Heidrick & Struggles International Inc (HSII) 2005 Q2 法說會逐字稿

Good morning, everyone and welcome to our conference call and webcast. On the today's call are Thomas Friel, Chairman and CEO of Heidrick & Struggles, Kevin Kelly, President of our Europe and Asia-Pacific region, Eileen Kamerick, Chief Financial Officer and Todd Welu, Controller. Tom will review our second-quarter results and the outlook for the 2005 third quarter and full year.

Kevin will provide insight into our European operations and then Eileen and Todd will provide additional financial details. As a reminder, there are supporting slides available on our website, www.heidrick.com to accompany today's comments. As always we advise you that this call may not be reproduced or retransmitted without our consent.

Second, certain matters in this call are forward-looking statements. Please refer to the Safe Harbor language contained in our news release, dated today, August 5, 2005, which was widely disseminated by the various wire services and other media. The language is also on slide 2 of the web presentation. And now I'll turn the call over to Tom.

Thank you, Eric, and the good morning, everyone. Before I talk about our financial results, I would like to take just a moment to comment on how proud I am of the performance of our search teams and colleagues around the world.

We continue to make progress in our efforts to improve profitability. While at the same time growing revenue and providing superior service to our clients. Our performance this quarter and the anticipated benefits of our recent restructuring, we affirm our confidence in our ability to achieve our 2005 goals, both financial and nonfinancial. And because many of our investors have questions about our plans for Europe, and for our prospects there, I'm pleased to welcome to today, Kevin Kelly, President of our Europe and Asia-Pacific regions to the call. Kevin will discuss our strategy for the European market in a few minutes.

But now let's talk about the financial results. Our net revenue performance of $103.4 million was strong again this quarter. We are at the high-end of our expectations, growing 6% compared to the 2004, second quarter. This growth includes a 2 percentage point increase from the impact of exchange rate of fluctuation.

The strongest net revenue increases were driven by the professional services, consumer, and industrial industry groups. Our expected second quarter operating loss of $7.8 million includes $20.8 million of previously announced restructuring charges. That 20.8 million consists of $14.7 million of severance and related costs, and $6.1 million of property related costs.

The majority of this charge was for the restructuring or European operations. Excluding the restructuring charge, which we believe more appropriately reflects core operations, the 2005, second quarter operating income would have been $13 million, up around 50% compared to the prior year's second-quarter operating income of $8.6 million.

Excluding the restructuring charge, the second-quarter's operating margin was 12.6%, which includes 4.4 percentage points of favorable items, and compares to an 8.8% operating margin in the 2004, second quarter.

Eileen will provide more detail on the favorable items that benefited the current year's second quarter in a few minutes. The $5 million second-quarter net loss, includes $18.5 million in restructuring charges, net of tax. The $5 million net loss resulted in net loss per share of $0.26. Excluding the restructuring charge, net of tax, our diluted earnings per share were $0.69 per share, up over 100% from last year's second quarter.

The number of confirmed searches in the second quarter increased 4%, compared to the 2005, first quarter and was up 9% versus the 2004, second quarter. Our consultant headcount this quarter increased by 2 worldwide, compared to the end of last quarter, and as of June 30th, totaled 307.

I should point out that the 307 consultants includes 13 who were part of the workforce reduction. Consultant productivity increased, again, as executive search revenue per consultant rose slightly from the 2004, second quarter to an annualized rate of $1.3 billion per consultant in the 2005, second quarter.

While I'm on the subject of our consultants, I'd like for you to know that we have historically compensated our consultants and our management with a combination of salary, a cash bonus, and discretionary grants of restricted stock and options. This year the compensation program will also involve substituting restricted stock units for a percentage of the cash bonus. This change continues our effort to drive ownership behavior and alignment with shareholders to increase consultant share ownership.

One final comment on the second quarter, is a reminder that we also completed our authorized and previously announced $30 million stock buyback program, and we continue to review potential uses for our excess cash. Looking forward, we anticipate net revenue for the 2005, third quarter to be in the range of 98 million to $103 million. At those net revenue levels, we expect that operating income would range from $10 million to $13 million, excluding any restructuring charges.

Assuming any additional restructuring charges of approximately 4 million to $5 million during the 2005, third quarter associated with the current restructuring, operating income would range from $6 million to $8 million. For the 2005 full year, we continue to anticipate the net revenue will be in the range of $400 million to $412 million.

At those net revenue levels, we expect operating margin will be about 10%, excluding any restructuring charges. Including expected restructuring charges, the operating margin will be approximately 4%.

As we have mentioned before, revenue in our business is difficult to predict. Our 2005, third-quarter guidance is similar to the 2005, second quarter. And our low end of the annual revenue guidance considers past seasonal trends. Our inherent lack of revenue of visibility, the confirmation trends that we have seen today, and also, historical seasonality patterns our factored into our guidance. As we all know, a major part of our optimism for the future is achieving profitability improvement in our European region.

We have taken and are taking steps of realizing the goal through our restructuring efforts. In addition, we have put new management in place to lead Europe to profitable growth.

Now I'd like to introduce the head of the new management, Kevin Kelly, President of the Europe and Asia-Pacific regions to discuss our Europe market strategy. Kevin.

Thank you Tom.

While I'm new to this leadership role, my tenure with Heidrick & Struggles extends back 8 years, and includes several management positions, including most recently, the regional managing partner of our Pacific Asia region.

As I am settling into my new role in Europe, I can say that Tom, Eileen and Jeff Scherb have certainly paved the way for me. They have enabled all of us to rethink our European strategies, to look ahead, building a sustainable business, and a profitable future now that we have taken action on a restructuring plan.

