Heidrick & Struggles International Inc (HSII) 2009 Q4 法說會逐字稿

Welcome to the Heidrick & Struggles fourth quarter and 2009 conference call. (Operator Instructions).

I would now like to introduce Julie Creed, Vice President of Investors Relations. Ms. Creed, you may begin.

Good morning everyone and thanks for participating in our fourth quarter and 2009 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer and Scott Krenz the Chief Financial Officer. As a reminder, we will be referring to supporting slides that are available at our website at heidrick.com. and we encourage you to follow along or print them. As always we advise you this call may not be reproduced or retransmitted without our consent.

Also, we'll be making forward-looking statements on today's call and ask that you please refer to the Safe Harbor language contained in our news release and on slide 1 of our presentation. Now, I will turn the call over to Kevin and he will start on slide 2. Kevin?

Thanks, Julie and thank you for joining today's call. 2009 was a challenging year. In fact, the year-over-year revenue decline of 36% was the worst in our history. It is not the kind of year any management team enjoys reporting to its employees and to its shareholders. The declines in salaries and employee benefits and general and administrative expenses were extremely significant for a company who's key assets are its people. So I would like to start the call today by thanking our employees and acknowledging the sacrifices that were made this year that helped our company through this recession.

But there were many positive headlines too. Heidrick & Struggles achieved break even operating margin excluding restructuring and impairment charges. This is quite an accomplishment given the drop in net revenue. There are a number of other achievements, which I will highlight later in the call, but first I will give a quick overview of some of our key financial and operational metrics in 2009 starting with slide 5. This was a global recession and all of our regions saw at least a 25% decline in revenue. And as you can see in slide 6 arguably this recession may have started in financial services, no industry was spared from the impact. All of our industry practices saw a decline of at least 25% in net revenue.

Looking at slide 7, a bright spot in 2009 which we will talk more about later in the call is the growth in net revenue from leadership consulting services. We are starting from a small base but a year when most every other metric metric was down, leadership consulting revenue grew 11% to $26 million and represented 6.6% of our business.

Continuing with slide 8, we confirmed 3, 651 executive searches in 2009, down 24% from 2008. The Americas saw the largest decline while Asia Pacific the smallest decline but is it I will a double digit decline.

On slide 9 the average fee per search was 101,000 compared to 122, 600 in 2008. Again, every region contributed to the decline, EMEA the most, America the least. The decrease in a number of financial services searches was our major factor in the lower fee per search.

Looking at slide 10, productivity which we define as annualized net revenue per consultant was $1 million in 2009 compared to $1.5 million in 2008. This reflects a 36% decline in net revenue but only a 14% decline in the number of our consultants. As you know, we made a conscious decision to keep consultant resources in order to be prepared to meet market demand as market conditions improve which we are starting to see now.

Turning to slide 11, consultants head count at December 31st, was 359. Voluntary turn over of consultants was 8% compared to 6% in 2008. Today our consultant's headcount is approximately 375 which primarily reflects annual promotions which occur each January.

While 2009 was clearly history making for the extent of the decline, we are optimistic it represented the bottom. And unlike the last recession where revenue declined for three years, we will only have had to endure two years of decline in revenue.

We are encouraged by positive trends in the fourth quarter confirmations for the first time in nine quarters reflected year-over-year growth. Monthly confirmations in January increased year-over-year as well and February looks like it will be similar to January. Now I'm going to turn the call over to Julie for an update on some of the key line items and then Scott and I will go into more detail on our outlook.

Thanks, Kevin. Our press release and our slides provide you with all the key financial and operational metrics of our fourth quarter. But as usual, I will give you additional color on the other line items on the income statement. Starting with slides 14 and 15.

Salary and employee benefits expense in the fourth quarter of $69.4 million decreased $29.3 million, or 29.7% year over year. Of the decrease, $15.4 million reflects lower performance related variable compensation which is largely as a result of lower revenue, provide considerably fewer consultants were bonus eligible. And fixed compensation declined $14 million, mostly as a result of a 20% reduction in global headcount compared to last year's fourth quarter, and also reflecting the firm-wide salary reduction of approximately 5%. Total stock based compensation expense in the quarter was $4 million, a decline of $2 million compared to last year's fourth quarter. This decline largely reflects the shift in deferred bonus compensation from RSU's to cash that we made last year. Salaries and employee benefits expense was 63.2% of our net revenue compared to 73.2% in last year's fourth quarter.

Turning to slide 16, general and administrative expenses in the quarter were $30.3 million a decrease of approximately 700,000 from last year's fourth quarter. The decline reflects the impact of our continued cost savings actions and a decrease in bad debt expense, partially offset by higher fees for professional services as we continue to invest in infrastructure and improvements.

