Heidrick & Struggles International Inc (HSII) 2009 Q2 法說會逐字稿

Welcome to the Heidrick & Struggles 2009 second quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Ms. Julie Creed, Vice President of Investor Relations. Ms. Creed, you may begin now.

Good morning everyone and thank you for participating on our second quarter call this morning. Participating on the call today are Kevin Kelly, Chief Executive Officer and Scott Krenz, Chief Financial Officer. As a reminder, we will refer to supporting slides available on our website at www.Heidrick.com, in the Investor Relations home page and we encourage you to follow along or print them. As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we will be making forward-looking statements on today's call and ask that you please refer to the "Safe Harbor" language that is contained in the news release and slide one of our presentation. At this point, I'll turn the call over to you Kevin.

Thanks Julie, thanks to you all for joining today's call. We are not alone in reporting another rough quarter of year-over-year results. We are a people business and we are struggling through this recession and 25 year high unemployment rate like many other companies. But Heidrick & Struggles has built its reputation over the last 55 years on its people and the way we are pulling through this recession reminds us why. First on today's call I would like to thank employees for all their continued efforts.

The best word to describe the second quarter was stable. Year-over-year comparisons were tough but some of the results and other operational metrics were the same or better than first quarter and we all hope that it's a start of a recovery. Starting with slide two, second quarter net revenue of $93.1 million was down 45.1% year-over-year, or about 41% on a constant currency basis. On a positive note, revenue was up 4.5% sequentially compared to the first quarter. America's revenue declined 45.1% year-over-year, but improved 4.2% sequentially. Europe down 48.5% year-over-year, but was only down 2.1% sequentially, and Asia Pacific declined 40.7% year-over-year but increased 17.8%, compared to the first quarter.

Looking at slide three, executive search confirmation in the second quarter were down 37.1% year-over-year but flat compared to the first quarter. Slide four is a monthly view of all confirmation, executive search and leadership consulting combined. Although July has traditionally been a slow month because of vacations, it is on track to be better than June, and in fact it is on track to be the best month of the year so far.

Turning to slide five, as a result of the second round of layoffs in May, total head count on June 30 was 1429 employees, down 10.3% compared to March 31, and down 18.4% compared to December 31. Consultant head count June 30, 380, down 5.8% compared to March 31 and down 9.3% compared to the end of December.

Looking at slide six, productivity, in the second quarter productivity defined as the total annualized net revenue divided by the average number of consultants in the quarter was approximately 900,000, compared 1.7 million in the second quarter of 2008. The decline largely reflects much lower revenue in this year's second quarter but also as is typical in professional services firms reflects the fact that the reduction in staff tends to lag revenue declines. Our second reduction in force did not occur until early May.

Turning to slide seven, average revenue per executive search was $102,700 compare to $122,200 and last year's second quarter. As a reminder, this figure is calculated as executive search revenue in the quarter divided by search confirmations in the quarter, it's not the average of actual search fees confirmed in the quarter. Therefore, while the decline primarily reflects lower revenue in this year's second quarter, it also reflects continued pricing pressure. We want to do everything we can to support our clients and as we explained last quarter sometimes this means showing flexibility. However, I again note that nothing we seen to date would indicate a fundamental change to the structure of how we are being compensated.

Referring to slide eight, excluding restructuring and impairment charges in the second quarter of $12.1 million, which we believe more appropriately reflects our core operations, we would have shown a small operating profit of $524,000. This would indicate that the aggressive actions we have taken in response to the economic crisis positioned us well to weather the storm. It is also worth noting that some of the cost initiatives we outlined for you on our last call on April 28, were not fully implemented until the end of the second quarter or in the third quarter. For example, our second reduction in force did not happen until mid May and the salary reduction was not fully implemented in the United States until the beginning of July. This means the cost structure will continue to improve in the third quarter, and if revenue levels improve, so will the operating margin.

So first I will turn the call over to Julie for an update on some of the key line items and then Scott and I will go in to more detail on these actions and our outlook.

Thanks, Kevin. Turning to slide nine, salary and employee benefits expense of $64.6 million decreased $52.7 million or 45% year-over-year, $40.9 million of the decrease reflects lower performance related variable compensation, which is largely a result of lower revenue and operating results. And fixed compensation declined $11.8 million, mostly as a result of the two workforce reductions this year and a 17.5% year-over-year reduction in global head count. Total stock-based compensation expense in the quarter was $4.6 million, a decline of $1.3 million compared to last year's second quarter. This decline largely reflects the shift in deferred bonus compensation from RSU's to cash-based that we made last year. Salaries and employee benefits expense was 69.4% of net revenue, compared to 69.2% in last year's second quarter.