Each of us on the executive team watches our competitors closely, and recognizes the opportunities Heidrick & Struggles has for greater revenue growth and higher operating margins, especially in Europe. We know that others in our industry achieved double-digit operating margins, and we see no reason why we cannot perform at comparable levels.

Each member of the executive team is contributing expertise to building a European business to be proud of. Tom and I have heavy client service and team building backgrounds, and we know how our management decisions affect revenue and our client relationships. We have teamed with Bonnie Glenn, President of the Americas, and other members of our leadership team to leverage the success in their region, as well as increase cross border work. We have combined this orientation with the process and cost structure expertise of Jeff Scherb, and Eileen Kamerick to set achievable goals, as well as some stretch goals too, that move Europe closer to results posted in North America in Asia-Pacific as we work toward a significant margin expansion.

My focus in Europe is two-fold. First, me to expand cross border work throughout Europe. In fact, we have a meeting scheduled in October to jump-start this initiative.

Second, we need to hire more of the right people. Tom has previously said that are hiring a strategy needs to be focused in three areas. Hiring search consultants from other firms. Promotion from within our ranks. And hiring new to search individuals.

While we are focusing on all three, we are particularly looking to hire new to search individuals who are highly experiences in the respective fields, and who are very well networked. We have achieved significant success with this approach in Asia-Pacific region and we have recently appointed a consultant within Europe to be fully dedicated to recruiting, in order to ensure that we execute on our hiring strategy.

Additionally, we have learned that there are gaps in certain industry practices and certain countries. Our intention is to hire experienced professionals in order to fill these gaps. The team now in place in Europe provides a strong base and able base on which to expand our platform and grow with bigger. We intend to continue building an energetic team of productive consultants. During the past months, I have made personal visits to most of our European offices to discuss our plans for the future, and I'm confident that our European future looks bright.

We continue to focus on becoming stronger, as we work together with our global colleagues to provide the highest quality service to our clients.

I appreciate the opportunity to be on call today and now we'll turn the call over to Eileen Kamerick, who did you more detail about our results.

Thank you Kevin.

As Tom said earlier, we're encouraged with the continued topline strength this quarter.

As you can see on slide 5, for the 6 months ended June 30, 2005, consolidated net revenue was $202 million, a 9% increase from $185.2 million for the first 6 months of 2004. Our year-to-date operating loss of $1.4 million, includes $20.8 million in restructuring charges.

The year-to-date net income of $1.9 million, includes $18.5 million in restructuring charges, net of tax, and the year-to-date earnings per share of $0.09, includes $0.92 per share of restructuring charges, net of tax. Excluding the restructuring charges, which we believe more appropriately reflects our core operations, the 2005 year-to-date operating income would have been $19.4 million, with a 9.6% operating margin. Net income would have been 20.4 million and diluted earnings per share would have been $1.01

For the sake of comparison, during the 6 months ended June 30th, 2004, operating income was $13.7 million, net income was $11.2 million and diluted earnings per share were $0.56. As you can see, this is a 41% improvement on the operating income line.

Turning back to the second quarter's results, excluding the restructuring charge, this quarter's operating margin was 12.6%, compared to an 8.8% operating margin in the 2004, second quarter. As Tom told you, included in the 12.6% operating margin is 4.4 percentage points of benefit, most of which is a non-recurring in future quarters. $3 million of the benefit relates to the deferral of expense for bonus payments paid with restricted stock under a recently adopted program.

About $1.5 million of the benefit relates to property tax rebate and an insurance recovery. In the third and fourth quarters of this year, we expect to have a recurring benefit of approximately $1.5 million each quarter related to the bonus payment paid with restricted stock under this new program.

I will now provide additional detail on what we've done to improve the operating margin and also, give more detail on the results of our region. Todd Welu, our Controller, will cover the income statement items and additional cash flow detail.

To begin, you should know that we're confident that our operating margin is on track to meet our 10% target for the year.

Please turn to slide 6. As you know, we have recorded a restructuring charge of $20.8 million in the quarter, and expect to record additional restructuring charges of approximately 4 to 5 million during the remainder of 2005, which will bring our total 2005 restructuring charge to approximately 25 to $26 million. The applicable accounting rules require the we record restructuring charges when they are incurred, rather than when we commit to a plan. Therefore, certain costs associated with the restructuring initiatives that began in the 2005, second quarter, will be recognized in subsequent quarters, primarily due to our exiting certain leased facilities during that time.

Almost all of the $20.8 million quarter restructuring charge is cash. The restructuring directly affect 57 individuals, including 15 consultants. Of the $20.8 million, second quarter charge, $18 million is in Europe with the remainder in the Americas and corporate. We have reduced lease space in Germany and in the U.K. and we will be reduced in some lease space in the U.S. It is worth noting, again, that the restructuring is not a response to specific economic or industry trend.

Rather, it is part of our global effort and long-term strategy to further improve our operating margin in order to meet company wide profitability goals. And in particular, to bring our European regions profitability in line with the rest of the Company. If our restructuring charge is higher an estimated during our first quarter earnings release, mainly due to additional opportunities were identified to consolidate lease office space.

Also, during the final review of the amount for severance, we determined that our original estimates were low. Estimated annualized savings for salaries and benefits is approximately $12 million, while estimated annualized savings from a real estate actions is approximately $3 million.

For 2005, estimated savings for salary and benefits is about $7 million. Estimated savings from real estate actions is about $1 million. Approximately $500,000 of the total 2005 estimated savings was realized in the second quarter, with approximately 3.5 million expected for the third quarter, and approximately 4 million in the fourth quarter. Of the total annualized savings, approximately 80% is related to Europe with the remainder related to the Americas and corporate.