Moving to slide 17 during the fourth quarter we recorded restructuring and impairment charges of $1.3 million. $1.1 million of this amount reflects restructuring charges,all cash for severance related to work force reductions associated with our process improvement project. And $200,000 represents an impairment charge on our client relationship intangible asset associated with our acquisition in February 2009 in eastern Europe. And finally, you'll see on the income statement that we recorded Other Operating Income of $17 million. This also relates to our acquisition in eastern Europe.

As a result of lower than expected 2009 revenue production from the consultants who moved to Heidrick & Struggles and uncertainty regarding their future performance we reassessed the future earn out payments under the new accounting rules for business combinations, which resulted in a $1.7 million reduction to the original earn out accrual.

Briefly looking at 2009 results, and slides 18 & 19, salaries & employee benefits expense decreased $153.8 million or 35.3%. $104.7 million of this decrease was due to lower performance related compensation expense as a result of lower net revenue, thus significantly fewer consultants who were bonus eligible, as well as an operating loss in 2009.‚  And $49 million of the decrease was a result of lower fixed compensation expense primarily related to two workforce reductions, base salary reductions, and a decrease in severance expense in 2009.

It is difficult for a professional services company to keep up with a rapid decline in net revenue. We did make two reductions in force, but we also made a conscious decision to keep consultant resources. The result was a significant shift between fixed and variable compensation.  Fixed compensation ended up being 88% of salaries and employee benefits expense, and variable declined to 12%.

Total stock-based compensation expense in 2009 declined to $19 million, compared to $24.8 million in 2008 mostly reflecting the shift in deferred bonus compensation from RSUs to cash that we made last year.

Turning to slide 20, General and Administrative expenses in 2009 decreased $9.3 million, or 7.4%. Savings associated with our cost containment initiatives amounted to $12.5 million and other items that contributed to the decline were $2.6 million decrease in bad debt expense and decline in rent expense of $1.4 million. These savings were partially off set by higher fees for professional services of $6.4 million, $5.1 million which specifically relates to our process improvement project as well as an $800,000 increase in infrastructure and other operating expenses and a write off of $800,000 for cost related to a software development project.

In 2009, we recorded restructuring and impairment charges of $26.7 million. $22.6 million of this was the restructuring charges related to severance and other employee related costs associated with reducing our global headcount by 363 employees. The other $4 million related to impairment charges, $3.8 million of client relationship intangible asset associated with our 2006 Highland Partners acquisition and $200,000 which related to our client relationship asset associated with the Eastern European acquisition which I mentioned just a few minutes ago. And now, I'll turn the call over to you Scott.

Thank you Julie. Let me emphasize something that Kevin said earlier. The trends we have been seeing in the last few months have been positive and encouraging. Maybe some companies are taking the view that the recession is behind us. We, however, are taking more of a "show me" approach. We will react as the timing and shape of the recovery become clearer over the coming months.

If you turn to slide 22, you will see that beginning in October monthly confirmation levels showed year-over-year improvement. Because of the lag between when a search is confirmed and when we recognize revenue, the year-over-year improvement really begins to be seen in the first quarter revenue. We are expecting first quarter 2010 net revenue will be between $110 million and $117 million. This is year-over-year growth of 23% to 31%. We estimate the first quarter 2010 operating margin will range from 2% to 4%.

First quarter operating margin is a challenge for a number of reasons. The restoration of the 5% base salary cut and 401K match, both cost savings measures taken in 2009 add approximately $10 million annually and $2.5 million per quarter to our costs. As with most professional services companies, US pay roll taxes kick back in during the first quarter. And although improving, consultant productivity has not yet returned to the levels we saw in 2008 . There are a lot of unknowns when you look out a year. But based on what we know right now, we are estimating 2010 full year net revenues in the range of $440 million to $480 million. That would be growth over 2009 of 11% to 21%.

Lots could impact this estimate. First and foremost being the pace of economic improvement in each of the 30 countries in which we do business. All industry practices are expected to grow, but we are anticipating more significant contributions from Financial Services and Leadership Consulting. A change in this mix is another factor that could impact full year 2010 net revenue.

Not to beat a dead horse, as we think about 2010 margins, let me remind everyone what I just said about taking a show me approach about the economic recovery. At this point we estimate a 2010 full year operating margin of between 4% and 6%. Many of the factors we mentioned with respect to the first quarter also impact a full year. Restoration of employee benefits and revenue per consultant being major factors. In a year like 2010, where revenues accelerating out of a trough we will add new people. In addition, we are adding new people focused on clients we do not currently serve, what we call white space. And we are continuing to invest in leadership consulting.

New people take a period of time to get up to speed. This is particularly true of consultants who we estimate take 12 to 18 months to hit full stride. And this in turn is a drag on productivity and margin. In years of relatively high revenue like 2007 or 2008 this is not as impactful. Unfortunately, we are coming off of a low revenue year.

