Heidrick & Struggles International Inc (HSII) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Heidrick and Struggles second 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. I would now like to turn the conference over to Julie Creed. Ma'am, you may begin.

Good morning, everyone, and thank you for participating in our second quarter 2010 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer, and Scott Krenz, our Chief Financial Officer. As a reminder, we will be referring to supporting slides that are available on our Website at heidrick.com and we encourage you to follow along or print them.

As always, we advise you that this call may not be reproduced or retransmitted without our consent. 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 one of our presentation.

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

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

We are pleased to report very strong results for our second quarter with net revenue and operating income both exceeding our forecast.

Net revenue in the quarter of $126.1 million was up 35.4% compared to last year's second quarter and up 10.9% sequentially. The Americas and Asia Pacific had great quarters. The Financial Services practice increased 85% year over year and the Industrial practice grew 20%. As you saw in our release, net revenue from leadership consulting services increased 32% to $8.2 million, or 6.5% of total net revenue in the quarter. These results continue to validate our strategy to become a leadership advisory firm.

Slide three is a view of our monthly confirmations, or signed contracts, for executive search and leadership consulting projects. Monthly confirmations in 2010 continue to track well ahead of 2009 levels and have been ahead of our forecast this year.

Slide four is a look at quarterly confirmation trends specific to executive search. Second quarter search confirmations were 28.2% higher than last year's second quarter and 0.6% higher than the first quarter. Every practice contributed to the year-over-year growth, but the Financial Services practice was the key driver.

Turning to slide five, we ended the quarter with 343 consultants, down 37 compared to the end of last year's second quarter and a decline of 24compared to March 31. we ended the quarter with 343 consultants, down 37 compared to the end of last year's second quarter and a decline of 24 compared to March 31. During the second quarter, 35 consultants left the firm, 31 voluntarily. A disproportionate number of consultants who left in the quarter -- about half -- were from the EMEA region. Although more consultants left than we'd expected, we are incredibly impressed with the way that our consultants -- in many cases less experienced consultants -- have responded and stepped up to ensure seamless client service. This validates what we have always believed -- that Heidrick and Struggles has the strongest bench and the best brand in the industry. We place a heavy emphasis in our firm on hiring and developing our people.

We have ramped up our consultant hiring initiatives as well. Eleven consultants joined our firm in the second quarter, and 13 others have signed contracts to join. As you know, we don't often hire consultants from other top tier global firms. We have, but it's not often. Generally, we like to hire consultants who have deep industry or functional experience or consultants who have demonstrated great success at smaller firms who we believe will excel on the Heidrick & Struggles platform. Our research and past experience has shown that the return on investment is not as attractive for hiring big producers from one of the other top global firms as most require large upfront payments and guarantees. There are other firms who are making lots of noise about their hiring of our consultants, but these hires are in effect no different than mini acquisitions with high valuations. We prefer to maintain our strategy which we firmly believe will yield a much higher return for our employees, clients and shareholders.

Looking at slide six, productivity, which we define as annualized net revenue divided by the average number of consultants during the quarter, improved by $500,000 to $1.4 million in the second quarter, compared to $900,000 during last year's second quarter and compared to $1.2 million in the first quarter. We are extremely pleased with the continued productivity gains and continue to believe there is still room for us to improve this number.

On slide seven, the average revenue per search is calculated by revenue in the quarter divided by confirmations in the quarter and can therefore be a little confusing as revenue lags confirmations by a quarter. Last quarter we started providing you with the average revenue per search on a trailing 12- month basis. For the second quarter, average revenue per search for the last 12 months was $102,300, an improvement compared to the first quarter when it was $100,800.

Turning to slide 8, operating income in the quarter was $7.6 million and the operating margin was 6.0%, well ahead of our guidance of 2% to 4%.

Now I am going to turn the call over to Julie for an update on 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 second quarter and by region. But as usual, I'll give you some additional color on other line items on the income statement.

