Heidrick & Struggles International Inc (HSII) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Heidrick & Struggles first quarter 2010 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 be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to hand the conference over to Ms. Julie Creed, Vice President of Investor Relations. Ma'am, you may begin.

Good morning, everyone, and thank you for participating in Heidrick & Struggles first quarter 2010 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer, and Scott Krenz, Chief Financial Officer. As a reminder, we will be referring to supporting slides that are available on our website at heidrick.com and we encourage you to follow along or print them. As always, we advise you 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 you refer to our Safe Harbor language contained in the news release and on Slide 1 of our presentation. Now, I will turn it over to you, Kevin.

Thanks Julie. Good morning and thank you for joining today's call.

For a long time I have been looking forward to reporting year-over-year growth. And today I am pleased to be reporting our first quarter of year-over-year revenue growth since the second quarter of 2008. It has been a long road to recovery and we are not out of the woods. Our improvement in revenue growth is tempered by the fact that we did not meet our operating income objective for the quarter. But the economy and our business are making steady progress.

First I'll start with a quick overview of some of our key financial and operational metrics in the quarter, starting with Slides 2.

Net revenue in the quarter was $113.7 million, up 27.5% compared to last year's first quarter and up 3.5% sequentially. Every region contributed to the year over year and sequential growth, but Asia Pacific was especially strong and, as we've noted in past calls, Europe has been a bit slower to recover from the recession.

Slide 3 is a view of our monthly confirmations, or signed contracts for executive search and leadership consulting projects. January, February and March confirmations showed slow but steady improvement over the fourth quarter, and like the fourth quarter, were higher than 2009 levels. In fact March confirmations were very close in number to those we recorded in March of 2008 which is obviously quite encouraging. April is also tracking to come in higher than 2009.

Slide 4 is a look at quarterly confirmation trends specific to executive search. First quarter search confirmations were 26.9% higher than last year's first quarter and 10.4% higher than the fourth quarter. Every practice, except Life Sciences, contributed to year-over-year growth, and every practice except Consumer Markets achieved sequential growth. So while Financial Services was the largest contributor to growth, every practice is showing improvement.

Turning to Slide 5, we ended the quarter with 367 consultants. The increase compared to December 31 mostly reflects our annual promotions in January, as well as some targeted hiring in the quarter. We will continue to hire throughout 2010 but on a very selective basis, hiring where we have industry, functional or geographic gaps or when opportunities arise. As you know we are focused on investing in and growing our leadership consulting services and we are placing our emphasis on hiring for this business.

Looking at Slide 6, productivity, which we define as annualized net revenue divided by the average number of consultants during the quarter, improved to $1.2 million, compared to $900,000 in last year's first quarter and $1.0 million for all of 2009. Given this level, relative to our peak levels, we believe there is still capacity in the system to grow net revenue without a corresponding increase in headcount growth.

On Slide 7 -- As you know, the average revenue per search is a simple calculation of revenue in the quarter divided by confirmations in the quarter and therefore can be a little confusing as revenue lags confirmations each quarter. As such, we've decided to provide you with the average revenue per search on a trailing 12-month basis. For Q1, average revenue per search was $100,800, which is essentially flat compared to last quarter. We do believe that pricing and terms have improved over recent months, and we expect the trend to continue, but the improvement will likely take a few quarters to be reflected in the averages.

Turning to Slide 8, the reported operating loss in the quarter was $4.3 million. This loss includes the $4.7 million related to two special items which are explained in the release and which Julie will go into in more detail. Excluding these 2 items, operating income was still not as high as we had forecasted due to several unanticipated and accelerated expenses.

But 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 posted on our website this morning provide you with all the key financial and operational results of our first quarter. But as usual, I'll give you some additional color on other line items on the income statement.

Starting with Slides 10 and 11 -- salaries and employee benefits expense increased by $3.8 million, or 4.8% year over year, mostly reflecting the year-over-year increase in net revenue. Fixed compensation declined $7.8 million, but this was offset by performance related, variable compensation which increased $11.5 million compared to last year's first quarter. The decline in fixed compensation mostly reflects the 9.5% reduction in worldwide headcount compared to last year, offset by a few items like our reinstatement of the 401(k) match in the US, and severance expenses, some of which relates to the reorganization of our corporate support services known as Project Velocity. The year-over-year increase in variable compensation is largely the result of higher bonus accruals related to higher net revenue.

Total stock-based compensation expense in the quarter was $3.3 million, a decline of $2.8 million compared to last year's first quarter. Salaries and employee benefits expense was 73.1% of net revenue, compared to 89.0% in last year's first quarter. This percentage has historically been highest in the first quarter.

Turning to Slide 12 -- general and administrative expenses increased $1.3 million, or 4.4%, from last year's first quarter. The increase reflects the reinstatement or increase in investment in a number of company initiatives including training, business development marketing, and the development of our internal search system.

