Heidrick & Struggles International Inc (HSII) 2003 Q1 法說會逐字稿

Please stand by. Good day everyone. Welcome to Heindricks & Struggles 2003 First Quarter Financial Results. This call is being recorded. For opening remarks and introductions, I will now turn the conference over Chief Investor Relations and Communication Officer, Ms. Lynn McHugh. Please go ahead.

Thank you. Good morning everyone and welcome to our Investor Conference Call and webcast were we will review the results of our 2003 First Quarter. Featured on today's call are, Piers Marmion, Chairman of Heindrick & Struggles and Kevin Smith, our Chief Financial Officer. We plan for our call to last no more than one hour. As a reminder, there are supporting slides available on the web to accompany today's verbal comments. You can follow along using the online version, via the webcast which is accessible through our website, or by downloading a set to print for a hard copy.

As always, I would like to advise you that this call may not be reproduce or retransmitted without our consent. Second, certain matters on this call are forward-looking statements. We refer you to the Safe Harbor Language contained in our press release dated April 30, 2003, which is widely disseminated by the various wire services and other media. The language is also on slide two of the web presentation. I will now turn the call over to Piers for a brief overview; Kevin will then discuss the first quarter in greater detail. Piers?

Thank you Lynn and good morning everyone. During the First Quarter of 2003, we had a number of successes in the face of what was still a very difficult business environment. Europe turned an important corner to profitability as the new management team in the region tackled the cost structure that as you know, posed a problem last year. The bottom line improved very significantly versus a year ago, in almost every region. The top end of our business is looking stronger. Board search bookings increased and we completed several marquee CEO searches with a number of others confirmed this month.

In leadership services, we booked a board assessment project for very major German group and a further combined board assessments and board search project, worth over $1m. Prospects for our complimentary services overall continued to look good. On the hiring front, we have made seven new consultant hires year-to-date, as part of our ongoing program to upgrade the team. In addition, I'm very excited about some of the hires we presently have in the pipeline, including some talented people who left this firm but are now interested in returning.

Let me turn to a quick overview of our financial results. Net revenue in the First Quarter of 2003 was $77.3m, a decrease of 16% from the year ago, but in line with what we expected, as we operate in the world that continues to be weak in terms of economics, plague by war, geopolitical issues and the emergency SARS. As I indicated a minute ago, we improved our cost structures significantly and therefore, our bottom-line considerably.

Our Quarterly Results include two other rites, which you should be aware of -- a charge that resulted primarily from a reverse of the fortune on one of our expected sub-leases and a non-cash write-off of a differed taxed asset. Kevin will have more to say about both of these in his remarks.

There's really little I can say about the external environment that you don't already know. So let me instead focus on a few issues specific to Heidrick & Struggles. First of all, the search for my replacement is well under way. As I stated on the call earlier in April, we're looking at the best of both internal and external candidates. Gerry Roche* our acting CEO and leader on the search will be the first one to tell you that he would like to see it concluded as soon as possible. As you know, the exact timing of the research process is a little unpredictable even for us, but I'm pretty confident that by the date of our next earnings announcement we should have concrete news to report. In the mean time, I, and indeed the entire senior management team are committed to ensuring that we do not lose any momentum, and we won't.

Next, we have said repeatedly in recent months that our energy and resources are now concentrated on the marketplace. Everyday, our consultants are aggressively competing for business from these sources, while building and nurturing their established client relationships. Our industry and functional practices are working overtime on executing their business development programs, refining their approach to key account management and ensuring that our present clients are receiving the highest levels of service.

We continue our focus on the senior level of organization. We are beneficiaries of the heightened scrutiny of corporate governments, with many public companies in the midst of changing the composition of their boards of directors. In the first quarter our board search work increased 14%. At the CEO level, we recently concluded searches for new CEO's of some very high-profile clients, including NASDAQ and Warnaco. In April, we won the assignment for several other CEO searches under very competitive circumstances.

