Heidrick & Struggles International Inc (HSII) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Heidrick and Struggles First Quarter 2009 Quarterly Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I would now like to turn the conference over to Miss Julie Creed. Miss Creed, you may begin.

Good morning, everyone, and thanks for participating on our first quarter conference call. Participating on the call today with me are Kevin Kelly, Chief Executive Officer, and Scott Krenz, our Chief Financial Officer. As a reminder, we'll be referring to supporting slides that are available on our website at Heidrick.com on the Investor Relations homepage and we encourage you to follow along or print them.

As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we'll be making forward-looking statements on today's call and ask that you please refer to our Safe Harbor language contained in our news release and on slide one of our presentation. And now I'll turn it over to you, Kevin.

Thanks, Julie, and thanks to all of you who are taking the time to participate on our call today. If you are following along with the slides we've posted on our website, I'm going to start with slide number two.

Market conditions around the world continue to worsen more than we expected in the first quarter, and even with the benefit of favorable currency rates, America's revenue declined about 39% year-over-year, Europe was down about 35% and Asia-Pacific declined approximately 28%. All of our practice groups reported year-over-year declines of at least 20% in revenue and in the number of searches confirmed.

Looking at slides three and four, executive search confirmations in the first quarter were down 38% year-over-year and down 7% sequentially. We saw a modest improvement each month through the first quarter, but that improvement was not enough to make up for the weak confirmation levels in November and December. Given spring breaks and Easter, we would not be surprised if April confirmations are somewhat less than March, but we won't know that for a couple of days.

Slide five; total headcount on March 31st was 1,593, a decline of 9% compared to December 31st. Consultant headcount at March 31st was 403, compared to 408 a year ago and 419 at the end of December. 403 might be higher than you'd expect, given that we let go 37 consultants as part of the global workforce reduction in January, but there were also additions in the quarter.

As part of our annual promotions process, 13 of our associates became consultants in January. We also acquired seven consultants in February as part of our expansion into Eastern Europe, and we hired 11 other consultants in faster grower regions or practices.

We are acutely aware of the delicate balance between keeping the capacity that positions us for improving market conditions and reducing cost. Our strategy is to selectively add and keep high producing consultants while reducing costs associated with underutilized support leverage.

Looking at slide six, productivity. In the past we have reported productivity as search revenue in the quarter divided by the number of consultants in that quarter and then annualized that figure. However, beginning this year, we will calculate productivity as total net revenue in the quarter, not just search revenue, divided by the average number of consultants in the quarter.

The consultant numbers we disclose each quarter include consultants who only provide leadership advisory services, consultants who only provide executive search and consultants who do a bit of both. But given our increased focus on growing leadership advisory services and our holistic approach to talent management, we think it's a great time to start reporting productivity as total net revenue divided by all consultants. In this slide, we provide you with both figures going back to 2004, but if any of you would like the history on a quarterly basis, just please let Julie know.

In the first quarter, productivity was $900,000 compared to $1.5 million in the first quarter of 2008. The decline largely reflects much lower revenue in this quarter, but only a slight decline in the number of consultants which relates to our conscious decision to retain some excess capacity, but also as is typical in professional services firms, reflects the fact that the reduction in staff tends to lag revenue declines.

Turning to slide seven, the average fee for executive search was $98,900 compared to $106,700 in the last year's first quarter. As a reminder, this figure is calculated as search revenue in the quarter divided by search confirmations in the quarter. It is not the average of actual search fees confirmed in a quarter.

Although the decline therefore reflects the very slow first quarter, the economy is having an impact on our average fees per search as well. It is hard to generalize because the impact has taken on many different forms. In some cases, we have agreed to lower upfront retainers, but we'll make our normal search fee upon completion. In other cases, we have seen attempts to negotiate lower caps on search and for certain customers, we've agreed.

We have also seen some clients attempt to negotiate lower percentages of first-year compensation. All of these are reviewed on a case-by-case basis and as always, we are committed to supporting our clients in these troubled times. This means sometimes showing flexibility. However, nothing we've seen to date would indicate a fundamental change to the structure of how we are compensated.

Referring to slide eight; excluding restructuring charges in the first quarter of $13.4 million, which we believe more appropriately reflects our core operations, the operating loss would have been $19 million compared to operating income of $10.9 million in a 2008 first quarter. The reason for this loss is straight-forward, although it doesn't mean that we're happy with the results. Despite $31-plus million in reductions we made to salary and employee benefits and continued savings in general and administrative expenses, we did not keep up with such a sharp decline in net revenue.

We're striving for the right balance between keeping some excess capacity in order to be better positioned to come out of this downturn and running a profitable company this year. However, given the first quarter, I can assure you that we are taking more aggressive actions in order to achieve this goal. So, I'll first turn the call over to Julie for an update on some of our key line items and then Scott and I will go into more detail on these actions in our outlook.

