Heidrick & Struggles International Inc (HSII) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2008 second quarter conference call. At this time, all participants are in a listen only mode. Later we will conduct and question and answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host today, Julie Creed, Vice President, Investor Relations. Please begin.

Good morning, everyone, and thank you for participating in our 2008 second quarter conference call. Participating on the call today are Kevin Kelly our Chief Executive Officer, Scott Krenz our Chief Financial Officer, and Jim Andrejko our Vice President and Controller. As a reminder, we will be referring to supporting slides that are available on our website at heidrick.com and we encourage you to follow along or print them. As always, we advise you this call may not be reproduced or retransmitted without our consent. We will be making forward-looking statements and ask that you refer to our Safe Harbor language contained in our news release and slide one of our presentation. Now I'll turn the call over to you, Kevin.

Thanks, Julie. And thanks to all of you participating on our call today. Before I get started with the discussion of the second quarter I would like to take a minute to officially welcome Scott to the Company ask and introduce him all to you. Although Scott's official start date was August 4, we are fortunate he has been integrating himself into Heidrick and Struggles for the last month.

If you are following along with the slides we posted on our website, I'm going to start with slides three through six. We are pleased to be reporting another quarter of growth both year-over-year and sequentially. Consolidated new revenue in the second quarter was $169.5 million, up 5.9% compared to last year's second quarter and up 10.7% compared to our first quarter. On a constant currency basis net revenue in the quarter was up approximately 2% year-over-year. Net revenue in the Americas region was down 1.4% compared to last year as a result of softness in the consumer goods practice and to a lesser extent, continued softness in the financial services practice. But the technology, industrial and nonprofit practice groups each achieved double-digit year-over-year growth. Compared to the first quarter net revenue in the Americas increased by almost $10 million or 12% driven largely by strong performance in the financial services practice. Europe's net revenue is up 1.7%, although down approximately 7% on a constant currency basis.

All of the industry practice groups in this region achieved double-digit net revenue growth except financial services, which declined year over and was the one area of softness. Sequentially Europe's reference new in the second quarter was about the same as the first and like in the Americas the financial services practice also realized a sequential increase in revenue. Asia-Pacific achieved another record net revenue quarter up 50.6% on a reported basis or about 41% on a constant currency basis. The financial services, industrial, technology and business and professional services industry groups were the largest contributors to growth. And compared to the first quarter Asia-Pacific's net revenue increased 27%. Since there are very few generalizations we can make about any industry practice in either quarter or in all three regions this year we think slide seven is helpful in showing how each practice group is performing year-to-date compared to last year's first six months. Every industry practice group except financial services is growing.

Turning to slide eight, consultant's head count was 408 at June 30 and at the end of March, compared to 398 at the end of last year's second quarter. In the quarter, we added 19 new consultants primarily in the Americas region. 13 are experiencing a surge, including six through the acquisition of Schwab Enterprises and IronHill Partners and the other six were new to search. But offsetting these additions in the last quarter, were six consultants who left as part of our ongoing productivity review and five who were reclassified to working as affiliates in our Portuguese operation and there were a few others who resigned or retired. Year-to-date, voluntary consultant turnover is very low. Approximately 4%. And no surge consultant has left our firm this year to join another firm or start their own.

Turning to slides nine and ten, executive search confirmations in the second quarter were down 2.1% compared to last year's second quarter and decreased 2.5% on a sequential basis. On a monthly basis, confirmations have been very steady so far this year, with no big infections. The July trend that is expected, given the summer holiday season.

Moving to slide 11, productivity or analyzed revenue per executive search consultant increased to a new record of $1.6 million with improvements in every region compared to last year's second quarter. Increasing productivity has been one of our major initiatives over the past year and a half, and we have every intention of continuing this effort.

Looking at slide 12, the average fee for executive search was $122,200, up 10% compared to last year's second quarter. The year-to-date average fee per search is also up about 10% compared to the first six months of last year. Referring to slides 13 and 14, second quarter operating income was $18.7 million compared to $19.5 million last year, and the second quarter operating margin was 11% compared to 12.2%. Now I'll turn the call over to Julie to go into a little more detail in some of the light items that are key to operating income and regional results.