Estimating tax rates at Heidrick is always a bits of an art. Being a relatively small company operating in 30 countries, the mix of earnings by country has a sizable impact on the full year effective tax rate. Based on our current estimates, we anticipate full year effective tax rate of between 35% and 42%. As year progresses, we will be able to refine this number further.

Stating the obvious, compensation expense is the major driver of our profitability. In 2009, compensation as a percentage of revenue was 71%, the highest level in the last ten years.

This was driven primely by two factors. The lag between our ability to shed had compensation compared to the rapid revenue decline we experienced in 2009. And the fact that in a conscious effort to preserve our capabilities we carried more consultants than required for 2009 revenue levels. We are not comfortable with this level of compensation as a percent of revenue. For the last ten years we have ranged between 66% and 71%. Our goal is to return and sustain a level close to the bottom of that range.

Turning to slide 27, our cash position continues to improve. Our cash position at year end was $123 million, up $48 million compared to September 30th and somewhat higher than we had anticipated. In March, we will pay $47 million in variable compensation. So subtracting that, we still maintain a healthy cash balance.

Our focus in 2010 is to continue to strengthen the balance sheet. We expect 2010 free cash flow of between $10 million and $25 million. Free cash flow is net of the increase in accrued bonuses and capital expenditures. 2010 capital expenditures are expected to be somewhat higher than normal, $26 million to $28 million. This reflects a higher level of real estate fit out costs and investments in our IT infrastructure, principally latitude our new research system.

Let me end with a couple of real successes. I mentioned a relatively high level of real estate fit out expenses. This relates to a number of projects completed or will be completed in 2010. When complete we will reduce our rentable square feet by 13%. This will produce nearly $4 million of savings in 2010 and nearly $9 million in 2011. And we are still working on our $10 million annual savings goal. During 2010, we will complete the first and the biggest phase of reengineering our G&A processes. At present, we estimate that on a full year basis, this will generate approximately $8 million in annual savings. We will continue to fine tune these processes to achieve the $10 million savings target we set for ourselves. With that, I will turn it back to you,

Thanks, Scott. 2009 was a long year and probably one of our toughest but there were a number of highlights as well. We achieved break even operating break even excluding restructuring and impairment charges despite a 36% drop in revenue. We reinforced the Heidrick & Struggles brand with some very significant client and search wins including Yahoo, and the direct TV CEO searches. We applied the lessons we learned in a previous downturn and decided not to cut as deeply as we had in 2001 to 2003. We invested in a number of key recruiting in the year and feel better positioned to compete as the economy improve as we are starting to see now.

We furthered our industry and practice led structure. And finally as I mentioned earlier we made great progress in our goal to become the world's first leadership advisory firm. Leadership Advisory is defined as the service experienced by clients when their leadership risks and challenges are solved through the deployment of our consulting and search resources, either in collaboration or directly. Our mission is to be recognized as the premier authority of leadership talent focusing not only on the acquisition but the retention, development, assessment and succession planning. I can't predict how quickly the economy and our business will recover but I do believe we are better positioned as a company to take advantage of a recovery and make a bigger impact at leadership teams around the world. At this point we would be happy to take questions you all might have.

(Operator Instructions) Our first question from Tobey Sommer.

Thank you. I was wondering, you gave a lot of detail in your prepared remarks, but I may have missed, what level of fixed expenses have you trimmed over the last 18 months that may not recur as you start to see better revenue? Thank you.

I think to start with the real estate expenses and the G&A expenses are gone and they will not come back. In total that is expected to be $20 million, probably another year or so out here. Right now, what we have quantified is something on the order of $16 million which will impact 2010. Those definitely won't come back.

The harder thing though to quantify and here Kevin may want to jump in as well, is we took out a lot of people during the year. We took out approximately 21% of our people during the course of the year. Many consultants, also some search associates and others within corporate functions in stuff here. I think I addressed corporate functions. But I think the biggest factor will be how fast we can improve productivity going forward. And how many of those as revenue grows will not come back or at lease not come back at the same rate they did before. I don't know if you want to add to that, Kevin.

Tobey, I think you've heard in over the last couple years Scott and I conveyed we believe that we can on average get productivity up close to $1.28 million per consultant. And that's our collective goal now. The balance we are trying to strike is as we see the market pickup across each and every practice and leadership consulting, how do we balance the resources we have in the firm before adding new once in the organization. Scott alluded to this, or mentioned this in his remarks earlier. We do see through an analysis a lot of opportunity for us both from a practice perspective globally and geographies that we believe we have the ability to capture market share.

Our next question from (indiscernible) Buff.