Thanks, Kevin. Turning to slide nine now; salaries and employee benefits expense of $79.3 million decreased $31.3 million or 28.3% year-over-year. Variable or discretionary compensation represented $24.5 million of the reduction, mainly as a result of lower bonus accruals related to lower revenue and operating results and fixed compensation declined $6.8 million, mostly as a result of the reduction in force announced on January 15th.

Total stock-based compensation expense in the quarter was $5.9 million, a decline of about $700,000 compared to last year's first quarter. As a reminder, this decline largely reflects the shift in deferred bonus compensation from RSUs to cash based that we made last year. Salaries and employee benefits increased to 89% of net revenue, which, as Kevin just explained, reflected our cost structure in a very low revenue quarter.

Turning to slide ten, general and administrative expenses in the quarter of $28.8 million declined 9%. The decline reflects our continued cost-savings initiatives, offset by several small year-over-year increases, including professional fees related to our core process improvement initiatives and a charge associated with vacating one of our old locations in New York City.

If you've been following us for the last few quarters, you've heard us talk about our core process improvement efforts. To help us, we've engaged The Hackett Group, a business advisory firm that is a world leader in best practice research and process benchmarking. In December, we began to benchmark the core processes of the Company, specifically focusing on the HR, IT and finance areas of delivery. They've completed their initial study of our processes and we've already begun to assess how to address our efficiency and effectiveness.

In addition to providing better services, cost savings will be achieved through a combination of business process redesign, standardization, better use of technology, outsourcing and delivery consolidation. Our goal is to achieve $10 million of annualized cost savings from our core processes by 2011.

Looking at slides eleven and twelve, excluding restructuring charges, which we believe more appropriately reflects our corporation, the net loss would have been $11.2 million and the net loss per diluted share would have been $0.68. The effective tax benefit rate of 42% in the quarter was slightly higher as a result of lower book income in the quarter and the geographical mix of the book income. Now I'll turn the call over to you, Scott.

Thanks, Julie. In an economy which just doesn't seem to be able to find bottom, forecasting is incredibly difficult. On our fourth quarter call, we provided you with a forecast for 2009 net revenue, but it has become increasingly apparent that with all the uncertainties and in an environment where our clients cannot forecast their own business, we just can't provide an outlook in which we have a reasonable degree of confidence.

So the bottom line is that we are not going to provide 2009 guidance. This is not a change of our philosophy, but simply a reflection of these times. We know that market conditions will eventually improve and we are certain that when we do, our client's needs for talent management will be more important than ever.

Based on client feedback, we do anticipate a pick-up in confirmations in the second half of 2009, but we are not counting on it to manage our business. Instead of trying to forecast when a turn will happen, we are managing our cost structure as if the level of first quarter confirmations continues through 2009.

As we stated in the release, our operating margin goal for 2009 is a minimum of break-even at our current run-rate. If confirmations pick up, results should significantly improve. To be clear, the January to March run-rate is not four times the first quarter net revenue. First quarter net revenues are heavily impacted by November and December confirmations. Rather the January to March run-rate, if continued throughout the year, would produce approximately $400 million in net revenue.

On January 15th, we announced a restructuring plan to reduce overall costs and improve operational efficiencies. That restructuring included a headcount reduction of approximately 11% or about 200 employees and expected annual savings of approximately $27 million. But we realize that to make up for the first quarter and to achieve at least a break-even operating margin, we need to take more aggressive actions to cut both fixed and variable expenses.

We will further reduce our total global headcount by 8% to 10% in May. This is expected to produce an additional $12 million in savings in 2009, or approximately $20 million annualized. As a result of this action, we would expect to take an additional restructuring charge of between $6 million and $10 million in the second quarter, essentially all cash related to severance.

We are reducing base salaries across the board by 5% through a combination of cuts, reduced work hours and unpaid time off. Also every member of the operating committee, our senior leadership team, is going to forgo one month's salary. Our board of directors unanimously approved a 50% cut in their annual cash retainer. In addition, our Non-Executive Chairman has taken a 50% cut in the amount he receives for acting as Chairman.

Taken together, these reductions in fixed expenses will produce savings of approximately $5 million. As for cost savings targeted at lowering variable expenses, we are reducing our 2009 discretionary bonus pools by $26 million and have identified approximately $10 million of other expenses that will be eliminated in 2009.

Our latest initiatives, not all of which can be outlined here, are targeted to save approximately $60 million in 2009. These savings are in addition to the savings expected as a result of the January workforce reduction.