Thanks, Kevin. Turning to slide 15, salaries and employee benefits expense in the second quarter was $117.3 million up $6.6 million or 6% year-over-year. As a percentage of net revenue, salaries and employee benefits were 69.2%, the same as in last year second quarter. Of the increase, fixed salaries and employee benefits expense accounted for $4.7 million and performance based compensation accounted for the remaining $1.9 million. The increase in fixed expense was primarily a function of the 9.4% year-over-year increase in our worldwide head count. The increase in performance related compensation expense mostly relates to higher bonus expense as a result of higher net revenues levels. Total stock based compensation expense in the quarter was $5.9 million, which is down compared to $10.5 million in last year's second quarter. This decrease largely reflects a change to our 2008 compensation program. As we discussed on the first quarter conference call, starting with 2008 bonuses, which are payable in March of 2009, the portion of consultants and management's bonus that was previously paid in restricted stock units will now be paid in cash although still deferred over three years. The accounting treatment is fairly unchanged so it is neutral to the P & L. Another reason for the decrease from stock based suspension expense is that in last year's second quarter it included expense associated with the accelerated vesting of restricted stock units for our former chairman who retired.

Turning to slide 16, general and administrative expenses in the quarter were $33.5 million an increase of $3.7 million compared to last year's second quarter. As a percentage of net revenue G&A expenses were 19.8% compared to 18.7% last year. Similar to first quarter results, the year-over-year increase is primarily related to an increase in premise related costs for new offices and lease renewals since last year's second quarter. Including among others New York, Hong Kong and Tokyo.

Looking at slides 17 and 18 our net income was $12.7 million in diluted earnings per share of $0.72 reflecting to quarterly reflected tax rate of 38%. It is a bit difficult to compare these results to last year second quarter when we had and effective tax rate of 2.3% as a result of our decision to release evaluation allowance related to certain of our foreign tax credits. That gave us a tax benefit of $8.5 million in the quarter. You will note we have narrowed our expected 2008 full-year effective tax rate to a range in between 38% and 40% down from 38% to 42%. This is primarily because we have honed our forecast for the mix of book income expected from each jurisdiction based on the first half results. But also reflects that we are no longer planning to incorporate the foreign branch we were considering for 2008, which as you know would have had a associated discrete tax charge.

Kevin gave you insight into revenue trends in each of our three regions both year-over-year and sequentially, so I'm going to provide color on the operating margin in each region starting with the Americas on slide 20. Second quarter operating income in the America was $12.6 million, which is down 35.3% year-over-year and the operating margin was 14.4% compared to 22% in last year's first quarter.

The decrease in operating income and operating margin is attributed to lower net revenue and increased salaries and employee benefits and an increase in G&A expense. The increase in salaries and employee benefits expense reflects several items. The largest is an increase of approximately $1.8 million of discretionary compensation associated with mix of consultants who were generating revenue in this region and Scott will explain this expense further in a few minutes. The increase in salary and employee benefits also reflects expense associated with the amortization of new long-term incentive awards that didn't exist in 2007. Severance for consultants and several others who left as part of our ongoing review of productivity, an increase in associate leverage and support staff head count. The increase in G&A expenses in the Americas region largely relates to premise related costs and renewal of leases for existing offices. The largest being New York.

Now turning to Europe on slide 21 operating income in Europe increased 4% to $7.7 million and the operating margin improved 14.4% compared to 14.1% last year The increase in net revenue of $0.9 million in the quarter and a decrease in salary and employee benefits expense were offset by an increase in G&A. The decrease in salary and employee benefits expense is due to lower discretionary compensation and a decrease in consultant head counts since the second quarter of '07. But the increase in G&A it largely relates to our European meeting, which was held during the second quarter and to a lesser extent, increase in promise related cost and other operating and infrastructure expenses.