Using slides 10 and 11 -- salaries and employee benefits expense increased by $21.4 million, or about 33.1% year over year. This increase mostly reflects higher performance related, variable compensation which increased $22.7 million compared to last year's second quarter as result of higher bonus accruals related to higher net revenue.

Fixed compensation, which includes fixed salaries, employee benefits as well as stock-based compensation expense, declined $1.3 million year over year. This decline reflects several items. Stock-based compensation declined $3.8 million year-over-year reflecting an increase in RSU forfeitures specific to the second quarter and a reduction in the RSUs granted in 2009 and 2010 compared to prior years when a portion of consultants' bonuses was paid in the form of RSUs. The decline in fixed expense also includes a decrease of $1.3 million in deferred cash bonus expense related to lower 2009 bonus accruals due to lower revenue and consultant headcount.

These declines in fixed comp expense were offset by an increase of about $2.0 million related to special recognition awards issued in the second quarter to certain consultants in order to incentivize future service to the Company.

Despite an increase, salaries and employee benefits expense was 68.2% of net revenue, compared to 69.4% in last year's second quarter.

Turning to slide 12, general and administrative expenses increased $4.8 million, or 17% (sic - see Press Release), from last year's second quarter. This increase includes approximately $2.5 million related to our global consultants' conference, the first time in three years we have been able to get our partners together from around the world. This meeting is vital to our collaboration and is an important step in our continued transformation to a practice-driven, leadership advisory firm. The year-over-year increase also includes $2.2 million related to professional fees for the development of our internal search system, process improvement projects, and several other items. These two increases, plus a few other smaller items, were partially offset by decreases in premise-related costs and depreciation expense of $1.4 million as a result of favorable lease renewals and lease terminations.

Moving to slide 13, and moving down the income statement, let me explain the restructuring and impairment charges. During 2Q, one of our subtenants defaulted on its sublease in one of our previously restructured offices. As a result, we revised our estimated remaining obligation for this lease and recorded a restructuring charge of approximately $700,000.

Other operating income of $1.1 million reflects a fair value assessment of the potential future earnout payments under the purchase agreement for an acquisition we made in 2009 in Eastern Europe. The assessment indicated that there would not be any future earnout payments, resulting in this $1.1 million adjustment.

And net other non-operating expense in the second quarter was $2.4 million. Of this expense, $1.3 million represents exchange gains and losses on cash and intercompany balances, which are denominated in currencies other than the functional currency and are not considered permanent in nature. The other $1.1 million represents a cumulative adjustment for the accounting of our minority interest associated with our operation in China. In last year's second quarter, recall that $3.0 million of the net other non-operating expense was the write-off of our investment in VisualCV.

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

Thank you, Julie.

In the first quarter we reported an operating loss as a result of a number of non-recurring and difficult to forecast expenses. We were very disappointed, but knew that our underlying business was performing as expected. Strong second quarter results, including a sixth quarter of sequential net revenue growth and a 6% operating margin, reinforce our belief that the business is on solid footing.

The Americas and Asia Pacific regions grew 35% and 69% respectively. The Financial Services practice grew 85%, Leadership Consulting grew 32%, the Education and Social Enterprise practice grew 35%, and the Industrial practice grew 20%. Net revenue in Europe grew 15%.

Focusing on Europe for a moment, we note that in addition to Europe's seemingly slower economic recovery, we lost a disproportionate number of consultants in this region. I will reiterate what Kevin said, hiring is a priority in all 3 regions, but especially in Europe. In fact, about 50% of our new hires in the second quarter and about 50% of the 13 new hires made post-second quarter were in Europe.