Turning to slide 10, general and administrative expenses in the quarter of $28 million declined 16.5%. The decline reflects our continued cost savings initiative, especially of the variable components of G&A. Looking at our income statement on slide 11, let me explain some of the usual items. The first is restructuring and impairment charges of $12.1 million. Restructuring charges of $8.3 million were primarily all cash charges related to the second round of layoffs announced in May. The balance of the charge, $3.8 million, represents a non-cash charge related to the impairment of intangible asset associated with our acquisition of Highland Partners. Following our workforce reductions announced in January and then again in May, and as a result of continued uncertainty in our business in the broader economy, we performed a review of the remaining client relationship intangible asset associated with the Highland Partners acquisition and based on this analysis, we recorded the $3.8 million impairment charge related to the America's region.

On a related note, it is worth mentioning that although our annual goodwill impairment evaluation is conducted during the fourth quarter each year, we have conducted additional evaluations as a result of continued deterioration in market conditions. Following an evaluation on February 28, it was determined that the estimated fair value of Americas and Asia Pacific reporting units were significant in excess of their net carrying values. However, we have been specifically monitoring the fair value of European reporting unit with a estimated fair value exceeded it net asset carrying value by only a modest amount. As such, we conducted a limited scope goodwill impairment evaluation of Europe as of May 31, and indicated that fair value continued to exceed its net carrying value.

Going down a few lines on the income statement to the line other, net. We recorded an expense of $3.5 million in the quarter, which primarily reflect a $3 million write-off of our investment in VisualCV. VisualCV was a start-up company that developed unique web-based approach to creating and sharing internet-based resumes. This write-off was, quite simply, a result of economic conditions over the last year, or so that severely impacted the Company's ability to be successful. As a result, both the lead investor and Heidrick & Struggles decline to invest in the additional funds.

Looking at slides 12 and 13, excluding restructuring and impairment charges of $12.1 million, which management believes more appropriately reflects core operations, the net loss was $3 million and the net loss per share was $0.18. The effective tax rate in the quarter was 5.7%, which reflects an adjusted full-year expected annualized tax benefit rate of approximately 27%, down from a 42% benefit rate in the first quarter . The lower expected annualized tax rate is a result of a change in the projection and mix of income, or loss, for each country including additional unbenefited foreign losses, the recording of a valuation allowance on certain deferred tax assets and several other smaller items including the book write-down of VisualCV.

Now I will turn the call over to you,

Thank you, Julie. First I will address current business trends and then I'll spend a little time taking about how we are managing our cost structure. Although the second quarter did not improve as much as we had hoped, there are a number of indicators that lead us to believe that our business may have stabilized and could still improve in the second half. First, as Kevin has already mentioned, revenue in the second quarter was up slightly compared to the first quarter. Total confirmations, executive search and leadership consulting projects combined, also improved sequentially compared to the first quarter. And in fact if you look at slide 14, on a rolling six month average, June was the first time in 12 months that we saw an increase. Third, as Kevin already mentioned, July confirmations, which are seasonally slow because of vacations, are on track to be better than June for the first time in at least five years. Finally, on a more qualitative basis, daily and ongoing conversations with consultants and clients still point to a more active second half of the year. Client feedback and queries picked up. The difficult part is determining when that will translate into revenue.

Next I want to highlight a couple of accomplishments and a couple of initiatives relating to our cost structure. We continue to work to align our operating cost structure with lower level of revenue. Our goal for 2009 remains breakeven or better, excluding of course, restructuring and impairment charges. That goal is more difficult to achieve if first and second quarter revenue levels continue throughout 2009. However, that goal is much more achievable if our revenue levels pick up in if second half as we expect. The most difficult part of my job is to forecast a timing of recovery in this economy. We believe we have achieved an operating cost structure that supports break-even at a revenue level of approximately $400 million, excluding restructuring and impairment charges. However, given the continuing economic uncertainties, we are not providing guidance for the remainder of 2009. To date in 2009 we made two reductions in our workforce, resulting in worldwide headcount that is down 18.4% compared to December 31. Restructuring charges through June 30 related to the workforce reductions were $21.6 million, with expected savings in base salaries alone, of approximately $29 million, in 2009.

In our two previous quarterly conference calls, we highlighted a number of other cost savings initiatives. Most were initiated and/or completed by the end of the second quarter, but others were not fully implemented until the third quarter. So we expect to realize further expense reductions in the third quarter.

Also, I want to give a quick update on Project Velocity, our core process improvement project. We are still in the early stages of the project, but recall that our goal is to realize $10 million of annualized cost savings from our core processes by 2011. So far progress has been good. We already identified actions that will result in $3 million in annualized savings and implemented changes or processes that will result in approximately $1 million in savings in 2009.