Our financial position remains solid. Cash used in operating activities was $113.2 million in the first quarter and our cash balance was $96.4 million at the end of March. The decrease compared to December 31st 2008 reflects the payment of approximately $123 million in the first quarter related to 2008 bonuses. There will be an additional payment of approximately $10 million in the second quarter related to 2008 bonuses. This is for payroll taxes in non-US countries.

Earlier this month, we amended our credit facility with our bank group. Since October 2006, we have had $100 million committed unsecured revolving credit facility. There has never been any borrowings under this facility. As a result of our first quarter restructuring charge, the Company would have fallen out of compliance with one of the financial covenants of the facility.

We executed an amendment to the credit facility which although decreasing the size of the facility from $100 million to $75 million, assures its availability throughout 2009, even at the January and February run-rate and with restructuring charges. Similar to our goal for break-even at the operating level, we expect to generate enough cash flow in 2009 to fund ongoing operations and any bonuses we may pay. We do not anticipate any borrowings under our facility in 2009.

We did not repurchase any shares of our common stock in the quarter. We did continue to invest in our business where we saw opportunities to enhance our market position, like in Eastern Europe where we acquired seven experienced consultants and we will also look for ways to accelerate our capability to deliver a broader range of talent management solutions. Strategic hiring, training and development and acquisitions have been and will continue to be part of this strategy. Kevin, I'll turn it back to you to close.

Thanks, Scott. Clearly, these are unprecedented times. According to an article I read in Sunday's New York Times, which ranked all recessions since 1960 on various measures, this recession is close to being the longest and worst recession since that of 1973 to '75. And the two areas in which this is already the worst recession since 1960 are employment and industrial production. There is no consistency by market industry, product or geography; everyone is affected.

We are doing everything we can to be profitable, but we are also cognizant that the economy will improve and so will our business. As such, we need to make sure that we have consultants who are trained, capable and in front of their clients so that when the markets start to improve, we will be positioned to help our clients with a host of talent management needs.

Unfortunately, we cannot forecast demand when our clients can't forecast demand. We can preserve our strengths, stay close to our clients, be nimble and remain profitable. So at this point, we'd be happy to take any questions that you might have.

(Operator Instructions)

And our first question comes from Tim McHugh, your line is open.

Yes, first wanted to ask Scott; your comment about the difference between the revenue implied by the confirmation trends and Q1 versus the late in Q4 that impacted the actual Q1 revenue. Are you saying that if confirmations just stayed at the same level as Q1, the total annual for 2009 would be $400 million, or is that the annualized run-rate as we're going forward here?

Yes, a couple things; I mean, I think you know our revenue recognition model is not terribly complex but there is a nuance here and that is that we don't recognize the revenue as we sign a confirmation, it's recognized based on the level of effort expended to close the search. That means that the revenue you saw in Q1 is really mainly impacted by what we saw in November and December confirmations and then somewhat by January. So you didn't see the impact of the improvement we saw in January, February and March; that will be on an outgoing forward basis.

So, you can't simply take four times first quarter and say that's where the Company would end out if you stated that run-rate. It's really based upon the run-rate of January, February and March; those confirmations levels we saw. If that confirmation level does not improve and we would end up with about $400 million in revenue for the full year 2009. Now, there's two things; one, as I said in my remarks we still hear from all of our consultants that we expect to see an uptick in the back half of the year.

We just didn't think it was prudent to take a chance, if you will, on that happening. So we made a very conscious effort to move aggressively now and to size our cost structure to the January, February, March run-rate. So something which would produce about $400 million. So, the goal here is to break even at a minimum, hopefully show a small profit, even if we didn't see an improvement from where we were in January, February and March.

Clearly, if what we're hearing from our clients and from our consultants happens and we have an improvement in the back half of the year, then having taken the actions we are now, we would have significantly better bottom -- well, both top and bottom line results. But we just weren't willing to, I guess, bet on that. We felt we had to act on the information we had in hand, which was what we were seeing in January, February and March. Does that answer your question?

Yes, that's helpful, I mean, and to go on with that; you've given out a backlogs number sometimes in the past, do you have that available for the end of Q1 to give us a sense for where Q2 might trend?

Yes, Tim, it's $35.6 million.

Okay, and then my other question would be the pricing pressure that you described, Kevin, recognizing you weren't in your current role during the last recession, can you compare that to what you might have seen during the throes of the last recession? Is this an unusual level of pricing pressure and if so, how confident are you that this is just a temporary thing as you talk to your clients about it?

Tim, it's a great question. What we're seeing is quite simply lower upfront retainers and so what we are expecting is more on the backend. And this happened -- this is the same thing that happened in 2001, 2002 where clients came to us and said, okay usually you would have a $350,000 retainer, why don't we give you a $200,000 retainer and on the backend you'll get the other $150,000, and that's exactly what we're having now. A lot of our clients are cash strapped, so we want to make sure we support them through these economic times.