We continue to work to improve our marketing margin through actions, in addition, to the restructuring, such as limiting the hiring of non-revenue producing staff, prioritizing discretionary IT expense and meeting costs, and reviewing and renegotiating operating leases. In total, these discretionary spending control actions to give us confidence in our ability to reach a 10% operating margin for the year, excluding the restructuring charge. Of course, the 10% margin is more challenging at the lower end of our revenue guidance.

We are committed that until we are running at a higher net revenue run rate, certain planned but discretionary costs simply must follow revenue, not lead it. Now, moving to net revenue in the second quarter. Worldwide, all of our regions posted topline growth . Net revenue increased 6% versus the second quarter of last year, and approximately 2 percentage points of this increase was from foreign currency exchange fluctuation. Next, we will look at the results for the Americas on a slight 7. The Americas is the combination of the regions we reported before this year as Latin America and North America.

The Americas net revenue was $59.3 million in the quarter, a 4% increase from the same quarter last year and a 9% increase sequentially. The year-over-year increase was largely due to significant strength in the industrial services and consumer industry groups were out of the healthcare and technology industry groups posted declines. Operating income in the Americas was 15.8 million in the quarter, versus 11.2 million in the comparable quarter of 2004. The operating margin was 26.7%, versus 19.7% a year ago.

The major causes for the increase in operating margin are the increased net revenue level, as well as a benefit related to the accounting for a portion of bonuses to be paid in stock. Without this benefit, the operating margin would have been approximately 24%. The consultant headcount in the Americas at the end of the second quarter was 160, which is flat when compared to a year ago.

However, consultant headcount has increased by 3 from 157 at the end of the first quarter of this year. Okay, let's turn now to our European results on slide 8. Europe's 2005, second quarter net revenue increased 6% to 34.3 million with about 3% of the increase coming from a favorable exchange rate impact. Europe's operating income was $1.2 million, versus $600,000 in the comparable quarter of 2004. The corresponding operating margin was 3.5% versus 1.8% a year ago. We see improvement in Europe's result this quarter due primarily to the increase in revenue.

We plan to continue to improve the operating margin line through the restructuring and revenue driven initiatives. Europe's consultant headcount was 108 at the end of the quarter, a net increase of 5 from 103 as of June 30, 2004. Included in the 108 are 13 consultants, who will be leaving the firm as part of the workforce reduction.

Okay, let's move onto slide of 9 and looked at the results of our Asia-Pacific region. Net revenue was 9.7 million in the quarter, a 13% increase over last year's second quarter. Year-to-date net revenue was 19.7 million, a 29% increase over the same period last year. We expect the year-to-date growth rate to be a more sustainable growth rate for this region going forward. Operating income for the quarter was $2.3 million, basically the same as a year ago. The consultant headcount in Asia-Pacific was 39 on a June 30th, a net increase of 5 from 34 at June 30, 2004.

In the second quarter, total corporate expenses increased by $700,000 to $6.3 million from $5.5 million in the 2004, second quarter. Due to increased professional service fees, including in particular Sarbanes-Oxley fees, and tax consulting fees.

I will now turn the call over to Todd Welu for more detail about second quarter results by income statement line item, and more detail about our cash-flow expectations.

Thanks, Eileen.

If you turn to slide 10, you will see that salaries and benefits expense in the second quarter of 2005, was $68.1 million, up 3% of the second quarter of last year, growing more slowly than revenue, which was up 6%. The expense increase was a result of increased salary costs of $2.7 million and $2 million related to stock based retention incentive awards issued in the 2005, first quarter. This expense increases partially offset by a benefit of $3 million related to the bonus payments to be paid with restricted stock under a recently adopted compensation program.

In the 2005, second quarter our Board approved a new compensation policy under which 10% of consultant and management bonuses will be paid in the form of restricted stock units that vest radically over a three-year period from the date of grant. The restricted stock units will be issued in March, following the year in which the bonus was earned.

Compensation expense related to these restricted stock units is recognized over the service period. Which, for this year, is considered to have begun at the start of 2005, as bonuses are earned and continue over the three-year vesting period. Due to this competition change, we are required under applicable accounting rules to defer to future periods a part of the restricted stock unit portion of the bonus. For any given period, there will be a certain amount deferred into the future. The benefit to this quarter was $3 million and the expected benefit to the second half 0f 2005 is $3 million in total, for a total 2005 benefit of approximately $6 million.

Total stock based compensation expense was $4.5 million for the 2005, second quarter and is expected to be approximately $13 million for the 2005 full year, of which approximately 7 million relates to the second half of 2005. These numbers include the impact of restricted stock units retention grants and a partial payment of bonuses in restricted stock.

As you know, restricted stock units are accounted for as an expense over the vesting period between the grant date and the date they convert into shares of Company stock. Therefore, these expenses are non-cash. These non-cash expenses are all included in our 10% operating margin target. Total cash bonus accruals in 2005, second quarter were $20.7 million, versus $23.6 million in the 2004, second quarter. G&A cost for the second quarter of 2005 were $22.4 million, down 3% compared to the second quarter of the prior year. As a percentage of net revenue G&A was 21.6% compared to 23.5% in the second quarter last year.

The decrease in G&A and was attributable to 1.59 of favorable adjustment, The decrease is G&A is attributable to 1.5 million of favorable adjustments, including a property tax rebate and an insurance recovery, offset by higher fees for professional services and discretionary spending related to business development. The fees for professional services include audit, tax, and other professional fees.

