leadership services market and that doesn't mean we're going to be going out on an acquisition spree, you're absolutely right.

But we can see people movements and I think there will be a consolidation of individuals around the stronger and safer players.

Okay.

And you know, I wouldn't be surprised later on in the year to see, again, as some optimism returns, you may see in the industry some acquisitions or consolidations take place.

So you're talking more about.

I'm talking more about people.

You're talking more about individuals as opposed to full scale acquisitions of firms.

I am.

And potentially firms in some of the ancillary leadership services area.

Uhm-hmm.

Okay. I wanted to be clear on that. Thank you very much.

And we have time for one final question which will come from Richard Friary from Delphi Management.

Good morning.

Good morning.

Looking historically, it looks like your revenue peaked in 2000 at just under $600 million, I'm wondering what portion of that came from the Internet boom, the dot-coms and might not come back. How much of that 600 million?

A lot.

Can you quantify it?

About a hundred million dollars. At the peak, to give you a flavor, at the peak of the technology boom, technology-related revenues represented about a third of the company's total revenues. And it's now just under 20%.

Of the smaller number.

All right. Thank you very much.

Okay.

And there are no further questions at this time. And Ms. McCue you, did you have any closing remarks today? That does conclude today's conference, we'd like to thank you all for your participation.