Heidrick & Struggles International Inc (HSII) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2007 second-quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS).

I would now like to introduce your host for today's conference call, Ms. Julie Creed. You may begin, ma'am.

Good morning, everyone, thank you for participating on our second-quarter conference call. On today's call from Heidrick & Struggles are Kevin Kelly, our Chief Executive Officer, and Eileen Kamerick, our Chief Financial Officer and Chief Administrative Officer. Kevin will start by discussing some of the operational and financial highlights for our second quarter, and then Eileen will review our financial results in a little bit more detail. Kevin will finish the call with some comments on our business initiatives before we open up the call for Q&A.

As a reminder, there are supporting slides that are available on our website at www.heidrick.com that accompany our remarks today, and we encourage you to follow along or print them. As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we will be making forward-looking statements on today's call and ask that you please refer to our Safe Harbor language contained in our news release dated today, which was widely disseminated by the various newswires and other media this morning. The same Safe Harbor language is also on slide one of our presentation.

At this point, I'll turn it over to you, Kevin.

Thanks, Julie, and thanks to all of you who are taking the time to participate on our call today. Before I give you a quick overview of some of the highlights of our second quarter, I'd like to take a moment to recognize the hard work of our employees around the world that contributed to the strong results we have achieved. We set some very lofty goals for ourselves for the quarter, and everyone should be proud of what they did to help us accomplish these results.

Now, if you're following along with the slides we've posted on our website, I'm going to start with slide number three. We had a great revenue quarter. Net revenue of $160.1 million was up 33.2% year over year and up 11.9% over the first quarter. Every region contributed to year-over-year sequential revenue growth.

As you know, our business is not perfectly stair-stepped, and we do not expect to report sequential revenue growth every quarter, but there has been great momentum in our business and also an acceleration in our net revenue growth. All of our key growth drivers and operational metrics contributed to improved top-line results in the second quarter.

Turning to slide five, consultant headcount at June 30 was 398, up 19% year over year, although down sequentially from 414 at the end of March. In the second quarter, as is typical in our business, we had consultants who retired and who resigned. But more than half of the net decrease reflects underperforming consultants who were asked to leave the firm.

Turning to slides six and seven, executive search confirmations were up 18.1% year over year and are up 25.1% year over year for the first six months. Also, the average fee per executive search increased 11% to $111,000 in the second quarter. Year to date, the average fee per executive search was $103,500, up 8% over the same period in 2006.

Moving to slide eight, we are pleased to report that, despite having added 63 consultants in the last year, annualized revenue per executive search consultant hit a new record of $1.5 million. Improving the productivity of all our consultants has been and will continue to be a very high priority for our company. We will support the development of our consultants in any way we can, but like any good organization, we will also be disciplined about moving those who are underperforming out of the firm.

Referring to slides 9 and 10, second-quarter operating income increased 25.7% to $19.5 million, and the operating margin was 12.2%. Now, if we were to add back the cost of the worldwide consultants' meeting, which came in under budget at about $2.5 million, our second-quarter operating margin would have been 13.7%. So we know that we're capable of improving our operating margin further.

As shown on slides 11 and 12, reported net income was $21 million and diluted earnings per share were $1.11. But that is after a net tax benefit in the quarter of $8.5 million, which Eileen will discuss in more detail. On an adjusted basis, without this $8.5 million benefit, our effective tax rate would have been 41.6%, resulting in net income of $12.6 million and diluted earnings per share of $0.66, a significant improvement over 2006 second-quarter results.

Given that our quarterly results are often uneven, I would also like to highlight quickly our year-to-date results. Our consolidated net revenue for the first six months of 2007 was up 36.8% compared to the first six months of 2006, and our operating income was up 49.6%. Every region achieved at least 25% net revenue growth and at least a 40% increase in operating income, and every region improved its operating margin.

With that quick overview of our great second quarter and first six months, I'll turn the call over to Eileen to give you some more details on the quarterly results.

Thanks, Kevin. Looking at slide 13, net revenue of $160.1 million increased 33.2% year over year and was up 11.9% sequentially. The impact of foreign currency exchange rates accounted for approximately 4 percentage points of year-over-year growth in the second quarter. Revenue associated with the former Highland Partners consultants was about $16 million in the quarter.

Turning to slide 14, salaries and employee benefits expense in the second quarter was $110.7 million or 69.2% of net revenue. Fixed salaries and employee benefits expense increased $18.8 million or 36.4%, which is largely a function of the 17% year-over-year increase in our worldwide headcount, including a 19% increase in consultants. Performance-based compensation increased $10.9 million or 37.1%, mostly reflecting higher expected net revenue levels for 2007, which translate into higher bonus accruals.

The increases in fixed and performance-related compensation expense also reflect $4.2 million of additional stock-based non-cash compensation expense, including a $1.2 million charge associated with the accelerated vesting of outstanding equity awards for our former Chairman, Tom Friel, which we mentioned to you in our first-quarter conference call. The additional $4.2 million also includes amortization expense related to restricted stock units granted during the year to retain our largest revenue producers, as well as former Highland Partners consultants, and to further align them with shareholders.

Turning back to slide 13, general and administrative expenses in the quarter were $29.9 million, an increase of $6.6 million compared to last year's second quarter, including a $2.5 million charge for the cost of our worldwide consultants' meeting in June. As a percentage of net revenue, G&A expenses decreased to 18.7%. Considering the worldwide consultants' meeting, our acquisition of Highland Partners last October and a year-over-year revenue growth rate of 33.2%, the year-over-year increase in absolute dollars is within our expectations.