Looking at slide 15, our ending cash balance at June 30 was $64.6 million. Our biggest uses of cash in the second quarter include a $12.6 million related to 2008 bonuses, the final earnout payment of $11.6 million associated with Highland Partners, $9.4 million in payments related to both workforce reductions, and $2.2 million for a second quarter dividend. Cash used in operating activities was $18.9 million in the second quarter. We believe the cash on hand and funds from operations will be sufficient to meet anticipated working capital, capital spending, and general corporate requirements. In fact, as we said in the release, in June we generated positive operating cash flow. Now that we have the cost structure more aligned with our revenue, we expect to generate cash for the remainder of the year and to rebuild our cash balances.

With that I will turn it back to you, Kevin

Thanks, Scott. We remain cautious about the timing of the global economic recovery. We have a long way to go before declaring victory but can't help being a bit optimistic given recent confirmation trends and client activity in every region and in every practice. In the meantime, we are doing everything we believe is reasonable for our business and our shareholders to be profitable. Our strategy is to ensure that Heidrick & Struggles is well positioned to benefit as economies improve. And that means retaining consultants and their teams who are trained, capable, and in front of clients. When the market starts to improve we are will positioned to help our clients with all their talent management needs.

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

(Operator Instructions). Our first question or comment comes the line of Mr. Andrew Fones from UBS.

Thank you. First off, I wanted to ask about the confirmation trend, you obviously saw a nice pick up in July, but also, it appears as though you've seen kind of a since the usual January jump you actually seen positive trends through the year to date, where in at least the last two years you saw seasonal declines, during those months can you comment at all in terms of what you seep, what you think might be driving some of the confirmation trends you've seen? Thanks.

Sure, Andrew it's Kevin. Reflecting on what we ahead spoken about in the last two calls, we know there is pin-up demand with our clients as mentioned across each geography and practice, what we are seeing now is clients realizing that they can't wait any longer to execute and get their hiring needs in place. So the log jam we saw the first half of the year, is kind of, we are hoping kind of -- its breaking openings so we are seeing, again positive in flows of confirmations and a lot of activity with clients and seeing that a lot of business development activity that we put in place across the globe has helped out.

Thanks. Then just kind of moving onto the salary reduction in the US, I think you said that that occurred in July. Could you give us an estimate of what you think the dollar cost savings will be from that action over the balance of the year? Thanks.

Yes. Andrew, I might decline to respond to that. The problem is that with people coming and going in a very dynamic workforce that number changes, you know, from month to month, and initially, I mean substantial sum, but it really does fluctuate from month to month depending on what is happening in the work force here. I'm not sure it will give you a huge data point here.

Can you tell me, roughly what the percentage change was in the salaries that you instituted?

We instituted a 5% reduction in salaries but it was done a little differently depending upon the level within the firm. Which is the other sort of difficulty in estimating this. Essentially, people who were higher up took more of a hit than people lower down in the firm. Which we only thought was four. It was a 5% reduction but varied between levels.

Okay. Thanks. In terms of pricing trends, you mentioned that you are making some adjustments there where you deem necessary. Are you seeing the market move away from the -- kind of the usual rate for search or is this just in terms of structuring payments or how should we think about that? Thanks.

We haven't seen a fundamental change in our pricing model at all. What we are seeing is more of -- this is a case by case basis, it isn't across the board. There are some examples where our clients are cash strapped, to a degree, so we have a local initial up-front retainer, but we still get the 33% on the back-end in terms of an uptick, so instead of a $150,000 or $200,000 retainer it maybe $125,000 or $100,000 retainer, but we get the full 33% after the individual is placed.

Will that change how you recognize revenues?

No. It's nothing wide spread enough to change our revenue recognition models at all.

Thanks, final one, if I could. In terms of the remaining cash on the balance sheet could you give us a rough idea of how that spread geographically across your businesses? Thanks.

It is spread but the majority of it is here in the US, and although, we do have cash around the world, which can reduce a little bit how much we can get a hold of immediately; it's a small amount to the total. So it really doesn't. It shifts everyday because we move money around and try and centralize it to make it easier for us to actively manage it, so it will depend on what treasury is doing this morning frankly, to know exactly where it is, but the bulk of it is in places where we can get our hands on it right away.

Okay. Thank you.

Our next question or comment comes from the line of Kevin McVeigh from Credit Suisse. Your line is open.

Thanks, you folks did a nice job on the gross margin in a difficult environment. I would like to understand what drove that and looking at the fixed comp versus discretionary, it was more weighted towards fixed. If we can get a sense on how that's your trend in the back half of the year as well.