I think that's me. First I wanted to ask about the fees per search if you could give a little more color there. I know mix shift has a big impact on the year-over-year comparison. So, maybe on an apples to apples basis, what are you seeing in the different practices as it relates to your fees and what is impacting that?

The fees per search, obviously we mentioned last February that there was pricing pressure. And we were working with a lot of clients that were long-term Heidrick clients on how we mitigate that risk and the downside. As we talked about before when it specifically comes to financial services, many times we are capped in the $350,000 to $500,000 range. It wasn't necessarily the number of searches that brought down the average fee but it was more of the mix of our -- that you just mentioned, the mix of where the searches came from and financial services, quite frankly had a big impact on the average fee per search last year. But as a whole I think what we have seen over the course of the last 6 or 8 weeks is that these fees are starting to come back.

As I said in my comments, Tim, a lot of this is as Kevin said mix. Professional services or financial services is extremely important to us. Right now we are seeing a pretty good recovery in financial services and in that practice which is something which is very gratifying to us but also figures into 2010. That's why I said any movement away from that, financial services does not recover as quickly as we think it will here. And we are seeing a pretty good recovery. It could impact our full year results in terms of revenue because those are areas where we tend to have relatively higher fees per search.

So just so I understand, wouldn't the relative strength in that business help the average fee per search year-over-year or what am I missing?

It will help. The issue is primarily on the up tick side. The calculation of the average retainer up front versus if someone gets a higher compensation package down the road. We then have to charge the differential between that 33% what the number of that package was. We've seen a number upticks in the last 6 to 8 weeks, which in turn impacts the average revenue per search.

The other topic --

To put it in perspective for you, if you recall last year, February, March time frame is usually when financial services picks up primarily because bonuses paid. We didn't see as great an increase at that time last year, February through June. But the financial services industry did pick up around the July time frame. So we expect to see that pick up carry into 2010.

Ok, and the other thing was about hiring plans to 2010. I know you said you are taking some what cautious approach to the recovery, but how aggressively do you plan to start hiring. Or are you looking for something at which point you will start to get more aggressive later in the year.

Well we spend a lot of time. If you go back and look at what happened in the 2001 and 2002 time frame, as an organization, we ended up cutting more dramatically or drastically than our competitors. And it took us a couple years to grow and catch up through investing and recruiting. There are two things that we are focusing right now. Number 1, we made a conscious decision as we mentioned earlier not to cut as deeply because we have some great consultants here but given the market conditions were off.

So, we do have capacity in the system right now. And simultaneously we will make select hires across the globe where we do have white space. I wouldn't look for a wholesale recruitment effort. There are two things we are going to do. Focus on productivity with the capacity in the system. And also, over the last couple of years we have a great internal talent management program. So, we are focusing on developing our own beam. As you have seen with the promotions this year we have the number of consults in the range of 15 to 18 who become consultants. So, it is a combination of those we are looking for this year.

I would add that to (inaudible) in leadership consulting, as I said, we will continue to invest there. Of all the areas we saw, that's the one that continued to grow throughout 2009. And where we probably are really pushing the limit of the capacity we have got right now. Those people are working extremely hard right now. We will continue to invest during the year and bring on people in that area which is really responding to a really strong demand.

Okay, thank you.

Our next question comes from Andrew Thung.

Thank you. Couple questions, if I could. First on your full year guidance, $440 million to $460 million, kind of looking at the midpoint of the range there, it looks like you are looking for on average something around $115 million a quarter which is very similar to your Q1 guidance. It looks like you are looking for a flattish year from Q1. If I look at the slide on confirmations, other than July last year where you had a bit of a spike up, we've seen a pretty steady trend in terms of 2009 catching up to 2008 levels. And eventually over taking in the latter part of the year. So these kind of starting this year with what looks like 30% higher level of confirmations in January and February relative to last year suggest that you are seeing a steady trend towards growth. I think your Q1 guidance also suggests that up 20% for revenues. I guess my question is why such a conservative approach to the balance of the year in terms of your full year revenue guidance?

Two things. First, the guidance I gave, I'm sure is in the release, was $440 million to $480 million. You have to give me credit for the extra $20 million at the top end there.

But I think I said it. And that is we came out of what is an unprecedented year. The revenue decline we saw is the greatest in our history. I don't think anybody fully understands exactly what happened here in terms of the general economy. And I think there is still a lot of conversations about how the recovery is going to happen during the year.

So, as I stated I was accusing by some people of sounding like I was from Missouri here. I'm actually from Minnesota. But we really are taking a "show me" approach to this. We are taking all the facts we currently have and baking them into that outlook. And we will see what happens as the year unfolds. I certainly hope, as you are alluding here to, Andrew, that the recovery will be very strong and significant but like I said, we will say show me and let's see it. Right now we think that the prudent level, based on the facts we have in house right now is the $440 million to $480 million.