If you refer back to slides 11 and 12, second-quarter reported net income was $21 million and diluted earnings per share were $1.11, reflecting a quarterly effective tax rate of 2.3% after discrete items. The discrete tax item in the second quarter was the result of our decision to release a valuation allowance related to our foreign tax credits.

We had not anticipated releasing the allowance in the second quarter. However, following an additional quarter of significant improvement in the financial performance of our foreign branches, particularly our UK branch, it became clear that it was appropriate to release the valuation allowance and receive the benefit of foreign tax credits. These actions resulted in a net tax benefit in the quarter of $8.5 million. Excluding this $8.5 million tax benefit, the second-quarter 2007 effective tax rate would have been 41.6%, which would have resulted in net income of $12.6 million and diluted earnings per share of $0.66.

Turning to slide 15, I would like to briefly highlight our first six months' results. Net revenue of $303.2 million for the first six months of 2007 increased 36.8% compared to the first half of 2006. Operating income of $35.8 million increased 49.6% year over year. The operating margin improved to 11.8% from 10.8% in the same period of last year.

Moving to slides 16 and 17, cash flows and balance sheet items, the cash, cash equivalents and short-term investments balance as of June 30th was $180 million. The increase, compared to March 30, 2007's balance of $151.3 million, reflects additional accrual of consultants' bonuses to be paid in March of 2008. Net cash provided by operating activities was $30 million in the second quarter, compared to $30.3 million in last year's second quarter.

In the second quarter, we repurchased 257,000 shares at an average price of $48.45 for a total of $12.5 million. There is $12.7 million remaining on the $50 million authorization by our Board from May 2006, as well as the new $50 million stock repurchase plan authorized by the Board in May 2007.

Acquisitions, as well as strategic hiring of consultants, continue to have an important role in our growth strategy. We are actively reviewing options for both on an ongoing basis. But as you know by now, we are very disciplined about how and where we look at potential acquisitions, as well as how we evaluate the integration and potential return of both acquisitions and consultant hires. Some of our current priorities for strategic hiring include the Asia-Pacific region, where there is enormous opportunity for growth, and in the energy, media and entertainment and asset management practices.

Looking at regional results, please turn to the Americas results on slide 18. Net revenue of $88.2 million in the quarter was up 29.5% year over year and up 5.8% sequentially. All of the key revenue drivers contributed to this growth in the Americas; confirmations, consultant productivity and average fee per search all increased year over year.

The operating margin was 22% compared to 23.6% in last year's second quarter. This decrease was largely a function of an increase in salaries and employee benefits expense, both fixed and variable, related to an 18% increase in headcount in this region, including a 20% increase in consultants as well as higher bonus accruals associated with higher levels of net revenue. It also reflects higher amortization expense related to restricted stock units that were granted over the last year to retain our largest producers and align them with our shareholders.

Turning to slide 19, second-quarter net revenue in Europe of $52.5 million was up 29.7% year over year and up 23.2% sequentially. In the quarter, the positive impact of foreign currency exchange represented approximately 9 percentage points of the year-over-year revenue growth. The London office, in particular, had a great quarter and was the primary driver of our net revenue and operating income growth in the EMEA region. From a practice standpoint, Industrial, Financial Services and Professional Services groups were the largest contributors to net revenue. Operating income increased 87.7% in the quarter, and the operating margin improved to a record 14.1% compared to 9.7% in last year's second quarter.

Turning next to slide 20 and the Asia-Pacific region, this region turned in another record quarter with $19.4 million in revenue, up 67.2% year over year and up 12.8% sequentially. The Australia/New Zealand region was the biggest contributor to growth, with revenue in the quarter up 195% compared to last year's second quarter. Operating income of $5.2 million was up 78.5% year over year, and the operating margin was 26.8% compared to 25.1% last year. Consultant headcount was 55 at the end of the second quarter, up 34% compared to a year ago.

I'll review our guidance for 2007, starting with slide number 23. As we head into August, we continue to see good business trends and continuing demand for executive search and leadership consulting services. But as we have reiterated many times, we run the business on an annual basis, because so many of our clients also manage their recruiting plans on an annual basis. But given the strong first-half results, we have increased our net revenue guidance to between $580 million and $595 million in 2007, representing growth of between 21% and 24% over 2006 net revenue. We are still aiming to achieve an operating margin in 2007 of approximately 13%.

We now expect that net income and earnings per share will reflect a full-year effective tax rate of between 35% and 42%, down from our original expectations in March of 42% to 48%. This rate reflects a combination of our year-to-date tax rate of 22%, which is low because of the tax benefit in the second quarter, plus our expectations for the third and fourth-quarter rates.

In the third quarter, we are expecting a tax rate in the range of 40% to 42%. However, in the fourth quarter, we are expecting to complete the incorporation of our UK branch, which will result in a discrete tax charge and a quarterly rate of somewhere between 65% and 75%. The UK is our largest office, and is currently one of our most profitable offices. So although there is a sizable tax effect on our tax rate in the fourth quarter, due to incorporating this branch, it will help lower our effective tax rate in future years.