There is pricing pressure across the globe. We do see it, we actually do turn down some search work which doesn't make sense for us because we have to make sure that what we're doing for one client we're consistent with another across the globe, but each market at each practice we have to take case-by-case and work with clients whether they've been a client for ten years or six months to work through this time period. So, it's a case-by-case basis, we're seeing a lot of different things, but nothing different than we saw in 2001, 2002.

Okay, that's helpful. Thanks.

Thank you. Our next question comes from Mark Marcon. Your line is open.

Follow-on to the prior question; just when we take a look at the fee per search, is part of the function just the mix in terms of where geographically or by industry you're getting searches now?

I'm sorry, Mark, it's Kevin, I'm sorry. The question was is there a --

When we take a look at the decline in the fee-per-search, is part of that a function of just the mix of the types of assignments that you're getting now?

Well, yes. I mean one thing is that historically financial services has been 30% of revenue, in the first quarter it was 24%, although we are seeing a pick-up in financial services. As we all know, salary or compensation at financial services is higher than any other industry, but across the board we're seeing not a discount, but clients asking for better pricing upfront with payment not contingent, but on the backend after the placement is made.

But the other thing to mention that's come up before, particularly in financial services, is even though there's been a falloff in compensation in financial services, we are capped, so our caps fall between $350,000 and $500,000. We just tend to be getting more on the backend, as we have historically.

If you go back the last two or three years, given bonus payments in February, March for financial institutions, we usually see a load of upticks come around the May, June timeframe when those individuals are getting placed. But to answer your question, financial services is off and salaries are higher in financial services, but additionally it's hitting all of our other practices as well across the globe.

All right, so you're seeing salaries, the offering salaries for positions come down across the globe now in --

No, Mark, sorry, it's not the salaries that are coming down, it's say a historically somebody was getting paid $300,000, we would get a retainer of $100,000 --

Yes.

The clients are coming to us and saying, okay we're still going to pay this person $300,000, yet we only want to pay you a $75,000 retainer upfront, but we will give you the $25,000 to make up the difference on the backend after the candidate joins.

Got it, but the $300,000, that hasn't changed in terms of what's being offered to the candidate.

Correct.

Okay.

And, Mark, just as a reminder again, there -- pricing has definitely had an impact on it but it is, at the end of the day, it is a calculation, which was affected by lower revenue in the quarter.

Sure. And then can you also talk a little bit about Asia-Pac and just the revenue trends that you're seeing there on a constant currency basis, vis a vis the expansion in terms of the consultant base and how you're thinking about that going forward?

Sure. Asia-Pacific continues to be -- we saw somewhat of a blip in Asia, as we did in all markets, year-end and into January. However, we want to be well positioned. As I know I'm out talking to clients and as our colleagues are talking to clients around the globe, firms continue to look for areas of growth, and Asia-Pacific, the Middle East, as well as Central and Eastern Europe, provide that opportunity.

So we want to make sure that, and it's getting the balance right that we've spoken about consistently, getting the balance right of making sure that we invest in our business, follow our clients and have the capacity and, or the execution capability to deliver what they're trying to do in Asia. So, we did see a blip in Asia for the first time, but what our consultants are telling us is after that initial blip they're starting to see demand for executive search in the region.

So you would anticipate that that would be one of the first areas to come back?

Absolutely.

Okay. And then could you just clarify what you meant in terms of the breakeven. Were you talking about breakeven for the year, or are you talking breakeven for the balance of the year? In other words, Q2 through Q4 exclusive of Q1?

No, we were talking about for all of 2009, including Q1, but excluding restructuring charges that we would have either a breakeven or a small profit at the operating income line. So we -- another way of saying that is we're talking about making up for the loss we've seen in Q1.

Okay and that would be at that $400 million revenue run-rate?

Right. Yes, at the $400 million run-rate, that's where we have sized the cost structure and basically what we can afford to pay for things here in order to produce that result. So --

What would the -- once you're done with all of the restructurings, what would the -- obviously there's seasonal variations, but on a run-rate basis, what would the cost structure come down to?

I guess that's a big question, because --

Yes, on a quarterly basis?

Quarterly basis, if we're producing a breakeven, we'll have to go back and produce a margin of some amount in the other quarters. I'm trying to remember exactly what it is to get us to the full year result. Hang on a second, here because we've got it broken down by quarter. Yes, so it means that we'd be producing margins which are in double-digits here for the remainder of the year in order to make up for the first quarter here.

And the anticipated reduction that you're -- the additional charge that you're going to take in May and the additional cost actions; that should suffice to get you there assuming that things do stabilize at these levels?

Yes, that's what it was designed to do is to make sure at that January, February, March run-rate we don't have to come back and revisit this again, that we've sized the cost structure at that rate. If it does improve, and I should probably add on, we have plans in place -- Let me start this a different way. The cost reductions we're taking are not all flexible.