Slide 15 shows monthly confirmations. Our monthly confirmations continue to trend well above 2009 levels and have been above our forecast. But you can't pick up a paper without reading about the fragility and uncertainty of the economic recovery. For example, last week Federal Reserve Chairman Ben Bernanke told Congress that the economic outlook remained unusually uncertain. This, combined with the normally heavy summer vacation schedule, and a slightly lower backlog going into third quarter, makes us a bit cautious as to whether we can maintain the same level of year-over-year growth we achieved in the first half of 2010. Our current forecast is for third quarter revenue of between $114 million and $122 million, or 10% to 18% year-over-year growth.

We are estimating a second quarter(Sic-see press release) operating margin of between 3% and 7%. Net revenue is the biggest factor in whether we hit the top or bottom of this range, but also, as you know, the mix of consultants who generate the revenue also impacts operating margin.

We are forecasting 2010 net revenue of $460 million to $485 million. We increased the bottom of the range from $440 million to $460 million to reflect the strong first half. After factoring in seasonality, and multiple other factors, we decided to tighten the range, and increase the top end of our guidance from $480 million to $485 million. In arriving at this forecast we expect to see continued strong growth in our Financial Services practice and Leadership Consulting.

In arriving at this forecast, we expect to see continued strong growth in our financial services practice and leadership consulting. We are maintaining our full year margin guidance of 3 to 5%. The full year margin continue to be impacted by a number of things. The restoration of employee benefit, the restart of much-needed company initiatives which we postponed in 2009 and the hiring of additional consultants. Our effective tax rate is highly dependent on the mix of earnings in 40 countries. We anticipate the full year effective tax rate to be approximately 51%. The rate has been primarily impacted by unbenefited losses in several foreign jurisdictions, mostly in Europe and by the non-deductability of some of the costs associated with vacating our former London office, and by the revised forecast of mix of income.

We are maintaining our full-year margin guidance of 3% to 5%. 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 which we postponed in 2009, and the hiring of additional consultants.

Our effective tax rate is highly dependent on the mix of earnings in 40 countries. We anticipate the full-year effective tax rate to be approximately 51%. The rate has been primarily impacted by unbenefited losses in several foreign jurisdictions, mostly in Europe, by the non-deductibility of some of the costs associated with vacating our former London office, and by the revised forecasts and mix of income. As Europe continues to recover, and as we get the real estate restructuring behind us, our goal is for an effective tax rate of under 40%.

If you turn to slide 20, cash provided by operating activities was $23.3 million, compared to cash used by operating activities of $19 million in the 2009 second quarter. We ended the quarter with $92.6 million in cash and cash equivalents, up from $81.2 million at the end of March, and compared to $64.6 million at the end of last year's second quarter.

We still expect positive operating cash flows during the remainder of the year, and strengthening the balance sheet is still a key goal for 2010. We expect 2010 free cash flow, net of increases in accrued bonuses and capital expenditures, of between $15 million and $25 million. Principally because of fit-outs required for new offices in some of our major markets, capital expenditures in 2010 is going to be higher than our normal 2% to 3% of revenue. We expect 2010 capital expenditures to be between $23 million and $25 million, but we'll continue to refine this during the year based on the timing of leases signed and the start of fit-outs.

And with that I will give it back to you, Kevin.

Thanks, Scott.

Like so many other companies, we are navigating our way out of this recession slowly but surely. In the midst of the worst recession most of us will see in our lifetime and enduring a $220 million one-year decline in our net revenue, we made a number of bold and ambitious decisions to become a more formidable competitor and a stronger partner to our clients.

The most significant decision we made, and cornerstone to our strategy, was to expand beyond executive search to become a leadership advisory firm. Clearly, we don't expect a 57 year old executive search firm to transform overnight, but consultant and client feedback supports our strategic vision. As important, the revenue growth that we have achieved over the last 18 months from providing leadership consulting services validates that our strategy is working

Another critical decision was to change our client service delivery model from a regional focus to an industry practice-driven focus. Understanding the business challenges of our clients is a prerequisite for being great consultants and for earning the distinction of trusted C-level talent advisor. This is why we organized our firm around global industry and functional practices to focus intently on creating strategic client relationships. Through our practice focus we are driving revenue, global branding, hiring, knowledge management and thought leadership.