After the 2005 third and fourth-quarter reversal evaluation allowance on our US deferred tax assets and this quarter's reversal evaluation allowance related to foreign tax credits, the majority of our valuation allowance has been reversed. There is no US valuation allowance remaining on US deferreds. While there is $21.6 million of valuation allowance related to our foreign operations, which may be reversed in future periods, this is a combined number for all of our foreign operations.

Generally, after these countries begin showing strong earnings over a number of years, the valuation allowance on their deferred tax assets could be reversed. Of all of our foreign operations with remaining valuation allowance, Germany is the only country where the reversal of valuation allowance could have a material impact on our effective tax rate. The timing of any potential reversal is speculative at this point, but we will update you going forward.

For 2007, as a result of our increase in guidance for net revenue, we are expecting to generate free cash flow of between $75 million and $85 million before stock repurchases. We have approximately $62 million in total available on our share repurchase authorizations, and we're continuously looking at all viable options that will maximize our ability to increase shareholder value.

With that review of the second quarter and our financial goals for 2007, I'll turn the call back to Kevin.

Thanks, Eileen. I believe that our second-quarter results demonstrate that the initiatives and investments that we set forth last fall to accelerate revenue growth and improve profitability are showing signs of success. We are focused on ensuring that these trends continue. As I said at the beginning of the call, we have a talented and dedicated group of employees, consultants and leaders in this company. I know we have the right growth in place to take this firm to a higher level of success.

One key driver of more profitable revenue growth, which I discussed in the first-quarter call, is our ability to function as a single global firm. Having worked and lived in Asia, Europe and now the US, I was starting to be concerned that we were functioning too much as a collection of countries. I've seen firsthand that the strength and commercial advantage we can harness by truly being a global, single, unified team and shifting from a geographic orientation to a practice-driven focus can better help us leverage our diversity and market intelligence and improve client service.

Our clients, particularly our key accounts, are clamoring for this. This really hit me recently when we sat down with a client, one of the largest clients of the firm, who had paid us $6 million last year for our recruiting services. As an organization, we were very happy with this level of spending, until the client then went on to tell us that they had actually spent over $60 million in recruiting fees in the year. He then went on to tell us flat-out that they would love to give us as an organization more of this spend, and they would if we could have a more unified global account team to serve them.

So this was a priority of mine in the second quarter -- working with my team to encourage and to enable the people in all of our regions to work more closely as a client-focused group within practices, both industry and functional, instead of teams within regions. I'm convinced that this practice-driven focus will improve the quality of our service and promote a client-first culture which will drive profitable growth.

An added benefit to this model is that we believe it will help bring new consultants up to speed more quickly. We've seen the advantages of this focus in the results of the Financial Services practice, which has been operating this way for a few years. We've also seen significant growth in our Life Sciences practice in the last year, following several significant new hires around the globe, who embarked on a number of practice-based global initiatives.

The worldwide consultants' meeting in June went a long way toward furthering this new structure. While a key benefit of this meeting was the opportunity for consultants to network and connect directly with colleagues around the world, the meetings and presentations focused on practices and functions, not countries and regions. Practice and global account teams around the world engaged face-to-face in planned and ad hoc meetings throughout the three-day gathering. The former Highland consultants, for example, had not had the opportunity to meet a great many of their colleagues around the world. I absolutely believe that after our worldwide meeting, they are better able to expand their client relationships around the world, and that they are more excited about doing so, now that they know their practice colleagues personally.

I'll close by saying that we were very pleased with the record performance we achieved in many parts of our business in the second quarter. But we're not satisfied. We want to be number one or number two in every market we serve. Our revenue growth has been impressive this year, and in fact, so has the improvement in profitability, especially in Europe.

But we still have tremendous opportunity. Worldwide demand for executive talent is strong, and we are in a great position to capitalize on that demand. With a more client-facing approach, we believe we can continue to drive revenue growth and improve profitability. I also believe that we can accelerate profitable growth by capitalizing on our firm's assets. By that, I mean finding new and innovative ways to differentiate ourselves using our intellectual property, like better capitalizing on our database and contacts or establishing strategic alliances. This is still a high priority, and you'll hear more about our ideas and initiatives in the future.

Thank you all for your time today. At this point, we would like to open up the call to questions.

(OPERATOR INSTRUCTIONS). Mike Carney, Coker & Palmer.

Eileen, can you tell us what is the discrete item in the UK?

The discrete item in the UK is just an issue of having to write off some deferreds that are related to the branch when we incorporate it, so we have to write off some of the deferred tax assets associated with the branch when we incorporate it to a controlled foreign corporation.

Since you have done so well, let me just ask some questions that you don't want to answer. First of all, in the monthly confirmation graph, you didn't give July. What is the -- I know that, obviously, it ends today, but what will that look like, in July?

Well, we expect that there will continue to be a strong trend there. So July is a holiday month; there's usually a little bit of a dip, but we still see strong demand for our services.

Also, Kevin, there's -- in the US, I guess that was where the significant drop-off in the consultant headcount had occurred. I haven't really seen that in probably four or five years. You had mentioned that there were some underperformers that had left. But that's still a pretty significant downward move, just on a quarterly basis. Is it your intention to have that higher, to continue to ramp that up to a 10% growth rate or something? Or is it just to have the strong productivity that you've had for the rest of the year?