Many of these things are permanent reductions, permanent improvements in our efficiency, permanent improvements in the efficiency of our leverage model, in the way we run certain things around here, which are meant to stick. That's another way of saying that when revenue recovers, and it will, we will have affected the cost basis to produce a better result than we would have had we not taken these actions. So we're not just going to bounce back to the same cost structure we had before.

And I'm assuming that it basically would imply, since the cost structures or the cost actions are going to take place in the middle of Q2 that essentially the year is going to be backend loaded in order to get to that breakeven.

Yes, in terms of the profit, in terms of the bottom line, you are absolutely right for the obvious reason that --

Sure.

-- cost structure kicks in. The cost savings start kicking in here and really they've started to kick in, or some of them have already begun. The bulk of them are going to start to kick-in in May.

Mark, I mean quite simply, it's Kevin; we're trying to get our cost base down to a $400 million run-rate, as Scott mentioned before. On the revenue side, or the top line side, what our clients are telling us, I mean what our consultants are telling us is there's a backlog of pent-up demand in terms of executive search needs across the globe, and it's just taking longer to get some of these engagement letters signed as well, which happened in the last recession -- at Tim's point earlier, this happened in the last recession as well in 2001 and 2002. So, we're fairly confident that we will see a increase in search fees going forward.

But I just want to reiterate, because we spent a lot of time talking about the run-rate; that's exactly what it is, is a run-rate. As I said in my remarks, right now what we're hearing from our clients that they can't figure out in this environment what's happening with their business, that's the reason we just felt -- didn't feel comfortable, didn't have the confidence in providing guidance, but we did decide that we would just assume this run-rate was there since we've seen modest recoveries since what seems to have been a low point in December. What we want to do is size things to that January, February, March run-rate.

And then in terms of the cash; did the earn-out go for Highland and how are you thinking about the dividend?

The earn-out did go out for Highland, that's been paid. The dividend is obviously something which is the purview of the Board, not ourselves. We continue to have discussions with them, but at this point we have not introduced any discussions -- I'll go where I think you're leading the question, we have not introduced to the Board any discussions of cutting or reducing the dividend.

And that wasn't a condition in terms of the amendment with the facility?

No, it was not.

Great. Thank you.

Your next question comes from Josh Vogel, your line is open.

Hey, good morning, thank you. Given the broad-based cuts you're making to the base salary, I was curious if you were now offering maybe a higher bonus payout to the consultants, provided they perform?

Josh, we have a very structured compensation system in place based on tiers instead of the consultants know what they're going to make. So the answer there is no, we won't offer a higher payout vis a vis the bonus this year.

Okay, and I know this is kind of forward-looking, but you're expected capacity following this second round of restructuring -- if say the run-rate on the year is $400 million, would you have an idea of what the bonus payout would look like for '09?

We clearly do, but it's not something I guess I'd want to discuss at this point. That amount of that pool is extraordinarily sensitive and something which I'm sure that many of our competitors who may actually be listening on this call would want to know. So, we obviously know what it is. It is less than in past, because clearly as Kevin said, this is based upon actual achievement how much you sell. If $400 million continues, if that run-rate continues through the year, the payout is obviously going to be significantly less than was made in early 2009 for the 2008 bonuses.

Okay, great.

But, just to come back and reiterate the point I made; again, in terms of this planning, whether it's the cost structure or cash or anything, we want to be profitable this year no matter what this terribly uncertain market hands us and in addition to that we want to be able to be self-sufficient in terms of cash. That means we generate enough cash to run this business and we will have generated and put away enough cash in our bank accounts that come first quarter of 2010, we have essentially funded the amount of bonuses we're going to be paying out.

Okay.

And doing that without drawing down on the credit facility. The credit facility remains a safety net for us, as viewed by us as that has not changed, that view of that, we just wanted to make sure that that safety net would be available throughout this period. And what really threw a monkey wrench into it was the restructuring charges, which were just not thought of when we the original deal was cut.

Okay, so basically the only way you would tap the facility is if you were going to make an acquisition. Is that how I should look at it?

Yes. I mean if we were to make an acquisition, or something really unusual happens, that's what the facility is there for. It's not meant to be part of our normal operating cash flow cycle.

Okay. And I may have missed this, I apologize; but of the 8% to 10% headcount reductions that are slated for next month, are those broad-based or targeted to just one region in particular, maybe Asia-Pacific, or --

They are all levels, all regions and include both search employees as well as support and corporate employees.

Okay, great. And just lastly; outside of pricing pressures, I was wondering if you could just give us some general comments on the environment in general. I know that there is a much bigger focus today on executive compensation and I was wondering if you were seeing any decline in the Company's average compensation packages for their executives?