Finally, turning to slide 22 in our Asia-Pacific region, operating income of $6.6 million increased 27.3% year-over-year and the operating margin was 22.7% compared to 26.8% last year. The increase in net revenue in the quarter of $9.8 million was partially offset by an increase in salary and employee benefits expense and to a lesser extent an increase in G&A expense. As we discussed in first quarter call the increase in expenses generally reflects the investments we have made in growing this region over the last year. In the past year total head count in this region has increased approximately 34% and we have grown our consultant head count by 36%. The timing of these hires, as you know, means additional fixed costs without corresponding margins as they get up to speed. The decrease in margin also reflects higher infrastructure costs related to the leases for new and existing offices since lasted year's 2Q. As we said on the first quarter call we will leverage these investments now to drive revenue and margin. In fact, the improvement in this region's operating margin from 11.9% in the first quarter to 22.7% in the second quarter partially reflects this expected improvement in consultant productivity.

Thanks, Julie. The outlook for our business is based on multi-dimensional prospectus from each region, industry practice, functional practice and individual consultant. As a global company we continuously combined these views in order to determine what our business will achieve in 2008. Secular trends, demographics, growth and emerging markets and continued turn over in the C-Suite no matter what the economic conditions are all drive the need for executive recruiting and leadership services. That is why we believe this is a growth business. Some industries might be softer than others and some regions tougher than others but the strength of our business model lies in our global footprints. And revenue is on target as of this date to fall within the range of $650 million to $660 million.

As for the operating margin, the entire management team remains committed to achieving approximately 13%. Since being appointed CFO, Scott has been focused on our cost structure and potential for cost savings. I would like to turn the call over to him. To give you an update for our specific initiatives.

Thank you, Kevin. First, let me say how excited I am about joining the Heidrick & Struggles team and how pleased I am to be able to participate in today's call. As you have heard our net revenue is still on track to fall within guidance. Although with two quarters completed we have narrowed the range from $650 million to $660 million. On the cost side, we have had several significant unexpected expenses this year. We will need to offset these increases in order to achieve our target operating margin of approximately 13%. The biggest of these expenses is compensation expense related to the mix of consultants who are producing the revenue. As you know in our business, and in many consultant-driven businesses, the compensation model, at its basic level, is that the more revenue you generate for the firm, the higher percentage you keep as compensation. This year, there is a wider discrepancy between the number of consultants generating very high revenue and those working in the lower tiers. So to date we have accrued approximately $3.5 million in additional compensation expense for this reason.

Another expense we are looking to offset is approximately $1.5 million in severance. Much of which relates to the former CFO. So to make this up, and to protect the firm from future economic uncertainty, we have increased our focus on cost savings initiatives. We have made progress on the initiatives we have discussed with you earlier in the quarter but have recently instituted additional cost saving initiatives. These include restrictions on travel, so only travel required to generate revenue or that is necessary for the current operation of the firm will be allowed. A new approval process was implemented to assure the effectiveness of this policy. We are postponing until 2009 or in some cases eliminating, all industry, functional practice, training and corporate meetings.

Finally, every finance, IT, marketing and training project or open position, whether capitalized or expensed, is being evaluated, as we seek to delay or eliminate what is not necessary. The exception is the new search system. This project will not be deferred, as we believe it is critical to the firm's future.

At this time, we estimate the savings from these additional initiatives could reach $8 million or more. It will be a challenge to fully realize the cost savings and to achieve our operating margin goal. But this is a priority for me and it is a priority for the Company. We want to execute the plan that our executive committee set forth for 2008. And I know that we will benefit for the increased discipline and sharper focus on the expense structure. Of course, we can't predict the future. And our expectations assume there is no further significant deterioration in the economic conditions in any of our regions. In any event, these actions we are taking are the prudent thing to do.

Thanks, Scott. I hope that we have conveyed we think this is awe a growth business. Our global footprint, our brand and focus and work at the Board and CEO level gives us comfort in this outlook. While aggressively pursuing meaningful cost savings in order to pursue our goal for operating margin, we will continue to invest in our business so Heidrick & Struggles emerges from the economic cycle to be the leader in every practice and in every region. At this point we would be happy to take any questions you might have.