Moving to Slide 13, during the first quarter, we recorded Other Charges of $4.7 million. As explained in the release, $3.2 million of this amount related to our former London office, which we vacated earlier this month when we moved to a new, smaller location. Of the $3.2 million, $1.7 million was additional expense incurred to settle our dilapidations obligations with the landlord and $1.5 million was occupancy cost and amortization expense that was planned for Q2, but which, because of our move date, was accelerated into Q1. As a result, nothing will be incurred in Q2 relating to our former premises. The remainder of the $4.7 million item is $1.5 million related to an unfavorable judgment entered against the Company by an appeals court following a lawsuit filed by a former European employee.

Now I'll turn it over to you, Scott.

Thanks, Julie. Although it is great to see year-over-year and quarter-over-quarter revenue improvement, we are not happy to have missed our operating income goal. Like Kevin, I am disappointed, especially because the underlying business is performing about as expected. Unfortunately, we had a large number of difficult to forecast expenses in the quarter. It wasn't just one thing. It was a mixed bag including severance, professional and legal fees associated with certain employee matters, ending our attempts to sublease our former Wall Street office, a couple of sign-on payments for strategic hires during the quarter, and the $4.7 million for the two items which Julie discussed earlier. We always anticipate a certain level of the unexpected, but this quarter was exceptional. If there is any good news in this, it is that we have a number of these things behind us and they will not impact future quarters. In particular, $1.5 million related to the London lease was an acceleration into the first quarter of expenses we had planned would hit in the second quarter. We have taken that into account in second quarter and full-year guidance.

The economy and our business continues to grow. Europe appears to be lagging the rest of the world -- and certainly is recovering more slowly than any of us would like. Reading the papers, it appears we are certainly not alone in feeling some uncertainty about the scope and speed of this recovery. So to underscore what Kevin said -- we are being quite cautious and targeted in our hiring, in our investment plans, and certainly in our view of 2010 growth.

Slide 15 shows monthly confirmations. Beginning October 2009, monthly confirmations began showing year over year improvement. This trend has continued right through March 2010. In fact, March 2010 confirmations very nearly equaled March 200, missing by just one.

As many of you on the call know, recognized revenue lags confirmations by about a quarter. The result was year over year and sequential revenue growth in the first quarter. And, we are expecting the second quarter to also achieve both year over year and sequential revenue growth. Our current forecast is for second quarter revenue of between $117 million and $123 million. That represents year over year growth of 23% to 31%.

Estimating operating margin is always tougher than revenue. As we recover from the 2009 recession, our operating income numbers are relatively small. This makes our forecast quite vulnerable to even small, unanticipated expenses or the timing of expenses from quarter to quarter. With that cautionary note, we are estimating a second quarter operating margin of between 2% and 4%.

We took a hard look at 2010 full-year net revenues. After factoring in seasonality, the impact of potential losses from the consultant ranks, and the inherent uncertainty in any economic forecast, we decided to leave our revenue guidance unchanged at $440 to $480 million. In arriving at this forecast we expect to see continued strong growth in our Financial Services Practice and Leadership Consulting. Practice and business mix is also one of the variables we took into account.

Given our shortfall in operating margin in the first quarter, we are slightly lowering our full-year margin guidance from 4% to 6% to 3% to 5%. Note, this includes the $4.7 million of Q1 Other charges we talked about earlier. The full-year margin continues to be impacted by a number of things -- the restoration of employee benefits, the restart of much needed company initiatives postponed in 2009, and the hiring of additional staff to target growth areas.

The difficult part in predicting our effective tax rate is forecasting the mix of earnings in 40 countries. We anticipate the full-year effective tax rate to be approximately 48 percent. The rate has been much impacted by unbenefitted losses in several foreign jurisdictions and by the non-deductibility of some of the costs associated with vacating our former London office.

If you turn to Slides 20, cash used in operating activities was $32.2 million and we ended the quarter with $81.2 million in cash and cash equivalents. As is always the case, our first quarter reflects the payment of bonuses. In the first quarter 2010, we paid approximately $45 million in bonuses, almost all of it going to our revenue producing consultants. This compares to 2009 when total bonus payments were $133 million. We anticipate a payment in the second quarter of approximately $2 million related to payroll taxes on 2009 bonuses in non-US countries.

Bonus payments behind us, we expect positive operating cash flow during the remainder of the year. As I said in February, strengthening the balance sheet is a key goal for 2010. We expect 2010 free cash flow of between $10 million and $20 million. To remind everyone, free cash flow is net of increases in accrued bonuses and capital expenditures. Principally because of the fit outs required for new offices in some of our major markets -- London, Paris, Chicago and Washington DC, to name a few -- capex in 2010 is going to be higher than our normal 2% to 3% of revenue. We expect 2010 capex to be between $26 million and $28 million, but we'll continue to refine this during the year based on the timing of leases signed and the start of fit outs. These fit out costs are a result of the real estate strategy which by 2011 is expected to reduce our annual rental expense by approximately one-third.

