Heidrick & Struggles International Inc (HSII) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Heidrick & Struggles second quarter 2003 results conference call. This call is being recorded. For opening remarks and introductions, I would now like to turn this call over to the Chief of Investor Relations and Communications Officer, Ms. Lynn McHugh. Please go ahead.

Welcome to everyone to the 2003 second quarter results. Featured on today's call are Thomas Friel, Chairman, President, and Chief Executive Officer, and Kevin Smith, Chief Financial Officer. Although Tom has been with Heidrick & Struggles for 24 years, he has been in his new role for just five weeks now, and he will share with you some of the thoughts about the firm from his new vantage point. Kevin will then review the second quarter in more detail. As a reminder, there are supporting slides available on the web to accompany today's prepared comments.

As always, I would like to advise you that this call may not be reproduced or retransmitted without our consent. Second, certain matters in this call are forward-looking statements. We refer you to the Safe Harbor language contained in our press release dated July 31, 2003, which is disseminated by wire services and other media. It is also on slide 2 of the web presentation. With that advisory taken care of, I will now turn the call over to Thomas Friel.

Thanks, Lynn, and good morning, everyone. We appreciate your joining us today. While I have met a few of you over the past four years, I appreciate that not everyone knows me well, so this call is a good opportunity to begin changing that.

First of all, because I have been at Heidrick & Struggles for most of my career, I really feel I do understand this company, our people, and our work. I love this business and I feel it's a privilege to be part of it and to have the opportunity to lead the Company. For those of you who don't know me, during my time here I have opened and run a number of offices profitably, including those in Silicon Valley and the Asia-Pacific region which I established and managed for seven years. I was one of the founders of our technology practice and served on the executive committee of the firm when we were private and on the board of directors when we became public. I've recruited 40 consult annuities to the firm, and I'm proud of the fact I've been a top producer in the firm and a leading business developer for over 20 years.

I was also the original sponsor of our leadership services initiative which has resulted in our adding several new capabilities to our lineup with more to follow. I think there's one other important thing that you need to know about me. I own over 260,000 shares of Heidrick & Struggles stock. Every share I own I bought. And when we were private, I bought as much as I was able to buy. I have never sold one share of our stock in over 20 years. So while I may not own as many shares as some of you do, and we certainly to appreciate the shares you do own, what I own is at least as important to me as what you own to you, so I think you'll find we are very much aligned.

So what have I been focusing on over the past 30 days? Right now I'm directing the majority of my energy toward listening, learning, and planning. There is no argument that the past several years have been very difficult for Heidrick & Struggles. Most of the actions taken during this time, however, were absolutely necessary from a financial perspective, but they came, not surprisingly, at fairly high emotional cost to the firm. The good news, though, is that the fabric of the firm is intact. How many companies could have gone through the changes we have over the last 24 months and still restrained their strength and their reputation? That's testimony to every person in this organization, and I thank them for that and I've been going around the world doing just that. These people are battle-hardened and they're tough. But now our people want and are ready to move forward. They've been patient and hopeful as we went through the process of selecting new leadership via a thorough CEO search, a process, by the way, we manage every day on behalf of our clients. That's what our partners expected and I've been very pleased with the level of support they've expressed for me, for the firm, and for the process we went through over the last 30 days.

Now, while I won't pretend to have answers to everything in my four weeks in my new position, I would like to spend a few moments talking to you about what I do know and what I believe. First, I believe there should be true alignment among our investors and consultants. That means our people should have real ownership in the company. Many of them do and should be owners and will be. As part of this we will be taking a hard look over the next few months at all of our compensation and equity ownership programs.

Second, I believe that the operating margin goal we've presented to you previously remains appropriate, and Kevin will talk a little bit more about that in his remarks. As part of that, we realize that spending 70 cents of every dollar on compensation is clearly unacceptable. But reducing that cost doesn't mean cutting individuals' compensation in most cases. I believe, I think we all believe in treating people fairly and paying them favorable fairly. That's good business. But I think that our staff size and especially the number of non-revenue producers must continuously kept in check. We're building in an aggressive management of productivity whereby weaker performers will exit and we'll manage that year on year. We're also commit today continue to go after cost savings, although I think we all believe the large-scale reduction programs are behind us. For example, we need to further simplify the processes in the organization and we have teams working on this globally. I've been meeting with the leaders of these teams almost every day. Managing the cost structure will be a continual process of balancing smart investments with taking unnecessary costs out. And we certainly can't let expenses get out of control as our revenue growth returns, and we won't.

