Heidrick & Struggles International Inc (HSII) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your 2008 third quarter conference call. (OPERATOR INSTRUCTIONS.)

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

Good morning, everyone, and thank you for participating in our 2008 third quarter call. Also participating on the call today are Kevin Kelly, Chief Executive Officer, and Scott Krenz, our Chief Financial Officer. 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 that this call may not be reproduced or retransmitted without our consent. We'll also be making forward-looking statements on today's call and ask that you please refer to our Safe Harbor language contained in the news release or on slide 1 of our presentation.

And now, I'll turn the call over to you, Kevin.

Thanks Julie.

Given what the U.S. and other countries' economies have gone through over the last year and specifically in just the last couple of months, I am satisfied with the third quarter results we are reporting today. It's not the year that any of us were hoping for, but we are managing quite well.

If you are following along with the slides we've posted on our website, I'm going to highlight a few things about our third quarter and year-to-date results starting with slide 2.

Consolidated net revenue in the third quarter was $158.3 million, down 2.8% compared to last year's third quarter. On a constant currency basis, net revenue in the quarter was down approximately 5% year-over-year. The Life Sciences, Technology, Industrial, and the Education/non profit industry groups all achieved year-over-year growth in the quarter, but their growth was offset by declines in Financial Services and, to a lesser extent, in Business and Professional Services, and the Consumer Goods practice was flat year-over-year.

Net revenue also declined sequentially compared to the second quarter, but we've seen a third quarter decline in the past as a result of summer vacations, especially in Europe, and this year the Olympics had a noticeable impact in the Asia Pacific region.

Turning to slide 3, net revenue in the Americas was down 0.2% or essentially flat compared to last year's third quarter. The Technology, Industrial, Life Sciences, and Education/non profit practices each achieved double-digit year-over-year growth, but this growth was offset by softness in Financial Services and Consumer to a lesser extent.

Referring to slide 4, Europe had a slow quarter, but it's an especially tough comparison to last year's third quarter which was a record for this region. Net revenue in Europe declined 14.6%, or approximately 17% on a constant currency basis. Although the Life Sciences and Consumer Goods practices achieved double-digit year-over-year growth, it was offset by declines in Financial Services, Industrial, and Business and Professional Services. Recall that as of April 2008, our Lisbon office is now an affiliate and this represents $5 million of the year-over-year decline.

Referring to slide 5, net revenue in the Asia Pacific region grew 18.2% year-over-year, or about 15% on a constant currency basis. It was the second best quarter in the region's history, and on a rolling 12-month basis we are now the largest executive recruiter in this region as measured by net revenue. Every industry group except the Technology practice achieved year-over-year growth in the quarter.

For the first nine months of the year, compared to the same period of 2007, consolidated net revenue increased 3.2%. Net revenue in the Americas region was down 2.9%, up 1.7% in Europe, and up 33.3% in Asia Pacific. As you can see from slide 6, all of our practice groups except Financial Services achieved growth in the first nine months.

Turning to slide 7, consultant headcount was at 416 at September 30th. We are still investing in the business by strategically hiring consultants in regions and sub practices that are growing. In the last year, we have added a net 23 consultants, 15 of which we added in Asia Pacific. Year to date voluntary consultant turnover is still very low, under 5%.

Turning to slides 8 and 9, executive search confirmations in the third quarter were down 4% compared to last year's third quarter, and decreased 11.8% on a sequential basis. On a monthly basis, confirmations were fairly steady until July and August, when we started to see a slowdown, some of which was expected. Because July and August are heavy vacation months, we wanted to wait for September confirms before drawing any conclusions.

But when September confirmations didn't return to the levels we were expecting it confirmed our thoughts about softening demand. And, as a result, we revised our reforecast for 2008. And although there are only a few days left in the month, October confirmations are tracking very similar to September.

Moving to slide 10, productivity or annualized revenue per executive search consultant was $1.4 million, compared to $1.6 million in last year's third quarter, not really all that surprising given the lower revenue in the quarter.

Looking at slide 11, the average fee per executive search increased to $127,200, slightly higher than last year's third quarter, and the year-to-date average fee per search is $118,200, up 7.2% compared to the first nine months of last year.

Referring to slides 12 and 13, third quarter operating income was $20.9 million, compared to $25.5 million last year. And the third quarter operating margin was 13.2%, compared to 15.6%. The decline is primarily a result of lower revenue, but also reflects an increase in salaries & employee benefits expense.

Now I'll turn the call over to Julie to go into a little more detail on some of line items that are key to driving operating income and the regional results.

Thanks Kevin.