So there are some bright spots on the revenue front but it will take an improvement in business confidence to drive our performance in a meaningful way. While the conclusion of the Iraqi war will take one negative card off the table, people have come to realize that the war's end alone is not a cure for what ails the global economy, but, we've worked enormously hard to put in place a cost structure that is much more in tune with the current environment and everyone in the firm remains sensitive to spending.

At the same time, there are some investments we are prudently making for the long term. We're investing in strengthening our position in conducting searches at the top level, expanding our Leadership Services offerings so that our ability to serve clients, extends to evaluating and improving the performance of incumbent serious managers, deepening our relationships with a select group of key accounts, and training our people so they remain the best in the industry. We're also investing in new people selectively.

All our actions are intended to make certain that we are in the best position possible when we emerge from the economic haze that hangs over the landscape. The fundamentals of this business overall, are the strongest they have ever been. Our cost structure is sound, our cash position is strong, our people and processes are being operated as necessary, we are very active in the market place, and we have the strongest management team possible, in place. I really believe that nothing ails this business that little revenue wouldn't cure and I believe our focus on that will pay dividend in the months to come, even if we don't see any great strengthening in the market; but of course, we hope for that too. And now I will turn the call over to Kevin to give you more color on the first quarter and comment on the second quarter. Kevin.

Thank you Piers, good morning everyone. Before jumping into a detailed review of the first quarter results, I want to take a minute to make a couple of overview comments on the results and the economic environment.

First with the regard with the results, excluding the $5.5m special charge to strengthen our leased property reserves, our first quarter results were generally in line with our expectations, and they reflect the continued improvement in our cost structure.

Second, I am sure you have noticed that although we recorded a special charge in the quarter, we have not shown pro forma results as we have generally down in the past. This change in presentation is in response to the current governance environment. As you know, the SEC has taken a dim view of pro forma results and consequently, companies are increasingly moving away from showing them. We will, however, continue to highlight unusual and non-reoccurring items in our earnings releases and during these calls.

And finally, with regard to the economic environment, while things appear to have bottomed out, we have not seen any signs of a sustained uptake in demand for our services. The activity level continues to be very inconsistent and visibility remains very limited.

Okay, with that backdrop, lets now look at the first quarter results in more detail and begin the review by turning to slide five.

Net revenue for the first quarter of 2003 was $77.3m, a 15.7% decrease from the $91.7m we reported for the first quarter of last year. Foreign currency exchange variances were positive in the quarter, benefiting revenue by approximately 5 percentage points year-over-year, primarily due to the strength of the Euro versus the Dollar.

Our Healthcare and Professional Services practices reported revenue increases in the quarter, while Financial Services and Technology continued to show our weakness. Revenue from Leadership Services was flat versus the comparable quarter of last year.

The good news is, that despite the revenue weakness, our operating profit continues to improve, due to the reduction in our cost structure over the past 18 months. On a GAAP basis, the operating lost in the first quarter was $4.9m, compared to a loss of $28.2m last year, as significantly lower operating expenses and a substantial reduction in the restructuring charges, more than offset the decline in revenue.

With regard to special charge in the quarter, the $5.5m relates entirely to increases in accruals for leased property that had been identified as excess in previous special charges. There is no new restructuring activity reflected in this charge. In establishing our accruals in the fourth quarter of 2002, we took into account an anticipated sub-lease in London that was pretty close to completion. Unfortunately, that sub-lease collapsed late in the first quarter and because of further weakness in the London market, we have had to increase our accruals. Excluding this charge, operating income was $599,000 in the first quarter.

The net loss in the quarter, again, on a GAAP basis, was $6.7m, compared to a net loss of $17.7m in 2002. The loss per share was 37 cents in the first quarter of 2003, a significant improvement over last year's loss per share of 98 cents. In addition to the $5.5m special charge reflected in the operating loss this quarter, our tax provision includes a $3.1m deferred tax asset right off that I will talk about further in reviewing the next slide.

So, now lets turn to slide six and look at a few of the line items on the income statement in more detail.