(OPERATOR INSTRUCTIONS) Our first question comes from Kevin McVeigh with Credit Suisse.

Thank you. Nice job on second quarter. I wanted to focus on the guidance a little bit. You have reduced the high end of the range by $10 million. Can you give us a sense of where that's coming from? Is it across the Americas? Europe? Is it pretty consistent? Want to get a sense of where you are seeing trends.

Kevin, how are you? It is primarily in North America at this point. We are still seeing growth in each region. Asia-Pacific as you saw. Europe continues to be strong and even in America it continues to be -- we continue to see demand for our services. It is just we have narrowed it a little bit North America, which reflects the $10 million.

In terms of -- you had said part of the incremental cost or higher comp accruals. Where is that focused? Is it primarily more senior surge executives generating additional revenue? Or why the incremental accrual? Is that pretty consistent with what you have seen in previous cycles?

This is actually it's a little rare this year. And we are seeing it across the board. Historically, we have seen it in North America to a greater degree. But, given our investments over the last couple of years, and given the number of consultants we have hired in each region, and given our continued focus at working at the top, we are seeing it across all four regions today. Europe, Asia-Pacific, Latin America and here in North America.

Okay. One last question and then I'll get back in the queue. The $8 million. Is that an analyzed savings? Or just in the second half of '08? And is that in addition to earlier cost savings or in aggregate?

It is both. This is Scott.

Hey, Scott, how are you?

It is both. Related to the second half of the year and it is additional.

Great. Thank you.

Our next question comes from Andrew Fones with UBS.

Yes. Thanks. I was wondering if you could tell us what the impact of what IronHill was in the quarter. I think it was in your results for maybe about a month. And what the impact is in your full-year guidance, for revenue? Thanks.

Andrew, we don't break it out that way. But I can tell you that we are excited about this acquisition. These guys have been a hit internally from a cultural perspective, but also in leveraging the Heidrick brand and getting together with a lot of our functional practice leads as well. So it's been a great impact. It's early days yet. But we just don't break out that revenue.

Okay. Thanks. And then in terms of getting from your current operating margin of 11% to the guidance of 13% for the year, you are currently running at 22%, 23% in Asia-Pac. Where should we expect the margin improvement to occur?

I think -- sorry, Scott.

Hello, Andrew. You don't seem to be able to lose me, here. We are always talking. But it's going to be across-the-board. I mean, these initiatives we have taken are global in nature. And the entire leadership team, irrespective of what region you are in, is committed to them. So I expect to see the results happening across the entire globe.

Okay, thanks. And welcome, Scott.

Next question comes from Tim McHugh with William Blair.

You mentioned head winds in getting to your operating margin guidance. Excluding those two items you mentioned would you otherwise being feeling good about being able to hit targets for the year or is there otherwise something holding you back right now?

Hi, Tim, it is Kevin. I think given the current environment we'd be confident in hitting the 13%. You know it is interest reflecting on some of the comments we have seen over the course of the last couple of days. But you know the front page of the Financial Times last week, and this is what we are seeing from many of our clients, shows Morgan Stanley is going on a $1 billion recruitment spree. And what we are seeing across the globe, the Chicago Tribune last Sunday, I know you are here in Chicago, Tim, talked about the number of Wall Street bankers that are moving to Chicago now. So their organizations view this as a once in a lifetime opportunity to get the best-in-class professional they can to execute and drive their strategies and we are not only seeing that in North America, but we are seeing it's cross the globe. This provides a huge opportunity. I know what the unemployment rates predict. And I know what the labor markets what they are saying. But at the same time you do have work organizations looking at this as an opportunity to upgrade or top grade their employees.

Okay. And is it fair, it's kind of -- I can eyeball it from the chart. Year-over-year July seems relatively flattish at this point, is that about right?

Yes. I mean, you can eyeball it from the chart. The confirmations in July they trend how they have for many years in terms of July, post-June and summer holidays. So slightly down from June.