I think the bottom line is that we moved on, sort of all aspects of the cost structure to get ourselves into a position where we felt that within a margin of error here that we would could breakeven at a reasonably low level of revenue, approximately 400 million. We are relatively comfortable we achieved that. We've gotten the cost of that level and are comfortable that on a going forward basis we can generate profits operating income profits and generate cash. How do we achieve it in the fixed versus variable? Well, I think up front, we have told everybody that we have been walking a fairly fine line between how deep do you cut and how much capacity and good consultants do you keep on board even though, in the tough environment they may not be generating what they have in the past. That's always been our real the -- I guess conundrum here is trying to make sure we can respond to a market uptick and at the same time not overloading our P&L with cost. That's really what is driving is fixed versus variable, it is not a change in philosophy or anything else. It's simply carrying frankly, a number of consultants and other staff who are not currently generating as much as they have in the past which drives that fixed component up. That's a conscious decision as revenue picks up that changes back to a more normalized sort of look. And going later this year going into next year that's hopefully what we achieve. The other thing we've done is looked very hard at all other areas of discretionary spend and nonproductive spend and been very vigilant in making sure those are spend and been very vigilant in making sure those are kept to the lowest level as possible.

In terms of -- as you look towards your second half of the year, that makes a fixed versus discretionary, should that be closer to what it was last year, or 80, 20, 70, 30, how much excess capacity on the bench, if you will, obviously there was a decision to retain consultants relative to laying them off, how should we think about that?

I think there is a couple of things, it's difficult to give that number given that we've already declined to give full-year guidance here and I think we will continue to do that until this market becomes a little more predictable than it's been. That will largely drive the -- that fixed versus variable ratio when we get to tend of the year here. On the other thing, which is how much capacity are we maintaining, I think that's something, again, which we have not publicly disclosed and I would think, I would consider, defer to my boss here is Kevin, but I would think is too proprietary to let in to the market.

The only thing I would say, Kevin is that we have great people. If you look at what's happened or is happening in the marketplace, you're seeing times we never seen before. We have some of our top consultants you have have the worst year, whether it is 15 or 20 years in the industry the worst year ever; however, they are bring in revenue and as I mentioned with the uplift in comp firms we would rather maintain and keep our great people, because going into this third and fourth quarter this year and into 2010, when this market starts picking up they will be able to hit the ground at a much faster pace just given their experience in the industry.

I will get back in to queue. Are we looking for 30 million of free cash flow this year?

Let me check. We are on track, more or less to where we expected to be. I will double check quickly what that is, I honestly didn't look again at that number before I came in here.

Thank you.

Our next question or comment comes from the line of Mr. Josh Vogel from Sidoti & Company. Your line is open.

Thank you, good morning. It is good to see the sequential ticks up in fee revenue in Americas and Asia Pacific, I was curious as to whether any of this improvement was driven by seasonal factors or pick up in demand relative to first quarter?

Pick up in demand. And what we've done across the globe is focused on business development, focused on key 100 to or excuse me key accounts globally but focused on making sure we stay in a down market in front of our clients. The uptick in Asia, has been fantastic, it's a growing market and bullish on the Asia Pacific, North America colleagues done a fantastic job of staying in front of their clients and developing business and being there when the market started to pick up. What we seen in Europe, somewhat of a lag behind what happened in the US last year, but we hope that through our concerted business development efforts in Europe that that will start picking up, or has started to picked up in July and will continue into the third and fourth quarter.

I would state it's counter seasonal as I said in the opening remarks. This is the first time in five years we seen July look like it's going to be stronger than June. So demand trends are moving against the traditional seasonality in confirmations.

So that strength is broad based across all three regions?

That's fair to say. It's across all three regions and across all practices as well.

Okay. Based on your comments about July, just catches me off guard that you mentioned that your outlook for a second half of the year is weaker than previously expected. I was wondering if you can get granular there or quantify in terms of revenue what's going on there?

I think it wasn't the second half of the year it was the second quarter. I was looking at reports and I was surprised to see it mention that we thought the second half of the year was going to be weaker. We are optimistic given what we seen so far as we mentioned all year, we believe that the third and fourth quarters will be stronger given the activity that we are seeing over the course of the last two months.

Okay. On the balance sheet, looks like accounts receivable picked up along with DSO's I was wondering if that was a timing issue.

There is nothing there, we looked closely at receivables, there is nothing unusual, no particular up tick in bad debts or collectibility problems, we are looking at timing of when things are build and collected.

Lastly at this point in time you are not expecting any sort of restructuring or impairment charges for third quarter? Is is that true?