As a firm, we are and will continue to do everything we can to support our people. But like any good organization, we need to be disciplined about moving underperformers out. If you look at the number of consultants we've hired over the last 18 to 24 months, it's not really a significant number. These underperformers impact our business as well as morale. So we are and continue to, as Eileen mentioned earlier, to focus on recruiting, particularly both from a geographical perspective into places like Asia, where we're seeing huge demand for our services, as well as some of the gaps that we have today -- energy, media and asset management.

So net-net, in March of every year, just like most of the investment banks, after bonus is paid you have individuals who retire and other individuals that move on to other organizations for different reasons. As a firm, we just want to continue to be disciplined about underperforming individuals.

Also, I probably know the answer to this question, but before you had gotten the top job, especially in the US, it had that kind of tepid growth for a while. Since then, and of course with the Highland acquisition, there's been very strong growth. Would you say that the productivity gains that have occurred have come more from fear or teamwork?

Well, I'm a huge advocate of morale in organizations and teamwork. When I go back to my comments earlier about being more of a global organization versus a collection of countries, it's how we work together as a team that's going to have the highest impact on both the organization and our clients on a global basis. A lot of the increase in revenue I also attribute to the fact we've, for the first time over the course of the last 18 months, really focused on training and developing individuals in the organization and having accountability from a practice perspective of ensuring that we do, again, everything we can to make our consultants productive.

So the short version is teamwork. The longer version would be we're doing things as an organization we haven't done before vis-a-vis training and development, engaging, developing our people. That's the reason why you're seeing this increase in productivity, and we'll continue to do that.

Tied to that, is it already over, kind of the change from management from a geographical perspective to kind of the practice groups, sitting in with your global perspective? Or is that still in the process?

Well, the majority of changes we've finished with. But again, like most organizations, we have to do what we can to ensure that we have the best people in the best roles, and we'll continuously look and assess our individuals. We have a great group of individuals coming up through the organization as well that sooner or later want to take on a leadership role.

So I think, like most organizations, it's a continual process. But most of the changes are over right now. We just want to focus for the rest of the year on getting our consultants more productive and in a great search market where there is a lot of demand.

Clinton Fendley, Davenport.

Congratulations on the quarter. Kevin, could you update us on where we stand on the turnover within Highland Partners, currently?

Let me pick that up, if I can, Clint. In general, we are very pleased with how Highland Partners, the people who are former Highland Partners, have performed. They are great search consultants. They have brought us additional depth in terms of a number of practices, and the revenue associated with former Highland Partners consultants in the quarter, as I mentioned, was about $16 million.

So they are now fully integrated into our business. In terms of looking at performance management and considering whether or not people are able to perform on our platform, they are considered in the same way as Heidrick consultants are. So that same rigor is applied, and we're not really breaking out the number of people who have left or we've asked to leave who are former Highland/former Heidrick, because really, the Highland people are fully integrated into our business. But we're very pleased with the acquisition, and it's really outperforming our expectations.

On the European margins, obviously some nice improvement there. What's your longer-term outlook on those, over time?

Well, I think there's always going to be -- and Kevin and I have discussed this -- a differential between the US and Asian margins or Americas and Asian margins, and Europe. Some of that is the cost of doing business there, particularly in Professional Services. The social charges, other issues around hiring, retaining and letting people go in a number of jurisdictions in Europe make it more complicated.

It's also not one big, homogeneous market, despite the EU. There are cultural and language issues. So trying to get leverage off a group of consultants, as we do in the US -- which is a large, fluid labor market -- is more difficult. But we certainly think that we can make strides towards narrowing that gap, and we think that, unlike the gap we have now -- which is this quarter about, say, 8 points -- we can get that down to the 3 or 4 or 5-point range. But that's going to take some time in terms of driving productivity in our major markets, particularly Germany and France, and continuing to exceed expectations in the UK.

Could you explain why you are holding your operating margin outlook steady at the 13% while raising your revenue, especially considering the operating leverage that we've historically seen in your business, when the top line is really working?

Really, the reason for that is we're trying to balance growth and profitability. We had added a lot of people, including the Highland Partners acquisition last year. We hired a lot last year and the beginning of this year. So 13%, again, to take that into perspective, this is a much higher margin than Heidrick has had traditionally.

So we are really trying to push that margin, at the same time driving revenue growth. It's just a question of the fact that we have to make some investments in our business and also in terms of hiring people. We're conservative in terms of how quickly even experienced search consultants will get up to speed, once we hire them.

So we're comfortable with that guidance. There's real thought behind the fact that, even though we've raised revenue guidance, we think that approximately 13% is appropriate guidance.

Tim McHugh.

I was wondering if you could touch on trends in the revenue per search, which seemed to increase nicely, about 11% year over year. Is this being driven by increased comp rates for the people you're placing, a mix shift, or success in moving upmarket? If you could just touch on some of those factors?

I think it's really all of them. I will defer to Kevin in terms of the market issues. But in terms of what we're seeing in terms of trends in compensation, certainly, there's pressure in the labor markets, in the managerial and technical ranks. That's driving fee per search. But particularly in Asia and Europe, we have been more successful in moving upmarket, and we have been very conscious in our efforts to do that.

Yes, we have moved upmarket in both Germany and France. We'll continue to do so. It's a supply/demand issue in Asia, as we have seen, given the growth there. There's huge demand in Asia for talent and global talent, not just talent in the Pacific Rim, but bringing in people from overseas. We're seeing the demand in the United States as well. So I think it's just a supply/demand issue at this point, as well as moving upmarket, as Eileen referred to earlier.