As Eileen mentioned earlier, we continue to work to reduce our G&A expense as a percentage of revenue, and have already adjusted our spending for the remainder of the year to gain better operating leverage. We are also pleased to note that during this quarter, we have completed all of our planned efforts related to property included in previous restructurings.

We disposed of 58,000 square feet of real estate in 5 locations this quarter and a total of 206,000 square feet to date. This greatly reduces our balance sheet exposure related to these restructured properties. Net non-operating income of 1.7 million in the second quarter of 2005, was up versus 1.0 million last year, due to higher interest income and foreign currency gains. The net loss for the quarter was $5 million or a loss of $0.26 per share. Results in the second quarter were favorably impacted by the tax benefit recorded in the quarter due to rate pre-tax book loss.

We had an 18.3% effective tax rate for the quarter, compared to 28.2% effective tax rate for the 2004, second quarter. Our second quarter, 2005 effective tax rate is low because we have zero federal provision and almost almost no state provision. This is due to the valuation allowance on our U.S. deferred income tax assets. As we generate federal provision, we are allowed to uncover valuation allowance to the extent of the provision amount for deferred income tax assets reversing in 2005 and 2006.

We estimate no federal taxes will be due for the 2005 year. Now, let's talk about our income tax provision for 2005. for 2005, we expect that income tax expense will continue to benefit from the reductions in the valuation allowance for most of the year. We expect the annual rate to be between 15 to 20%, which assumes we will be able to continue to utilize deferred tax assets. Our effective tax rate estimates will continue to be affected by the amount of tax assets we are able to record in accordance with FAS-109. The profitability of our foreign tax paying entities and the mix of taxable income within those jurisdictions. This rate would also be affected by the nature, timing, and deducibility of restructuring costs.

Now turn to slide 11. Our June 30 cash and cash equivalents and short-term investment balance of $154 million was $35 million higher than 1 year ago, but $31 million lower than March 31, 2005 due to the completion of our $30 million stock repurchase, of which $25.1 million was spent on stock repurchases in the second quarter.

Additionally, during the second quarter, the Company paid $17.6 million of deferred compensation to our CEO, Tom Friel, representing the final payment relating to the 2005 -- 2004 exercise of a "Google warrant and subsequent sale of common stock shares. Tom earned the right to his portion of the proceeds in the sale of these warrants in 2001, when he served as a consultant on the Google account prior to his tenure as CEO. Looking at other cash flow items for the quarter, depreciation was to $2.7 million and amortization of intangible assets was $219,000. Capital expenditures for the second quarter were $2.1 million, compared to $1.5 million in the second quarter of 2004.

Finally, we expect capital expenditures to be in a $5 million to $6 million range for the 2005 year. With that, I will hand it back to Tom.

Thanks very much, Todd, Eileen, and Kevin.

Before we finish our prepared remarks this morning, I would like to highlight, again, some of the items we have completed in the 2005, second quarter. A very significant quarter in our history as a Company.

This is the first quarter that we have broken $100 million in revenue, since the third quarter of 2001. Just about every measure we use to track the performance of our business has improved in this quarter.

We have drastically decreased our excess office space, to the point that we consider this problem now behind us. We have completed our authorized a $39 million stock repurchase and finally, we have completed our current restructuring efforts, as well as transitioned Europe to new management.

In summary, we're confident that we have taken and continue to take the right steps to expand our profitability this year with the completion of our restructuring plans and with the continued focus on other cost control measures.

With that well in hand, we're not in a position to focus even more of our attention on the future, on revenue producing activities that enhance our brand and help us expand our profitability.

The leadership team and I firmly believe the we have the right team, the best clients, the right strategy, and the right business plan to get us there. Thanks very much for joining us this morning. Now will open up the call to your questions .

[ OPERATOR INSTRUCTIONS ] One moment for our first question. Our first question comes from of Michael Morn of Merrill Lynch.

Yes, good morning. A few quick questions on the restructuring, some points of detail and may be a bit more color on future plans. But in terms of the deals, in the $0.69 that you provided, what was the fully diluted share number that you used to calculate that?

This is Eileen it. We don't have right in front of this. So if we go you next question -- we can go back to it. Oh, Here we've got it. It's 19 million 743,000 in terms of fully diluted.

Okay, and in terms of the restructuring, the main thing I would like to walk away with today is a sense that this is a less restructuring that we're seeing. Obviously, we know there will be a bit more in the second half, but we've seen a lot of restructuring over the years, and you've talked about the office space having been kind of put behind you. Can we be confident that there's nothing else that needs to be done here?

This is Tom. The answer to that is generally, yes. I believe we have the major restructuring efforts behind us.

The restructuring of Europe was the last piece of the plan but needed to be completed. Now it has. The real estate that we had to be disposed of, some of which was acquired in the run up of 3 or 4 years ago, has now been successfully worked off.

It's difficult to predict absolutely what might happen in the future, but as best we can see now, we have no current plans for additional restructuring.

Okay, great, to like the much .

Our next question comes from Mike Fitz from SunTrust.

I have two questions, and one of them are related to your commentary regarding growth in Asia. You said maybe the slower growth rate on the year to date number may be the better going forward growth rate. Wondered if you could give us a bit more color on that slower than anticipated growth?

And then regarding the commentary on spending, you said that some of your spending items will have to wait for revenue growth in order to drive them. That makes sense. I was just wondering if you could give us some more color on what kind of spending initiatives you have to wait for additional revenue to execute on. Thank you.