And with that I can take a breath and turn it back to you, Kevin.

Thanks, Scott.

Like so many other companies, we are making our way out of this recession slowly but surely. In addition to all of the financial metrics we've reported today, there are many other facets to our business where I can report increased activity and enthusiasm — it's the intangibles that make me encouraged about the progress we are making and the trends that we're seeing. I'll give you a few examples.

We completed some great, marquee searches this quarter, including Board members for ADP and Legg Mason, the CEO of DirecTV, and the CFO of Bank of America.

We are currently working on three prestigious searches for Kleiner Perkins for three different companies in the greentech space. These hires will shape the future of these companies and we are honored to be treated as a partner of Kleiner Perkins in securing their management talent.

We continue to see strong results from our Leadership Consulting business. Due to the highly strategic and confidential nature of most of our assignments, we are restricted from mentioning specific client names, but I can give a few examples that are highly representative of the work that our Leadership Consulting team launched or completed in the past quarter.

We worked with one of the leading U.S. homebuilders who is seeking a competitive advantage through their executive talent management as that very hard-hit sector seeks to rebound. We assisted a leading real estate firm in selecting an internal candidate to lead a fast-growing business which they are spinning off. We sold a highly innovative leadership development engagement to one of the leading industrial firms in the world, demonstrating our ability to not only help clients with identifying their top talent, but developing it as well.

We believe these and many other examples from around the world show that our Leadership Advisory strategy is working and will provide a very solid foundation for growth in 2010 and beyond.

We have made a number of bold and ambitious decisions to become a more formidable competitor and a better partner to our clients. To help us execute that vision, we have partnered with the Harvard Business School in an innovative leadership course to ensure that our leaders are aligned with the new strategy and are prepared to play a role in effecting change within the organization.

As the economy improves, I believe that we are better positioned as a company to take advantage of a recovery and make a bigger impact on leadership teams around the world.

And at this point, we would be happy to take any questions that you all might have.

Thank you. (Operator Instructions). We have a question from Kevin McVeigh from Macquarie.

Thank you. I wonder if we could talk about the guidance a little bit for 2010. Given than financial services seems to be coming in stronger relative to some of the other segments, I would have thought the profitability within financial services is stronger than some of the other segments. Will you talk about specifically what drove the cuts and if it looks like the mid point is 100 basis points, Scott you did a nice job framing what those components were. But can you frame out a little bit. Is it a third, a third, a third, or where those 100 basis points really came from. Thanks.

Some where along the line I lost you there, Kevin.

Sure.

Why don't we go through this again and maybe I can pick it up. I'm being particularly dense this morning.

No, no, me, too. It has been a long morning. If you could just frame out, relative to the prior expectations, the guidance looks like the operating margins are down at the mid point of the range about 100 basis points and you did a nice job of framing what the components of that were. Could you give us on a percentage basis what each one contributed to we can get a better sense of what the drivers were.

Talking about the items I mentioned, that is a lot of -- in all seriousness we mentioned the two big items, and the rest of it is a virtual cornucopia of different issues that we are dealing with and none of them are particularly large but they just add up. And as I said in my comments because we are dealing with relatively small numbers as we come out of the recession -- you know, even some of these small issues can impact us quite a bit.

I will say that, you know, of the group there, probably severance which shows up in our compensation line, was the single biggest issue there and that related to carrying out some of the plans we have been talking about for quite a while here in restructuring our corporate organization here, and then there were couple of other things that happened during the year. That is the biggest single item but the rest of it is really a lot of stuff. We chose essentially to reflect this in the full year guidance, which is why we came down slightly on that. The rest of the year, we expect to be where we were the last time we talked.

And again, that $4.7 million, the one-time charge. That's in your range now, right? The $4.7 million related to the office closings?

Absolutely. We included that. We are not trying to exclude it in anyway.

Got it. That's helpful. Okay. I'll get back in queue, thank you.

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

Yes, first, on the expenses, certainly the thing that surprised me a little bit was the bonus levels. Did the mix of revenue as it come in or any other factors, I guess you mentioned some sign-on bonuses, did that cause it to come in higher than you expected or maybe was I just modelling it wrong and bonuses is what you would have expected given the revenue level?

It is not -- it is really what we expected which is why the difference between where we reported and what we anticipated when we gave guidance is this list of sort of other things I mentioned. The biggest thing impacting it is, understand 2009 was a very bad year. And as we have mentioned before, you know, roughly half of our consultants were under water during the year, last year, 2009. You know, things have picked up markedly and that means that, you know, it has lifted just about everybody up there and that is reflected in the amount of accrual for the bonuses. The other thing to note is that we estimate accrual bonuses on a full-year basis. So we estimate here and then take a pro rata share of the full-year estimate. So what you are really seeing is I think the change between a remarkably bad year, 2009, and what is looking to be, you know, a relatively good year. Certainly not back at the levels we saw in 2008 but still a remarkable turnaround from 2009 and that is reflected in the amount we will be paying our people which we pay them for production and we are simply producing a heck of a lot more.