You mentioned Germany there. You guys had talked about the strength in the UK. Can you talk about your turnaround after realigning Germany late last year? Then, I guess, any other variants. Was the strength in Europe fairly broad-based, or were there particular countries that were -- other than the UK, which you said was very strong -- that were especially strong or weak?

I think it was broad-based. Overall, in Germany for us, both Germany and France provide a tremendous opportunity as an organization. Going back to Eileen's comment about the challenges you face in some of the European countries as well as the huge potential, one of the things that you discover is it takes anywhere from 6 to 12 months -- if you take a step back and go to 2005, we lost a significant number of revenue producers. Although they weren't performing as well as we expected them to, we took out some revenue producers. Now, it has taken anywhere from 12 to 18 months to recruit in that market because of gardening leave. We're at the point now where we've added five to six new consultants in Germany, from major competitors as well as from industry backgrounds, and they're performing.

The same holds true for France. So over the course of the last two years in France, we lost some revenue producers, too, through the restructuring. Now we've added five new consultants who are really performing the way we expect them to.

So the power in Europe will come out of both Switzerland, France, Germany, the UK and Spain. But overall, we're very pleased with the results across the globe. Going back to the comment earlier about morale, we have tremendous morale in Europe right now, and it's impacting the business.

Lastly, if I could touch on the headcount reductions that you kind of pushed through this quarter, I guess, were there any severance expenses associated which flowed through the income statement? Did this happen late in the quarter, early in the quarter? Should we expect that as well as any other planned headcount reductions to have an impact on revenue going forward?

We are continuing -- we have a very disciplined approach in terms of giving our consultants all the tools that they need to succeed, but we are also very much a performance management organization. So the issue of looking at whether or not people are performing on our platform is really sort of a continuous issue.

There was about $0.5 million of expense in Europe associated with severance. In the US, it was a much lower number than that, so it's not a significant number moving through the P&L on a sort of global basis. We don't have any anticipated plans for any significant severance moving forward, but to be fair, we're always in the process of evaluating our people, trying to make sure that they are productive and can succeed on our platform, and some of that is applying performance management and thereby taking steps to, in fact, remove people who are not most productive.

Mark Marcon, R.W. Baird.

Congratulations on a nice quarter. I was wondering, with regards to -- I was just looking through the appendix of the slides. It looked like Financial Services is around 37%. Did the other parts of the business grow at a faster rate than Financial Services this quarter?

We typically don't give growth rates, as you know, in terms of practices. The thing about Financial Services, as you know, is we have a number of verticals there. We have asset management in that, real estate; it's a very broad-based practice group. So Financial Services grew, actually, a little bit quicker than some of our other industry groups. But again, Financial Services covers such a broad swath that it's hard to speak broadly about Financial Services because it's asset and wealth management, consumer financial services, investment banking, insurance, private equity and real estate.

So within those groups, there were varying levels of growth, but we're very pleased with the Financial Services business. I would just note that our Health Care business, where we made some significant investments in the last couple of years, we were very pleased with that growth rate.

With regards to Europe, you have obviously made some really nice progress with regard to the margins there. How high could the margins go in Europe? When you think about getting to an overall 15% margin for the overall Company, where would Europe be?

Well, as I said before, I really think there's still going to be a gap. You'll see this in most professional services organizations -- in our competitors, in executive search, in advertising, there's a differential between their EMEA margins and those in the US and other regions. Some of the reasons for that is some of the costs of employment in the European markets. So I would think, over time, we can certainly narrow that gap. But I would expect that there will continue to be a gap in those margins.

Typically, our competitors and, again, the professional services firms show margins in perhaps the high teens. I would expect that over time that we could do that. But that's going to take a series of events, in terms of building our productivity and investing there.

I'm sorry I missed this, but the corporate or the partners' meeting that occurred this quarter and happens once every six or so quarters, of $2.5 million in terms of the expenses -- where was that allocated?

Well, it's in the corporate line, but it's also in G&A.

It's in the corporate line and it's in G&A? So it's not in any of the individual segments?

No, it's not in the individual segments as such.

Lastly, in terms of the Americas, I'm sorry I missed this earlier. But in terms of the consultant headcount, sequentially, how many people voluntarily left and how many were involuntarily --?

Well, we had a number of movements. First of all, we hired a number of people. We didn't have any promotions in the quarter, because we typically promote in the first quarter, and then we had reductions. Some of those were voluntary, and some people were involuntary. So some of that was performance management, and then other people left.

Of the number of people who left, it was a relatively small number going to a top-tier boutique competitor. I think, as you know, our turnover, as defined by people who go to work for our competitors, remains at less than 5%, which, compared to really most professional services firms, is very low.

So did you give the total number of people or consultants that left in the quarter?

No, we haven't given that number.

And I guess you're not going to?

No, we're not planning on it.

The reason why I ask partially is because when you had that same dynamic in Europe, and this is back when Kevin was running Europe, it seemed to really lead to an acceleration with regards to your revenue growth afterwards. I was getting towards Kevin's points with regards to productivity and morale and how certain -- in a lot of cases, in the services firm, underproducers actually hurt morale. So I was just trying to understand that to a greater extent.