Hi, this is Kevin, I will answer the question on Asia. Realistically going forward, with think that double-digit growth is more realistic and we're going to manage for the whole year versus quarter on quarter. So I think we're more comfortable going forward with double-digit.

Let me respond to the spending comment. As Kevin mentioned, Asia was experiencing a very high growth rates, as high as 50%. We don't think that's a sustainable growth for going forward.

Something like the mid-20s is a more sustainable growth rate and what were targeting really for the year. In terms of our spend, we talked about this on our last conference call and in particular, we have deferred our worldwide partners meeting, as a means of making sure that our spending doesn't run ahead of our revenue.

But in general were very conservative, in thinking about how we spend and been as careful as possible to manage our spend, and not let it run forward of revenue. We do that on an annual basis, so as we've mentioned before, you will see the operating margin move through the quarters because we can't perfectly predict revenue. There is not visibility to revenue in this business, and so although we can't match perfectly, with conservative about how we really phase discretionary spending.

Our there any investments that you might need in order to drive revenue higher? I just want to get a sense for the ongoing investment, not necessarily coming at a cost of perhaps slower revenue growth.

Well I think, and Tom will speak to this as well, certainly, we always look at finding and retaining the best possible talent. We do you think that there's capacity in our system and as you can see, from the expanding revenue per consultant productivity numbers, that continues to move upwards.

We still think there's an opportunity there to expand our revenue and increase productivity, but this is not a business that requires heavy investment dollars, except in attracting and retaining talent.

This is Tom.. I'll add to that. The major to thrust for us to drive revenue involve adding additional people. We did have some holes in the lineup of some areas where we think we can increase our leverage of some additional people. Kevin commented on that earlier relative to Europe.

These are primarily investment in people. We will have some additional expenditures and marketing and programs to help build our branding.

We've been very selective in terms of how we make those but as revenue increases, we will be able to increase was slightly, but we will be careful in most cases to attract very carefully these expenditures as a percentage of revenue. Thats the number that we really watch.

One more question and I'll get back in queue. You are using a little bit more restricted stock in your compensation now. I was wondering if you could tell us what the receptivity of the type of competition has been in your conversations, in terms of recruiting new consultants?

Actually, in most cases the people that we are recruiting are looking for more equity even than what we're including in our current compensation plan. In some ways, this is a return to having equity as part of the compensation program, for our particularly our senior consultants that we had for many years, before we took the company public. This is a return to both standards historically to some degree, and standards of the profession. I firmly believe, and I think most of our partners, and a think most of the shareholders outside the Company believe that increasing the percentage ownership and having more shares in the hands of our working professionals is a good thing on a number of measures.

It locks in the longer term, it lines their interests and the performance more with those of the investing shareholders and it provides the glue that keeps the team together, and hopefully, continues or relatively low consultant turn over historically in the firm. All of those are valuable things and we will look at ways in fact over time to increase the percentage of compensation in equity instruments as we can find opportunities to do that.

Thank you very much .

Our next question comes from Kelly Flynn from UBS.

Yes Hi, this is Andrew, for Kelly Flynn. I have a couple of questions on your guidance. You mentioned that your Q3 revenue guidance included your -- I guess what you're seeing currently in terms of confirmation trends and seasonality? I would imagine in conclusion thoughts on any restructuring and an impact there. I was wondering if you could walk us through those three points and how they've put it into your guidance for Q3.

Andrew, this is Eileen. I'd be happy to do that.

First of all, on the confirmations in July were down 4% year-over-year, so we're looking at revenue that on a year-over-year basis, our guidance shows growth of 7 to 12%, but having said that, certainly when are very cognizant of the fact that we want to be conservative in terms of estimate revenue, particularly with those confirmation trends.

And we are taking into account the fact that the majority of the benefits of the restructuring will come into play starting third quarter, but given the lack of visibility on revenue, given the seasonal trends in this business, just as data point, in the last 5 years we have never had a third quarter that is higher in revenue than the second quarter. All of those things come into play when we think about what we have to achieve in order to meet our commitment to Wall Street to hit a 10% operating margin.

So all of those factors come into play and were generally conservative and want to take into account the possibility that we could have extraordinary items that at the moment we are not aware of.

So all of that is in the calculus of a given your guidance for the rest of the year. Obviously, in terms of our margin performance in the first half of the year, we need to have higher operating margin in the back half in order on a full-year basis to be able to meet the 10% operating margin target. All of that is what we're thinking of in terms of putting together guidance.

Okay. So if I understand correctly, you actually expecting a slight acceleration year-over-year in revenue growth? Is what is implied in your Q3 guidance?

Yes, it is.

Have you seen a slowdown (Indiscernible) Do you see that lumpy or due to the restructuring. Is there anything that gives you confidence that you will see a pick up here?

It's hard to go exactly a year-over-year, in terms of what's happening with confirmations. For example, in June, confirmations were extremely strong, but then have tapered off in July.

So if you look at it on an average basis, in June and July we're up in confirmations, averaging those two months over that same period last year. But yes, we're concerned that confirmations are down, but we're reasonably confident with the limited visibility we have to revenue, that we should be able to hit the range that we've given you, that again, would be a 7 to 12% revenue growth rate over the same quarter of last year. .

Right, thanks, and then I did have a question on the margins as well. I was wondering if you're now excluding the 1.5 million of equity, in Q3 and Q4 in terms of the guidance?

No, the operating guidance that we are giving for the year includes that benefit. includes the benefit.

Okay and can you give me the Q2 bonus accrual, including that?

This, it was 21 million. Yes.

Thank you very much.

Thank you. Our next question comes from Matt Litfin from William Blair Company.