Okay. And then, last call, you talked about a backlog kind of ending coming out of the first quarter. Do you have what that would be for the second quarter?

We had a more significant backlog, given the December firms coming in. I don't have that, we can get that number to you, if you hold on for a second, Tim.

Okay, then while you look for that, if actually the financial services sequential strength in the US, if you could give a little more color on that too, that would be helpful.

Sure. If you recall on the first quarter call, we talked about investments we were making and how we were using this as an opportunity to capture market share, particularly in the areas of financial services where we didn't have critical mass. We did make those investments in the first quarter. And we are seeing the results really hitting our books in the second quarter. And I think we'll continue to see that through the course of the next year. Not necessarily just in financial services, but also in other industry practices as well.

Also, you know, given financial services, bonuses are paid in March and you have seen this historically over the last couple of years. You know, you have investment banks or banks looking to recruit after they lose individuals based on their bonus payouts. So they tend to join some time in May or June, so you're seeing the impact there.

In terms of the backlog it was roughly $73 million going into the first quarter. We have about $71 million going into, excuse me, into the third quarter, Tim.

Okay. And then lastly, I guess especially with Scott having joined your views on share repurchases going forward at this point?

Tim, why is that especially since Scott's rejoined? I'm not --

Every CFO has a different view.

Every CFO has a different view. That's not something I think consistent with this Company and consistent with just about every company I have been associated with. Not something we talk about in advance. That's a decision which gets made based upon investment opportunities the Company has in front of them, as well as you know what we think will be ultimately the best thing for the shareholders. As you can see from our press release, we do have $28 million remaining under our authorization. And we know it's there and will do the right thing.

Great. Thanks, guys.

Next question comes from Tobey Sommer with SunTrust Robinson.

Thank you. Wanted to follow-up on the last question. You talked about after typical bonus season in financial services people moving and that makes sense, was the typical seasonal pattern of what you saw in April and May similar to previous years?

Tobey, yes. We have gone back the last number of years and taken a look at what happens in financial services. And you do see an increase in revenue in the May and June time frame, primarily because when you book a search it can take anywhere from three to four months. We also have the uptick as we have discussed before, the differential between what the perceived compensation is and what the actual compensation is once the individual joins.

Okay that makes sense. In terms of head count, which was kind of held flat sequentially, what's your outlook there over the next several quarters? Just kind of philosophically? Are you tightening the screws on productivity? Despite the fact that productivity actually improved pretty nicely, any additional scrutiny you will be applying to any underperformers within the group?

If you recall last year, 2007 was the first year Heidrick & Struggles actually went through a performance review and took out a group of underperforming consultants. And we'll continue to did that on a quarterly basis. What we have talked about consistently is if, for example, we get to remain at 409 and drive productivity from 1.6 to 1.8, we'd be extremely happy with that just continuing focus on making our consultants more productive.

However, we don't think that's realistic, particularly if we want to capture market share. There are areas media and entertainment, asset management, energy, diversity, technology where we can go out and recruit individuals in this market we are going to continue to do that. Particularly in some of the emerging markets like central and eastern Europe, Russia, Middle East, and parts of Asia such as India and China, we'll continue to recruit there. I think it is a two-pronged approach of driving productivity and continuing to recruit consultants that can actually add value to those areas that aren't presently covered.

One more question and I'll get back if the queue. When you when looking at your ample balance sheet at this point, a lot of things in front of you. But on the M&A front, I was wondering if you could comment about whether private valuations for opportunities seem to be coming in? And whether the sellers are being influenced by an outlook that might include a potential increase in the capital gains rate next year? Thanks.

I think that's a long way around to say we are finding a, correct me if I'm wrong, Tobey, but I think what you're asking is were you expecting a better M&A environment with people looking to close transactions to avoid the taxes? Is that your question?

That would be one of the questions. And then any comment you can have about sellers's expectations coming down with public market valuations in addition to that, that would be great.