There is one thing that has not changed at Heidrick & Struggles throughout the years -- our commitment to the core values that make our brand synonymous with best in class -- including client service, people, integrity, teamwork and respect.

I'd like to thank our employees listening to this call for their commitment and hard work. I'd like to thank our investors and analysts for their continued support. At this point, we'd be happy to take any questions that you all might have. Thank you.

(Operator Instructions). Our first question comes from Tim McHugh. Your line is open.

Yes. First can I ask you about the comment about the 35 consultants who have left year to date, can you put that in context for us versus last year was certainly probably an abnormal year, but maybe relative to a couple years before that, how does that compare to what you've seen historically?

Hi, Tim, it is Kevin. How are you?

Good.

To put it in perspective, we always have this issue after bonus time. If you look at -- I will go back to -- on average going back to 2005 it was anywhere between 10% to 15% turnover. And on this year we are about 15% as well.

Okay. And then in response to that, what are you doing -- you mentioned ramping up recruiting. Are you looking at retention bonuses or getting more aggressive in what you are willing to pay for sign-on bonuses? How is that going to reflect it?

First of all, I should correct myself. It is only 11.1% this year, so it is on the lower end of the range that I gave you. Secondly, a couple things. One of the things we are very proud of is that, more so than any other official, we have truly invested in developing our own people. We spend a lot of time using not only outside resources such as some major business schools, but also internally developing a cadre individuals who have been able to step up. We continue to do that around the globe.

Secondly, we are hiring, and we will continue to hire in markets where we think there is definitely a return on investment. We don't want to get into a game where we are paying a major up front sign-on bonuses, et cetera. Given our research, we have seen the return in many cases is just not there from three to five years. And third, if you recall from the first quarter earnings call, we have a lot of capacity still in the system. We made it a concerted effort last year to make sure that we hung on to a number of consultants who have historically been great producers, but had an off year last year. We still have a lot of capacity in the system and that was again a concerted effort on our part. It is a combination of all of those three things.

Are you paying retention bonuses when some consultants are getting competing offers or is that something you guys aren't willing to do as people are recruiting from you guys?

It depends, Tim. Overall, it is not just one off here, one off there. It is more of than approach of longer term -- working on a long-term incentive program for all of the consultants in the firm. It is something holistically we have been looking at for the last 12 months as not only a retention vehicle for key consultants in the organization but also a way to make sure we are retaining these individuals longer term.

Okay, then Scott, quickly, the G&A, you -- can I assume -- it seems implied the second half of the year be at a lower run rate. Can you talk about some of the factors? I imagine the cost of the partner meetings, some of the professional fees, and some of those factors would drive a little lower run rate going forward. Can you just give us the puts and takes we should think about?

As you can imagine there are lots of them. Let me give you the highlights here. You know, as we move into the second half of the year , there are a number of things which are winding up. I mean, one of them being what we refer to seems like forever, but Project Velocity. We have now passed probably the single largest milestone when we converted EMEA to the new systems and processes which we did just last week. And now in the second half we will begin seeing the benefits and the investment falls away. That's a major factor.

A major factor is our real estate initiative. That has been very successful, and we are beginning to see the real results there. And this number includes some formerly restructured properties, but since we began this, our square footage -- the square footage of the company is under contract to pay for is down 44%, and I think that's a pretty remarkable, remarkable achievement. In the second half of the year we are looking at approximately $2.5 million of benefit of just lower rental expenses from that achievement in the second half. We are looking at dropping something like close to $1 million related to the Velocity investment which will fall away and we will get the benefits from that going forward.

You know, in addition to that, you referenced the global partners conference. That's obviously a one-time thing in the second quarter we won't have the third. There are a bunch of other puts and takes. Roughly speaking, we are talking about $4 million in the third quarter -- having seen maybe about $4 million in the third quarter than it was in the first -- or the second quarter all things being equal. That's, knock on wood here, we don't have any big surprises in there, but it is a pretty big achievement in the second half of the year and you can see that reflected in the

Okay, great. Thank you.