And third, we're redoubling our efforts to hire the best consultants in the marketplace as a means to upgrade staff in the short run and as a means to build our brand as our growth returns. As part of that of course retaining our current producers through competitive compensation and an appealing culture is paramount, as is investing in our younger talent.

A word about strategy. There have been times where we may have lost some clarity on this issue but I think we have it all back now. Heidrick & Struggles is primarily a search firm, our people are search people, and I'm a search person. Having said that, I'm a strong supporter of offering our clients an integrated set of leadership solutions to enhance our core executive search business. We will review every one of our offerings to ensure that each is of the highest quality, is scalable, and is supportive of our commitment to work to the top. In all of these services our focus will be continue servicing our senior levels of client organizations and the ability to be able to price these services profitably. Finally, I think the single most important thing we can do right now is go see clients. This is a message that I've been delivering around the firm at every opportunity. This is true whether it's me, the consultants, or our staff officers, like Kevin and Lynn, for that matter. Serving clients is why we're in business. They're the source of our revenue. In all my meetings and communications with our people I'm emphasizing this point. I'll keep doing that, and I will do the absolute best I can to lead that effort by example.

In my early communications with our people, I focused on two main themes. They're simple, I believe they are clear, and I've received a lot of feedback from my colleagues around the world that they are welcome. The first theme is that we're here to build and we're on a profitable, efficient, a quality business and providing an attractive return to our shareholders, which includes many of us internally and I hope many of you on this call. The second theme is that a good partnership among our people and a strong culture are vital to our success. As part of our revitalization the aspect of our firm, we are holding in September our first world wide meeting of consultants in four years. This gathering, taking place just outside Chicago, will give our chance to build or renew relationships with each other which is so critical when we serve clients on a global basis. It also gives our consultants an opportunity to collaborate on business development initiatives, and we have a number of new ones underway in the last 30 days.

I firmly that believe that these two themes are not in contradiction of each other and are inextricably linked in a service organization, frankly in any business, public or private. We cannot have a profitable business for long without a good culture, and we clearly cannot have a good culture for long unless we run a good business. As I said, over the short-term, I've been and will be spending most of my time talking and listening to my colleagues, working on our strategy and structure, and as I always have, seen clients. There will be a few functions in the company that I will take on personally so that I can be fully engaged in them. Certain areas of management will be refreshed with new leaders, and we'll make changes to our structure where it makes sense to make it simpler, more responsive, and most importantly more client focused. You can expect more details on these topics and on our strategies and tactics in the coming months.

Achieving our goals is frankly only minimally impacted by strategy and structure. What we need to learn about both is to ask our clients by asking them how we can build and enhance their leadership teams and help them compete more effectively in an interconnected, tough global economy. We know how to do that better than anybody in our business and we'll keep getting better. When our clients win, we win. I've taken on this role with passion, with energy, with pride, and with the support of my partners and my family. I believe Heidrick & Struggles is the best brand in our business, not because it is our right but because it has been and will continue to be our total commitment and my total commitment. 2003 is Heidrick & Struggles' 50th anniversary year. Gardner Heidrick and Struggles were pioneers and innovators in the concept of executive search, and we expect to carry their principle and innovation of integrity, quality, and client service into our second 50 years.

I'm excited about the future of this firm and I look forward to sharing our progress with you. Before I turn the call over to Kevin, I'd like to say a few words about the second quarter and about the current environment. As we all know, we've been struggling through a very difficult period over the past two years, but finally we're beginning to see some good news for a change. We were very gratified to see an up-tick in our performance from the first quarter. Almost every practice reported an increase in revenue sequentially and our bottom line improved. On a regional basis, North America, Latin America, and Asia-Pacific all showed increases from this year's first quarter on both the top line and the operating profit line. And on this call I want particularly to note and recognize my colleagues in Asia-Pacific who, despite S.A.R.S. and economic difficulties in the region, met their targets for the quarter and exceeded their performance of the prior quarter. This is the kind of performance that people in this Company are capable of. We continue to win a number of high-profile CEO searches, and while these high-profile searches contribute a fairly small part of our revenue, they're very important to our reputation. Making sure we continue to win at the top will be one of my most important personal priorities. Our performance in our board services practice is very robust in terms of both director searches and board advisory projects all around the world. In fact, year-to-date revenue in this area is up over 30% from the same period last year, and we expect that to continue. In partnership with our alliance partner, Lord International Institute, we have booked are agreeing on a number of long-term coaching assignments including one for a well-known consumer products company and the other for one of the world's best technology companies. This service, which is picking up momentum, is a good example of how we can extend our brand in a very logical way to provide real value to our clients and keep the focus at the top.