First quarter salaries and benefits expense, decreased 21.4% to $54.2m, due to the reduction in headcount over the last 12 months, lower bonus accruals and a $1.5m benefit, resulting from the forfeiture of certain restricted stock units. We have approximately 400 fewer employees than we did at this time last year. Bonus accruals in the first quarter of 2003 were $11.7m compared to $15.9m last year. Salaries and employee benefits as a percentage of revenue declined to 70% in the first quarter of 2003 from 75.1% in the comparable quarter of 2002.

We continue to rigorously manage our G&A cost. G&A expenses in the quarter were $22.6m, a decrease of 18.9% from the comparable quarter of 2002. The decrease in G&A is primarily attributable to reduced discretionary spending, lower rent costs and lower bad debt expense. G&A as a percentage of revenue also declined to 29.2% in the quarter from 30.3% last year.

Quickly looking at the other items on this slide. Interest income declined modestly from last year due to lower interest rates and the net gain from the Warrant program was not much of a factor in either year.

As I told you in February, our tax provision continues to be a bit complicated for a number of reasons, including the mix of profits and losses in our non US operations, the timing of those profits and losses and various other structural issues. This quarter we had a tax expense despite the reported pre-tax loss due to foreign taxes and a $3.1m non cash write off of the deferred tax asset related to restricted stock units.

Let me now explain that write off. Back in 2000, a portion of our consultants' compensation was paid in restricted stock units. The price of those RSUs were granted at approximately $41 per share and that price served as the basis for the compensation expense and the related tax benefit that we recorded. Since tax benefit is only realized when the shares vest, the anticipated tax benefit was recorded as a deferred tax asset.

The RSUs vested in March of 2003, and since the price of the date of vesting, approximately $12 a share, serves as the basis for our actual tax deduction, we will get a much lower deduction than we had originally recorded. Accordingly, we had to write off a portion of the deferred tax asset in the first quarter. We expect to record additional deferred tax asset write offs of approximately $1m over the balance of the year as additional RSUs vest.

Slide seven shows some key statistics related to our executive search business. Confirmed executive searches in the quarter fell 16% from last year, while fees for search per search were about flat. Our consultant count at March 31st was 337, down 19% from a year ago and flat with the end of the year.

On our last call, we said we had expected that the consultant count to be about 325 at the quarter end but with the installation of the new management team in North America in February, it was determined that they needed some additional time to assess the performance and potential of the consultant base before any further actions are taken. The average number of consultants in the quarter was 345, and the voluntary turn over rate remains very low and is consistent with the rates we've seen in prior years.

Okay, lets now review our results on a geographic basis. Slide eight shows the results for North America. Net revenue in the quarter was $41.8m, a 16.1% decrease from the first quarter of 2002. While the Healthcare, Industrial and Professional Services practices all showed double digit increases in revenue, that performance was more than offset by the ongoing weakness in Financial Services and Technology.

The North America operating margin in the quarter was 14.1% compared to 6% last year. The region benefited from both reductions in headcount and lower discretionary spending across the board, versus the first quarter of 2002. With regard to consultant headcount in the region, we had 174 consultants at the end of March, a 14% decline versus March of 2002.

Slide nine shows the results for Latin America. In the quarter net revenue was $2.3m which is a decrease of 21.3% from last year as global economic blows, local political issues, and the loss of revenue from operations that were sold or shutdown last year, all negatively impact the year over year revenue comparison. Latin America did reduce its operating loss to $123,000 from a loss of $353,000 a year ago, but it's likely to remain modestly unprofitable until the top line improves. The quarter end consultant count in Latin America was 18 a reduction of 14% from the first quarter of 2002.

Okay lets now turn to the European results on slide ten. First quarter net revenue was $28.3m, a 15% decline verses last year's first quarter. Europe's reported revenue was aided significantly by favorable foreign exchange variances. The year-over-year revenue decrease was nearly 30% on a local currency basis due to general economic weakness in Europe, particularly in the Financial Services practice in London and the loss in revenue from unprofitable operations that were sold or shut down during 2002. The Professional Services, Consumer and Education/Not-for-profit practices generated higher revenue, but those revenue increases were more than offset by weaknesses in other areas particularly Financial Services and the Industrial practice.