Okay, just one follow-up. As I look at bonus accruals, I think the increase in Q4 from Q3, I think you increased the accrual from about $3.8 million relative to a $6.3 million sequential increase in revenue looked a little bit higher relative to general I would expect. Do you have anything unusual there in Q4? I know you had a good year. You probably want to make sure you pay people given the salary cuts and other items. Is there anything else we should be thinking about in terms of bonus accruals as we go into next year, given your comments about reversing the salary cuts and so forth?

No, there is nothing unusual there. The plan has been pretty consistent. There have been tweaks but it is basically the same plan we have had for many years here. At the end of the day what we pay out is proportion that will to what the Company makes here and our earnings. You said that 2009 -- there are two-ways of looking at 2009. One is that it was an absolutely dreadful year. Revenue was down 36%. We went from quite a profitable year in 2008 to break even excluding restructuring charges. That's not a good performance. I don't think it is incredibly bad given the economy. But it's not a good performance. And that is bound to be reflected in the compensation we pay people here. As Kevin said we are pretty good about the fact that we managed to maneuver through this year and end up with a break even excluding restructuring. Going forward, it is the same plan. I would expect we will payout significantly more in compensation particularly the variable compensation in 2010 because we are expecting quite a better year than we had in 2009. But again, it will be the same plan we had in place more or less. And we are looking to continually fine tune that. But roughly the same plan that we had in place. And it will be proportion that will to how much we are able to earn.

I guess if I can try that question a little bit differently. Should we anticipate an increase in compensation for the increase in salary? Or are you looking at people's pay overall and all you are literally due doing with the increase in salary is increasing the minimum pay if you would like but it doesn't necessarily mean it will change the overall amount people get paid next year? I'm not sure we are following you here which is probably just a comment on our relative slowness here in this room. Maybe we can talk about this but to try again, we look at total compensation for people, not base. One of the reasons we had, as Julie said the higher amount of fixed versus variable in 2009 was simply we had a number of people who are -- a fairly significant number of people who we said are under water which is simply our term that they haven't earned more in excess of their fixed amount. We knew that was going to happen.

In 2010 we don't expect that to be the case. We expect people to earn much more variable compensation because of the improving economy here. We are looking very hard as I said in my remarks at the overall percentage where we payout. It is probably sort of the at the high end of what we find tolerable this year. Not by the way out of line with our public company competitor that we are obviously compared against here, approximately the same with them. But it is our goal in 2010 to sort of bring that down to what we find more of the historical level we've see as we continue to grow out of this and make people more productive.

The only thing I would clarify -- this is Julie -- I think what you may be referring to or what I can clarify when we referred to restoring the 5% salary cut, you may recall that in 2009 we cut everyone's salary across the board by 5%, that part has been returned. That returns to a fixed cost to salary and employee benefits. It doesn't mean we went company wide and then increased above and beyond that. We restored everyone to the salary they were making for and that became the fixed portion. But we've at least restored everyone to the salary they were making before and that becomes an increase to the fixed portion.

Okay, that was a piece that I was looking for. But what you're saying, it doesn't necessarily change somebody's overall comp. But it just means you brought the fixed component up, the minimum component has been raised. I doesn't necessarily the overall they getting paid.

Right. Everyone's base salary was cut and that part has been restored.

Okay, great. Thanks.

Our next question comes from Ty Gabados

Hi I wondered if you can go into the SG&A a little bit deeper. You have a lot of moving components from including professional fees that might come out a little more this year and then savings later on.

You are absolutely right. We spent. one of the successes of this year being 2009, I'm your classic Chief Financial Officer. I never change here until the 10-K gets filed. So, it comes with a beat here. So, I keep referring to it as this year, meaning 2009 because the 10K isn't out yet. But in 2009 one of the real successes was and we really worked on this, we wanted to produce a break even bottom line which we did absent the restructuring but we didn't want to back off on the major initiatives we had going on here to really improve this Company on an ongoing basis. And there is a whole bunch of those. Kevin enumerated a whole bunch of those. One of them is our reengineering of SG&A and we did invested $5.1 million in that in 2009. There's a little bit more of investment in early 2010 here but you are right. It falls off as we go through the year here. And as we transition to fully into this new structure where he put in place which is a much more efficient structure. And when we completed that, we will have, I'm confident, we have clocked up $8 million of full year savings in that program. I'm pretty confident we will get the $10 million target. We won't get all of that in 2010 but we will get a substantial savings in 2010. The reason I'm not giving a precise number it is determined by when we can shut certain things off and transition to others. And there are systems reengineering and systems configurations going on. But by mid year we should be in there and there will be a substantial savings from our core processes, Finance, HR, IT which are full year ongoing of somewhat in the neighborhood of $10 million of that. And we continue to work on real estate. We made a huge amount of progress in 2009. We will continue to work on that to generate another $10 million of ongoing permanent savings which will come through the G&A line.