We have also confirmed a series of very high-profile leadership team assessment projects for major global companies. This is another of our growing group of leadership services. And finally, we continue to hire. Just recently a well-regarded consultant who left us for a competitor about a year ago returned to Heidrick & Struggles. We expect to see more of these key hires in coming weeks and months, and we have a very focused effort to follow up on this part of our business underway. Turning to the third quarter, it appears that business in North America is picking up a bit based on what we have seen so far in July. Europe, however, continues to be pretty soft pretty much across the board. So at present we believe that any positive bounce in North America would be tempered by the seasonal -- summer seasonality we typically experience in Europe and magnified by the ongoing economic sluggishness there. Therefore, we anticipate revenue in the third quarter to be in the $70 million to $80 million range with a corresponding bottom line range of a loss per share of 7 cents to diluted earnings per share of 10 cents. I think any signs of economic improvement in the U.S. bode well for us, especially as we move toward 2004.

If the U.S. economy rebounds, the other regions of the world will follow in time, as history has shown. So we're directing much of our energy to business-building and revenue-generating initiatives, while keeping a watchful eye on costs, and pursuing methods to simplify our processes. In the meantime, we're fully engaged in driving business and are very enthusiastic about our future. As a team, we look forward to leveraging our strengths and solidifying the leader in our position in the marketplace. And now I'll turn the call over to Kevin Smith for more detail on the quarter.

Thank you, Tom, and good morning, everyone. As Tom indicated earlier, despite the ongoing global economic weakness, there were a number of positive developments in the second quarter. Excluding the $8 million of non-recoverable severance charges, our operating profit improved significantly during the second quarter of last year, due to the benefits derived from our ongoing cost reduction programs. And while total revenue continues to be depressed, our work at the top, particularly board level assignments, remains quite strong. Okay.

Now let's look at the second quarter results in detail, and I'll begin my review with slide 5. Net revenue for the second quarter was $81.7 million, a 13% decline from the $93.5 million we reported in the second quarter of last year. Foreign currency exchange variances were positive again this quarter. Excluding the effects of foreign exchange rate variances, revenue decreased 18% versus of the second quarter of last year. The decline in revenue versus the prior year is primarily due to the continuing weaknesses in our financial services and technology practices. As you know, those two industry segments have been particularly hard hit by the economic weakness over the past couple of years. The operating loss in the second quarter of 2003 was $1.6 million compared to operating income of $956,000 in the second quarter of 2002. However, as I mentioned earlier, this quarter's loss includes approximately $8 million of severance charges, $5.2 million of which relates to the previously disclosed separation agreements with our former CEO and COO. The remaining $2.8 million covers some additional reductions in our global work force, primarily in Europe. Excluding the severance costs, which the Company believes more accurately reflects the results of its core operations, operating income was $6.4 million in the second quarter compared to $956,000 last year. The net loss in the second quarter was $2.6 million or 14 cents a share, compared to a net loss of $3.4 million or 19 cents per share in 2002. In addition to the non-comparable severance charges, there were a couple of non-comparable items in the prior years. As you may recall, the results for the second quarter of 2002 included a $5 million non-cash write-down of a long-term investment and $1.4 million in net losses on our warrant portfolio. While this year's net loss includes a $1.2 million write-down of a deferred tax asset relate today certain restricted stock units. Let's now move to slide 6 and look at some of the line items on the income state in detail. Salary and employee benefit expense in the quarter declined by 2.1% during a comparable quarter in 2002. However, exuding the $8 million of non-comparable severance expense, salary and benefits declined by nearly 15% versus last year during the headcount reductions over the past 12 months. Total bonus accruals in the second quarter of 2003 were $12.5 million compared to $12.1 million until 2002.

Excluding the severance costs, salaries and benefits were 67.2% of revenue compared with 68.8% in the second quarter of 2002. In addition to reducing our staff cost, the largest component of our cost structure, we also remained focused on reducing our G&A costs. In the second quarter, G&A expense declined 27.8% to $20.4 million, compared to $28.3 million last year. Reduced discretionary spending, lower bad debt expense, and lower rent costs all contributed to the decrease. G&A as a percentage of revenue fell to 25% from 30.2% last year. Quickly looking at the other items on this slide, interest income increased slightly due to higher cash balances during the quarter, and the net gain on the warrant portfolio in the second quarter of 2003 was insignificant. Once again this quarter, we recorded a tax expense, even though we reported a pre-tax loss. Foreign tax expense in certain countries and the previously mentioned $1.2 million write-down of the preferred tax asset were the principal reasons we ended up with an expense in the quarter. We do not expect another deferred tax right-off until 2004, and based on the current stock price, that will probably be in the $2.5 million to $3 million range.