You are absolutely right, and we continue to focus on morale. We continue to focus on how we can engage and support our consultants. Again, like any organization, there are times when you have to move people out of the firm. It's never a fun thing to do, but it's good for you -- excuse me, it's good for the firm and it's good for the individuals.

Tobey Sommer, SunTrust.

Most of my questions have been answered, but I was wondering if you could give us organic growth rates year over year, by region, if you have them?

We haven't typically broken that down, and I'll tell you why. Typically, it's because Highland Partners is now fully integrated into this business. But if you want to get a rough estimate of that, say there's about $16 million of revenue associated with Highland Partners. The bulk of that is in the US, and there is some portion in the UK where we brought in about seven consultants from Highland Partners. Then in Asia-Pac, we really only had two or three people. So on a relative basis, you can get a sense of what proportion of that revenue is US-based.

Over the last conference call, you mentioned taking a look at all the ancillary and industries surrounding executive search to maybe assess the attractiveness of those. Is there any kind of update in terms of how you view the spaces contiguous to executive search, given the fact that you have a really ample balance sheet and the resources to potentially expand into those?

We, as a firm, continuously look at both those -- into businesses within our core, the executive search industry, and beyond the core, as well, if they make sense from a client perspective. We have been doing that for the last 9, 12 months, and we're going to continue doing it. But it has to make sense. We've set the bar fairly high in terms of the Highland acquisition. Touch wood -- so far so good, as you see by the results.

But we will continue, and I think you'll see more over the course of the next six to nine months some of the exciting things that we're doing as an organization to differentiate ourselves. But we continue to figure out ways to return capital to shareholders, and we will continue to do it. So all I can say at this point is stay tuned, but we continue to look at new and exciting things to do as a firm.

In terms of assessing the liquidity that you'd like to maintain on the balance sheet, any change as far as your thoughts there?

Sure, let me address that. First of all, we've always said about $40 million or $50 million. Let me break that down for you. That's the amount of cash we really need as a base to run the business. About $23 million of that is restricted cash, for a number of reasons -- it's places where it's difficult to get cash out without paying a significant penalty, or it's areas in which we have cash in escrow. So if you add to that about $1 million a country, that comes up with about $50 million in total that you need just for working capital and to run the business.

So in terms of needing cash on the balance sheet, really, our working capital needs are only about at that level. So we are very dedicated to returning cash to shareholders. As you can see, we have been very disciplined about the stock repurchase.

Michel Morin, Merrill Lynch.

I was wondering, how should we think about the impact that the recent consultant attrition will have on gross margins? I define gross margins as revenue minus the salary and compensation benefits. Should we expect to see any change there as a result of culling the lower producers?

Well, there may be some change. The issue is that, again, we're trying to run a business here with now 400 consultants. So on the one hand, we made those moves specifically, frankly, to make our margin objectives in the quarter and to make sure, as Kevin mentioned, that we had the right people in the right spots. There are many morale issues around taking people out of the organization who are not performing. But it is something that we thought about in terms of improving the gross margin by, frankly, not having that salary and benefits expense.

I was asking the question because I guess I was a bit surprised to see that the gross margin was down year on year, even if you strip out the $1.2 million. So it would be fair to assume that your objective still is to move that number up over time?

Yes. I think again, your point is a good one, but we're trying to manage high growth rates and profitability and do that very strategically. That requires some investment, and you're going to see some pressure on the margin and gross margin as a result of that.

I was also wondering -- given the voluntary departures, I was surprised to see that on your comp slide there was no item for the RSU forfeitures.

Well, the RSU forfeitures under 123(R) are not accounted for that way now. There's a forfeiture rate that you set at the beginning of the year, and it is impounded into how you account for RSU expense. Before 123(R), if you had forfeitures they would run back through the P&L. That doesn't happen anymore. So unless we had a very significant change in forfeitures, we would adjust that rate annually. You are right; prior to 123(R), you would see that come back through the P&L as a credit, but that's not true anymore.

Finally, the cash bonus accrual -- it seems that as a percentage of fee revenue, it seems quite high. It's like almost 23.4% or so. Is there anything special going on there in terms of where the profits are coming from? Is there any reason why that number is a tad high this quarter?

Well, I think we always have the issue in our business that our best performing consultants -- and I know you understand our compensation system -- actually have a percentage takeout that is very high. So if our high performing consultants are overperforming, their bonuses will be higher and their percentage takeout will be higher. So there's nothing that's particularly unusual about the accrual, other than we're doing well, our consultants are doing well. Again, we're looking at this as an estimate on a quarter-to-quarter basis. That estimate becomes actual at year end. But it still is an estimate, a judgment, at this point.

Finally, if I may, you mentioned in the release that you are seeing higher professional service fees. I was just wondering what those were.

Well, they are really everywhere in the organization. It's a question of some of our tax planning, which, obviously, our tax position has been quite complex. It has to do with some fees in terms of enhancing our HR processes. It's a number of things; it's no one particular item. We're not really spending any money on outside services for Sarbanes-Oxley. In particular, that has now been impounded into our own processes.

But we're growing business, and as such, we need to invest in our people in processes. So yes, our professional service fees are higher. Some of that also includes our Board of Directors fees. Like many companies, we have raised those over time to be appropriate and commensurate with the market.

Andrew Fones, UBS.

I was wondering if you could talk about your headcount goals for the second half of the year, hopefully where you expect the consultant count to be at year end.