Turning to slide 14, salaries and employee benefits expense in the third quarter was $108.6 million, up $2.0 million or 1.9% year-over-year. The increase was driven by an increase in fixed expenses of $9.5 million as a result of a 9.5% increase in headcount since last year's third quarter. It also reflects higher fixed salaries for associates and search support staff. The increase in fixed expense was partially offset by a $7.5 million decrease in variable expense, or performance-based compensation, which largely reflects our lowered expectations for 2008 net revenue and operating margin. Total stock-based compensation expense in the quarter was $6.2 million, which is down compared to $7.6 million in last year's third quarter. As a reminder, this decrease largely reflects the change to our 2008 compensation program whereby 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. Now, turning to slide 15, general and administrative expenses in the quarter were $28.8 million, a decrease of $2.0 million compared to last year's third quarter. This year-over-year decline largely reflects the absence of several items that we recognized in last year's third quarter totaling $4.1 million, including professional fees, legal fees, and an impairment charge that did not reoccur in this year's third quarter. This was partially offset, though, by an increase in premise-related costs for new offices and lease renewals since last year's third quarter, including among others New York, Hong Kong, and Tokyo.

But compared to the second quarter, third quarter G&A expense was lower by $4.7 million and was a record low 18.2% of net revenue which reflects the positive impact of our cost containment initiatives.

Looking at slides 16 and 17, net income of $14.0 million declined 13.3% compared to last year's third quarter, but diluted EPS declined only 4.8% to $0.80 on a slightly lower tax rate and a 9.3% year-over-year decrease in diluted weighted average common shares outstanding, primarily reflecting our share repurchases over the last year.

Kevin already gave you insight into the revenue trends in each of our regions, so I'm going to provide color on the operating margin in each region. Looking at slide 19, in the Americas third quarter operating income was down 18.6% year-over-year, and the operating margin was 17.1%, compared to 21.0% in last year's third quarter. The year-over-year decline in operating income and operating margin is attributed to an increase in salaries and employee benefit expense and an increase in G&A expenses.

The increase in salaries and employee benefits expense reflects several items, including higher fixed expense for search associates and support staff, which I explained earlier, as well as for severance expense. The increase in G&A expenses largely relates to premise-related costs and lease renewals for existing offices, the largest being New York.

Operating income in Europe decreased 26.7% and the operating margin was 15.9%, compared to 18.5% in last year's third quarter. And the decline in operating income and this resulting operating margin in the quarter is largely a result of the lower net revenue, which Kevin explained earlier.

In the Asia Pacific region operating income increased $508,000 or 10.3% year-over-year, and the operating margin was 20.5%, compared to 21.9% last year. The slight decline in operating margin primarily reflects investments made over the year to grow this region.

In the past year, total headcount in this region has increased approximately 26%, including an increase in consultant headcount of 25%. This translates into additional fixed costs without corresponding margin as consultants get up to speed. There are also higher infrastructure costs related to leases for new and existing offices since last year's third quarter to accommodate our growth.

Turning to slide 21, I'd like to highlight the 13.1% decline in Corporate expenses year-over-year and 20.6% sequentially, compared to the second quarter, again largely reflecting our cost containment initiatives.

And now I'll turn the call over to you, Scott.

Thanks, Julie.

As we released on October 14th, our current forecast for the year is net revenue of approximately $630 million and an operating margin of approximately 10%.

In our last call we outlined some of the cost savings initiatives we had implemented. These initiatives have had a significant, positive impact, much of which is reflected in G&A.

Most salary and benefits expense is fixed, but there is also a variable or discretionary component that was reduced as a result of our lower expectations for the year. Unfortunately, the full benefit of our cost savings has been more than offset by our lower revenue expectations.

As for lowering fixed costs, these are harder to reduce in one or two quarters but remain a key priority. The Company has made significant progress in improving its cost structure since the last downturn, but there is still more we can do and that we plan to do.

We are in the middle of our 2009 budgeting process. As you would expect given the considerable economic uncertainties, this has not been an easy exercise. We will not complete this process until approximately mid-December. Therefore, at present we are not in a position to provide 2009 guidance. However, I did want to give you some insight into what we are seeing so far.

First, and most importantly, at present as we look into 2009, we are not seeing a dramatic decline in demand. Yes, certain countries and practices are slowing, but then others are expected to grow robustly.

Other search firms that are not as diversified as Heidrick are not weathering this storm as well as we are. This opens the possibility for investment at very attractive prices. This includes both investments in people, as well as acquisitions. But let me assure you we'll be cautious, but we still do not want to ignore this opportunity.

Lastly, as we plan for next year, we are maintaining a strong focus on costs. This means continuing many of the programs we began in 2008, but also taking a hard look at everything from real estate, to how we deliver our services. We want to stay as lean as we can but at the same time improve our platform to support future growth.

Our financial position is solid. Net cash provided by operating activities in the quarter was $61.0 million, our cash balance was $183.0 million at the end of the quarter, and we have no debt.

We repurchased fewer shares in the quarter in order to conserve our cash in these market conditions, but we have the flexibility to continue to repurchase shares, pay a dividend and invest in our business where we see opportunities to enhance our growth and market position.

Kevin, I'll turn it back to you to close.

Thanks Scott.

Just a few other thoughts before we open it up to questions. When we released our second quarter results at the end of July and we reiterated our guidance, it reflected our forecast for the business at that time. As we all know, visibility into the economy wasn't great, and I knew that our top and bottom line goals would not be easy to achieve.