The good news in Europe is that Europe turned profitable in the quarter due to the cost reductions that we took in the fourth quarter of last year. The regions first quarter operating profit was $565,000 verses the loss of nearly $1m in the first quarter 2002. And while there's more work to be done on the European cost structure, we're clearly making solid progress. Consultant headcount at quarter end was 114, which represents a 26% decrease from March of last year.

The results for Asia Pacific are on slide eleven. Net revenues in the quarter fell 10.9% to $5m, while operating profit was $439,000, compared to 659,000 in the first quarter of last year. The revenue and operating profit declines in the first quarter were primarily driven by lower revenues in the Financial Services and Technology practices. Needless to say, our primary concern in Asia is the impact that the SARS virus will have on our results. While I’s impossible to quantify at this point SARS is likely to have a negative impact on the regions results for the balance of the year. The consultant count in Asia Pacific was 31 at March 31st a decrease of 14% verses the prior year.

Our final slide, slide twelve, shows some selected balance sheet in cash flow information. Our cash balance at March 31st was $78.7m. The primary reason that the balance was above the $70m that we told you to expect at the end of the quarter, was that we received the $7m U.S tax refund in March. Accounts receivable, net of allowances for doubtful accounts, was $51.1m at quarter end. Much of the $9m increase from December 31st relates to an increase in the current portion of our receivables. Regarding the cash flow items, depreciation was $3.1m in the first quarter of 2003 a 7% decrease from the same period of 2002. Amortization of intangibles was $457,000 in the quarter, a 15% decrease from last year. We still expect depreciation and amortization to be in the 14 to $16m range for all of 2003. Capital expenditures in the quarter were $1.3m, down from $1.6m in the first quarter of 2002. We anticipate capital expenditures to be in the 5 to $7m range for the full year.

Finally there are three other cash flow---cash out flows of note that I should mention. First we paid $32m in bonuses in the first quarter. Second we paid out $9m in cash related to prior restructuring charges, and finally during the fist quarter we repurchase 288,000 shares of our stock for $3.2m. The average price of shares we repurchase was $11.02..

Okay let me now move on to the outlook for the second quarter. Our current expectation is that net revenue will again be in the 75 to $85m range and the corresponding bottom line should be in the range of their loss per share of ten cents to diluted earnings per share of seven cents excluding any cost to the separation pack related to Piers' resignation. As we told you in the first quarter, we are hovering right around the break even point which accounts for the broad range in our EPS guidance. And, based on our current forecast we anticipate our cash balance will be approximately 80 to $85m at the end of the second quarter.

As I said back in February, we believe most of the heavy lifting, in the cost structure is now behind us. More of our attention and resources are now directed to generating revenue, strengthening our relationships with clients and investing in programs that will drive performance over the longer term.

As Piers said the crystal ball for the economy remains cloudy, but at least the end of the Iraqi conflict has removed one drag from the business environment. We continue to focus on positioning ourselves, to capitalize on the eventual recovery, while being vigilant about keeping our cost in line with revenue in the interim. And with that, we'll open it up for your questions, operator?

Thank you, the questions and answer session, will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one, on your touch-tone telephone. If you're using the speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. We'll proceed in the order that you signal us and take as many questions as time permits. Once again please press star one on your touch-tone telephone to ask a question, we'll pause for just a moment. And we'll take our first question from Randy Mehl, with Robert W. Baird.

Yes good morning. And I apologize, if I ask something that's on the slides, I don't have them in front of me right now. But what were the confirmed searches by month, throughout the quarter, and into April?

As I said Randy, it's been very inconsistent and I don't want to into talking about what each of the individual months looked like, but it's been very inconsistent. The year started picked up and then it slowed down again, so no real particular trend.