Okay. That's helpful. And then Kevin, I wanted to ask you a little bit about your comment that you think there is room for the revenue or the per consultants to move up and certainly history would suggest that. I want to dig a little bit into the components of that. You talked about pricing. Can you also address kind of the productivity levels of the people in the room for improvement? As I run the numbers, it seems like the number of searches per consultant, it is not quite back to the peak but it is starting to get close so your people seem to be pretty busy right now. Is there room to go above the prior peak?

Well, let me take a step back, Tim. If you look at 2001, 2002, after the last downturn we as an organization cut too deeply and too broadly and we didn't invest in trending and development, we didn't invest in our people at the time. We made it, as Scott just mentioned, we made a concerted effort last year to make sure that we kept capacity in the system because we knew eventually the market would pick up. And we have some fantastic consultants out there who, quite frankly, just had a very difficult year as many across the globe did. As you recall 2007-2008 productivity was $1.5 million on average and at that we had consultants far beyond $3 million to $4 million in revenue. We believe that as an organization and our goal collectively is to drive that number between $1.8 million and $2 million. We think that is very feasible, and that's globally -- particularly as wages continue to increase and revenue per search increases as well. I think as I mentioned in my comments you will see that reflected probably more so in the third and fourth quarter. Given, number one, the capacity in the system. Number two, the average fee per executive search and the consultant pool we have out there and the tools we are putting in place today, we are quite confident we can bring that numbers up to 1.8 to 2.

So, to get up to those levels -- your assumption, it sounds like is you will get back to and then exceed the revenue per search numbers that you were at back in '07 and '08 when you got to the 1.5?

Absolutely. And I think we have seen a lot of that come through particularly with our financial services practice over the course of the last three to four months and CEO and board practice and in conjunction with the Leadership Consulting business as well, where we know that every search that we do that entails Leadership Consulting and Executive Search, there is a significant increase in fees and client retention.

Okay, thank you.

Our next question comes from Tobey Sommer, SunTrust Robinson.

Thanks. I just had a question about headcount and also average fees. Are you seeing any chances that compensation on kind of an apples to apples basis is starting to creep higher as you would expect as we come out of the recession? Or do we need to wait a little bit more for that? And would you expect also a slight sequential growth in consultants as we move throughout the year? Thanks.

Tobey, first of all, yes, it is slow but we are seeing an increase in compensation across the globe. First we saw it in Asia Pacific which, quite frankly, has come back out the strongest. And it is starting to happen in North America. Additionally, headcount will increase we are -- as I mentioned and Scott mentioned in the remarks -- taking a hard look across the globe. We going to recruit in Asia. We have gaps in Europe right now, actually we have gaps in every geography and we want to continue to invest in our Leadership Consulting business. We have a number of potential hires in the queue right now but we want to make sure they fit in culturally and they fit in longer term with the strategy and they are going be effective and hit the ground running as soon as possible. We do have a very stringent recruiting practice in place right now driven by our global practice leaders. Now, I don't think we will hire 50 this year but we definitely will invest in not only developing our people but making sure that we fill the gaps we have globally and by industry sector and geography.

So in terms of the outlook and you did highlight that this is an uncertain environment still and you are trying to be conservative, but at the top line in a context in which you are hiring as well as the context in which confirmation kind of underlying demand is growing, it would seem there is a bias towards sequential growth. How do we square those data points?

I'm surmising that one of the ways you are looking at this is taking the average revenue per consultant and times it by 380 or 400 to get a revenue number. One thing to keep in mind is that we have a heck of a lot of capacity in the system right now, as Scott mentioned. So there are a lot of consultants out there that are having fantastic years this year that, quite frankly, again, given the fall off in our business last year had a challenging year last year. First and foremost, I think you will see a huge uplift just given the capacity we have in the system. And then secondly, through selective hiring we will see an increase there as well. We want to make sure that we cover the industry and functions that we have that are vacant right now.

There is a number of factors when you look at the second half of the year. And I think that if you look at the numbers, you know, I think the high end of the guidance probably is one if you just start annualizing first quarter you began, you know, getting close -- you began, you know, getting closer to it and then say why do you keep the low end at 440. That is where the factors that I mentioned before, if we have some key levers amongst our high producers, that could impact us and slow us for a time. We worry a little bit about the economy, particularly in Europe. I mean reactively, believe it or not, had a discussion the other day about the potential impact of, say, Greece on the recovery in the EU and how that could impact us. There is a number of unknowns out there and I think it led us to take, as we mentioned, whether it is in our hiring, whether it's in our investments, whether it is in forecasting the growth to still be relatively cautious.

One other question and then I will get back in the queue. In terms of have you taken any steps to mitigate the risk of big performers leaving? And if so, could you share any of those with us? Thanks.