At this time, no. We took a good hard look at it at the end of second quarter in conjunction with second quarter. The business is down, the market has been tough. Now we are not expecting anything additional.

Great, thank you very much.

Our next question or comment comes from the line of Mr. Tim McHugh from William Blair. Your line is open.

First I wanted to ask about G&A two questions about that, I would have thought it would have been down more given the restructuring charges you've taken. If you can comment. Is there more expense savings that will flow through as we go through the second half of the year, maybe comment on the run rate.

Bulk of the G&A is at least in the near-term not variable. It's real estate lease related, it's infrastructure costs like what we pay on our contracts for our IT network and the like, that makes up the lion's share of that. The amount we can affect near-term is small. To the extent it has come down it's because we work hard on that variable piece of it. We do expect more improvement in the second half of the year. And over sort of the medium term as we look into 2010 we expect significant improvements as we are able to work with our footprint related to real estate and some of the things we are working on to bring down other sort of the large elements of fixed charges we have within the G&A.

And on the cost of services or the compensation expense line, the bonus accruals someone was asking earlier about this they are absolutely obviously extremely low here in the second quarter as business would start time improve, how much of the revenue increase would we need to see flow back in to the bonus line to compensate the consultants back to a level that's going to keep them happy versus how much can we expect a flow through of profit at this point?

Without getting in to too much detail here, in the situation we are currently in, a much higher proportion of additional revenue will drop directly to the bottom line. That's simply because we have a number of consultants out there who have not reached the trigger point to pay bonuses which is a reason you are seeing it so low. It is a calculation based upon current revenue and whose produced that revenue. So we are in a situation where the answer to your question is a little bit indeterminate in it depends on the mix, who sells what, but in a situation we are where we have much higher proportion of consultants who have not reached a trigger point to pay bonuses yet than we normally have a higher proportion will drop to the bottom line.

Okay. Lastly if I could foul up on earlier question about fees per search. You had said that it was -- there is not a change in the historical one-third of compensation model. Or in how you are recognizing revenue so I wasn't very clear why what the explanation was for the pressure on the average revenue per search as you report. If you could elaborate on that a little more.

Part of it is mix of assignments. And what we seen in sort of the first half in the mix of assignments, that has an impact on this. Another is the structure of it, even though we -- get, charge the same amount if it's structured differently as Kevin mentioned earlier, cash is king these days, and a lot of our clients like ourselves are trying to husband all their cash, so there maybe less up front and more paid on the back end but the same total amount. What that does means we only recognize that initial commitment up front. Being conservative accountants we only recognize that up front piece that puts some downward pressure initially on the average fee per search as well. That -- we should pickup, in the back half of the year of what is know as upticks when we close out the assignment.

Following up than, the mix of searches, is that by the level of employees, by practice area, financial services being weak, can you explain what you meant by that comment.

That's a big piece of it, financial services have traditionally had very high salaries, therefore generated average higher average fee per search. We know the struggles that are happening in that sector. As that sector has been more severely hit that affects this mix in terms of just the size of the salaries we are seeing on the jobs we are doing. That's a big piece of it.

Thank you. Our next question or comment comes from the line of Tobey Sommer with SunTrust.

Switching gears a little bit. Wanted to ask you a question about leadership services and the goal you have in front of you, in that regard is pretty big over the next several years, wanted to see if you could update us on where you stand in terms of that development, thank you.

As we develop our firm to become a leadership advisory firm, we are focused on this, it's part of a strategy, five year plan as we have in place, as you mentioned and that we have been vocal about. What is fantastic is the business this year, leadership consulting business has grown up 7%, year-over-year. And we continue to invest in that, we have gone through training our consultants across the globe, it is the one piece of the business we continue to invest in, so we had training in both Asia Pacific, North America and Europe this year. We will continue to train consultants and invest in the business, we will continue to look at growing organically and inorganically as well. What we seen is a demand for leadership consulting this year, as clients have focused on developing assessing their own talent internally, while simultaneously focusing on succession planning, we are excited about the progress we made so far and continue to invest, our goal is to grow the business to about 40% leadership advisory over the next four or five years.

Just wanted ask you in terms of acquisitions, the cash balance is down a little bit obviously for some one time reason. And I guess the expectation is for that to start to rebuild itself over the balance of the year and off in the future once the market resumes growth. What sort of appetite do you have in how stable does the business need to get and start to grow before you feel comfortable deploying cash to spur the growth in leadership derailment.