But I wanted our Company to do everything in its power to meet our commitments and so our Management Team took some very specific cost cutting initiatives that, based on revenue of $650 million to $660 million, would allow us to achieve those goals.

Given the unprecedented turmoil in the economy, our business has slowed since July and our ability to achieve our original goals for net revenue and operating margin seem unlikely.

I know it's easy to focus on the doom and gloom of economy and, in particular, the Financial Services industry where you all work, but our business has not stopped and the sky has not fallen.

As you've seen, confirmations for the month of September were up 9% over August confirmations, and October confirmations look very similar to September. Achieving $630 million in revenue this year would represent growth over last year, and that's something many thought we could not achieve. Fortunately, we are not the same Company that we were in 2001.

One reason is that we are much more diversified. We serve our clients in 33 countries, 20 plus industry sub sectors, and 11 c-suite functional practices, many of which will achieve record results this year. They will achieve records because we've invested in the people to help us gain market share and because there is a shortage of management talent throughout the world despite economic conditions.

Heidrick & Struggles has been around for 55 years, and in that time, as today, we have demonstrated strength and resilience. This is a growing business, with demographic and secular drivers that will fuel this Company for many years to come.

The acquisition and development of leadership talent is not just a business-critical situation any more, it is country-critical to each of the world's major economies. Organizations around the world need top leadership talent to manage through good times and through bad.

At this point, we'd be happy to take any questions you might have.

(OPERATOR INSTRUCTIONS.)

Our first question comes from Andrew Fones with UBS.

Yes, hi. Thanks. I was wondering if you could give us a little more color in terms of the revenue guidance for the year of $630 million? What your assumptions are there in terms of currency impact, seasonality, normal seasonality? And then kind of any impact you've seen from the recent economic weakness that we're experiencing? Thanks.

Andrew, this is Scott. I think Kevin can jump in here where he wants, but let me take a crack at it and start. I think when we put out the guidance of $630 million for the year, I mean we have factored into that the weakness we've seen from the economic conditions, and I think that's weakness which we saw manifest itself in the third quarter, and that in fact is factored into the fourth quarter, which is pretty much, you know, you can do the math as well as I can, flat with the third quarter. So it basically is projecting that the level of confirmations and revenues are approximately in line with what we saw in third quarter.

As a seasonality, as we noticed recently we have in the third quarter you get a lot of vacations and a lot of disruptions, the Olympics this year, there are a lot of those things which impacted the third quarter. And obviously in the fourth quarter we've got the holiday season. But in some respects those almost wash with each other, which is sort of why we took -- we consider the two to be roughly equivalent to each other.

Kevin, do you want to add anything to that?

Oh, I just would add that we still see significant growth in certain parts of our business across the globe, be it by practices, such as technology, alternative and renewable energy, the practice is up significantly year-over-year, technology is up 25%.

We see tremendous growth still in Asia Pacific, and a lot of the recruits that we put in place the end of last year and the first quarter of this year will start hitting their stride or have hit their stride in the third quarter going into the fourth. Central and Eastern Europe, the Middle East and Russia still are -- we still see high levels of confirms coming through.

So I think in aggregate if you put those two things together we're confident right now with that $630 million number, Andrew.

Okay. Thanks. And there was just one other part to that, if you could just comment on your currency assumptions? Thanks.

Is that after last night? I mean, yes, I used to trade currency way back in my dim, dark past here. I've, in many senses I've given up trying to predict which way it goes. I mean that's a tough thing to do.

I mean essentially we have assumed that there isn't any significant impact in the fourth quarter and where we are in the third quarter. And anybody who wants to take a prediction at that, give me a call because I can make a lot of money off that if you can get it right.

Okay. Thanks. And two other questions. SG&A, I was wondering if you could just kind of talk about how you're feeling in terms of the sustainability of the SG&A we saw in Q3, whether we should expect that to remain kind of steady? We could see some further reduction in the fourth quarter, or whether there -- it was, you know, for any reason there could be an increase?

And then in terms of the share buyback, you said you've kind of pulled back a little bit on that during the third quarter, and I was just wondering what your thoughts were regarding continuing that in the fourth quarter? Thanks.

Okay. SG&A is sustainable. I think the short answer is yes. We -- the actions we took are not things which are the type of things which are -- represent panic or change. I mean these are solid business decisions we made to pull back on some things in this economic environment, and I think we're confident we can sustain that.

Going forward, as I said, we'll be looking at impacting some of the very large spend items we have in real estate, continuing to look at travel and how we can make, be much more effective in our use of travel. Continue to look at our IT spend, another large area we spend money on.

So I suspect there is room in the future to actually improve that, and that will be our goal. I'm not going to quantify that for a very simple reason, and that is that we're not far enough down the path to really, to have a good quantification other than, no, that there's -- it's pretty clear that we have some room for improvement there.