Slide 7 shows key search statistics. Confirmed executive searches in the quarter fell 18% from last year while fees per search were up just over 8%. At June 30th, our consultant headcount was 318, down from 383 a year ago and 337 at March 31st of this year. The average number of consultants in the quarter was 330, and the voluntary turnover rate was about 5%, which is in line with historical rates.

Okay. Let's now review our results on a geographic basis, and we'll begin with slide 8. Slide 8 shows the results for North America. Net revenues in the quarter were $44.7 million, a 14% decrease from the second quarter of 2002, but a 7% sequential increase from the first quarter of this year. The healthcare and professional services practices reported increases over last year, but those increases were more than offset by a significant decrease in the technology practice. Operating income in North America increased 6% from the previous year to $10.2 million, and the operating margin in the quarter improved to 22.7% from 18.4% a year ago. The margin improvement was primarily due to a reduction in headcount, an unusually low level of discretionary spending, and a reduction of the allowance for doubtful accounts due to improved collections. But a note of caution here, as we've told you in the past, margins over 20% in this region are not sustainable on a long-term basis. With regard to consultant headcount, North America ended the quarter with 152 consultants, an 18% decline from last year.

Let's now turn to slide 9 and look at the results for Latin America. Net revenue in the quarter was $2.7 million, an increase of 3.2% over last year. Strong performances in our Miami and Mexico City offices more than offset the loss of revenue resulting from the conversion of certain Latin America offices to affiliate status and the weakness in some of the regions of their operations. Latin America reported a modest profit in the quarter compared to a $1.2 million loss last year. The loss in 2002 resulted primarily from the cost of converting certain wholly owned subsidiaries into licensees. The consultant headcount in Latin America at quarter end was 19, a reduction of 10% from the second quarter of 2002.

Okay. Let's now turn to our European results on slide 10. Net revenue in the quarter was $28.2 million, a decrease of 14% compared to the second quarter of 2002. Foreign exchange variances were a positive factor this quarter due to the strength of the Euro. On a local currency basis, the year-over-year revenue decrease was 29% due to the broad based economic weakness in Europe. Financial services, our largest practice in Europe, has been particularly weak in 2003. Europe's second quarter operating loss was principally due to severance costs of approximately $2 million that were recorded during the quarter. Excluding those severance charges, the region operated at essentially break-even for the quarter. While the profitability of the region has improved year over year, our margins there are still clearly unacceptable. There are two factors that are adversely affecting our profitability in Europe. First, we're under-scaled in certain markets, so we're not fully leveraging our fixed cost structure. And second, our cost structure is still too high in some locations and we're working on bringing it down. The bottom line is, we're not happy with our profitability in Europe, and we recognize that we have more work to do. The consultant headcount in Europe at quarter end was 116, which is a 19% decline from last year's second quarter.

The results of our Asia-Pacific region are on slide 11. The second quarter was a good one for Asia-Pacific, despite the challenges presented by the SARS outbreak. Net revenue in the quarter was $6.1 million, a 5% increase over the comparable quarter of last year, with every practice except technology showing an increase. Operating income in the quarter increased to $1.1 million from $432,000 in the second quarter of last year. The operating margin in the second quarter of 2003 was 17.8% compared to 7.4% in 2002, due to lower compensation costs this quarter and the contribution from the higher revenue. Going forward, SARS probably will not be much of a factor if the situation continues to be contained in the affected countries. The consultant count in Asia-Pacific was 31 at the end of the second quarter, a decrease of 6% versus the second quarter of 2002. Corporate expenses, which are not on this slide, were $11 million in the quarter, but that amount included the $5.2 million charge related to the executive separation agreements. Excluding that charge, corporate expenses were $5.8 million, a 22% reduction from the second quarter of last year.