Is there a chance that your SG&A than for the year will actually be flat to down more marginally?

Oh, yes, absolutely.

One more question while I have you on a roll. That's why you should never answer these things. Based on your revenue guidance, it would look like a bonus accrual for the year might be closer to 15% instead of 20% of revenues. Reasonable?

We have never really parsed for obvious reasons exactly the percentage in what our bonus accrual represents. All of us in this business are very cautious about letting that out. I will beg off of that. Because that's a number, let me just say though that the plan we have, the guts of the plan has consultants earning something which is directly proportional to the amount they produce during the course of the year. And next year we will be producing quite a bit more than we did this year. And I expect the amount we accrue for these people will go up directly proportional to that and operating income.

Fair enough. Thanks a lot.

You're welcome, Ty.

Your next question comes from Jeff Mueller.

Good morning, it's Jeff Weather from Baird in for Mark Marcon. Obviously we have the re-set and the compensation expense in 2010. But as productivity continues to ramp, can you talk about what type of renew level you need to get back towards directionally to get back to a double digit operating margin?

That's a good question. And there are a lot of moving pieces which doesn't make that something you can't spout something off. We are certainly talking about something that which has got to be in the mid to high 500s, somewhere in there which gets us on the trend lines we are. The reason I'm cautious is we are trying to change that trend line. We are trying to actually improve productivity with a whole bunch of internal things we are looking at. Given where we have been historically, I think a good rule of thumb is that mid to high 500s.

Okay, that's helpful. And then any commentary on Europe and the quarter? It looks like the year-over-year CT trend actually worsened a little bit? Is there any color on any specific geographies or end markets?

Part of it is obviously the currency. Secondly, it was financial services. And some of these geographies in Europe given there are 19 countries which we operate were lit a little harder. France and Germany started off strong at the beginning of the year. And lag a little behind, but you simultaneously see that Europe as a whole went into the recession probably about 6 months behind the US and Asia Pacific. And we've seen a bounce in Asia, a bounce back in North America. And we are just starting to see an increase in Europe but over the course of the last two months.

And then just a housekeeping question, anything unusual impact the tax rate in Q4?

My Tax Director would probably call that the other way and say what is usual as opposed to is there anything unusual. As opposed to is there anything unusual? It was an odd year because again, although we broke even before restructuring obviously from a tax point of view, you need to take that into account. In a lot of countries we had some fairly significant losses and that's always a challenge in trying to estimate what is going on. Again, it is nothing unusual. It is the real issue we have being in 30 countries is trying to figure out where the profits will fall by country and that has a big impact on us. And that has a big impact on us. Nothing unusual although it reflects exactly what you would. The tax rate for 2009 reflects the fact that the reported net income was a loss in many of those countries.

Okay. Thank you very much.

(Operator Instructions) Our next question comes from Tobey Sommer.

I wanted to ask you about pricing in this environment. If you have seen any changes either in the timing that customers are willing to pay the fees or whether you have seen any changes competitively I guess among the big players? Thank you.

Pricing is always an interesting one primarily given the relationships. I think we have mentioned that historically we have probably one of the if not the best strategic partners program (indiscernible) program globally.

Specifically, we have not tended to go towards in the last 12 months clients who are looking to compete on price because when the market picks up they will leave and go to somebody else. We are really focused on maintaining and strengthening a lot of our key relationships around the globe and growing some of those. For example now we are working with over 99, 100 companies and in each and every geography with 40 plus consultants on each account. So, pricing hasn't impacted most of our global strategic accounts.

Now the challenge you run into you try to develop relationships. There have been some competitors out there who go in and try to discount prices given the severity of the marketplace. But we've tried to stick to our pricing models and focus on the longer term relationships. I think that really was beneficial to us over the last 12 months and we are seeing now that it is much easier to go down than it is to come up. And the fact that we have stuck to our guns has been great to us over the course of the last 6 to 8 weeks because we haven't had the discount. Long story longer, is that we did show some flexibility but not in the way we priced. It was more on flat fees versus going and discounting wholesales. So, I think that helps us as we go into a more (indiscernible) market in 2010.

Thanks. Just one last question, could you give us an update on what your expectations are for capital deployment now that the coffers are being refilled. And you have some targets set out there for growth particularly in leadership? Thanks.