We're going to be very systematic in terms of hiring for the second half of the year because, as I'm sure you are aware, going out and hiring ad hoc can impact the margins. So we're going to be very systematic in terms of looking, as we mentioned before, from a geographical perspective in places in Central and Eastern Europe, maybe Russia -- Asia, where you see 67% growth and we need to meet the demand there by clients, as well as the gaps that we have, going back to somebody's earlier comment about our portfolio of practices. Right now, we have gaps in the energy space, media and asset management.

So it's a matter of finding the right individuals that can fit in culturally and also add value right away to organization. So we're not going to go out and hire numerous consultants. We're going to be very specific about the hiring that we do for the next six months.

Obviously, that impacts productivity. As I think about productivity, I see the consultants splitting their time between finding searches and filling those searches, productivity at $1.5 million in the second quarter. Do you have any concern that productivity at that level could impact growth? Or what are your plans or what are your goals in terms of productivity and where that could perhaps go over the next 18 months?

Well, one thing to bear in mind is that -- and I'll let Eileen touch on this as well. One thing to bear in mind is that we've added a significant, significant number of consultants over the last 12 to 18 months. Our number-one goal as a firm -- and this dovetails with the question earlier about growth in North American -- is on average, it can take 12 to 15 months to get a consultant up to speed, which is why, going back to the comment about driving the practices versus geographies, is getting consultants up to speed through the practices, getting the consultants up to speed through key accounts and making sure through our new training and development program that we do everything we can to ensure that those numerous consultants we have hired over the last 12 to 18 months can add value to the organization and help in terms of the increase in productivity we've seen over the last quarter.

I would just add, that's an average. So we have many consultants who are driving revenue at much higher levels than that. Also, remember that our fee per search is a piece of that, so that 10% increase or so that you're seeing year over year in fee per search is driving productivity as well.

So given that we have a number of people who are well ahead of that number of $1.5 million, I know we've gotten this question before whether or not that's sort of the ceiling in terms of productivity. Given the components of productivity, particularly fees per search, and the fact that we have focused very much on giving our consultants tools to be as productive as possible, I don't see that as a concern.

Finally, just on confirmation trends, I noticed that the year-over-trend there -- and I know confirmation can be quite volatile. But that slowed a little in Q2 to 18% from 33%, I think, in Q1. Do you have any thoughts on that, any practices, regions or industries and so forth that could have caused that?

Actually, confirmations in Europe, I think, were a little better second quarter than they were first quarter. We saw Financial Services a little bit slow in the first quarter. It was better in the second quarter.

This is not, as Kevin said, a stair-step business. So you're going to have, on a monthly or a quarterly basis, a little bit of movement. Confirmations are certainly important, but in terms of forecasting revenue, Andrew, it's really part of the whole picture. It has to do with our backlog as we start the quarter. It has to do with where those confirmations are and what is the level of fee that we're receiving. Then the other piece of it is we have something called upticks, which is when we do a search at a certain level and then that fee may be increased, because the person who is placed actually receives a higher bonus and base salary than we earlier anticipated.

All of those things combine, along with the revenue deferrals. So confirmations is certainly a key indicator, but one among many. We still see very strong demand for our services.

Mark Marcon, R.W. Baird.

I just had a couple of quick follow-ups. One question, Kevin -- when you talk to your clients, what are they saying about how they view the economy? I'm talking about your domestic clients. How do they view the economy in terms of six months from now? Do you have any of those sorts of discussions, and if so, what are they saying?

Absolutely. Many of the discussions we have go out 6, 12 and 18 months. What we're finding more and more is, when we sit down with organizations that come to us and say, "Okay, we have growth plans either by region or by business unit in Europe, Asia, United States, et cetera. How can you help us across the globe deploy your assets as a firm to make sure that you can help us find the talent that we need to drive our businesses?" So on top of these conversations, we do have discussions on how they view the market.

I think, overall, there is a tremendous amount of optimism in terms of growth internationally as well as domestically. At the same time, you have a lot of other assets that are affecting the market as well. You have, over the course of the demographics, you have over the course of the next few years, 45% of Baby Boomers that are going to retire. There's going to be huge demand there. In Europe, given the birth rates, you have the same thing happening. You have about 75 million less Europeans over the course of the next 20 years, 65 million less Japanese. You have the cultural Revolution in China that happened in the mid-60s. We are missing a whole gap of management talent there. On the other end of the spectrum, you have a whole generation coming through that apparently is going to have 14 jobs by the time they are 38 years old.

So we're seeing tremendous amount of interest from clients in terms of not only how we go out and attract talent for them, but how we help them and consult them in terms of retaining and developing their talent as well.

But long story longer, I think that there is a lot of optimism out there across the globe internationally and domestically here in the US.

As you think about the business over the next five years or so, clearly, there's big disparities in terms of economic growth. We've all seen the trends particularly in Asia-Pac, and then we've got the demographic picture in both North America and Europe. When you think about investing in terms of adding consultants and how your ideal mix of business looks, how should we think about the various regions? Particularly, I guess, what I'm getting to is you've had tremendous growth in Asia-Pac. How big can Asia-Pac become? How big can Europe become as an overall percentage of your business?

We're close to 55%/45%, and I'll let Eileen touch upon that. But one thing to keep in mind is 95% of our business in Asia-Pacific today is with multinational companies who are looking to expand into that region.