Our final slide, slide 12, shows some selected balance sheet and cash flow information. As we anticipated our cash balance increased during the second quarter and was $95.9 million at quarter end. Accounts receivable, net of the allowance with doubtful accounts, were $51.8 million at quarter end. Because of the improved collections over the last year, our allowance for doubtful accounts continues to decrease, but it still amounts to about 10% of receivables. Looking at some selected cash flow data in the quarter, depreciation was $3.2 million, essentially flat with the comparable quarter of the prior year, and amortization of intangibles was $362,000 in the quarter, a 27% decline from last year. Our estimate for depreciation and amortization remains in the $14 million to $16 million range for the full year.

One other cash inflow of note during the quarter was our receipt of a $7.3 million US tax refund related to the carry-back of our 2002 net operating loss. With regard to cash outflows, capital spending was $1.6 million in the quarter, approximately the same amount we spent a year ago. We still expect capital expenditures to be in the $5 million to $7 million range for the full year. And finally, during the second quarter, we paid out approximately $4.1 million in cash related to our prior restructuring charges. We anticipate paying out between $3 million and $4 million in each of the last two quarters of 2003 in connection with our previous restructuring actions. We now anticipate that our cash balance will be in the range of $100 million to $110 million by the end of the third quarter. With regard to the outlook, as Tom said earlier, although activity has picked up in the U.S. a bit during July, seasonality and continued economic weakness in Europe are expected to temper the top line in the third quarter. However, our profitability continues to improve. Our projected bottom line corresponding to the $70 million to $80 million expected revenue range, would clearly be an improvement over what we produced at those revenue levels in the past. The important point is that we are clearly demonstrating that we can and will leverage our fixed costs as revenues improve. There seems to be greater consensus among economists and business leaders that there is some light on the horizon, at least in North America.

While executive search tends to lag a recovery by three to six months, a rebound now would certainly give us a boost going into 2004. In the meantime, I will work with Tom over the next several months to chart the future direction of the business while continuing our efforts to improve profitability and cash flow. And with that, we'll open up the call for your questions. Operator?

The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit 1, on your touch-tone telephone. If you're using a speaker telephone, please make sure your mute is turned off. That is star, 1 to ask a question. And we will pause for a moment to assemble our roster. Our first question will come from Adam Waldo with Lehman Brothers.

Good morning, everyone. Starting on the top line, I wonder if you can just give us a quick quantification of the percentage of revenue the quarter contributed by the financial services and tech practices and what rates roughly of a year over year you saw in them?

Okay. Hang on a second. Okay. Financial services was about 25% of revenue. Technology was about 15% of revenue in the quarter. And the declines in the quarter were, financial services was down about 15% year over year, and technology was down about 27% year over year.

Okay, great. And then switching to the margins on the quarter. Very nice performance in terms of cost control net of the severance in executive compensation-related arrangements. I wonder, though, as you look forward to the third quarter, implicitly what you seem to be saying with your revenue guidance is that level of operating leverage is probably not sustainable. Were there unusually low bonus accruals in the second quarter? Are you just being conservative around third quarter margins? How should we sort of think about the 8% EBIT margin you booked in the quarter before these charges?

Well, as we've told you before, Adam, this is not going to be a straight line up. There are investments that we're going to make -- for example, Tom mentioned the world wide meeting that we're having in the third quarter. You know, that will be a fairly significant expense. That will be booked in the third quarter. And as we said, the discretionary spending was extremely low in Q2, so you factor all of those things in, and, as we said, the line continues to move up, but there will be little bumps in the road as we go.

Okay. Just try to pin you down a little bit more there, Kevin. Can you tell us what accrued bonuses were at the end of the second quarter? Thanks.

The bonus expense in Q2 was $12.1 million, I believe.

Okay. Thank you, all.

I'm sorry, Adam. It was $12.5 million compared to $12.1 last year.

And we'll take our next question, and that will come from (ph) Labek with CTS Securities.

Good morning G&A, obviously had great cost controls there. What is a sustainable level if discretionary expenses were well below normal?

We think G&A expenses should be in the mid 20% range, in the 25% to 27% range. Is it going to be there every quarter religiously? Probably not. There will be investments we make as the revenue recovers. But that's, generally speaking, where the range should be.

So that's a significant improvement over last year and in the past?

Yes.

Great. Could you talk more about just the new -- you know, compensation that you will be laying out for the consultants and just give us an idea, based on, you know, stock or bonus or options or how it's going to be structured?

Yeah, this is Tom. You can appreciate that we've been digging into a lot of things in a very short period of time here. So this is probably a better question, you know, for me for next quarter than for this one, but I have put together a couple of groups to take a very hard look at our compensation program over the next 90 days, to see what changes we want to make yet for 2003, we'll probably make some minor ones, but more importantly to look at the program going into 2004.