Well, it's -- I think it's there is a couple of things, number one waiting for the financial markets to open back up, simultaneously as Scott mentioned earlier, we expect our cash balance to increase going forward. Those two come together over the course of the next six months, nine months, we are very happy with where our business is today from the cost side how do we focus on driving productivity and making sure we invest in consultants to bring in the revenue for the top line. Over the course of the next six to nine months, given the cash balance in the financial market there is is something interesting for us to look at out there, we will definitely keep that in mind.

Some of the additional comments about the cash balance, one, one is a very technical sort of comment and that is what you are seeping in 2009 is impact of paying very significant bonuses out to consultants in March related to 2008 which was quite at good year. Approximately, $130 million was paid out in what is from a cash generation standpoint a relative weak year, 2009. We have the opposite impact in 2010. Hopefully a better year if as we all hope this recovery comes and trends improve and paying out relatively small bonuses because 2009 is relatively weak year, you will see a fairly significant improvement in the cash position as we move through that timing cycle. The other thing is we have $75 million of committed line of credit that's available to us. As it relates to acquisitions, I think it's too early. We've gone through a very significant analysis of the leadership consulting market as well as a search market. And what is becoming clear is that the growth in that business is going to be a combination of things. A combination of organic growth, where we already have an established footprint in the market and a lot of skills. It will be a potentially some team lift-outs or large hires of groups of people that bring in specific skills but not necessarily an acquisition. Then the third thing is some acquisitions. But the market is relatively fragmented. It is clear it is going to be a mix of those three things as we go forward.

If you could comment on competition, whether you seen changes there, particularly vis-a-vis, the slight change in payment with the last third of the fee being overweighted towards when a confirmation is a search is consummated.

You see that more for a lot of the small local boutique, we have not seen that with the firms we are competing against . Global footprint helped us during the downturn. We haven't seen the pressure if we were just focused on a capital markets business in New York, I think would have to be more flexible than we are today, but fortunately we have a great group of practices both functional and industry across the global. So we have not seen that with the major players that we compete against but with a lot of the local

Our next question or comment comes from the line of Mark Marcon of RW Baird. Your line is open.

Wondering if you could talk about specifically if revenue stays flattish, what would you expectation be in terms of the expense reduction from the actions that you've take than were partially seen in the second quarter but not fully seen. In other words, what should the expense rate go down to for the third quarter?

We are not providing guidance looking out. I'm going to be a little circumspect in answering that. But you know we are still -- our expectations still to see an improvement in the revenue in the second half. One of the issues you are seeing in the second quarter, first quarter and also second quarter, is if you lack at slide four and look at the trend of confirmations, we are still seeing the impact of that November, December, January, February, sort of get work through the system. Just on the basis of how we recognize revenue. As you see the back half of the trend start to feed in, it gives us a boost in the second half just sort of on a accounting basis. So that combined with the recent trends leads us to believe you will see improvement in the revenue in the second half of the year. As to the expenses, I think what we wanted to convey is that at the current level of revenue, we have now gotten our cost structure aligned to such an extent that we are breaking even or making money so if we do see the improvement in the second half that should fall through straight to the margin, that takes into account the other factor I -- we have working for us is some cost reductions were not fully realized in the second quarter. We are going to have additional improvement in the cost structure in the second half as well as fair one behind us, hopefully improvement revenue as well.

That's all I was trying to get at, Scott, was the all other things being equals what would the impact from the changes that you've made be if that we haven't seen already?

Yes. Again -- I'm trying not to quantify things that are in the third quarter and fourth quarter because of the uncertainty of the market. Principally at the revenue line not just the cost line.

I'm trying to take the -- I understand you are not giving guidance, I'm trying to take the revenue part of the equation out of it. Even though obviously it would be -- it's impossible that it's going to be exactly the same. But if it were, just to try to nail down like well how much of the expense savings did we see versus how much could we see going forward.

Again I'm trying not to specifically can't fie it. There is -- there are significant expense reductions we expect to fall through in the second half here. I'm just a little uncomfortable given the uncertainty it, I I know what you want but I'm not sure we can give it to you.

We talked about a couple in the call. Second reduction didn't happen until mid May.

That's exactly what I was trying to get at.

That salary reduction wasn't implemented until July. There are things to fall through, it's just a question of quantifying what that number is.

That's all I was trying to get at. That seems like a fact as opposed to projection.

Yes. It is a fact in some sense but the other one is a big piece of our compensation is, are our cost structure is compensation. And that will change depending upon revenue. Given an absolute number is very difficult until we get the revenue and revenues (inaudible).

If we take a look at the sequential change adjusted for revenue that we saw going from first quarter, to second quarter. Would the magnitude roughly the same that we would expect to see or --

In terms of going forward to third quarter and fourth quarter?

In to third quarter. You're not expecting additional expense reductions. It sounds like you don't have other restructuring plans.