And it slowed down again into April?

Yes.

Okay. In terms of pricing and rates, have you been able to hold on to the historical rate structure?

Yes we have. Yes, I'm sure in a --- I know in fact in a global business, we will have our moments of weakness at certain times, but I think we have done as good a job as anybody, if not better, at holding on to our view structures. That's I think is clear, of holding on to the average search team that we had last year, despite the pressure from the market, but we're still concentrating all our energies at a higher level on the market, than would work. And that's the least price sensitive area of the market.

Okay, thank you very much I appreciate it.

Thanks.

And now from Bear Sterns, we'll hear from Steve Rico (ph.)

Yes, hi guys. Just following up on that question, have -- I know your, some of your competitors have been doing some discounting, is that right?

The environment is very competitive, and I think, there isn't a firm around, who doesn't occasionally, or by habit, break with the normal cost structure. But for the most important searches, which are where we are focused, price sensitivity exists, but it's not the key issue.

Okay, so you feel you haven't lost out on any business, due to some of, I guess competitive --- competitor’s actions?

No, I think we have. I'm quite sure we have turned away business, but I know we've turned away business, because we're not prepared to discount.

Okay, one other question, and this may be hard for you to answer at this point, but I'm just trying to feel. With all the cost cutting you guys have done, which obviously you've done a great job on, I'm just trying to get a feel for the delta in the bottom line, should you experience a sequential uptake in earnings. You prepared to give any, sort of, guidance on that? Let's say if you see a 5% increase in revenues, say next quarter or something like that?

Well, I will tell you what we've said before, and that is on a flat revenue scenario versus last year, we expected to have operating margins of between 3 and 5% this year. And over the longer term we said if we get back the $450m of revenue we expected to have double-digit operating margins.

Okay, one other question, on the bonus you paid in the first quarter?

Yes.

That $32m?

Right.

Okay, is that - - I guess that's roughly about $1m per consultant, is that right?

No, no, we have 337 consultants.

Okay, so that's in line with historical payout ratios then?

Yes. - - Hello?

Hello? Yeah, is that in line with historical payout ratios?

Yes it is.

Okay good. All right thanks a lot guys.

Sure

Kelly Flynn with UBS Warburg has our next question.

Yeah, thanks. I had a question on your guidance for Q2, revenue guidance. You mentioned that kind of a sequential trend, month to month from kind of February through April, there's kind of been a decline?

No, no, we said that - - February - - we saw a pick up in February and March versus January, they were up sequentially but April has been a bit slower.

Okay, thanks. Specifically in North America, I guess last year, you saw a slight improvement in Q2 over Q1. I was just wondering if you could kind of speak to the seasonality there?

Well historically the second quarter has been our strongest quarter. Because what happens is, as get into the third quarter you start to lose some of the European revenue because people disappear on holidays, and then you get into the fourth quarter and you have holidays worldwide, so generally speaking Q2 has been our strongest quarter.

Okay thanks, and then - -

Again we're working in a pretty tough economic environment at the moment which we - - we really hope will improve in the back half of the year.

Okay. And one final question, I was just wondering if there's any remaining bonus payment to be made in Q2? And then also if you kind of, give me a sense of what cash payments will be made over the remainder of the year, regarding your special accrual?

There will be no bonus payments in Q2, again we typically pay bonuses in the fourth quarter and the first quarter, and with regard to the restructuring charge payments, we're looking at about $12m for the balance of the year. It's pretty evenly split by quarter.

Thanks very much.

And next we'll hear from Chris Gutek from Morgan Stanley

Thanks Good morning. Kevin you mentioned that you are making further progress with cost structure in Europe. I'm curious you if could elaborate a little bit more on how much additional cost will come out of the cost structure in Europe based on restructuring activities that you've already implemented. And then as a follow up, are there additional restructuring activities yet to happen that you haven't implemented?