Well there is scrutiny over executive compensation, but a couple things to bear in mind; number one, we are capped in terms of search fees globally, particularly at the CEO and Board level at $1.5 million. So if a CEO was getting paid $12 million and it comes down to $4 million or $5 million, we're still capped at the $1.5 million, so it doesn't really affect us in regard to our fees.

Secondly, in this market, the demand for our services is probably much more important or greater than ever primarily because there's still a dearth of talent and leadership, especially for some organizations where they need it more than ever, so given the scrutiny and given the access to that talent, we're one of four firms, five firms globally who has the global footprint and the capability to actually deliver these talent management solutions to our clients. So, given the caps, given the fact that we have a global footprint, I think we're still very well positioned to serve our clients around the globe, Josh.

Okay, thank you, and I'm sorry, if I could sneak one last one in. I know the spring break makes April an interesting month, but I was wondering if, through the first three weeks, if you could tell us how searches were trending year-over-year?

Yes, I can make general comments. It wasn't just unfortunately spring breaks, we had Easter holiday in there as well, which in many areas of the world is a traditional time to take off. The result was that the month started very slowly, but it has definitely picked up steam in the latter half of the month, although we have an estimate in one of the slides here.

It really is going to depend on the next three or four days where we end up, and we'll just have to wait and see. I've talked to everybody. We know that there's a lot of things which are in the queue, we know there's a lot of paper, which is with our clients right now, we're waiting for it to be returned, but just because of the odd nature of the holidays in April, it's hard to predict whether that paper will actually hit our desk or will wait until May.

Okay, thank you very much.

Our next question comes from Andrew Fones. Your line is open.

Thanks. First, I wanted to just touch on the cost savings you outlined. I think you mentioned that some of the severance and some of the headcount reductions would save about $12 million this year and $20 million annualized. Did you say that $26 million -- there would be savings of $26 million from lower discretionary bonuses, was that right?

That's correct.

And that is relative to what as a base, Q1?

What it's relative to is sort of business-as-usual base case. This is just not usual times and whether it's in our base salaries or in the amount we can expect, let me make it very personal; the amount I can expect as a bonus. I think we need to recognize these are not usual times (technical difficulty) committed to producing a profit for our shareholder we all need to participate in that. So what we've done is looked at what the plans would normally be and we've simply said this is not normal times, we need to scale those back. And it's against that basis that we're saving $26 million.

So are you saying you expect to scale back further than you did in Q1? Because Q1 annualized would be $40 million, you did $140 million last year, I'm just wondering what the base is; there's a big difference there.

Well, there's going to be a very big difference; I mean we're not -- we've produced $600-plus million of revenue in 2008, so there's obviously going to be a huge difference in the amount of payouts just as you'd normally run the plans. I wouldn't -- the way we do this is to reflect in the quarter we're in basically what's earned in that quarter. In other words, we're not -- for the same reasons that we are not providing guidance here, we're not making a full-year estimate in terms of accruing the bonus, we're just doing whatever is earned in that quarter based upon performance is what's booked.

First quarter was obviously a dismal quarter and it reflects what is probably the low point here, hopefully what's the low point, which was December; but it reflects the fact that our first round of cost initiatives sized this firm for an amount much higher than we saw in the January, February run-rate, or for that matter in the first quarter results. So when we book that, that is going to be a lower amount probably than we'll see for the rest of the year because as you go forward, it's going to be better than the first quarter to make -- to get us to a breakeven and so the amount of bonuses earned in each of those subsequent quarters will be higher as well.

Okay, maybe I could just try this one other way, and then I'll leave it, but should I think of this as being a $26 million savings versus what you would have otherwise probably spent on bonuses if you'd have come in at the midpoint of your old guidance range from Q4, that you gave on the Q4 call? Is that how I should be thinking about this $26 million --

The reason I'm hesitating because that's not how it was calculated. I'm trying to think if you're getting to about the same answer. I guess I'd have to go back and look.

Okay, that's fine. Just moving on; the $10 million of other expenses; where are they coming from? Is that in SG&A?

A lot of it is in SG&A, a lot of it is travel and entertainment related things. It is in SG&A where we've looked at projects which may not make as much sense in the current environment. We've looked at functions that we thought could be resized and in some cases eliminated almost entirely.

So, it's a broad range of things, but we really took a hard, hard look at this and as I said, and I guess I'm going to repeat this again because I think it's incredibly important to us certainly, and I think should be to our investors and that is when we looked at this, we took a hard look at things that maybe people hesitated -- have had a life of their own for several years as things have said, now is the time we can cut this and get rid of it permanently; that we can permanently impact our cost structure. So a lot of them are areas like that.