(Operator Instructions). Our next question is from Kelly Flynn. Your line is open.

Thanks. Could you give us a sense of how you think salary and benefits growth year over year will compare to revenue growth in the second half?

Yes. It is going to be roughly parallel. I mean, we are a business whereas you know 80% or so of our costs are salary-related. A large part of that is variable and is just associated with the production that we have of our consultants. So we will see an increase into the second half. It should be somewhat less than you are going to see revenue increasing in the second half. We talked about this in the first quarter. 2009 was such an abnormal year. In the first quarter we saw two things happen, and that was we saw obviously a step up in normal production by a number of consultants, but we also saw an improvement in the overall profitability of the Company which increased the proportion they take away of that. There was a relatively large adjustment step up in the first half. It will continue to increase our -- our pool for bonuses will increase the second half, but it won't be quite as steep as we saw in the first half.

Sorry, I'm a bit confused because I thought unusually you said it would be the same roughly as revenue growth, but then later you said --

It will grow.

You think you will get a little leverage on that line.

A little leverage, yeah.

Great. And then in terms of the European consultant departures, I know you spent a fair amount of time on that already, but what was the driver? You mentioned some competitors kind of making too much noise about taking your consultants, but was it that or were there other specific factors that you think you can prevent from occurring going forward?

Kelly, this is Kevin. I will answer that. If you look at what we are doing as an organization, we are in the second year of a major transformation to become a leadership advisory firm. All of the CEOs I talked to who have gone through this transformation talked about how challenging year two is. We knew going into this year that given the change in structure, given the change in terms of driving the leadership advisory business, that it was going to be a knock on affect and we will lose some people who really weren't long-term and in a leadership advisory firm. If you couple that with the fact that the market has picked up and last year was a very difficult year, you have competitors specifically looking at targeting us.

We have a great group of people in trying to buy market share which is not really a game we want to get into right now. It is a combination of things. And we have had some great hires this year as well. If you look at the backgrounds of the individuals we have hired, again coupled with the individuals that we have kept in the organization, we have a great bench, we have great succession planning in place and will continue to invest in the business. It is a myriad of reasons people leave the organization, but our focus now is continue to invest in our people that we have as well as look at recruiting great people that are going to fit in longer term with our strategy.

Okay. And in terms of the leadership advisory issue that you mentioned in the first part of your answer -- I mean, practically speaking, what would be sort of the problem with that strategy for a consultant that would opt to leave? Does it come down to their comp being impacted by a broader array of factors?

No, it just comes down to, quite frankly, change in general. You know, change is always difficult no matter what you do. Again, we still have a great group left in Europe. It has been hit much harder economically than any other region. We have 19 different countries in which we operate over there. So we are going to continue to hire and invest in that region as well. A huge upside in countries like Germany, France, Switzerland and the UK, and we will continue to make sure we invest there.

Okay, and then one final unrelated question on the revenue guidance for the third quarter . You mentioned sort of a little bit of caution just given what we are all hearing about the economy. Can you help us understand what you are expecting Europe's growth versus Americas and Asia, where you will see the biggest slow down,

I think we are going to see -- we expect increases in year-over-year growth in every one of the regions. It is just a question of not -- the growth has stopped. It is a slight slowing of the growth compared to the prior years that we are seeing in the back half of the year here. Relative to which region -- when we start forecasting for 2011, it gets a little more dicey because you are getting a bit more granular than I think I want to really pin myself to here. But clearly the biggest increase is in the second half -- or the biggest increases have been in North America, and they have been in financial services. That has been what is really driving the revenue growth in this company. I think that's where we would expect to see the biggest impact in the back half of the year. Asia Pacific has been really relatively spectacular in their growth. They have done exceedingly well in the first half of the year. Again, interjecting a little caution when you have that good of a first half, you have to ask yourself, can we sustain that level of growth? And it doesn't mean they are going to stop growing. It just means it may slow down a bit.