Where we're going to see and what we're excited about seeing is -- where we will see exponential growth in Asia is when you have the Japanese, for the first time in 15 years, are looking to expand internationally. The Koreans, the Chinese -- we are just on the cusp of helping those organizations expand their businesses, both in Europe and North America. But today, our business in Asia, excluding the Australia/New Zealand region, is 95% multinational companies, those American and European companies who are looking to expand. So you'll continue to see tremendous growth in Asia-Pacific, from a search perspective.

At the same time, as I referred to earlier, we still have tremendous potential in Germany and in France and in Central and Eastern Europe. So we're also exploring the Middle East right now. So I think, more and more, you will see, as a percentage of our revenue, increase outside the United States.

I would just add, obviously, the US is an enormously important market for us and has been historically. But we have a much more balanced portfolio. There are a number of secular trends that are really overcoming day-to-day economic trends in the general business community that are really inuring to our benefit. I think that's one of the many things driving our growth rates.

Could you see a day where your international revenues could actually end up being 70% of your business or 65%?

Well, the US growth rates have been very strong. As I think someone previously said, we were having some trouble accelerating growth in the US. We have now really accelerated that growth engine. So this is a very important market, the US market, for us. It really remains to be seen. We see opportunity in all of these regions. So yes, that's a possibility. But again, we're seeing very strong growth rates in the US right now as well, and in the Americas generally.

Mike Carney, Coker & Palmer.

A few quick follow-ups. First, Eileen, on I think it's slide 27, there's a graph that talks about the practice group growth rates that I think is probably a new graph. But on there, Financial Services is actually the lowest grower outside of Technology. You had mentioned that you thought, in the second quarter, that Financial Services had grown a little bit faster. Was that a guess, or were you talking about a trend that Financial Services has grown faster?

What I was mentioning, actually, was specifically in terms of Europe. Someone asked a question regarding confirmations. I think that Europe's confirmation trends in general were better in the second quarter than the first quarter. Some of that is driven by the Financial Services business in London, which was a little bit soft in the first quarter and came on much better in the second quarter.

In terms of the lowest growth rate, understand that there's a big base. So the fact that their growth rate was a little lower than others -- they are working from a very large numerical base. So it doesn't concern us that Financial Services grew a little less quickly.

One thing to bear in mind as well is how we used to define technology. Technology used to include Media and Telecom, Business and Professional Services and the Internet. What we've done to better serve our clients is we have segregated this now. We have a separate group for Business and Professional Services. We've put Media and Entertainment into Consumer Goods. So whereas, before, Technology used to be a huge practice for us, it was all-encompassing; it encompassed, excuse me, the Internet, Media, et cetera. So now we've divided and split those out.

Does that graph -- do you happen to know if that includes the acquisition?

Yes, absolutely.

Secondly, there has been a couple of executive recruitment acquisitions globally. The valuations are just super low for to five times EBITDA, for what appears to be pretty strong companies, mostly in Asia. Obviously, you are looking at acquisitions all the time. Do you think that when you go look at the acquisitions over there -- and they are all, obviously, small acquisitions. But do you find that when you do your due diligence, that it just doesn't work out and that has been one constraint to acquisitions? Or is there other reasons why you wouldn't make an acquisition if you could find a cheap one that fits?

Well, maybe I can give you an example of something that happened recently. We were looking at a couple of acquisitions in Asia, and we had the opportunity to lift a team of individuals out versus acquiring the whole firm. Again, it dovetailed nicely with our business out there. So there's a lot of different reasons that these don't work out, and some may be the valuation. As you know, in a buoyant market, people get unrealistic expectations. Again, we have to protect our shareholders and we have to protect the organization.

So we will continue to look at them. Asia is a very nascent business, so you have a lot of Internet startup recruiting companies, as well as a lot of contingency firms. So right now, at the executive search level and the level in which we want to operate in that region, there are not as many search firms as you would imagine.

It's not a mature industry in Asia. So I think you may be seeing low valuations there because of the kind of business that you are buying. We have to look at lots of acquisitions to be able to come up with something that works. We were very fortunate with Highland; it has been very successful. We got some great people. But this is a people business, and we have to make sure not just that the numbers work, but that we have integration plans and that, culturally, it's going to fit.

We also always look at a buy versus build. We are looking at things like boutiques, and we think about whether or not we should actually just hire people rather than buy businesses. So we always are disciplined in terms of looking at that, both on the financial side and to make sure there's a good cultural fit.

Let's say, if you found something in an emerging country like India. Is that a place that you look, emerging countries like that, even though obviously it's a non-mature market and your average fees, your lower productivity all would be much lower than you have on a global basis? Is that a constraint because of that, or are you still willing to look at those?

Those countries are very important to us, and we continue to hire and we look at acquisitions there. I think it's a question of finding high-quality acquisitions in those countries. So they're important to us. We have invested in India. We invested in other areas where our fee per search is not as high, but they are important parts of our business.

So we are not constrained by the fact that they are working on a lower fee level. It's finding a quality acquisition that will work.

There are no further questions at this time.

Well, in closing, I would just like to again reiterate my thanks to our employees across the globe. We're excited about the fact that all three regions, four regions, really performed. We've seen margin expansion in all of them, and we're excited about the next six months. Thank you all for your time today, and have a great week.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.