We don't have restructuring Mark, we have things such as upticks that come in, we have new searches. We have seen an uptick in comp firm use see and Scott pointed out in slide four, at the same time until we actually close the books at the end of the quarter actually close the books at the end of the quarter we are not going to understand how many -- we track it on a daily and weekly basis the number of upticks, the number of new searches yet, until we close the books we are not going to know from a percentage stand point what that is going to be

Can you talk a little bit about the free cash flow. Is the expectation that even if revenue stays at the current level free cash flow will continue to increase? Or is it dependant on revenue picking back up to we get to the $400 million level?

Well, I mean, it's always dependent revenue.

Sure.

You know. You know are we still expecting to be about in the order of where we were, the answer is yes. I mean, a lot of its going to depend on what the revenue number is. We will, I mean what I am confident of, is that, we reached the point that even at the current level of revenue what we saw in the second quarter, particularly at the of the second quarter we are generating operating cash flow. And how much will largely be determined by the revenue line as we go forward. But I think the important take away here is that the Company has now aligned itself, it's cost structure to be both generate operating profit or income, as well as generate operating cash flow at this level, and so again our expectation is still we will see improvement from this level, but that improvement will generate additional cash as we go forward.

Can you talk about, obviously nice uptick here in July. Is it our expectation that that can continue in terms of the confirms or would the normal seasonality take affect in August and we will have a slowdown a downtick in August and then probably resumption in September. How are you thinking about things?

I think, we are in to unchartered territory here, because of -- we've known for a while that many of our clients have put positions on hold that they know they are going to have to fill at some point. They are looking for some sign out there of when they want to move. That is creating a different pattern potentially in the market than we've seen and is another one of the reasons why we are not providing guidance for the rest of 2009. July should have been a slow down, based on all past patterns, been lower than June. It's not. It's looking to be not only better than June but probably the best month we've had the entire year. That is total counter to the rest of the pattern here. Do we see that continue in August? August, as you correctly pointed out, tends to be a vacation month and a relatively slow month traditionally but so is July. Certainly the sort of chatter we see going on, the level of activity would seem to indicate that things are continuing at accelerated rate, but only when we get there will we know for sure, too many things which are different this year than past patterns. That's not to take away at all from the fact that July has been a revelation to us. Not only better than June, but the best month of the year, in a month which traditionally has been anything but. And that can't be anything but good news.

At the a same time, it sounds like you are going to remain conservative and focus on protecting your cash balance. You are not going to think one month does a trend make and we are out of the woods.

Correct.

You are talking to a very conservative CFO, I think in many ways my CEO, my boss to my right is more conservative.

That's good, great, thank you.

Our next question or comment comes from the line of Andrew Fones with UBS. Your line is open.

Couple of follow ups. Appreciate it. First on a SG&A, wondering if you could explain of the 5.5, 6 million in year-over-year decline in SG&A cost, how much of that was variable versus fixed? Thanks.

I think it's all variable, almost by definition. We've done a little bit on premises costs and stuff did you most of that is ahead of us. I think the bulk of the goal which we stated and still frankly are committed to which is reducing our premises costs, real estate costs by about $10 million, on an annual basis most of that is ahead of us. Because that takes a while to work through the system and stuff. Substantial part of this is related to travel, and meeting expenses and all of that which are a big variable component where we clamped on real hard. That's where the majority of the savings are coming from.

Andrew if I can add to that. Every quarter it's going to be a little bit different in terms of how you define as Scott said by definition they were all variable. Some we consider fixed like maintenance and premise costs and insurance, and depreciation. And then others are variable. In general, probably it's not quite half, 50/50 variable, 50 fixed, more depends on the quarter. But this quarter if you look at the the year-over-year decline, we improved our -- we decreased the G&A cost in the variable component by 29%, almost 30%, we did do a great job not as Scott said as travel and entertainment and other variable expenses that we had a great handle on this quarter and did see a great improvement.

Okay. Thanks. That was what I was trying to drive at was the travel and meetings and entertainment.

Some of the other, the fixed is where Scott was referring to, we have programs in place, and really taking a look, those just take a bit longer to flow through.

Understood. Thanks, the second question, I just wanted to (inaudible) -- not looking for you to took final points on it but you commented about some of the pick up in confirmations coming from pin-up demand. Just wondering as you look at that growth, what you would of the -- of the month improvements, January, February, come from just release of projects you've been expecting versus new work that was perhaps a surprise of the consultants coming in, just wondering if you can give me a general sense.