I think it is a couple of things. Number one, as Scott mentioned we really want to strengthen the balance sheet this year. But similanteously, as the market picks up, what we have seen and a number of clients are demanding is our advice, particularly when it comes to leadership consulting. So, not only making sure we invest in the training and development of the people we have currently but simultaneously looking at, and Scott mentioned this earlier, looking at where we can grow our consulting leadership business. Primarily because one of the challenges we have this year is delivery. There is such a demand from our clients on the leadership consulting advisory plate and the leadership consulting advisory space, it's how do we keep up with demand but not over hire but similtanously make sure we can deliver the projects that we sell.

The thing that, and I don't know, maybe I'm reading more into your question here, Tobey but, I think you are probably talking about acquisitions and things of that sort. We have never been terribly inquisitive simply because we need to be very mindful of the ability to integrate these into a professional services company. In addition, the shape of most of our acquisitions has a significant amount of the purchase price tied up in earn outs which happen in future years. That is just a long way of saying that relatively little capital goes a long way in terms of building this business. Certainly, we will be looking for things as Kevin said and things that make sense in the business but it should not interfere. And we will not allow it to interfere with rebuilding our balance sheet here in 2010.

Thank you very much.

Our next question comes Scott Tobin.

Can you hear me here?

Yes, absolutely.

This question is for Scott. So, if I look at your operating margin guidance range this year, 4% to 6% and if I just make my own assumptions. And we all know that the outlook is pretty cloudy beyond 2010. But if you were to grow like you did, 2003, 2004, 2005, can you expand that operating margin at least 200 basis points going into a 2010 type time period or does this variable continue to constrain margins as revenue lifts until you get to a certain point of productivity? Can you help us think about the broader margin progression story?

I would be happy to. In answer to your question, is there room for margin improvement? The answer is absolutely yes. We have stated in had past that our goal is to move into the mid to high teens here in terms of margin. I think that's imminently doable as we continue to reduce the fixed nut here in terms of infrastructure and real estate and stuff which I think we are doing a great job of and as we continue to drive productivity. The Company becomes as we move up the revenue curve, we have a tendency to be more productive and that's the case here. There are more people running on all cylinders. And although they take out more, it is not something which continues forever in terms of the size of the take out here from the business here. As we drive more and more revenue through it, we will be able to become much more productive and draw much more of a bottom line. Where 2011 is, heaven knows. We are having a hard enough coming to grips in 2010 here given the nature of this beast. But certainly, if trends and revenue continues to grow and out there we can, as I said earlier easily start looking at the double digit year or year and a half out or something.

Let me ask it differently. In Q3 and Q4 you had a very significant operating performance because you don't have the compensation type of requirements that you now do as you move onto production, et cetera with more of your representatives. Can I consider the run rate of plating margin we are at right now as a quasi new norm that we should see progression from here on a more consistent basis, relative to how Q3 and Q4 were really high, is this new 4% to 6% level a new sustainable baseline that you work off of into 2011?

One, let me make sure everybody understands. What you saw in Q3 and Q4 was to some extent an artificial margin. We were making up ground we had last earlier in the year and we were working really hard. We had the 5% across the board salary cuts we had imposed. We eliminated the 401K match.

We also did a long list of other things to restrain cost in a very bad year. So, that is clearly an abnormal level relative to that level of revenue. Let me say the new norm. We will have margins which will be somewhat cyclical. That is at the higher revenue levels you can expect to see quite a bit higher margins. We are trying, we are working very hard on all these projects we mentioned to make sure if you go back historically that we will be somewhere above the margin levels you have seen and comparable levels of revenue. And that's what all these cost savings and productivity initiatives are about. But it will still go up and down with revenue and that's just the nature of the Company. And it will always be like that. I'm not sure if I call the 4% to 6% a new norm as much as it just represents a level which is a combination of one, a fairly significant revenue improvement over 2009 which is what we are anticipating here for the year. But it also represents some negatives here.

It is still not a return to normal. It is still not hitting on all strides. It's still not all of our consultants working to full capacity here. There are a number of things that will be with us I think throughout 2010 which I think are the legacy of coming out of that trough that we were in. We should be able to significantly improve over 2009. And again very cautiously and if trends continue, you should see those improvements continue through 2011. But, I will not start trying to predict what 2011 is here in February yet. There is nothing that says if these trends continue you shouldn't continue to see the margins improve.

Our next question from Josh Vogel.

Good morning. Thank you. Sorry if I missed this before, did you discuss the expectations you have for the leadership consulting business that was built into your 2010 guidance?

Not specifically, no. We didn't break that out and that is something which gets into a -- gets into an ongoing conversation. As the shape of the business changes, we are considering how that impacts our disclosures and how we break the business up and whether leadership consulting becomes something we actually disclose separately here. We have been pretty open on describing it in the call let us get through the K and stuff and those discussions and then I think we can talk about it. At present we have not told people what our expectation is relative to 2010 in terms of a revenue level. Although we have an expectation that the business continues to grow and grows fairly significantly. But 2010 as we have described on previous calls will be a year of investment. I always describe it short hand is sort of 2008 was conceptualizing. 2009 was proof of concept and 2010 is when we really start scaling this business up.