My own personal view is that we're not too far off in terms of the overall expense, but the mix of cash versus equity needs to be shifted, in my mind, a little more towards our equity, which I think aligns all of us better for the long run, and I think we may have some modifications of what exactly we pay for and what pieces we shipped around the consultant base, depending on their performance level. There's a lot of support in the firm right now for taking a hard look at this and making sure that everybody is aligned and our compensation programs are fair. We obviously have to be competitive. We think, in many areas, we are, and some that we're maybe not quite as competitive as we need to be, but I think we can manage any changes in the compensation programs, particularly any improvements, a lot better if we offset them with corresponding cost reductions somewhere else, and that's the goal.

Great. Thanks very much.

We will now hear from Andrew Fones with UBS Warburg.

Hi. I was wondering, in your (inaudible), you expect the seasonality impact might be in the third quarter?

Well, we typically see a little bit of weakness in Q3 versus Q2 because of the holidays that you experience in Q3. You know, I would say we might see maybe a 10% dip in the revenue in Q3 versus Q2.

Thanks. And I guess overall, could you kind of, particularly in North America and Europe, could you talk to kind of the trend in bookings in the second quarter month to month?

Well, you know, we don't give out monthly confirmation numbers, but what I can tell you is that April was a reasonably good month, May and June were tough months. They trailed off significantly, and as Tom indicated earlier, we've seen a nice recovery in July, particularly in North America.

Okay. And was that -- the trend you just gave me, was that for North America or the --

No, that was a global trend.

Okay, okay. And then finally, just so I'm ready for this, I'm wondering if you could give me some kind of idea on what you think the cost of the meeting in Chicago will be next quarter, this quarter?

I'm not sure we want to get into that. We may get into it in Q3 after we have the meeting.

Okay. Thanks.

I'll make one comment -- this is Tom -- about meetings. We haven't had, you know, a partner meeting in four years, and it's my experience, having done a lot of these, is historically, these meetings pretty much pay for themselves by the generation of business that comes out of the interaction, you know, of our partners. It's not an exact science. But this is going to be a very carefully cost-managed meeting, so it's not going to be extravagant by any means. But we feel that getting our partners together is absolutely critical in terms of re-establishing the sense of linkage that we need to manage global accounts. So while we do take people out of the market for a few days and we do spend some money, our experience has been that in the quarter or two after that, we get that back, and I don't see any reason to expect it will be different this time.

And a good chunk of the meeting is going to happen over the weekend on people's own time, and the meeting is being held, not on the Riviera, it at an actual conference center held outside of Chicago. It will be very business focused.

Mark Allen with SunTrust Robinson Humphrey.

This is a strategic question. I think I know the answer, but it may give you a chance to expand on it a little bit, and this is relative to staying in the top end and not going down into the middle market. Do customers want one-stop shopping and sort of what are the pros and cons of participating in the middle market search biz?

Well, you know, first off, all our options in the market and the reputation of our brand, as you know, historically is based on our work at the top. If you work at the top, then you can choose as your clients want in this business as conditions allow how far down into a particular client you go. That varies by market and it varies by client. Historically, as we've added services to core executive search, as we will add services, our current plans are to stay pretty focused on the top of the market, that would be the top two or three levels, not just the office of the CEO or board, but the top two entry levels of our major global organizations but as opportunities permit, particularly clients to go a little lower, if we think we can do that profitably and maintain the same brands and margins, we will probably consider that.

The same question would be on the overall consultant count. Where do you see the consultant count bottoming? Is this quarter the bottom? It sounds like you've been doing some selective hiring. Do you have any general goals about where the consultant count would be at year end?

Yeah, I do, Mark. My guess is that at year end, it won't be very different from where it is now, but the makeup will be slightly different. You know, we think we have a consultant count and, as Kevin has said, an overhead structure to support substantially more revenue than we've had in the last couple of quarters. We don't need to add a lot more people to drive up revenue. What we are doing is an aggressive program to recruit, and we'll couple that with an equally aggressive program to improve the quality of our consultant work force. There's no magic in how you do that. You frankly focus on improving the quality by hiring, you know, good people, and asking the ones that are not producing at levels that they need to move on, and we'll do that in a systematic way going forward. So we will manage our turnover. We will go up, but just a little, between now and year end.

Thanks a lot and good luck.