It's tough to quantify, we raised the level of going into the fourth quarter last year, we raised the level of business development and continue to focus on that, you have seen a trend this year where it's taken longer for clients to sign engagement letters, so in terms of breaking it down, we can't put a number on it at this point because it's combination of business development and the fact that there is new clients that developed over the course of the last six months that are now starting to recruit as well and businesses that are looking to come into different regions and/or grow their different product lines so it is a combination of all of those.

Thanks.

Our next question or comment comes from the line of Mr. Kevin McVeigh from Credit Suisse. You line is open.

Scott, when you talked about breakeven at current revenue level, does that assume the same level of bonus accrual or that breakeven assuming higher bonus accrual in the second half of '09.

The amount of bonus accrual is entirely determined by what we sell, closed confirmations we have got, The program has not changed. And it's just determined by how much. As business picks up the amount of bonuses accrued will pick up in some proportion to it. We do have, as I mentioned earlier, the benefit this year of the fact that there is a number of consultants who have a fair ways the to go before they reach the trigger point to pay bonus. Probably be a little less of an impact as revenues grow if revenues grow as we go forward, but it is determined solely by how much we actually sell, what we achieve in the market here.

Okay. Thank you.

Our next question or comment comes from the line of Mark Marcon from RW Baird. Your line is open.

Just to clarify the last question, breakeven if you achieved $400 million, right?

Yes.

Okay. So if less than that, then we may end up having a -- at least on a reported basis or at least on the income statement a slight loss but we could still be cash flow positive.

Both are correct statements, yes.

Then, as you look ahead, eventually things will turn, maybe it's a new normal, maybe it is a "V", nobody knows for sure. How are you thinking about longer-terms in terms of where you would like to invest. We've seen comments previously about maybe becoming more involved in terms of internet. There is obviously, also, secular growth that's occurring in Asia. How do you think about that Kevin in terms of once we get through the storm and your priorities for investment?

They are twofold. It's a great question. And the market will pick up. Whether it's a "W" or "L" or "V" as you mentioned, nobody is sure at this point in time. When we talk about technology it is all related to productivity. And our ambition and goal to drive that number from the 1.7 we saw at the high last year in second quarter, to somewhere around 2. Our goal is to eventually through technology enabling consultants to be better, faster, and more efficient to deliver a higher productivity number across the board across every region. So when we invest one of the investments we are going to make in technology, the other in training consultants that's step one. How do we get more revenue from each consultant and how to enable them to serve clients better. Part two is really focusing on the leadership advisory piece of the equation that we talked about before. Over the course of the next four to five years, we already started on this and seen a lot of great results so far, is really investing in training and developing our people to become or giving them more arrows in their quiver to have different types of conversations with their clients, that we have done for a number of years, revolving around succession planning, retention, development, and assessment of their talent right now. And we have seen, particularly in these markets, there has been an inward focus from a lot of our clients who use Heidrick & Struggles to figure out what talent they have, is that talent -- is that talent they need to execute their strategy going forward and when they come to us versus one of the other leadership firms, we are giving them a feel of what is out there in the market, vis-a-vee, who are the "A" players at the competition, not doing it based on quantitative metrics on a piece of paper. We have seen an increase in that business, so, again, it's twofold. Number one, helping our consultants and driving productivity and two, our ambition to become a leadership advisory firm where it's roughly 40% of our business, again, not shrinking the executive search business because we want to keep growing that by region, and by practice, but also making sure that we get the whole talent chain enable our consultants to serve clients across the globe.

On the leadership advisory side do you think long-term margins can be equal to what they are on the consulting side?

Absolute we are looking somewhere in the mid teens. That's our goal. Long-term. To have the margin somewhere in the mid to high teens.

Can you take about competitive behavior not from a revenue or from a pricing perspective but from a poaching of existing consultants perspective. Has that slowed down? Are you seeing a dimunition in that sort of activity?

It has slowed down you see protruding from the competition but one thing to bear in mind it's very difficult at least for the top firms to recruit somebody from a direct competitor unless there is white space. You have a situation where we face off limits, for example, if we work for three major consumer goods companies one of our competitors is working through three different ones, so if they joined Heidrick & Struggles they would have to give up the clients they with are working for, so basically it would be like hiring somebody that's starting from scratch and it would take them 12 to 18 months to get up to speed. Unless we have white space and certain practices in life sciences where we hired directly from competitors and the CEO and board practice where we made significant hires, then it's very difficult to bring somebody on board, would rather focus on developing our own people.

Great, thank you.

Given the time I think happy to take one more question.

I'm not showing any questions in the queue at this time, sir.

Great. I would like to thank all employees around the globe and thank you all for getting on the conference call today and have a good day.

Ladies and gentlemen, thank you for participating in today's conference this concludes the program. You may now disconnect. Everyone have a wonderful day.