Whether better valuations -- You continue to look at acquisitions primarily in those areas that are going to help us grow the business and give a better return to shareholders. To a degree, Tobey, what we are saying is the same thing that you know is happening to us. We continue to drive revenue across the globe. You have a lot of boutiques we are looking at others organizations who continue to see strong results in these markets. Although coming down somewhat, they haven't come off significantly. At the same time it depends on the organization, whether or not they want to get the transaction. Of course they like to get it, given the reference to the tax implications next year. But of course they would like to get it closed this year if possible. But going into 2008, if we see an opportunity on the acquisition front that's going to help our business, we'll take a hard look at it as well.

Thank you very much.

Next question comes from Mark Marcon with Robert Baird.

Good morning, Kevin and Julie and welcome, Scott. On the recruiting environment, can you talk about what the distinct challenges are in terms of recruiting experienced consultants to come over at this point in the cycle and how you look at that? There are some people who would argue that we are at the peak of the current cycle and that things are likely to slow. When you look at how much you are going to pay somebody when you should go after them, how do you think about that?

Well, Mark, first of all it's Kevin. I hope you are well. The way we look at it is have to fit a specific niche at Heidrick & Struggles. Specifically, what I mean by that is, we can't go out and recruit somebody from a direct competitor if they are working for a different client base. Because it would be like hiring a consultant that's new to search. The ramp up speed for them would be 12 to18 months. What I mean by that is we work for a select group of clients and we have an off limits issue with those clients. So for example, if we are working for three consumer goods organizations as a firm, and they happen to be a direct competitor working for three different organizations, then they would come over here and not be able to work with the same client base, because we are already engaged in and involved with working with three global or strategic partners at Heidrick & Struggles. So it's a long way of saying that when we go out and we are consistently looking at recruiting great consultants here, we have to make sure they fit a specific niche that is not covered by our consultant base right now. That is why we are continuing focus on recruiting MBAs, promoting from within and developing our own consultants as well.

I guess what I was trying to get all the was, many people will argue that we are at the peak of the cycle and that things are starting to roll over. What I'm trying to understand is to what extent, if you believe that, to what extent does that influence the additions that you would bring into the organization?

If it helps, I guess one of the ways to look at it, are we overpaying to bring somebody in at this point in time? You never know. I mean, it's the perceived value or the value we actually get out of hiring somebody, and whether or not, under the Heidrick brand, we can drive significantly greater amounts of revenue. So at this point in time, we are systematically -- we have a great recruiting process in place a great talent in place. We don't want to overpay for anyone in this market but if we can leverage their experience and their client base, then we'll bring them into the firm.

It doesn't sound like you would pull back in terms of recruiting, based on where we are cyclically at this point.

Not for the right people.

How about on the acquisition front? Would you pull back or would you?

We are continuing right now to look at acquisitions as we speak.

Okay. In terms of Europe, can you talk a little bit about the trends that you saw there? It looked like on a constant currency basis, we were down 7%. Did that worsen as the quarter progressed? Or how should we think about that?

I don't have the answer right now on that. Mark, I can get back to you on that. But specifically what we are seeing in Europe is continued demand for our business. We are seeing great demand in some of the emerging markets in central and eastern Europe. Russia is continuing to grow, and even as we have spoken about before, countries such as Germany and France we see continued growth and demand there. So, it was only financial services that was off and it was off year-over-year.

Okay. And that was probably primarily located in the UK?

Right.

Okay. So it sounds like everything else continues to do well. Just have a few pockets of weakness and it sounds like we should be able to offset that.

We believe so. And just going back to Europe, even with FX, the margin improved from 14.1% to 14.4%.

Okay. Great. I'll jump back in the queue.

Thank you.

Next comes comes from Michel Morin from Merrill Lynch.

This is David [Ridley Lane] for Michel. Looking at consultant head count in Europe, can you provide color around that and also any outlook you have around head count in Europe?

What were you looking at specifically in terms of head count in Europe?

Consultant head count in Europe fell. I forget the number of heads quarter-over-quarter.