Part of it was the question which was asked a little bit earlier here by Tim and that is the amount of accrued bonuses is up significantly. I think the compensation levels we try to be very competitive in the marketplace and we constantly look at that competitiveness and you are seeing that in the numbers and in the bonus number which Tim had referenced earlier. I don't know if you want to mention some of the other things, Kevin, we are doing.

I would just say, Tobey, like I think there was a survey last year by one of the top consultants, number one in terms of what is on a CEO's mind, 97% were concerned about employee retention. Like our clients we are concerned about that as well. Of course, I'm going to be biased that we have the best people in the industry. We have been the only firm, quite frankly, that has spent a lot of time on training development over the years to develop the next generation so of course, we will be a target of many of our competitors, many of whom, some specifically are throwing around a lot of money right now. We try to make this a great place to work, we try to work on enhancing the brand and making sure that people in the organization particularly at all levels feel valued and we will continue to do that.

Thank you very much.

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

Good morning. I was just wanting to follow up with regards to the prior discussion. Can you talk a little bit about the bonuses that were accrued for this quarter? Is there any makeups for kind of a bad last year where now we are starting to see things and we are starting to get a little bit concerned that some people may end up going to greener pastures or being tempted by temporary incentive packages that are being thrown around?

You know, in the bonus accrual in the first quarter, I guess the short answer is no, there aren't any makeups in that. That is our normal plan, just as it is impacted which improved production and performance across the board. And that is what you are seeing there. You know, in terms of retaining people here, we are trying to resist what we are seeing in some places in the market where coming off of a bad year some people are looking to go some place and have large guarantees made. And that is just a bad practice except in certain very specific instances and so it is something we have attempted to avoid. Sometimes if one of our competitors are willing to throw a great deal of money at somebody, it may just not make economic sense. One of the strengths we have at this company is a strong, strong bench and a group of people who can step up to those roles. And we have seen that over and over again. And I think, in fact, that is one of the differences between Heidrick and some of the other people in this market.

These players that you are referring to, are they the private players that we would think of as the brand name, private players or someone else?

No, Mark, we don't want to get into specifics here in terms of who is going after what. Plus a lot of it is based on the anecdotal. I think we had very low turnover in the first quarter. 2.7% if I recall correctly Julie. And that's probably the lowest it's been in a number of years. We are investing in and we will continue to invest in our people. We are looking at ways to create or will look at ways to create long-term incentive programs to keep people here in the organization. A lot quite frankly just believe and our clients believe in what we are doing as an organization. That and making it a great place to work is probably stronger than any financial gain somebody might have short term.

With regard to the reduced margin guidance, it sounds like the real estate charge was a move from one quarter so another which you probably would have known about. Is the only thing that you didn't know about the $1.5 million and we are basically assuming, you know, at the midpoint of the range a decrement of $4.6 million in operating profits at the midpoint of the revenue range in order to come down by 100 bps. What would lead to that?

You know, one, to clarify the real estate charge. You know, $3.7 million, divide it roughly in half. And half of that was, unfortunately, a complete surprise in the sense that we had accrued for a certain level of repairs and putting the old office back to its former place and unfortunately we couldn't come to an agreement with the landlord and we ended up paying more than we had expected. And that is a -- certainly a one-time charge. It is certainly unanticipated and won't reverse. That is not a timing entry. That is real. The remainder, approximately $1.5 million is truly an acceleration from quarter to quarter. Although that really relates to the first. Our plans were to put the building back to where it was which we had accrued for and turn it back to the landlord in the second quarter when we would have recognized those charges. Because we finally came to a settlement with the landlord and finalized it, we actually walked away from the property entirely earlier than we had expected and it just moved it into the first quarter. And that is a timing change and helps us obviously in the first quarter. The rest of things I had mentioned are pretty much, they are both one time but they are not timing. They will stay with us for the rest of the year and that is reflected in the small reduction we made to the full year operating margin.

Got it is. So basically $2.2 million was not anticipated with regards to real estate, $1.5 million in terms of legal judgment was not anticipated. Total of $3.7 million and you are giving yourself another $0.9 million roughly speaking in terms of the reduction with regards to the full year. And then the reason why you were, you know, trends are better from a revenue perspective both in terms of what you did this quarter as well as going into the next quarter. How much of the lack of upside in the revenue guidance is due to, say, Greece versus the potential for some producers to leave?

A lot of it has to do with -- if you look at last time Mark, and I think it is one of the slides. Last time we were at this revenue level we were three years after the recovery. I think as we mentioned on the last call, this is a lot of things that we reinstated this year.

Yes.

Excuse me, not this year, this quarter. A lot of it we attribute to that. In terms of individuals potentially leaving, I think that personally is less of an impact because as Scott mentioned, we have a great bench, number one. And the capacity of the system going back to the point of make sure that we just didn't cut, but we invested and maintained our consultant population is something that, again, we wanted to do because we have great people. I think it's less there, and more of what we're seeing in terms of the 401K, some of the other investments and market and training development et cetera that we reinstated this year. That and I wish I could explain French law to you but unfortunately I can't do that in terms of the $1.5 million but the -- again, we are very positive and the outlook for the year. It is just being somewhat conservative.