Good morning, and congratulations on a strong quarter. Can you give us some clarity on the tax rate next year? It looks like there are some different views on First call.

Hi Matt, this is Todd.. We're currently estimating that our tax rate for 2005 is in the 15 to 20% range.

After the important time will be dependent on the status of the valuation allowance, which we'll really be looking at heavily over the next two quarters, and looking at facts and circumstances related to our earnings and where those earnings come, and our ability to, at some point, reverse the valuation allowance. And until we do that, it's difficult to give guidance beyond that, but we're comfortable with the 15 to the 20% for the current year.

What would be a statutory rate, kind of a worst-case scenario, if you have no deferred tax asset to apply in '06?

We would thank that number would be about 40, Matt. Would be about a 40% rate.

What are your latest thoughts on cash flow this year and how that will relate to your updated income expeditions?

Matt, this is Eileen. In terms of cash flow for the year, if you exclude all of the extraordinary items associated with restructuring and a stock repurchase, in terms of just cash from operations, we would expect to be generating cash of 35 to $40 million. And then at year end, we would expect out cash balance to be in the range of 120 to $130 million. And remember that is after the payment of the December bonus, which we estimate would be about 45 to $50 million.

That is very helpful. One more, if I might. Eileen, I believe it was that you said in your prepared comments that the healthcare and technology in the U.S. were down year-over-year in the second quarter. Can somebody on the call address both of those groups and separate out for us in the macro trend that you're seeing versus Heidrick specific issues in those (Indiscernible)?

This is Tom, let me comment to that. I think there's a little of both. As I think many of you know a group in the technology. It's been a challenging sector over the last five from high-growth to contraction to slower growth.

Some of it is market based there, some of it involves the need for us to do more aggressive recruiting in that sector. I don't know what the percentages are, but there is some of each. We have some of the same. It's a spotty market. We have historically done very well in that market sector. We have, in fact, quite recently, over the last two weeks made a couple of key new hires in the area, which we think will end up increasing the productivity of our health-care group in North America. Particularly, fairly dramatically between now in the end of year, so I wouldn't be a bit surprised to see the performance of health care sector recover by the end of the year.

It's a growth area, both in healthcare services and in by forma and forma generally that we're looking at heavily for additional investments..

Allow me to throw one more in, I have a meeting in 10 minutes, but can you quantify recent turnover trends? Both at the search consultant level, as well as at the more junior levels?

Yes, we can. Historically, both compared to what we believe is our level in the search profession, certainly relative to levels and professional services generally, are unplanned turnover levels are extremely low. The averaged under 5% for 7 or 8 years that we have practiced, on a base of 300 consultants, thats typically 10 to 12 or so a year. That is actually quite low. It's a little harder on the administrative and support staff levels but not excessive. Certainly, well within industry standards, below them in most places. We expect that this year will be any different.

Obviously, as part of our restructuring, we've had the unfortunate task of having to ask some people to leave the firm. You hate to do that, but it was necessary to get us back on the path that we needed .But absent that, the turnover of consultants is not viewed as a problem in the firm.

Things, congratulations again.

Thank you .

Our next question comes from Mike Marcoff with our R.W. Baird.

Good morning. I wanted to us, Tom and Eileen, with regards to the productivity levels, how much further -- where do you think a consultant, an average consultant, obviously you have got people like Jerry Roche that are an exception, but where do you think the average consultant within the firm would max out in terms of productivity?

Let me take that. We think that there is still significant room for improvement in consultant productivity. We benefit from a very senior and experienced workforce. Obviously, Jerry is the most well-known in our business, that's correct. Although, he is in many years not the top producing consultant in the firm for a revenue standpoint, although the results are up there.

We have many, many consultants producing at levels well in excess of 1.3 million average that we reported. I think, we see it that that could easily grow to 1.5, perhaps a little harder, before we start giving strains in the system.

Obviously, aggressive hiring and ramping up new consultant's tends to bring that down. But we will certainly see in our view additional productivity beyond what we have currently. Which I suspect is probably at or near the highest in our profession.

Great, and a question for Kevin with regards to Europe. In terms of the new people that you might higher, people coming from outside the industry, a couple of questions there.

How quickly would you see ramping up the hiring there? How long does it take for people to become productive? What are the implications for potential negatives if they don't become productive? The understanding is that it's much more difficult to terminate people over there, so how do you think about that?

Well, first of all, the rational for going outside of search is that if you look at what we've done in Asia, I think we hired 23 people over the last 18 months, 21 were new to search. An average, of course, Asia-Pacific is a high growth market, so their getting up to speed any where from 3 to 6 months, but a lot of that was the fact that our consultants across the globe were exported work to Asia-Pacific.

In Europe, as we have tracked, this is an organization, we've seen that it can take any where from 9 to 12 months for a consultant to the up to speed, so that's what we're predicting. Any where from 9 to 12 months.

We have a fairly aggressive hiring strategy over the next couple of years, but we are going to secure it, just to allow for the fact that its going to take time for these consultants to get up to speed. So you are looking at any where from 9 to 12 months. .

Where should we expect the consultant to be by year end in Europe?

I think, overall, if we look at the next 18 months, we will probably see any where from 10 to a 20% after the restructuring. But that the 18 month plan versus year end. We allowed for some hires this year but that would allow them to ramp up in 2006.

In terms of, how should be think about the margins progressing in Europe? We mentioned what the savings were from the restructuring but I am assuming that is going to be partially offset by increased hiring. So when should we look for the margins to improve materially in Europe?