About six (inaudible) -- the same thing happened in Europe has happened in North America. We continue to review consultants that aren't as productive as others. We had six. One thing to remember is also five of those consultants, as I mentioned in the call earlier, were part of our Lisbon operation that is now an affiliate. So although still engaged or involved with Heidrick & Struggle, we moved them off full-time status into affiliate status. That was five out of the six you are referring to.

Is that review of the lower productive heads review sort of done now? Or is that continuing?

It's going to be ongoing. Last year we did it over a period of six weeks. We decided that as any good organization will do or continue to do, we want to do it on an ongoing basis.

And then could you explain some of the puts and takes on the Asian margins this quarter?

Well, I think you saw as we had spoken about in the last call, we made a significant investment in people in the first quarter. And we were also hit by some of the real estate or renewed leases we took on in Singapore, Shanghai, Sydney, Tokyo and Hong Kong in the first quarter. So what you are seeing now is the investments, David, that we made in Q1 following through into the second quarter. And we are continuing to grow the business out there and I think you'll continue to see that trend.

Right. So as the revenues grow, you would expect further operating margin expansion throughout the rest of 2008?

Yes, we would. But we are still continuing invest in the business. As you can imagine in one of the fastest-growing regions in the world, real estate continues to be a challenge there. So we will continue to see margin expansion, but we want to make sure we invest in the business as well.

All right. Thanks.

Next question comes from David Feinberg with Goldman Sachs.

Good morning. One point of clarification. Your prepared comments about Europe, about financial services being the only end market down year-over-year, are you talking on a constant currency basis or on an as-reported basis?

As reported.

So if I look at it on constant currency basis, how do those numbers change?

Well, I could apply the same exchange rate to every single practice. But --

None of them to I guess the question is, none of the other practices turned negative, correct?

Everything was up except financial services.

Okay. Thank you.

Next question comes from Clint Fendley with Davenport.

Good morning, Kevin, Scott, Julie. Circling back to the July confirmations, recognizing that July is typically down on a seasonal pattern, could you guys provide any more details on a geographic basis as to what you are seeing out there?

Sure. I mean what happens, Clint, having spent three years in Europe, I can attest to this, most Europeans go on vacation in July. To the tune of two, maybe three weeks. We have seen that year-over-year and August tends to be vacation time here in North America. So the confirms are directly impacted by the vacation season each year. And just as a point of clarification, we still saw strong results in North America and Asia and they were just where we expected them to be in Europe, given the vacation season.

Was there anything different or unusual in the financial services area this year just apart from the typical, seasonal pattern that you would expect?

No. Not so far. Again, alluding to the Financial Times article last week about Morgan Stanley and the Tribune article, we continue to see demand in financial services.

Kevin when we look at the weakness that we are seeing in the financial services area, it feels similar to the down turn we had in technology a few years ago and we still have growth in most all areas. But significant weakness in one single vertical. I mean recognizing that you weren't leading the firm back then, I mean, how do you see Heidrick managing differently this time around? If you could speak to just your views on the retention of your search consultants? Especially if you consider the possibility of a prolonged down turn here.

Clint, you are asking me one of my favorite questions. The financial services -- you look at our technology practice -- and I was with the firm in 2000. If you look at our financial services practice today, it's a much different business than our technology practice was in 2000. Number one from a geographical perspective. Number two, technology was $150 million business in 2000, of which $75 million to $80 million of that was Internet driven. And that is a completely different business than we are seeing in investment banking, capital markets, asset management, et cetera. So you had a number -- we had approximately 90 to 100 more consultants at the time. They were -- our Menlo Park office had 40 consultants at the time chasing mostly dot-com searches. So it's a completely different business. When that Internet business went away there was a direct impacted to the correlation to the results we saw at that period in time.