Once again, if you would like to ask a question, press star, one. Moving on, we'll hear from James Pan with CPE Partners (ph).

You mentioned you had a $5 million bump on revenue from the foreign currency exchange. Was there a corresponding increase in expenses or did that $5 million drop the bottom line.

No, there were corresponding increases in expenses. In fact, since Europe is essentially operating at a break-even, you really don't get much impact at all from currency on the bottom line.

Okay. So the increase that was from efficiencies --

Yeah. It's the cost reduction programs that we've put in place over the last couple of years.

Great. Great job, guys.

All right. Thanks.

We will now hear a question from Paul Carder with Wachovia.

First of all, let me extend my congrats. Great cost controls in the quarter. Not to beat a dead horse, but turning over to Europe, it sounds like there may be some additional cost cutting, at least in the next quarter or two, coming out of Europe, and I noticed that your headcount hadn't changed as much in Europe, at least your consultant count, relative to what happened in the U.S. Should we be expecting additional changes there in Europe going forward or ...

You may seem some slight change in the consultant count, but as Tom indicated, our focus is on non-revenue producing individuals. We're also at a line on G&A costs in Europe. That's where the focus will be.

Can you give us an idea of the order of magnitude or should we should think about the next couple of quarters in Europe?

It's different. There are cultural issues to overcome, there are contractual issues to overcome, there are lease issues to overcome -- you know, there are a lot of factors that are in play here. As I've said earlier, you know, we're making progress, but there's more work to be done.

Okay, okay. Fair enough. Tom, prior expectations, I guess, for operating profit at various revenue run rates, I believe were -- there was kind of like a low teens operating margin for $450 million revenue and maybe 3% to 5% at $350 million. Are those realistic? You alluded to those earlier. I wanted to kind of pin it down a little further.

Yeah, we have -- and I think Kevin has indicated before, that the -- the general scale target that we have in mind is 10% at $450 million of revenue, and we still feel very comfortable with that. One of the things that we're working on now is to see how much better we can do than that, and we clearly are going to be putting a lot of focus on that. But in terms of our level of comfort with our previous guidance, it remains where it was.

Okay. Tom, one final question. Just, you know, in relation to your philosophy on returns to shareholders, I'm wondering if you could perhaps give us some, you know, color there, on what you would expect your strategy or philosophy to be, you know, going forward as the Company continues to improve?

Well, I think -- the comment that I have made to our partners is that any business, any good business, public or private, provides a good return to its shareholders. Now, this firm provided a very good return to its shareholders, you know, one of which was me, over a lot of years, before we went public, and there's absolutely reason why that wouldn't be the same now as we continue as a public company.

I think the question of alignment, which I've been asked periodically, which is a very good question, about alignment of consultants and our employees with our investors, particularly our non-employee investors, keep in mind we have a lot of employee investors, but the non-employee investors, the alignment of employs and consultants with investors fundamentally comes by making employees investors. And one of the key points that I have is to increase the amount and the number of our consultants and partners who are investors, which, by definition, creates better alignment. I think we probably have to do a better job of making this clear within the firm. I think we're still coming through the transition from private company to public company, and we've done it at a time when market distractions and some other things have got us off message and off the ability to really make that case clear. I think in the quarters ahead, we'll be able to clear that you.

Okay. Thank you. I'll hop off and let somebody else hop on.

We'll move on to Adam Wise with Chilton Investment Company.

A quick question on the currency. Was there an impact to the bottom line, or was it just a boost to revenues?

No, that question had just been asked a short time ago. There's really no impact on the bottom line, it's really on the revenue line.

Okay. Sorry about that.

Just as another reminder, it would be star, 1, if you do have a question. We do have a follow-up question from Adam Waldo with Lehman Brothers.

I just want to follow up on Paul's excellent question around sort of target returns on capital to shareholders through cycles, Tom. I know it's early, four weeks on the job, but can you give us a sense, as you migrate the culture, as insider employee ownership more broadly based, what sort of target returns on capital you think you can achieve, given that you have the goal of reducing the compensation expenses as a percentage of revenue below the sort of 70% to 75% level we've run? I mean, can we target a 20% return on capital and, you know, 40%, if you will, margin after compensation expense full cycle, or is it too early to say?

Well, I think it's too early to be specific, you know, about that, but clearly, you know, low double-digit targets which we've indicated before we think are very achievable. Some of this is market-dependent, I think there's no question about that. You know, given the way we have structured the firm, we are leveraged and, you know, that leverage hurts us when revenues declines, it helps us substantially if revenues improve. But, you know, we're going to be looking at all aspects of this over the next 90 days or so, and I think if you give me a little time, I'll be better able to answer that question maybe on the next call. We'll make a note of it and try to incorporate a response on that when we get together next time.