As to the share buyback, I think three things drove our thinking. One, in this market, as I'm sure everybody on the phone is far more sensitive to than we are because you live it everyday, I mean this is a market trading not on valuation, there's a lot of emotion in it. It just seemed like we wouldn't be certainly supporting the stock price, we'd be pushing against just almost a Tsunami here of emotions and stuff. That was one factor.

The second factor was it seemed clear to us that the bias was much more down than up, and why would be buying it at $30 a share or $28 a share when we're at $19 today, it just didn't seem to be a smart thing to do.

And then the last thing is what I mentioned, and that is they are uncertain times and I think like a lot of companies out there we're husbanding our resources and keeping our cash.

And I think it's doubly important for us because as I said a lot of firms out there are not doing as well as we are, particularly boutiques and stuff, and it does put us in a position to make judicious investments and spend some of that money to grow this business and really support the platform we've got.

And, Kevin, I don't know if you want to--?

No, I think you covered it.

Okay. Thanks for that.

Our next question comes from Kevin McVeigh with Credit Suisse.

Hi. A quick thought, Scott, you had framed out kind of $8 million of benefit from SG&A savings, did you reach that goal, exceed it, and have you undertaken any additional initiatives as you work your way through the fourth quarter?

The short answer is yes, I mean that's always sort of a difficult number to do it, because the business is dynamic and it's constantly changing. But in the main we are comfortable we're on course to achieve the $8 million.

We haven't taken any additional actions in the near term here, but that doesn't mean we're not thinking and not, in fact, thinking about the other things we should do in this market and in this economy going forward in the next year.

Some of those I've mentioned, other are, you know, I mentioned in the script taking a look at how we deliver service, support costs, real estate, just about all the spend items we've got. And we will be taking a real hard look at that as we go into next year.

Great. Then in terms of the discretionary comp, it looks like there was a decrease there, how should we think about that for the rest of the year in terms of the bonus accrual? Could it be lower or what are your thoughts on that?

At this point, we're confident, Kevin, with the $630 million, and like any other strong professional services firm our people are assets. We've got to make sure that we do what's right not only for the shareholders but we protect our assets as an organization, and we need to continue to look at paying people who perform in this organization to weather the end of this year as well as take us through 2009. So at this point, we don't have any idea, excuse me not any idea, we don't have any -- our objective isn't to decrease the bonus pool further.

Great. Thanks, Kevin. And then just one other thought, the industrial practice has been pretty strong here. Given the way oil has come off, do you see any incremental headwinds around that, or is there any type of, kind of price, oil price that you think would impact the hiring decisions within oil -- energy or some of the oil services clients?

I was going to say not in the ARE side, so given the volatility of oil it's no surprise that the other sectors, the alternatives and renewable energy sector is massive, and we're seeing a lot of recruitment in solar, wind, biofuels, energy efficient type of organizations, as well.

So I think it's more than offsetting the drop in oil at this point in time, and that's one area of our business that continues to grow and we're looking to expand, be it Canada, be it Australia, be it parts of Europe and North America, and it's really continued to grow for us.

The Technology practice, again, our investments that we made at the end of 2007 have paid dividends. We're up 25% year-over-year, so it's continued focus as we -- we don't want to make the mistake that we made in 2002 and just focus on the cost side. We're using this, as Scott mentioned, we have a rock solid balance sheet. We want to use this, Kevin, as an opportunity to go out either by region and, or by industry and capture market share, and we have the opportunity to do that now and invest in some of these industry groups.

Great. Thank you very much.

Our next question comes from Michel Morin with Merrill Lynch.

Yes, good morning. Kevin, I think in the prepared remarks you mentioned or maybe it was you, Julie, the impact of the Lisbon office in Europe. Could you similarly mention or go over kind of the impact from recent acquisitions? I think in North America there were a couple, if I'm not mistaken. How much did that contribute to the top line and to the confirmations?

Sure, I think we can get back to you on -- we've had great results from IronHill, the venture capital group that we brought onboard. In fact, two of the consultants are in the top 30 at this point and have really hit the ground running. 75 Search, the asset management boutique ...

It wasn't till August.

... and it wasn't till August, but they've started to get some traction, as well. And this placed, to Kevin's question earlier, Michel, about looking at opportunities in sub sectors of our business where we can continue to grow. I mentioned the affect of Lisbon. It was -- I think it was 6.6%, if I recall correctly, it was about $6 million that impacted our results in EMEA.

Yes, the decline in EMEA would have been, if you took Lisbon out of both sides of the equation it would have been approximately 7% down as opposed to I think 15% down in round numbers.

But, Michel, the other acquisitions we've done to date haven't been to that level of significance.

Okay. Well, I guess I'm asking really if I focus on the worldwide confirmations chart, slide 9, you mentioned, Kevin, that your decision regarding the outlook being lowered a few weeks ago was in large part driven by your observation of how confirmations were trending kind of in September.

But when I look at this chart it actually looks like you did better than you did a year ago. So I'm a little bit surprised by that, and it looks like October is holding up really well. So am I missing something maybe in terms of the mix of new confirmations coming in at a lower fee per search, or what else is happening?