We're not anticipating any new restructuring activities, we will continue to tweak the cost structure but we're not anticipating recording any special charges for that. It will just be a part of our normal process of reviewing performance of consultants and upgrading the team. Where we are continuing to focus our efforts in Europe in particular is in the G&A cost. The G&A costs are significantly higher than they are in North America. There are frankly a lot of good reasons for that, but they are higher than they should be and we are continuing to try and drive those down.

Would you care to try and quantify how much of the cost will be taken off?

It’s difficult to do that at this point Chris. We're still doing a lot of the analysis work and still pushing on people to get bused out. And I think we'll see continued improvement over time.

And Kevin I think you also did mention the bonus accruals in the quarter, this quarter versus a year ago. I missed that, could you please repeat that and then my understanding is historically in the first quarter in particular you try to be very conservative with the bonus accrual, recognizing it's difficult make-up. Higher bonus accruals should revenues rise on the upside. Do you again feel that you are very conservative, or feel that you are likely conservative with the bonus accrual in the quarter?

Well the bonus accrual in the first quarter was 117 versus 159 a year ago. And that's a function of two things. One, lower revenues in the quarter than we had a year ago. But also the fact that we are trying to do a better job as we said on the last call of spreading these bonuses more evenly. We, you know, we had 15m in the first quarter last year and it dropped down to 2 or $3m in the fourth quarter and we are trying to avoid that whip sawing affect this year if we can. And do a better job of smoothing this over the course of the year.

In other words it might be a little less conservative in the first quarter this year than---

No I'm sure that it's any less conservative. I think we are just taking a more, a little bit of a different approach to try and better smooth these things over time.

And finally, I must of missed it. I didn't hear any discussion about the Leadership Services businesses and I think in the last quarter you mentioned that the revenues were up double year-over-year in the fourth quarter. Could you give us a similar update on how those businesses are doing and in the context of the search for a new CEO is there any de-emphasis on those lines of business in your term?

I don't think that there's going to be, at least I would doubt that there'd be any particular change in strategy. The core of our business we continue to be search focused on the top end with a careful expansion into Complementary Services. I am very sure of that. The pattern with regard to leadership services, the trend is actually encouraging. Although if you compare first quarter of last year to first quarter of this year it's roughly flat, because we had some exceptional wins in the first quarter of last year which rather threw the numbers out. But, the trend is encouraging. We would it expect it continue to grow this year.

Great thank you.

And from Kings Point Partners we'll hear from Jack Salzman.

Yes, forgive me if you've mentioned this. I'm not sure I heard it, but can you tell us what the average revenue per consultant was in the quarter versus last year if it was up down. And also do you, can you elaborate a little bit on your effort to generate more revenue growth in the future. Do you have any specific projects or specific marketing efforts that you are going to be putting out to try and accelerate top line.

The--- I'm sorry the average revenue per consultant in the first quarter was about $225,000. We'll have to get the number for last year. And I'm sorry I missed the second part of your question. Could you repeat ---

Do you have any specific project. I mean do you have a plan of attack in terms of generating revenue growth in the future other than the more traditional hiring more consultants or expansion. Do you have specific targeted programs that may yield results in the next two three quarters?

The focus of the firm at the top of the market is extremely important. I think relative to where we were 18 months ago. So that focus at the top of the market where the premium space is, is much clear than it was. Key hires and upgrading the team are part of it. And with regard with the way we go to market, we are becoming much more scientific. We have specific training programs around key account managements and major accounts developments, and we are also learning how to approach clients with a broader sort of solutions proposition, which--- obviously key searches but also diagnosing the talent that companies currently have and helping that talent to grow. And that's where leadership services comes in.

So you know compared to the way that we went to market during very demand driven times, I think we've become much more focused, much more rigorous and rather more scientific. And all of those programs in combination will pay a dividend in terms of market share.

Jack, in response to your previous question, the revenue per consultant in the first quarter of last of 2002 was $215,000 per consultant, so we are actually up about $10,000 per consultant year-over-year.