Okay. You mentioned $5 million of savings from Board fees and lower management salaries and then the remaining $7 million to get to the $60 million, what is that other $7 million and where will that come from, if I could?

Well, it's a variety of things. It's when we look at what was planned for hiring and we know we're not hiring anymore. It's what was planned for certain expansions and stuff and we're not going to do that. It's a whole host of little things that add up to it and --

Okay.

-- I would bore everybody to tears here if I went through all of them; it's a long list.

Okay, and then just if I could just have one other; you had $96 million of cash at the end of the quarter, I think you mentioned $10 million of additional payoffs in Q2, $6 million to $10 million of charges in Q2 that will be mostly cash brings you down to about $78 million of cash. I was just wondering where that's located and then on CapEx, I think you've guided us to about $17 million to $21 million of CapEx for '09, is that still a good number?

No, the answer to the last question first is no, CapEx is one of the areas we impacted and we've looked at things which we don't necessarily have to do and we're now looking at a range of probably $11 million to $13 million. As to where the cash is located, there's two things to recognize; when we pay out that second quarter $10 million is it will be generated cash in the second quarter as well as the operations continue to generate cash. So for the full year we're expecting somewhere on the order of magnitude of $30 million free cash flow for the full year here.

And when I say free cash flow on the $30 million, that's after having set aside the amount we've been mysterious about, but what we think we're going to be paying in bonuses. So that's true free cash after -- even though the bonuses won't get paid until the following year, I understand that. We always consider that sort of an encumbered amount, as we give that guidance of what free cash flow is.

The other thing that where it is; it's spread around the world. We pay a lot of attention to where it is, trying to make sure we're optimizing tax payments and we keep cash in-country so we're not moving it around, and it's something we monitor all the time, but in terms of that's more than sufficient to fund to start working capital cycle here. We don't have to worry about that.

Okay, thanks.

We have a follow-up question from Mark Marcon. Your line is open.

Wondering if you could comment with regards to the expectations of some of the consultants and sounds like your new hiring activity is going to be minimized here, but one thing at least towards the end of an upturn, you typically end up seeing fairly aggressive demands by some of the consultants, particularly those that are still producing. How is that looking now and are your competitors becoming more rational with regards to their recruiting efforts? Are they still trying to poach people and offering them things that are more commensurate with peak revenue run-rates as opposed to where we are in the cycle now?

When you say how our consultants are feeling, first of all, Mark, I think that given that what we do for a living is engage with clients across the globe, and I don't think you can pick up a newspaper today without seeing what's happening to one organization after another. So I think number one, we have a great number of consultants across the globe and we pride ourselves in having the best in the industry and so I would say I know that our competitors consistently will try to go after our consultants in each geography or in any industry we work, and that's just the nature of the beast.

In terms of expectations I believe they are here for a reason. I mean our consultants are here because of the brand, because of the partnership and teamwork we see across the globe and because of the strategy and vision that we've set forth for the organization. So we're excited about it.

And they believe in it and they're here for the long-term. Our competitors will continue to look at recruiting some of our top talent as we will continue to look at them to recruit some of their top talent, the challenge in this market is how you balance focusing on growth on the future or rebound in the global economic environment with maintaining your cost basis. And I know that for a fact it's something all of the search firms are struggling with globally.

So, we want to prudent in terms of our cost base, but simultaneously as Scott mentioned, we'll continue to invest in our leadership advisory program and we will look at strategic hires where they make sense across the globe because we want to make sure when we do come out of this, and we know we will, we are well positioned to capture growth at that point in time. Another point I'd like to make, and we've focused on this consistently, is Scott's point earlier about making sure that we do things that are right for the organization that haven't been done historically in good times is right on.

Simultaneously, if I look at productivity, and this is a question that you all have asked for the last two or three years, we believe that we can take productivity up to $2 million. So by making some of these investments in technology, by making sure our structure is in the right and best shape it can be, we believe that investing in training will help bring productivity, even if our consultant ranks remain stagnant around the $375,000 to $400,000, we believe that we can drive up productivity from anywhere from $1.5 million to $2 million, and that's our consistent goal over the course of the next two years.

Okay. But it sounds like the poaching activity is probably going to be reduced a little bit, which should reduce some of the pressure.

It is, but one thing to bear in mind; it's very challenging for us or any of our competitors to pick off one of our consultants because pick an industry sector, whether it's financial services or technology, we work for a select group of investment banks across the globe. And therefore, our competitors work for different investment banks, so if we picked off a consultant from another firm, unless they're working for the same clients, which most of the time, or 99% of the time they're not, it's basically like hiring a brand new consultant and having them start from scratch.