Sorry, to interrupt you. Actually, if you look at the average fee per search it's up year-over-year. What we're seeing and August is always a tricky month, Michel, because you don't know what's going to impact the number of confirms, is it vacations in Europe, is it vacations in North America. And so we saw August creep down, but then we bounced back in September, and we're looking to be fairly consistent in October, as well, which hence the fact that we're confident with the $630 million figure that we gave you.

And we have seen over the course of the last two or three weeks a lot of activity across the globe, so we're just hoping that continues. And but these are uncertain times and we don't know what's going to happen going into 2009.

Right.

But part of the answer is your reference point was last year, which is an appropriate reference point, but when we were talking about how it matched up against our expectations and our internal forecast.

Right.

So that was our reference point.

Right. Okay. All right, that's fair. Thanks very much.

Our next question comes from Tim McHugh with William Blair & Company.

Yes, I wanted to ask first on the margins, better than expected this quarter, so the question is on the fourth quarter here, you talked about some of the SG&A reductions being sustainable going forward, that implies a fairly low gross margin as far as I can see it in the fourth quarter here. Is there anything unusual going on there or any other color you perhaps could provide?

No, I think the important thing is to note that the third quarter margin is higher than sort of the natural running of the business because we took the discretionary bonus down in that quarter. Had we not done that we'd have been somewhere around between 9% and 10% versus the 13%, which I think is pretty much more than sort of the normalized margin we're running at that level of revenue.

Okay. And then was there any severance that you -- or the press release mentioned some severance expense in the third quarter, is there anything meaningful there or as we move into the fourth quarter here?

Yes. Hey, Tim, it's Kevin. What we're continuing to do, if you recall last year 2007 was the first year that we've been taking action on underperforming individuals across the globe.

And instead of having one hit as we saw the second quarter of 2008 we've been making a conscious effort to make sure that we're consistently looking at how people perform in this organization and moving them out accordingly. So I think that's what the severance refers to in the third quarter.

Moving forward we'll continue to do that, and as Scott mentioned in his remarks we're going to continue to focus on costs and see if there's things that we can do better as an organization going into 2009 given the market conditions.

Okay. And, lastly, if I could ask about within Financial Services, while that practice is down, Private Equity seems to remain particularly strong for you guys. Can you give a little more color on what you're seeing there and how sustainable is that going forward?

Oh, absolutely. What you're seeing is the best way for private equity firms to give a great return to stakeholders is by having the right leadership in place, and given the times that we live in, different types of leaders can get better results, so we have seen turnover at the c-suite and our Private Equity practice is continuing to be extremely strong.

I mean, Tim, also our Financial Services practice was up in Asia Pacific, so we are still seeing strong demand out there, and Financial Services firms are using this as an opportunity to, particularly some of the second tier firms, historically some of the regional banks, and even some of the international firms from Russia, the Middle East, and China are looking at this as an opportunity to hire top talent.

Having just come back from China, there's a couple of organizations that are looking to hire 100 to 200 top bankers from New York, if we can get them to get over there, or London. So we're still seeing a lot of activity there, as well, but continued demand in private equity.

Okay. Thank you.

Our next questions from Tobey Sommer with SunTrust Robinson.

Thanks. I was wondering if you could comment on the fee growth, which was very good in the quarter, given the relative decline in Financial Services, it's kind of lucrative, I was wondering if you could give some color on kind of how you drove that average fee higher?

One thing to think about in Financial Services is the fact that despite an investment banker losing his compensation or seeing a decrease in compensation from, say, $2.5 million to $1.5 million, we are capped, Tobey. So most of our Financial Services searches are capped at $350,000 to $500,000, so despite again a decrease we wouldn't see a significant fall-off in pricing in Financial Services.

Part two of your question is we continue to move upstream, and what we've seen globally is continued, and you've heard us bang this drum for a number of years but we don't need job creation although we're seeing it in the Middle East and Russia and China, we need job churn. And you're seeing a lot of job churn at the senior levels of organizations, and there continues to be a supply, demand issue, so we've moved up scale, excuse me, upstream or continue to move upstream and see the revenue per search increase.

Thank you. Along those same lines to follow-up in kind of the uncertain economic times and challenging ones as we look into 2009 would you expect that intrinsic turnover rate to maintain itself at the current levels or would you expect there to be some sort of pro-cyclical decline?

Well, it depends -- pardon me -- it depends, again, on what we see in the market. Are we going to see other mergers or acquisitions take place? If so, our leadership consulting business continues to take off in terms of assessing the senior leadership teams of these organizations.

And then we're seeing, it's a tremendous trend or a trend towards internal versus external candidates, so a number of the CEO searches we're doing we'll have two to three internal candidates, and they're asking us to provide two to three external candidates. So we're getting paid not just for a one-off CEO search, but for a two-year cycle of assessing leadership teams of organizations.

Going into 2009 I think we'll continue to see a trend of activity in the M&A and also the acquisition front which, again, will lead to more search activity across the globe for us.