Per consultant, right. Okay and regarding the second question, which is really how you generate top line other than the more traditional ways. Are these specific programs going to yield results this year, or are these longer-term projects, which will benefit the company in the future?

I think both

Okay, thank you.

Your next question comes from Bob Levick (ph.) with CJS Securities.

Actually it's Arnie Ursaner from CJS Securities. Good morning.

Morning Arnie.

Morning.

On compensation or the percent of consultant comp that is fixed versus variable, can you give us what those numbers are now generally, and what your targeted goals would be for the year end?

Hang on Arnie, we're just checking the numbers.

While you are doing that let me shift gears for a second. You mentioned that SARS could impact your Asian business. Besides any anecdotal - you know, besides the newspaper reports, are there any other specific factors you're citing internally that would make you believe that? Is there any --- are you hearing specific things from your consultants in the region? To the extent this is a new piece of information to react to, will it affect your cost structure there?

Sorry. We were looking for numbers here. I didn't hear your question properly.

You mentioned that SARS could impact you for the balance of the year in the Asian region, since this is new information for all of us, I guess the question I'm grappling with is, is there specific factors you can cite that would cause you to be more cautious for the year? Or is it more just the general anecdotal ----?

with regard to Asian?

Yes.

Yes a little, although this is very fresh information, but the SARS only broke a few weeks ago. What we do know is that, for instance, candidates are not being flown around the world for final interviews, which is slowing down in the completion process. Senior management, who maybe from multinational headquarters, are not being flown out to Asia to perhaps start up new mandates.

So we are seeing, not surprisingly, just a slowing of business activity. And it's very hard to know, given the changing position of the World Health Organization and the lack of clarity coming out of China about how severe the problem is, quite how long or severe this will be. But you know as you would expect, there are symptoms of change, because I guess people don't want to travel.

Okay.

Okay Arnie back to your question on the cost structure of salary and benefit cost structure, about 78% of it is fixed at the moment and 22% is variable. It's obviously higher --- a higher percentage of fixed costs than we'd like and we're trying to drive it down. The problem we have at the moment is that the revenue line is hurting as we are under scaled at the moment and it's just driving up the fixed cost percentage.

Kevin looking out lets say 12 to 18 months, what're you trying to target as a mixed between fixed and variable?

I mean ideally we'd like to drive the fixed down, I say over the next 12 months I'd hope to get that down to more in the 65% range.

But that's still higher than when your business was booming in ---

Well yeah, it is but we're running at half the size that we were running at in 2000. So it's just when you factor in all the cost, the managerial costs etc you know that contributes to a higher percentage of fixed costs. Ultimately we'd like to drive it back to more of a 50-50 range, but you know we're going to need some fairly significant help on the top line to get there.

And you may have had answered this and I apologize if you did, but what percentage of your consultants are currently profitable?

I don't know if we want to get into that Arnie, it's certainly improved over time, as more of the under performers have come out. And I probably don't have that number in front of me.

And it's still pretty early in the year.

Yeah.

Okay, but you also typically would run how they stand relative to their budgets -- Can you share some of that with us?

Well I mean look, we are actually from a budgetary standpoint we're running in about where we budgeted for the first quarter, I mean we budgeted the first quarter fairly conservatively, because we knew where the environment was. You know as I said earlier we were certainly hoping for a better back half for the year. Unfortunately, there is nothing that we can point to specifically that says that that's going to happen.

Kevin the other question I have for you is I know you spend a tremendous amount of time, effort and money reducing some lease expenses and some other fixed costs. Can you freshen us up on where you are on that process?

Right well we have written off several, I shouldn't say written off, we have provided allowances for losses on several properties that we had deemed as excess. We are currently attempting to sublease all the vacant space that we have. We have been fairly successful thus far. I would say that when we started this process we had about 250,000 square feet of excess space. We sublet about 40% of that. There is about 100,000 square feet of space that has been sublet. We now have about 150,000 square feet of excess space -- contained in approximately 8 properties. And some of those properties are in what I would call undesirable locations at the moment Sears Tower, Wall Street, the London Financial district etc. And it's just taking time to move those properties.