And what about the margin profile of the business relative to executive search? Can you give more detail there?

We have not really broken it out and got into detail. Other than I said before. Our approach differs from some other approaches in this year. In that we have fully integrated this into a search. It is not a separate independent. It is part of an integrated service offering to our clients. To some extent that sort of pulls the margins into a similar range as being a fully integrated part of that service offering. And it is because of that it is not unlike the search business in general right now.

Okay. Shifting gears a little bit, I understand you took the almost $2 million reduction from the earn out accrual. I was wondering what your expectations were for 2010 and possibly 2011.

That specific acquisition?

Overall and that acquisition.

The real question is do we expect , we take this seriously. This is the sort of new accounting which has been rolled out in the new FASB of how you handle acquisitions now. We were having somewhat of a laugh with our auditors here because we are one of the first companies to actually start working through this new accounting. Having said that, we have made the best estimate we can as to what we think will happen in these businesses going forward. And so at present, we don't anticipate any further need to adjust the levels of earn outs we anticipate. Which is a long way of saying we don't anticipate right now seeing any additional items running through the P&L relative to earn

Operator, I'm showing top of the hour. I don't know if there are any other people in the queue. We will take the questions off line unless there is anyone lined up.

One more question from Mr. Mark Marcon.

I was wondering if you can talk a little bit more about the leadership consulting? In terms of the investment, is the investment going to be in new individuals that aren't currently part of the organization that would be delivering the services? And how should we think about that impacting on the marginal overall guidance for 2010.

It is Kevin. We have spent the last two years as you recall really, one of the things we did not cut the last two years was our training, particularly the training of our consultants as it pertained to leadership advisory. And we have seen a significant return there. Secondly, looking at those markets where there is huge demand. A lot of the emerging markets in Europe and even here in North America we have seen a lot of demand around the whole retention development assessment and succession planning piece.in leadership consulting. It is looking at individuals and/or smaller boutiques that would fit in nicely with our business model today but again making sure that strategically longer term something that will help our business. So, it's really focusing on training and looking globally on where the demand is and trying to make sure we have the ability to deliver for these clients. As we have mentioned earlier, it is one of the only pieces we have seen grew last year. We continue to see that growth in 2010 and that's a significant part of where we believe the evolution of this industry is going. Hence our desire to become a leadership advisory firm.

I have to add to go to your question. Organically, we will be adding people in leadership consulting when we look at our human capital plan. In fact, that is the area that we anticipate adding the most people over the course of the year. And as I said in my comments, as it relates to margin, when you bring new people in, it is inevitable. They have to figure out where to find their desk and where to go to lunch and whatever. And there is always a period of some disruption when they are not as productive as they will be a year out. That does have an impact on margin particularly when the base we are coming off of is relative low. That ramp up in leadership consulting does factor into the 4% to 6% which we gave as our expectation for the full year 2010.

Great. And it sounds like it's the promising investment. Please don't take the question the wrong way. But, I was trying to ascertain if independent of that leadership and consulting, how would the margin profile look? And again, it seems like a real promising area. Just trying to determine on the base business, are the margins for the full year relative to what you did in the back half of 2009. When we look at that margin comparison, is that because more investment or because we didn't compensate as much as we need to based on competitive dynamics in the marketplace? Just trying to think that part through.

You are absolutely right. This is something we are very excited about. In fact, as we have analyzed our business, we see this as a huge opportunity. And quite frankly, it's what our clients are telling us they want.

The challenge we have is finding the individuals who are working at the sea level in this base globally and adding them. But we are quite frankly, very diligent in our process right now. As you think about the margins, we just know from a going back and analyzing the business over the last four years that we should see margins equivalent to that or enhancing the margins of our search business over the course of the next three to four years primarily because it is more of a relationship and longer term solution versus a transaction based solution. And we have seen that our fees increase and our retention rates for clients increase as well. So, that's the other piece we are excited about. So, longer term we would see this has enhancing the margins of the organization.

Great. Can you comment if you weren't doing this, how would the margins look for the full year relative to what we have experienced in the back half of this year?

I think the back half of this year was quite frankly, as Scott mentioned different given the cost initiatives that we have implemented in 2009.

And as we talked about earlier, our goal would be as we get to as we hit the 550 plus level, our goal would be to get back to those margins we saw in 2008 and 2007. Great. Thank you very much.

You're welcomed. I would like to thank everyone for taking the time to join the call today and I would like again acknowledge our employees around the globe for really toughing it out in a very difficult environment. And I hope you all have a great day.

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