We're also seeing the advent of our Asia Pacific business starting to export work more to North America and to other European countries and looking for leadership talent to drive their strategy in organizations and we're on the cusp of having that happen, so we will continue to see that as a trend going into 2009.

Thank you. That's very helpful. Two other questions, and I'll get back into queue. On page -- on slide 6, where you have the change in revenue in some of your practices for the full nine months, would you be able to share any highlights for how those practices performed within the third quarter specifically, or is that something that's better handled offline?

I think we maybe ought to take that one offline. As I mentioned in my remarks, every single practice except Financial Services is up year-over-year. We'd have to circle back to you on the quarter-over-quarter.

But in the quarter-over-quarter we do highlight for all three regions which practices were up and which were down, for each region, and consolidated in the press release.

Okay. Thank you. And then the last one was you mentioned the Olympics having an impact on the third quarter, and confirmations were up in September and October. Specifically in China were confirmations up in September and October? Did you kind of bounce back from that pretty nicely?

We did bounce back, and I would say not only in China but other parts of -- I can't even say northeast Asia, I'd say all of Asia-Pacific is -- and to that degree had a lot of individuals across the globe going to the Olympics. So we have bounced back after that, and our China business continues to remain strong.

Thank you very much.

You're welcome.

Our next question comes from Mark Marcon with R.W. Baird.

Good morning. In terms of the October confirms, would that typically be up relative to September?

Well, you see -- Mark, it's Kevin -- how are you doing?

Good. Thank you.

We usually see this time of year becoming fairly active, specifically across most industry practices and specifically Financial Services as we move into the fourth quarter, they have an idea of what bonuses, payouts are going to be, as we've seen in the news the last couple of days. You have individuals looking at their business and strategy and budgets for 2009 saying, "Okay, what do we need to do to drive growth either across the globe or in a specific vertical in which we operate"?

So they start the recruitment process in November, December timeframe in order to get individuals onboard in early the following year. So usually we do see somewhat of an increase in confirms the last quarter of the year.

Now, December is something we're focused on, as well, and we have some activity going on internally on how do we drive confirms all the way to December 31st because, as you recall, we were short on confirms December 2007, and we didn't want to have that same -- we don't want to end up in the same situation going into 2009.

And but it sounds like in terms of October relative to September it was relatively flat and that would be suggestive of or consistent with the economic environment that we're in, is that correct?

Well, we don't know because usually it's tough to gauge. We have four days left in the month, and Asia Pacific always is very consistent with their confirms. Europe, you know, they have a huge flurry of confirms in the last three or four days, and North America, as well. So, and if I throw Latin America in there we see the same thing. So right now we're consistent with September if not a little bit better, but we have three days, four days left in the month.

Okay. You did a great job in terms of managing the expenses, but the one thing I was wondering about is with regards to the fixed costs, relative to discretionary comps, just the mix there and the change year-over-year, how do you see that trending?

What -- I'm sorry, Mark, are you talking specifically about the discretionary component versus fixed or in aggregate?

Right. I'm referring to slide 14 where fixed comp is about 70% of your Q3 salaries and employee benefits.

So how do we see that trending going forward?

Yes.

I would say that our focus as an Executive Committee and organization is to bring that 70% down.

So you would anticipate that next year it should be down a little bit?

Yes.

Okay.

It's also up, I mean the 70% represents a year in which obviously, as we've said, we've cut-back on the discretionary portion of this so that has an impact on the balance between the fixed and the discretionary.

Okay. And you mentioned what the total accrued expenses were but what was the actual bonus accrual?

Are you talking about what was reversed, or what are you talking about? Can you--?

The specific bonus accrual for this quarter?

Sure. Well, you can -- in the slide it was $33 million in cash was the bonus expense in the third quarter.

Okay. Yes, I saw that, and it said, "Includes bonus," so I didn't know if there was anything else that was in there.

And then what would you anticipate that the bonus payout will be when you get out to March from a cash perspective? I'm trying to figure out what your cash is going to look like for bonus?

Well, I think we're -- I think if you use the range of $150 million or so, give or take, you'd be in the right range.

And that would get paid out on March?

In March.

March, yes.

Okay. Great. And then just to make sure I heard correctly, your -- for the guidance you're basically assuming the same FX rate that was the average of the third quarter to be applied in the fourth quarter?

Yes.

Okay. Great. And then what's -- what are the areas that as you, it seems relatively obvious that economically things are going to remain challenging for at least the next three quarters. How are you going to, I mean philosophically manage through that, given that there's all sorts of debate in terms of how long we stay in a downturn? It seems like it's obvious we're in a downturn, it's just a matter of how long and how deep. So philosophically what are you going to use to kind of guide you through that?

Mark, a couple of things. First of all, going back to your currency comment, we'll reevaluate on a daily if not weekly basis. I don't think any of us expected the yen to go to 92, the sterling to go to 150, or the Australian dollar to 60 last night, so we'll reevaluate that, and that just happened in the last 12 to 18 hours, so we're on top of that.