Okay. And then the last question, can you talk a little bit about the CapEx and exactly what -- how do these fits work?

Again, I have been talking about this it seems like since I joined the company but we are now seeing the real results of it. We have instituted a real estate strategy which we are now executing which is significantly reducing the square footage, significantly increasing the efficiency of our offices, and also introducing a standard feel to the offices, wherever you are in the world so there is a payoff. But every time you move into one of these you need to spend some money to fit them out and get them up to snuff. The London office is a perfect example. We have moved into a new office there, it is a beautiful office, I was just there the last couple of weeks. But not only is it really nice. It is more efficient. We are going save roughly $10 million over the term of the lease on that, but it does take a little bit of upfront investment to get there.

We are not restructuring property at the moment. We are not walking away from leases, but as leases expire we are taking them into our new standards and bringing them into this common sort of feel we have got, or this common look we are instituting for these offices. And it just so happens that we had a number of big ones come up this year. London is our second largest office. We have Paris which is certainly one of our top ten offices. DC is probably in our top ten as well, and it as fairly large office. And then we are anticipating taking some action here in Chicago which is our third largest office, all of which will produce very large long-term benefits in the P&L but you just need to put a little capital into them up front.

What is the -- relative to the 26 to 28 that you are going to spend, what would the ultimate savings be?

We are going to take out roughly $10 million a year, repeated, $10 million every year for as long as you can see in terms of increased efficiency here.

It is pretty quick payback and obviously that 26 to 28 gets amortized over the lease term as well.

Right.

So from a P&L standpoint this is very beneficial.

Okay, great, thank you.

(Operator Instructions). The next question from Ty Govetos from CL King.

How are you? A couple of technical questions. I'm getting lost in the charges. You are now looking for 3% to 5% operating margins for the year. Does that include or exclude the $4.7 in million charges you talked about if the first Q?

It includes them.

So if I took that out we are still really talking 4% to 6%.

Yes, which is basically what I said. We reflected that in the full year and the rest of the year I anticipate will happen just as we anticipated last quarter.

Okay. The miscellaneous charges, I know you didn't give us a total amount on that but is it reasonable to assume in total they ranged somewhere in the $3 million to $4 million range?

You know, let me say because I -- it is really as having just come back from the UK as my British friends would say a dog's breakfast of stuff. It is a little bit of everything in there. Suffice it to say, let me answer it this way. If you look the 4.7 and reflected these other charges in total it gets us to the range we were anticipating of 2% to 4% in the quarter.

Okay. That is the other way of skinning the cat. Thanks an awful lot.

Thanks, Ty.

Our next question is from Kelly Flynn from Credit Suisse.

Thanks. Sorry to ask about these charges again but I am. So that last question was helpful. I'm wondering -- just to clarify I'm pretty sure you said this multiple times but you are assuming no continuation of those miscellaneous charges in subsequent quarters excluding the 4.7, you know, the additional charges you referenced, you are assuming none of them recur?

Of those specific ones I have talked about, yeah, that is true. These are specific to events in the first quarter.

Okay. I'm just wondering, you know, to the extent you weren't able to predict those predict those and some of them are severance related and seemingly related to just ongoing operations why wouldn't you continue to see similar charges in coming quarters as you make changes in your business?

It was not -- it is not -- as I said, there is always some level of the unexpected. We will always have, you know, a leaver. I don't think we are anticipating and I don't think you can anticipate a termination which is the company takes a decision which is when you pay severance as opposed to somebody just leaving. We think that is largely behind us so, you know, can it happen, yes. But are we really anticipating the sort of level we saw, the answer is no. It really was, you know, taking the actions necessary that -- to get our new systems and processes and organization in place which produced the bulk of these. You know, and then in addition occasionally you have some statutory obligations you need to fulfill in certain countries around the world which made up a small part of this. But we don't really anticipate severance going forward. We are not aware of somebody that, you know, we know now, you know, might be terminated later. It really will be a matter of people if they decide to leave it will be those and that goes not severance does not attach to those.

Okay. And were any of those unanticipated expenses bonuses that you now had to pay or increase to prevent people from leaving?

No.

Okay. And then related to that, your margin assumptions or guidance for the remainder of the year, do those assume that bonus expense as a percentage of sales increases as we proceed through the year as a percentage of sales?

You know, as I said, when you accrue bonuses here you take a look at the full year. You make a full year estimate of production. And then you pro rata -- you know, you evenly spread that through the year so to the extent that revenue would increase, yes, it would decline as a percentage as the year goes on. But we'll see. Historically it has been highest in the first quarter, largely because of that, because it is a full year estimate against the first quarter which, you know, not always because there can be a little lumpiness here but tends to be one of our lower revenue quarters.