If you look at what we have done as an organization from a management perspective over the course of the last three to five years we have really focused on our cost base. You can see that by being very prudent in the hires that we have made. We have a training development program in place that I think second to none in the search industry and that's in all four regions. We have hired some great people over the last couple of years. We have driven productivity up from $1.2 million to $1.6 million over the course of the last four years. We are focused on making sure the margins we see the margin expansion in Europe as we are committed to 14.2% we believe we will get to the high teens and we continue to drive that margin there, while simultaneously focusing on capturing market share. So there is a huge difference in our technology -- what happened in the technology practice in 2000 versus what's happening in financial services today. If we were going to see a similar thing happen, we would have seen the financial services practice fall off a cliff about six months ago as it was perceived to, not seeing the growth that we have seen sequentially, quarter on quarter here in 2008.

Thank you.

Does that help?

Very helpful, yes.

Next question comes from Andrew Fones with UBS.

Yes, thanks. A quick follow-up. I guess it looks as though across your practices -- technology and education accelerated from Q1 to Q2 in terms of the year-over-year growth, while the others kind of slowed. Can you talk about what was driving the strength in technology and education? And if you wish to comment on the other practices that would be great, thanks.

Andrew, one thing that we consistently do is we look at our portfolio of industry practice and his functional practices. When you are skewed toward one such as financial services, we want to make sure and our goal is collective goal, not only as an executive committee but a management committee is to have a broader spectrum of industry practices. Last year we realized that you know our technology practice wasn't as strong as it had been historically. Heidrick & Struggles was known for its technology practice. Our life sciences practice wasn't as strong as it had been or could be. And our education nonprofit practice. So if you look at the investments we have made across the globe, vis a vis people and our recruitment effort and our go to market strategy or key account strategy, we are very proud of what we have accomplished. Not only in life sciences under Graham's leadership but also under [Verna Pank's] leadership in technology particularly here in North America we have added six new consultants in technology and a lot of it I attributed to getting back to basics, going after our key accounts and delivering a better relationship management capability with our clients. And that is something we'll continue to do. Will financial services remain at 33% of the firm? Probably not. That's not because financial services is going to fall off a cliff. That is going to be because we continue to invest in those areas that we don't have the strength that we believe we need across the globe.

Okay. So in terms of kind of what does appear to have been a difficult quarter in Q2 last year, but a very strong quarter perhaps for you, this year in Q2 for technology, you would attribute that mostly to kind of the hires that you have made?

We hired a new global head of technology from a competitor last year. We hired a number of consultants in Asia, and in North America and technologist and in Europe. So it's adding bench strength and covering those clients we haven't historically covered.

Okay. Thank you.

Our next question comes from Tobey Sommer with SunTrust Robinson.

I was wondering if you could quantify the contribution of the incremental cost savings initiatives that you have instituted for the back half of the year? In other words, to try to get a sense that the contribution that has to the 13% operating margin for the full year? Thanks.

I think we stated, and we expected to be $8 million or more in the second half of the year here. All of which we expect to drop to the bottom line. I'm not sure I want to get into the granularity of how much of that is going to come from travel and other areas, other than to say that in our business, obviously compensation or anything related to open positions and stuff is our biggest expense, and travel is right up there as well, as a -- an area where we can do much better. Get people off the planes and on phones and on video conferences here. But beyond that, getting into which one is going to contribute how much, I really don't want to get into that level of granularity.

Fair enough. In terms of the ranking of your costs, obviously human capital compensation is the largest. Is travel kind of third behind real estate, generally?

It's down there. Real estate is clearly number two. Real estate is obviously something we are going to look at but that's in the a short-term item. That is something, which I think there is a lot of room for improvement, which we will rule out next year, frankly over the next couple of years, given the nature of real estate. Travel falls right into the next category. I think travel IT spend are probably pretty close to each other in sort of the next level of spend but that's a fairly significant step down from real estate compensation.

Thank you very much. Appreciate it.

I am not showing any other questions at this time.

I would like to say thank you for joining the call today. Scott, welcome to the firm and I would like to thank all of our consultants across the globe who continue to make a significant impact not only for Heidrick & Struggles but for the regions in which we operate. So thank you all and we are excited about the business and the next six months. Have a great day. Thank you, ladies and gentlemen. Thank you for your participation in today's conference.

This does conclude the conference. You may now disconnect. Good day.