Where we have made investments in hiring from our competitors before is to build and, or bolster those industry practice groups across the globe where we were lagging behind, and I think you recall two years ago we made a concerted effort in our life scientist practice and I think you say the results last year based on the recruiting we made in that area. So that's the way we view it. It's tough to recruit from our competitors in a particular area unless we have the bandwidth to bring them on and the client base that we need going forward.

Great, thank you.

If I could just take a second and quickly clarify something I said, just to give people the base point here; I had mentioned we would expect to produce $30 million of free cash flow after having made provision for the bonuses which would be earned in 2009 here. That's an estimate at the $400 million level. Again, like a lot of these things, that's just asking ourselves the question if the January, February, March run-rate persisted, which would annualize to about $400 million, that's what would result.

So, it really is consistent with the philosophy we've got here that we just can't, it's just such an uncertain environment that providing guidance is just not something we want to do right now. It's really an estimate of what would happen at that level. It's sort of the baseline; we'll look at the run-rate here and figure out where we are. Hopefully it will be better than that.

Okay, we have a question from Tobey Sommer. Your line is open.

Thank you. I was wondering if -- you talk about what you're hearing from clients, potential lot of projects in the cue, lot of paper with clients, et cetera. Do you think that they need to see a pickup in their own business in order to execute and reel some of that queue in or are -- will you expect your clients to basically just need some stability in order to make decisions?

I think it's the later, Tobey, it's more of the stability. We saw somewhat -- if we talk about a financial crisis, we also saw a leadership crisis at the end of last year where individuals were afraid to pull the trigger. But there's a couple of interesting things happening in the market. Number one, you have clients using this as a once-in-a-lifetime opportunity to go out and recruit top talent and also simultaneously, you have some individuals and organizations that would not leave their firm over the course of the last three, five, seven years because, number one, it was costly and, number two, they were pretty confident in what the direction or strategy that their organization was taking.

With most individuals, equity being where it is today, the cost of acquisition of talent is cheaper and so individuals are more willing to go look at another firm, hit the reset button so-to-speak and share on the upside. So there's a lot of fascinating things happening in the human capital area. And you also see a lot of pent-up demand, just it has been budgeted for and although some of the budgets vise vie requiring have been cut, they still need to have great talent in place to maneuver through or execute their plans over the course of the next 18 to 24 months.

I wanted to ask a question that I think you've touched on it, to some degree already; in the past on your slides that a Company -- the conference call, you've had a slide which has shown the move and favoring variable and compensation expense on the P&L. Are some of the efforts that you're making now actually going to propel that further and increase the proportion of expenses that are variable?

In general, yes. We're striving to do that in a whole host of areas. Julie had mentioned earlier outsourcing and one of the reasons we would look at outsourcing much more aggressively various functions is to try and turn what's essentially a fixed cost, or at least fixed in the medium terms into something which is variable, we certainly are looking -- I think we've discussed before, we've got a group internally here which is are looking at just the fundamentals of our comp plans and one of the philosophies behind that is certainly to create a much larger variable component of that and a much less fixed component.

So, yes, I mean it's part of our philosophy, and I think it's especially important in a business like this. And we're dealing with it right now as you want as much variability in there, whether it's compensation or other costs, so if a downturn happens you're not -- things come down automatically, you're not having to let people go and do other things. So, it is a major goal of ours.

In terms of the confirmations that you had in the first quarter, just wanted to follow-up on a previous question. You described perhaps an opportunity for Asia to be one of the first to bounce back. Did that manifest itself in the confirmations towards the end of the quarter or April?

Well, I think we've seen that if you look at the slides, you'll see an increase in confirms, steady increase in confirms since November, excuse me December, and so that's been across the board. We've seen an increase in North America, Asia, Latin America and Europe. So it's been fairly consistent across the board. My point was that when we talk to clients about their expansion plans, a lot of them, particularly European companies and, or US companies have expansion plans into Asia-Pacific.

Simultaneously, what we're seeing in Asia is the Indian companies, Chinese companies, Japanese and Korean companies looking to expand internationally as well. And my point earlier about being well positioned is we're only one of five search firms that can help them execute their growth plans be it in other parts of the Asia-Pacific region, Europe, Latin America or North America. So that's where we're also seeing an uplift in confirms in Asia.

Thank you, that's helpful. And one last question, Scott. The $30 million in free cash flow after bonus, again, if we maintain this $400 million revenue run-rate, would that also be encumbered by the dividend, or does that exclude the dividend cash payment?

No, it would be encumbered by the dividend. I mean we obviously would have paid everything related to -- that we would have paid in 2009, that's taken out of it, but to the extent that there are future dividends, they'd have to be taken out of that $30 million.

Okay, thank you very much, appreciate it.

I show no further questions.

All right, well listen, we appreciate you all taking the time to get on the call today and thank you very much. And I'd like to thank our consultants and our employees across the globe for their continued efforts and hope you all have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.