Great. For the confirmations growth, I know you referenced the levels were similar to March '08. What about the year-over-year growth? Can you tell us how it progressed in the quarter? Trying to get a sense of how much it may have accelerated as the quarter went.

It is typically the case it is not always a straight line. If you look at the chart and I forget which chart it is, Julie, but the one that shows monthly confirmations. You will see that it is sort of a jagged line. It does go up and down sort of month to month. What we have seen, though is, sort of a steady improvement as we go. If you put a trendline through it you would see an upward trend and we have been running 25% to 30% ahead of last year and this seems to be holding as the second quarter unfolds here.

From a year-over-year growth perspective you are seeing it is holding, the growth rate is not so much accelerating?

It is accelerating. We said some where here it is improving slowly but it is slowly improving. It is not anything dramatic.

I think you gave the annual tax rate guidance. Can you give us the second quarter tax rate? Should we use the same?

Use the same. That is really because we are in 40 different countries and that mix is so influential on what the tax rate is, that we do look out a year and then use that because as you get into the more granular, you are, I guess, making a lot of decisions which are very difficult to make as to where particular revenue and particular deals with these will fall.

Okay. Great. Thanks a lot.

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

Thanks. I had a question for you about what is driving the demand right now, see if you could give us a little bit more color. To what extent are you seeing outright new positions being created? And to a different degree is demand being driven by, you know, a reshuffling of the skillsets that boards feel like they want their management teams to have which is kind of the natural process after a recession and you see the performance of your company? Thanks.

I think it is a few things. So, first I will start on the search side. Happen to be if discussions with I think we were all a few of us trapped in London last week but met a number of CEOs over there and what we are hearing consistently is okay, we have gotten through the crisis, we let go 1,000 people. We are not going to hire 1,000 people back. We are going to hire 500 back and there is pent up demand there. Which skillsets do we need to get us through the next 12, 24, 36 months? One would be pent up demand and new skills needed to execute strategies going forward. Simultaneously what we are seeing is a big pickup in our leadership consulting business because given the fact they may have laid off 1000 but there is only 500 how do you get the best out of the people that you now have in the organization? So how do you work on a retention scheme for them, a development scheme for them, an assessment scheme for them to make sure that you have the leadership in place to help you actually execute your strategy?

We are seeing this across the board. There is some growth again as financial services picked up, technology has picked up, consumer goods. But you are also seeing it not only by practice but by geography as well. Some organizations tend to want to expand again into different markets now and we are helping them with that as well. Plus on the M&A front, when we saw a slight pickup last year, we were also working with a number of organizations on assessing both sides in terms of finding out who will be or who are the best leaders to take the organization forward. I think it is a combination of many things, Tobey, that we are seeing across the globe and it depends again on each market and each practice and each function in which we are operating.

Thanks. And I had one other questions. In terms of cross border searches, that is something that schematically we had heard more of over the last few years. I wanted to get a sense for whether recent trends indicate that your customers are looking for global providers of search and leadership services as opposed to regional or localized offerings? Thanks.

It as great question and absolutely, we are one of a few firms who can actually provide organizations with the skills and talent they need to expand. And what we are seeing and we saw last year and the trend we continue to see is we used to historically help American companies and European companies expand into other parts of the globe, be they, you know, Latin America, be they Asia, et cetera or other parts of Europe and North America. What we have seen is this continued trend of a number of global organizations, Chinese, Indian, Japanese, et cetera, expand into other parts, whether it be Europe, whether it be North America. So we are seeing that and given the strength of our consultants not only here in North America but the strength of our consultants in both Asia Pacific, Latin America and Europe and the strength of our relationships that really helped us as we have come out of the downturn.

Thank you very much.

Our next question comes from Josh Vogel from Sidoti & Company.

Thank you, good morning. I was just curious, do you still expect the fixed comp to trend back to the mid 60% range over time?

You know, it -- given the significant revenue falloff, obviously it has crept up over the last couple of years. Our goal collectively would be to bring that number downward, probably some where to the mid to high, you know, 65% to 66%, 67% but simultaneously making sure that we do reward our consultants and our people the best we can, particularly in the industry. Our goal is to collectively bring down the salary or employee benefits or the fixed component of that but making sure that we do invest in and we pay and reward our people the best we can given the competitiveness in the marketplace.

Great. And I apologize if you addressed this already I may have missed it. But are there any other pending lawsuits of former employees that we should know about?

Not at this time.

Okay, thank you.

Our next question is from Kevin McVeigh from Macquarie.

Great, thanks. How big is the Leadership Consulting business right now as a percentage of revenue?

Last year we saw a growth of 11%. Right now it is close to 7% and we believe that eventually we will be anywhere from 18% to 20% of revenue globally and that is the plan we are executing on. We have seen and continue to see demand across the globe. We have continued to invest in our current consultant population to train them. Given the demand that we have out there the greatest challenge we have -- and it is a great question because our continued focus is on the board and CEO sweep, at a C-level sweep, and as we have looked across the globe at adding and/or investing in the business, it is much more challenging to invest and find individuals and/or organizations that can focus on the C-level. It is easier to see leadership consulting that go through the HR route and/or focus on the lower level. We will continue to invest. We are looking at recruiting and potential acquisitions down the road at this space but it has to be at the right level.