Secondly, I've spent a lot of time talking to not only our consultants but our clients across the globe, and we know that we're headed for probably the most significant downturn that we've seen in a very long time, if not ever. And we want to make sure that we have a rock solid balance sheet, as Scott mentioned, we want to continue to focus on driving revenue across the globe, hiring the best people we can, and looking at potential acquisitions.

Simultaneously, these events also provide tremendous opportunity, and we will continue to look at how and if our business is the right size going forward for what we need, so we'll continue to have an ardent focus on our costs but making sure that we continue to be diligent about investing in our business because when this comes back we want to be well positioned to take advantage of that.

Great. Thank you.

You're welcome.

Our next question comes from Clint Fendley with Davenport.

Hi. Thank you. Good morning, guys. Most of my questions have been answered here. Kevin, one question, I mean a lot of talk now about capping executive comp in Europe and now obviously some extreme scrutiny around compensation in the U.S. How do you see this impacting your business going forward here?

Well, Clint, it's a fantastic question and one we get consistently. Now, if you look at the way we structure most CEO and Board searches, primarily CEO or c-suite searches, we have a fixed fee, so it's not based on comp. So if a CEO, I think the average CEO in North America got paid $11 million last year, we would get paid between $1 million and $1.5 million plus or minus on a CEO search. So it's still not the full one-third that we get for most executive searches.

In Europe, in the U.K., the average was about $5 million, $2.5 million, well, again, sorry, 1.5 sterling is somewhat a little outdated, but it was probably 4 million pounds on the -- excuse me, 4 million dollars for a CEO there. And, again, we see a cap of anywhere from 500 to 750 pounds. In Europe the average is a million Euros. So which holds true in Asia, there's a big decline in terms of what CEOs get paid.

So long story longer, given the structure and the way we charge for executive searches at the c level, at this point in time unless they come down to one-third, to one-quarter of where they have been historically we should not see a huge impact, particularly at the CEO level.

Okay. Thank you.

Our next question comes from David Feinberg with Goldman Sachs.

Good morning. Two questions. In terms of your comments earlier, and I think you addressed this several different ways but I figured I'd take a different tact. In terms of September confirmations and then ultimately October confirmations coming in below your expectations, can you give us a little bit more color? Was that across all regions and all business practices, or were some weaker? In other words, were the year-over-year trends that you discussed in the prepared comments, those that continued in September or was there any incremental change?

David, it's tough to gauge because they bounce around every month. I mean Financial Services could be strong the first two weeks of the month and then Consumer Goods could pick up the last two weeks of the month. I can say from a regional perspective Asia Pacific continues to be strong. North America and Europe continue to be, we still see huge demand there. Latin America continues to be strong, as well. So it's tough to gauge.

When we say off, it didn't fall off a cliff, so I just want to reiterate that we were up 8% or 9% from -- September was up 8% or 9% from August, given the vacations, and we look at October being the same. Falling off means going from 450 or 440 to 420, so it's not again falling off a cliff, going from 450 to 350, and we're continuing to see -- and we -- our forecast shows that we will see a fairly constant trend vis--vis confirmations going into the last three months of the year, the last two months of the year.

Got you. And then one final question, you talked about attrition rates running sub 5%, do you see any reason why that might tick up here as we head into yearend and as you look into '09? I apologize, I realize you've made some comments about '09, but my connection broke up a little bit.

No, no problem. I think what we conveyed, this is the lowest attrition in the history of Heidrick. We have made a concerted effort to look at how we perform as an organization, how our individuals at all levels perform. And we want to maintain having high quality people in the firm, so we will continue to move individuals out.

So the challenge is making sure that we can recruit top producers and make acquisitions as quickly as we move those who under perform out of the business and that's what we're focusing on going into, striking that balance, David, as we go into 2009.

Okay. Thank you very much.

You're welcome.

Our next question is a follow-up question from Tobey Sommer with SunTrust Robinson.

Thank you. I wanted to ask a question kind of about your philosophy of guidance. In the past couple of years you shifted to annual guidance, saying that looking at the business quarter to quarter might not be the appropriate way, but I'm just curious in these economic times if you might, as you start doing your planning for 2009 or I should say finish your planning, how you may approach that? Thanks.

Well, I think we've said before that it's easier to look at the year than it is a quarter, there's just so much volatility in it, and I don't think we've had any thoughts about changing the philosophy from where we are.

So even in the fluid market we're in, still maintaining a 12-month expectation?

Yes.

Thank you very much, appreciate it.

Our next question is a follow-up question from Mark Marcon with R.W. Baird.

Hi. With regards to upgrading the organization and taking advantage of the situation, obviously you have a terrific balance sheet, great brand name, are you able to bring people over to your Firm at a lower cost than you used to have to pay? Are -- and when you look at how you comp somebody or if you're giving a guarantee do you -- is it possible to change the normal metrics in a way that's more favorable to the Firm, given that the environment is obviously more challenging?