Well I don't think we're going to achieve the same margins in Europe that we enjoy in Asia-Pacific, due primarily to the overhead and infrastructure cost differences. However, having said that, there's no reason that Europe shouldn't be able to produce margins in the mid to high teens. Particularly, as I mentioned before, as we fill some of the gaps that we have across particular offices. But in terms of a timing, it's just going to take time it. It's going to take time for the consultants to get up to speed as well.

We will be margin improvement in Europe this year in the third and fourth quarter.

And we've actually seen it already in the second quarter, even before the restructuring kicked in a little bit, and that trend will continue. But as Kevin quite properly pointed out, and factoring into our plans that this is a several year strategy to bring Europe up to reasonable profitable levels, whether they will reach the exact levels of the other two regions, time will tell. It will certainly close the gap very significantly from what it has been and what we think it can be.

I was trying to determine how much of the savings that were discussed would end up dropping down to operating line for Q3 ad Q4, and how much would be offset by hiring? How should we think about that?

You should think about that in terms of about 80% of those savings to drop to the bottom line in Europe. So if you're modeling, we told you that we expect the savings the back half of the year to be 7 or $8 million, about 80% of that should flow down directly to your bottom line.

In terms of the charge, how much of that will actually be paid out this year, as opposed to remain on the books for future payouts?

Most of it is severance, so as a result of that, really the lion's share of it will be paid out this year. Of the 20.8 million that we have in fact booked for this year, 14.7 of it is severance, so that will immediately be paid out. The remainder, about 6 million, in property and some of that is cash, but most of it is cash and a less of it is lease payments to be made in the future. So you should assume that the lion's share of the total amount of the restructuring will be paid out in this year. So maybe some minor amounts that goes into 2006, but not much Mark.

So when you gave us -- where you expected cash to end -- you know, after December of this year, including the bonus payment, that included the impact of the restructuring charge?

Yes. Yes. And I assumed just to be conservative that all of that would be in cash and it would all be paid this year. That is a reasonably good assumption. Again, there's a small component that non-cash and perhaps some small pieces of cash that would be paid in 2006, but it's really minimal.

Great, and can you talk about the biggest practices that is the percentage of revenues for the quarter, and specifically how the financial services do?

Financial services was not as strong this quarter as it has been in previous quarters. Although, it's still a very significant portion of our business in general. It's about 30% of our business. Industrial showed some strength and I think that's a result of really a rebounding of sort of core industries in the economy. And consumer was also strong.

Where would industrial and consumer be as a percentage of reps?

They're both about 15% of our revenues roughly.

Great, terrific, I will jump back in queue .

Our next question comes from Michael Morn of Merrill Lynch.

Yes, just a quick follow-up. I wanted to check in terms of your Q3 guidance what are you assuming on the FX side? You had a 2% contribution this quarter?

Well, we've given you guidance but basically takes into account exchange rates, remaining about where they are now. So there's no significant contribution that different from this quarter, Michael.

But in terms of year on year, you would still expect a slight benefit? If I'm understanding that correctly?

I am sorry, could you repeat that?

You would be expecting a slight benefit from FX in Q3 year on year? , absolutely.

Yes, absolutely.

Okay, and then in terms of the cash, are there any other plans for another buyback are perhaps cash dividends?

Well, we look at exactly that issue continuously with the board and as I think that I said to you and everyone else who ask about it, and it's a fairly consistent question, we have an obligation, if we can't find a means of utliling our cash, that clears our cost of capital and in fact, provides value to Heidrick & Struggles to return it to shareholders. In the past, our preferred means of doing that has been a stock repurchase, but we look at a variety of means of doing that, and we discussed that with the Board really continuously and at every board meeting.

Great, thank you .

Our next question comes from Kelly Flynn with UBS. it's doing is, just as a follow-up to us question, could you perhaps to rest any thoughts on when the next board meeting might be, whether we may see for your position?

Yes, just as a follow-up to that last question, could you perhaps, give us any thoughts on when the next board meeting might be? Whether we might see it further (Indiscernible)

Well, as you can understand, we have board meetings several times a year. So we are in constant contact with our board. It's a matter that Tom and I and the executives in the Company discuss with the board really on a very consistent basis, Andrew, so there's no one triggering. This is a discussion that is ongoing.

Okay, thanks. And then also, you mentioned within Europe that you reduced in Germany and the U.K., and was wondering if you could give me some insight in terms of where you put headcounts and also, I see that most of the headcount wasn't consultants, but it was a guess back-office personnel.

Can you kind of characterize on the restructuring, and how that's going to (Indiscernible)?

I'll take the real-estate portion of that question. We did not accept any markets to this year restructuring. We certainly did rationalized real estate, a total of 26,000 square feet in 5 locations in Europe. Most of the headcount reductions came out of Germany and the U.K. and as far as on the real-estate side, we expect in the fourth quarter that there'll be another 11,000 square feet that will come, and that's primarily in the Americas.

Andrew, this is Kevin. On the people side, if you look at the individuals that we unfortunately had to let go, a lot of it had to do with the business going forward and our leveraged model. Our leverage model is out of wack in some of the countries specifically, and one of the ways we're going to improve profitability going forward is to make sure that we better utilize our support staff and not hire at the edmond level as we grow or hire the revenue producers as well. So I think it was a combination of both.

Our next question comes from Mike Fitz.

Hi, it's Tobey Sommer with SunTrust Robinson Humphrey, actually.

I was curious, could you -- with the cash balance you have and the estimated cash flow to 35 to 40 million, cash from op's for the year, could you give us a sense of where that would put the cash balance at the year and the year end and what the cash balance would be -- sort of a discretionary cash given, and I am sure that you would like to have some on a balance sheet.