Great, thank you.

Our final question comes from Mark Marcon from R.W. Baird.

Hello. A follow-up question with regards to margin levels. Certainly understand what is going on in Europe. Could you talk a little bit about, you know, what -- how we should think about the margins that we saw in the first quarter in the Americas? You know, given the revenue level relative to what you have experienced previously and how the margins ended up turning out?

Well, let me point out in Europe when you look at the margin for Europe in our segment reporting, I'm sure you figured out that both --

Yes.

-- of the 4.7, it all falls within Europe.

Understood. What is why I was asking about the Americas.

Going forward, we are, you know, quite -- given -- let me back up and answer this. Given the work we have done on fixed costs, which has been really quite extensive and very successful around here, like most of these companies we have become very sensitive to revenue impact. If revenue picks up in the US, which we anticipate it will, we should see fairly significant margin expansion in the US. That is just the nature of the company right now. If US recovery continues apace or even accelerates here we should see a similar pickup in the margin in the North America segment.

Right, I was just asking, I was trying to understand the first quarter, going back and looking historically at what you have done at a similar revenue level and trying to reconcile it relative to the margins. I was just trying to understand that to a greater extent.

Mark, this is Kevin. I think it was a couple of things. Number one, it was the capacity we kept in the system. Number two, the reinstatement of historic, we haven't taken out the 401(k) et cetera and there are a number of things that impacted North America probably more so than the other regions. As Scott mentioned we used to be in the high teens in North America. As the revenue increases I think we are fairly confident that we will see that number again.

Okay. And then from a longer term, perspective, Kevin, last call we talked about getting to mid to high teens long term. Is that still doable or are there things that we are seeing from certain competitors that would perhaps inhibit that?

No, Mark, I would actually say to you that we probably as an organization are more confident than we have ever been, particularly given the back office and the infrastructure and all the hard work that Scott has done with the financial function and real estate et cetera. We are very confident, in fact, more confident than ever that we can reach the mid to high teen number.

Do you have a sense for what sort of revenue level you need to achieve in order to get there?

We started get back to the levels we were in, in 2008. So into the 600s. We start seeing double digits and I mentioned this at the last call, somewhere in sort of the mid 500 range. You get into the double digits and then it just ramps up from there.

Okay. And can we talk a little bit about investments? Obviously you still have a great balance sheet even after the bonuses are paid out. You did a small acquisition this last quarter. How are you thinking about acquisitions relative to buybacks and what the potential returns are?

Let me touch the buybacks and I will let Kevin talk about the acquisitions. As I reiterated this quarter, you know, our focus right now is, you know, putting money back in our warchest here around gaining for financial flexibility than we currently have. Although, we are not in a bad way. Last year, cash on hand bottomed at $65 million in June and has been going up since then. So being in the 80s where we are right now is not a bad place given that bonuses are behind us. But this year will be a year of putting more money in our warchest and strengthening that balance sheet. It is not one where buybacks are our top priority by any stretch of the imagination.

Mark, I will just add that we have what we believe is a very distinct strategy. And the strategy maintains us working not only on the leadership search side of the CEO and board but also the leadership consulting side at the CEO and board level. We get approached probably every week with organizations who are in the assessment and the leadership consulting area but just not at the level that we want to operate. We have been and are looking at, number one, investing in recruiting individuals at the senior level and leadership, consulting leadership search and simultaneously looking at acquisitions in that space but we want to make sure that they fit in culturally and they align with our strategy. But they will definitely or we will definitely continue to look at those as we move forward into the next 6 to 12 months.

A couple of things I will add. One is we definitely have enough financial flexibility here to execute an investment plan and to grow this business and to look at opportunities which are out there. I mean we are not cash strapped by any stretch of the imagination here. Secondly because of the nature of the type of acquisitions we make it is very important that there be incentives here that they both stay and they continue to produce. And as such, most of them are structured with substantial earnouts and these substantial earnouts there are for a reason, to keep people focused on growing, to keep them loyal to the company and to move forward. What that simply means is although a purchase price might be fairly substantial the actual cash impact is spread over a number of years. There is no structural reason we can cannot grow the business and respond to opportunities that are in the marketplace. Having said that, we are being cautious about it. We are making sure they fit in culturally, we are making sure they fit into our strategy and we are being very, I guess, you know, taking a -- taking a really hard look at the prices we are paying on these things in the current market.

I appreciate the color.

Thanks Mark.

Listen, thanks for all your questions today. I would also like to take the time to thank all of our people across the globe particularly for a very strong first quarter at least on the topline and for the continued efforts to stay in front of our clients globally, and I would like to thank you all for joining the call today. And have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect. And have a wonderful day.