Well, Mark, unfortunately in this world I think whether you're a top investment banker or you're a top executive search consultant, if your top of your game, this market still provides opportunity, and we still see some of our consultants, top consultants in the Firm generating $7 million to $10 million in revenue. And, likewise, in some of the other organizations.

So I wish I had a solution or a magic potion to bring these guys over for less money because it would be tremendous for us, particularly as we look to capture market share, but we continue to look at competitors to fill gaps that we have as an organization. We will, if we have to, we're not going to overpay in this market but we need to structure a deal that makes sense for the organization, makes sense for the shareholders, and also doesn't kill our margin.

So we've been very fortunate for the last two years even in a fairly robust search market to bring on some top talent from other organizations and we've structured it such that whether it's them earning out over a two or three-year period or taking out more equity than cash, we've structured packages or comp packages in a way that they are beneficial to both us and the individual we bring onboard. So as we look to hire going forward we'll make sure that we continue to do what's right.

Can you talk about what percentage of your consultants would be recently hired and potentially have a more fixed kind of comp structure just because of guarantees as opposed to how much is fluid?

We can, Mark, I'm not -- I can't get on to that right now, I don't have the number in front of me, but given the hires that we've made it's not as significant as you think it may be.

I'm not sure what it is, and that's the reason why I was asking, I was just trying to get a sense for just how fluid that comp could be.

Well, I'm sorry, I don't have that in front of me, but if you want to circle back later I can try to dig that up with Julie and Scott.

Oh, that'd be great. Thank you.

Our next question comes Andrew Fones with UBS.

Yes, thanks. I had a follow-up actually to one of Mark's earlier questions about the cash balance and where that might be after you've paid out bonuses. I think so far you've accrued about $109 million in bonuses this year, and your cash balance is about $185 million, so of the kind of surplus cash you feel like beyond what you are due to pay out in bonuses, where is most of that located, what countries and what's it invested in, please?

Well, that's an easy one. Most of it is either in our U.K. Finance Company or in the U.S. As to what it's invested in, like I think a lot of companies, we have shifted our investments dramatically at the moment. About $100 million of that $180 million cash balance is in government securities of one sort or another, and the rest are in cash balances at banks. And we've made sure that the banks they're in are the ones that are the healthiest out there.

Okay. Thanks. And then could you give us just a general sense of where you think the cash balance might be after you pay their bonuses in Q1? Thanks.

Well, a lot of that's going to depend on how the fourth quarter comes in. Because that performance will determine how much we pay out in bonuses. We need to obviously discuss that with the Board, so I mean there's a lot of variables there, but I wouldn't expect fourth quarter to be a heck of a lot different than third quarter in terms of generating cash, we could give you sort of a yearend cash balance.

And I think we earlier said that a bonus number, order of magnitude $150 million, and I think you could figure it out. I'm just trying not to do the math quickly on a piece of paper here and make a mistake, so I figured I could shove it over to you, and you can use your calculator.

Okay. Thanks. No, yes, that's helpful. Just on currency, as we kind of think about which currencies you have the greatest exposure to, could you kind of give us a little bit of a rundown there, euro versus pound? And then in Asia kind of any significant exposures over there? Thanks.

Well, I mean we're obviously operating in 33 countries. I mean geographically you know that we have a significant business in the U.K. and in Europe, so Euro and sterling are probably the largest single exposures we've got in terms of foreign currency, but we also have an eye on all of the fast-growing Asian markets that we're in.

We look at that all the time. We try and get the cash pooled and back to where we can put it in our functional currency as quickly as we can, and where necessary we have entered into some hedges of pools of cash that we've got stuck out there. So I mean we're looking at it all the time but it's a very fluid situation, but certainly sterling, Euro are the major exposures.

Okay. Thank you.

Our next question comes from Mark Marcon with R.W. Baird.

Just one more follow-on along the same line as his question. Any payouts for acquisitions that we should think about in terms of cash balances and how it's going to look going forward?

Not until, Mark, not until March of next year.

March of 2009?

right. And that'll be the HP and I think Renton James is also -- has a small earn out potential, too.

Any order of magnitude in terms of the totals of those?

Yes, I mean I think we've -- yes, just to remind you all, I think based on our projections for Q4 -- well, remember, the total amount that we were subject to pay to Highland Partners, subject to their performance, was $15 million. In the last year we paid I think about $3.4 million, so they're eligible to earn up to $11.6 million, which we would pay out in March of '09, $11.6 million.

And that's pretty much it?

Yes.

Okay.

For Highland Partners that's it, yes.

Right. And for ...

Well, there's a small one for Renton James, so it's insignificant.

Okay. Great. Thank you.

There are no further questions at this time.

Well, thank you. First of all, I'd like to just thank everyone in the organization at all levels for what they've achieved in these uncertain times. I think we've done a great job internationally to make sure that we capture our share of market, so I'd like to thank all my colleagues around the globe.

And I would like to say that we're looking forward to continued issues revolving around human capital and how the demographics will affect our business going forward and how we capture that market share going forward.

So thanks for your time today, and I wish you all a great day.

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