Okay very good thank you.

And now form Lehman Brothers we will hear from Dan Dittler.

Good morning I was wondering if you could provide some revenue trends for geography particularly in North America. I know that you have touched in your prepared remarks briefly on Latin America and also to some extent on Asia?

Can you be more specific in terms of what you are looking for, revenue trends?

What type of trends you saw through out the quarter particularly in North America and provided in your guidance of 75 to $85m in revenue does that --?

yeah I think the trends are consistent with what we said (inaudible). I mean the year got off, January got off to a very slow start. February and March were better sequentially and things have slow down a bit in April.

Okay thank you very much.

Sure.

And we will take a question from Mark Marcon with Wachovia Securities.

Hi it's Mark Marcon.

Hi Mark.

Hi, in - as a follow up to the last question, would you--are the run rates in April appearing to be better than what you saw in January?

Yes, clearly.

okay so I mean we are not - it's not like we haven't - we have gone back down to January levels?

No.

And in terms of, you know we got the guidance in terms of if revenues are flat in terms of what we would expect in terms of operating margins. Q2 is traditionally the seasonally strongest quarter, what if things don't improve, you know during the balance of the year from a macro perspective?

Well if they don't improve it will clearly hurt the bottom line. I mean we will continue to look at taking cost out of the business, but as we said back in February there is a limit to how much of this you can - how much of this cost restructuring that you can do with out damaging the business for the long-term. And you know, we are talking daily about cost issues, cost structure issues etc. and tweaking things that we can possibly tweak. But I wouldn't expect, as I said earlier, another round of significant restructuring, because I just think that will hurt the business for the long run.

I agree.

Mark you know that we have talked in the past also about (inaudible) fixed cost structure rate now is kind of running in the 75 to $80m range a quarter. So you can kind of, you know, do the math from there as well.

But Mark there are built into our cost structure are some long-term investment programs and clearly those will get delayed, or even stopped, if it's imprudent to invest. So we have got significantly better control on our business than ever before.

And should we expect that in terms of the amount that was accrued for bonuses this last quarter is that consistent with the run rate for this quarter? In other words, if were to just kind of flat line for a while is that kind of where we would stay?

Well again it's the function of what we think the full year is going to look like, if we think the revenue is not going to pick up in the back half of the year then the accruals will probably come down.

Okay I was just trying to get a feel for the magnitude in terms of --

It'd difficult to tell at this point we will have to see how the revenue shapes up over the course of the second quarter.

Okay and then with regards to your key account initiative, which you highlighted a few quarters ago. Could you give us a little bit of a feel for how that's going?

It's going pretty well. We've got globally something like 50 identified key accounts all of which have been the subject of training programs for teams of consultants, which we invested in last year. And we are seeing some interesting gains as a consequence. And we are now looking at market share for our client amongst those accounts. There is a great deal of internal global collaboration. Account management accountabilities are being given. And there is no doubt that we are beginning to make some real progress.

Are you still seeing the same year-over-year revenues gains out of those key accounts as you did a couple of quarters ago?

It's a difficult science because it's so new, we have only been at this now for 6 months or so in terms of the training and identification. I think we will have more reliable data for you at the end of this year.

Okay great thanks.

As a reminder if you would like to ask a question please press star 1 at this time, we will pause for a moment. And we do have a question from Dan Dittler with Lehman Brothers.

Sorry just one follow up if I could, perhaps this is taboo in the current environment, but if you were to reverse out some of the non-cash items you discussed earlier, would a 41% tax rate be appropriate to use?

Yes that's what we believe is our normalized tax rate, yes.

Okay thank you very much.

It appears we have no further questions. Ms McHugh, I'll turn the conference back over to you for any additional and closing remarks.

Well thank everybody for joining us today and I will be available, obviously, on ongoing basis to answer any additional questions you might have.

That concludes today's conference, thank you for your participation.