Thank you.

And Paul Carder with Wachovia has a follow-up question as well.

This is Paul Carder for Mark Marcon. A couple of quick questions. In reference to your guidance, I'm wondering, since there is such a wide variation, maybe if you can give us a sense what the expense levels would be at the extreme ends of the guidance?

When you say at the extreme ends of the guidance, you mean 70 and 80?

Yes. I mean, because roughly you've got that, you know, swinging from a loss, seven, all the way up to a profit, what was it, Ten? I'm trying to get a sense of what the expense levels would be at either end of the revenue guidance which would get us to that.

Well, I mean, if you're talking about a 10-cent loss on $70 million -- sorry, a 7-cent loss on $70 million, you know, we'd have to back into it. I don't have the numbers in front of me.

Okay. I can -- You know, chat with you guys offline.

This is Tom. I mean, the overall philosophy here involves, and I think it's important to say, is we're continuing to drive cost, particularly fixed costs, down, as we're able to. At the same time, we're driving revenues up. We don't think that's incompatible, at least in the short term. You know, longer term, the business will have to scale and we'll have some incremental expense to continue to drive revenue up. But as Kevin said before, we have, you know, the scale and the execution capability in the Company to deliver on substantially increased revenue.

So while there is some variable component to that, it's not nearly as much as it has been, you know, previously. I think clearly we will benefit more from our cost reduction programs as revenues increase than we would have historically prior to taking some of these fixed costs out, which continues to be our focus.

Absolutely. All right. Thank you. Again, congrats on the quarter.

Thanks.

And also James Pan has a follow-up question as well.

Just a question regarding -- you mentioned, Tom, that you wanted to increase the equity participation of the employees. How do you -- how are you leaning to do that? Are you going to do that with restricted stock or options?

Well, number one, you know, we're a public company, and anybody can buy our stock, and many of our employees buy our stock in a public market. As the company performs better, you know, they'll buy more, without any programs. As far as the programs go, I think it's too early to make any specific comments on that. I've given you, after 30 days, a dose of Tom Friel philosophy on this issue. We will have some programs put in place between now and the end of the year to put process and program against philosophy, and I'd be delighted to report on that after we've been able to do it.

By the way, this is not -- you know, this is not -- we're not going to give people stock. They're going to own it and, in fact, you know, we'll be working on programs that will encourage them to do that, and hopefully be looking at programs that will include, you know, equity ownership as part of our compensation plans, more than we have historically.

Let me ask the question another way. Are there any companies out there that you admire from a business or, you know, business or personal point of view in terms of how they compensate? It doesn't have to be in the industry, it could be other companies like Hathaway or some tech company in Silicon Valley. I mean, is there any model that you admire?

Well, there's a lot of companies that I admire. I don't think I want to, you know, get into a discussion about, you know, a particular company's equity program. For one thing, I'd be going beyond my knowledge in terms of specifics. But, I mean, I think fundamentally, good-performing companies, you know, have a lot of ownership, you know, by their people, and companies that don't perform well don't. And so I think, you know, the dual goal of performing well and helping our employees participate via ownership in the good performance, just like you want to participate via your ownership in good performance, gets us aligned and makes us all better. I mean, that's the goal. There's no -- I mean, the model that we want is the right model for Heidrick & Struggles. I don't think that we can take one and lay it on from some other company.

Okay. Thanks, guys.

Mr. Friel, it appears there are no further questions. I will turn the conference back to you for final and closing remarks.

I think we're about at the end of our time. If there are no more questions, I'd just like to wrap this up by saying I'm very excited to have the opportunity to contribute to this firm in my new role, and as part of that, I know I'll be talking to all of you and some others from time to time.

As a final comment, I would just say, in a world where the quality of our people is increasingly the difference between success and failure, I'm delighted to be working with the best people in our business. We will work together to make sure that we take the maximum advantage of the resources that we have that we can offer our clients around the world. As I've been saying to my partners and colleagues as I've been meeting with them, this is a tough business, but it's a simple business. Now, when our clients win, we all win. And that's our goal. I really want to thank you all for joining us today and I look forward to talking to you again on our next call.

Thank you. That does conclude today's teleconference and concludes your participation. At this time, you may disconnect.