Sorry just on the Americas, when you say the biggest impact in the second half, you are saying you would assume the biggest slowdown there just because of -- I mean, the strong growth you are seeing? I want to make sure I didn't misunderstand --

I think on a relative basis. If you are comparing first half to second half, we will probably see the biggest slowdown in North America. But again, understand it is still growing and still being successful. We are talking about a relative comparison here. Europe's first half by comparison was, as numbers show, was relatively slow. That's probably going to be less impacted going into the second half.

Great, thanks a lot. I appreciate it.

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

Good morning. I was just wondering if you can talk a little bit about the longer term margin expectations as it relates to Europe. Obviously there are transitions that are occurring over there. How long will it take to get up to a decent level of profitability up there?

Mark, it is Kevin. First of all I think if you go back a couple of years we were in the 9% to 11% range, so an average of 10%. I think we are very confident we can get back there. It is just a matter of the macroeconomic environment we have all seen. Europe has been kind of much more of a challenge, and it has been slower to recover than the other three regions Scott just mentioned. So we are confident in getting the margin back up, and that's why we want to make sure we invest now . We are investing in Central and Eastern Europe. We are investing in Russia, you know, we have spoken about this before and Germany provides a huge opportunity as that starts to rebound as well, as does the UK. You just have countries like Spain this year that have really fallen off significantly and it is a matter of time before they start rebounding, but it is maintaining our client relationships there for the long-term and that's what we are focused on doing. Again, I think we are confident in getting up to probably the 10%

Assuming we have this new normal sort of recovery and we don't have a double dip, do you think that that's achievable within a couple years? Or how long do you foresee that would take given -- it sounds like there is a disproportionate level of changeover over there. I'm assuming some of the people that left were probably pretty good producers. It is probably going to take some of the people you will recruit a little bit of time to ramp up to those production levels, will it not?

It is a good point. I think that it is a combination of both the things you just mentioned. Number one, we do have a significant amount of hires that have joined and are still joining in the European region. We have opportunity in some of the markets. I would say that, yes, it is achievable in the next two years. As we have discussed before, anywhere from 12 to 14 months it takes for consultants, particularly the type we have been hiring to get up to speed. Plus we have a lot of great, some of the top producers in the firm this year quite frankly in Europe are those we promoted -- newly promoted principals, newly promoted partners. This goes back to a point that I was making earlier about really focusing on developing a pipeline of great consultants. I believe that within two years we will be back there just through a combination of great hiring and great development and work with our clients.

Great. And can you talk a little about the backlog and the July confirms. Obviously everybody is interested in terms of what is happening from a macro perspective. Now there is a great degree of uncertainty out there with a lot of mixed data points. What are you hearing from your folks?

Well, I will jump in and then let Scott take over. As you have seen, historically in the summer, primarily in Europe a lot of countries, particularly the Nordics go on vacation in July. We are dealing with the vacation season right now. We are happy with the confirmations thus far, but cautiously optimistic in terms of what's going to happen in July and August. So far we are happy. It is just a matter of making sure we get through the next couple of months vis--vis vacation season. Scott, I don't know if you want to add --

I would just say you are right. I think what we are seeing in July just reinforces exactly what we set in the guidance which is we are expecting the back half of the year, the year-over-year growth rate to grow slightly, and that's exactly what we are seeing in July results.

Would the July confirms just be a little below the prior two years just because we had such a good June and May? How do we think about that?

When you go back and look at this company, it is difficult to draw a conclusion that July last year, July this year, July next year are all sort of a consistent pattern. It tends to because it is sort of a -- you know the nature of the business being transactional depending on just how many you have coming at any given time, you can jump around a fair amount. When we compare to last year, I'm not sure --

Last year was an anomaly.