The year end cash, as I said, we would expect to be about 120 to 130 million, and that's assuming all of the restructuring cash has been paid, which is reasonable assumption. As we said before, our sort of core operating cash is about 50 to $60 million. That is to be somewhat conservative in terms of the working capital that we need to run the business. So that does give us excess cash of about 50 to 60 million, assuming those balances.

Thank you very much.

Our next question is from Tim Long with CLK. No question, thank you. Our last question comes from Mike Marthon, with RW Baird.

A few follow ups. First of all, what would you anticipate before on revenue impact would be from the 13 consultants?

We factor that into our guidance, so what we've given you is full year guidance takes into account any loss of revenue associated with those consultants.

Kevin probably wants to comment on this. But our experience has been in the past, well, obviously cutting revenue producers can have an impact on revenue. We often find that other consultants come in to pick up that revenue that was associated with the consultants who were leaving.

I think that's right and it also enables us to grow the younger consultants, as they step up and pick up a lot of the revenue and a lot of the clients that were with those specific consultants that have left the organization.

Right, I was just trying to get a sense for what it, you normally have a seasonal impact in Europe. I would imagine that would be exacerbated to a certain extent.

Again, we're comfortable with the guidance and we have done a very specific review of the revenues associated with the people who are leaving the firm. We have impounded that into the guidance. So, it is something that we have been very cognizant of, and we are still comfortable with the range that we have given you for the year, given that effect.

I am sure you are. I was just trying to a -- in term of the specific region and modeling in segments and how we should think about that.

Well, typically, we haven't given you that much granularity regarding revenue trends and forecast by region, and that is really how we are moving forward. but we again, don't have any issues with the guidance that we have given you for the full year.

In terms of the trims that you saw in July, in terms of the slight decline, was that concentrated in Europe or is that across the board?

It was really across the board.

I wouldn't read too much into that because some of is a seasonal, which really brings us back to the point we made over and over again. It's very difficult business to track and forecast on very small periods for these quarters and full years these things round out a lot. You are dealing with exceptionally strong months in terms of confirmations. July, a little bit light, June and July combined, about actually ahead of what we would have had in June and July combined last year.

August is historically a slow month and around the world, particularly in Europe which is one of the reasons is why Q3 is typically not one of our strongest quarters, but as we've seen over the last few years, things change. Not every quarter ends up showing the normal seasonality, so that is one of the reasons we tend to be a little on the cautious side, because our visibility is limited into some of these factors.

How many officer do not have in Germany?

We have 6 offices in Germany now, Mark.

Is that what it's going to be?

Yes, I mean we're not, in fact, exiting any of those markets in Germany. Again, Kevin may want to speak to this more, but Germany, unlike other major countries in Europe, is really as you know, a combination of city states and their industry was in fact developed in the same way. So unlike, for example, the UK, where we have one major office in London, or in France where we have Paris, in order to service us our clients in Germany, it really requires a first set of offices.

Eileens right. If you look to the German business today, you got healthcare companies scattered throughout the country. You have industrial companies scattered throughout the country, and financial services as well. So right now we're happy or comfortable with the number of offices that we have.

It seems like the guidance for Q4 seems conservative, are there any plans for any pickup increases in spending for Q4? You had one year, you had a group meeting in Miami, is there anything similar like that that's been planned?

No and in fact, we have deferred our world wide partners' meeting to make sure, again, that we can meet the guidance targets that we've given to the street. One of the reasons why it may look to you to below is it really depends, if you're working on a full-year basis, what our third quarter ends up being. As I mentioned, the guidance we could and is in 7 to 12% growth rate. Obviously, if we hit the high end of that, if you're trying to translate that into a total revenue number for 12, mix the fourth quarter look unusually low, which would probably be not inappropriate way to model it.

But we have very little visibility on revenue and by in large, third quarter and fourth quarter have not been seasonably big quarters for us. That has not been true in the last 2 years, where the fourth quarter has tended to be a higher revenue quarter. But in general, were conservative in terms of how we provide guidance to you because we have a very limited visibility of beyond a month are two into the next quarter. So if we are returning to the seasonal trends in this industry, we would not expect on a revenue basis for Q4 to be a major quarter in terms of revenue.

Finally, with regards to the course use and the benefit from it certainly seems like a great move, but wait in terms of shifting some of the consultants are aligned with us, and I am wondering why you would phrase it as a one-time benefit, and that we're going to continue to see that ongoing, I'm assuming.

Mark, this is Todd, there's a couple of things related to the benefit in this second quarter. First of all there's a catch up of 1.5, if you will, related to -- that plan, and then there is 1.5 for this year.

There's certainly no expectation going forward that that program would change. Now we will always, again be deferring some of that expense with the idea that in 2005, we are going to recognize about a third of the total 10% expense. In 2006, we'll have another third and it bleeds out through 2009 with kind of a 22, 10% and then a 2% rate.

Certainly, if this program continues that we're going forward, there be another layer of these items that will be added into here, but the bulk, of course, will be dependent on what the bonus percentages are in relation to a next year. But as we sit here today, a don't think there's any plans that would say this is just a one-year item at this point in time. We expect that it would continue.

I understand in terms of how the deferrals work. In terms of the guidance that was originally presented to us for 10% operating margin for this year, did that envision the implementation of these and the impact that would have with regards to expenses?

Yes, Mark, we did to that into account. Because we said, because the program had not been formally approved by the board until the second quarter, we had some catch up. We took that into account in terms of providing you with guidance.

Great. Thank you.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and thank you for your participation.