When you look back over the last several years , we've had some evidence and you begin seeing the impact of vacations and stuff, but that's not always the case. In this year when we look at July, it confirms what we have baked into our guidance and exactly what we told you. That is we have just seen compared to the first half of the year, just a little slowdown in the activity we have seen which is exactly why we put our guidance where

Are you seeing that conference -- aside from the Nordics and some places that are going on vacation, are you seeing that across any vertical area, anything -- aside from just normal seasonality, are you seeing anything?

No, it is not concentrated any place. I think it is -- I hate to say it, but it is just sort of the uncertainty and people taking a look. People not being in the office. They are spending their time at the beach and not being in the office. We see all of that impacting it. Our forecasting models told us to anticipate that, and July is proving to be right on -- spot on with our forecasting models.

And then the Americas operating margin, how much did that benefit from a shifting of expenses?

There is about $1 million that we moved. This is a result of Project Velocity and gaining sort of these efficiencies by bringing things into central organizations there. We took about $1 million that normally would have been in the Americas operating division and moved it into the operating support line.

Great. And then just the last question and I will jump back in the queue, but in terms of the current consultants on board, you had your global meeting. Do you feel like the current base is fairly stable and committed, or should we anticipate because of your perspective in terms of holding the line on comp and maybe some other competitors maybe being aggressive that there may be continued change that we should anticipate?

I think, Mark, that the short answer is we had a great meeting. I think there is a lot of commitment to the strategy, a lot of commitment to the practice-driven structure in the way our business model is working, and we have a lot of great people in the firm. Will we potentially lose one or two other individuals? Absolutely. I think That's what we do for a living as well. It is unrealistic to think we won't. I think the base that we have right now is committed, and we have a great group of people. Like I mentioned before, simultaneously in each and every practice we will continue to invest and continue to recruit, as Scott mentioned earlier in his remarks.

Thank you.

Welcome.

Our next question is from Tobey Summer. Your line is open.

Thank you. I was wondering if you could comment on consultant productivity by geography. You had really strong growth in Asia and I was just wondering how things compare on a relative basis. Thanks.

Sure. Tobey, it is Julie. It grew across the board. It improved across the board.

Okay. Just a follow-up then, did Asia make more progress than the others just on a rel--

Yes. A lot of that has to do with the revenue too. As you know, it is a calculation. It is revenue divided by average consultant. So they had great revenue growth, and that impacted their productivity.

It is hard not to. I mean, Asia Pacific had absolutely a marvelous first half and a marvelous second quarter of the year. They really did a great job. And that is bound to be reflected in productivity improvements that are above that of the rest of the firm. As Julie said, it is a mathematical exercise. But they really did, when we look back, had a number of areas that had absolutely record years. I think Australia had a record first half. A number of other countries had really, really strong results. Asia has been in the past and continues to be a real, real bright spot for us.

And one way, Tobey, you need to look at this is the average compensation. If you look historically at Asia Pacific, vis--vis the other regions, the average level of compensation has been lower. What we have seen over the course of the last three or four years that given the challenge we are finding great people not only across the globe, but specifically Asia Pacific, compensation has increased out there as well. That's also been a benefit to us.

So that compensation is kind of normalizing closer to the average?

Yes, I mean in terms of executives being compensated commensurate to both those individuals in Europe and North America, yes, it is. It is increasing, so it is more balanced than it used to be historically.

But still lower than you can imagine.

Yes, thank you. Quick question for you about kind of some changes that are going on with respect to pay and what your expectation is that -- to see how it could impact the business if at all. One would be kind of the laws or the rules that are coming out in Europe relative to pay . And then as part of the recent financial services regulation here in the US about clawback provisions and see whether in the limited instances those have existed here already, whether that has ever impacted your compensation for performing

Tobey, at this point, it hasn't. If you recall from probably some of the other conference calls -- we have a structure where we are capped both the average CEO search for example is $1 million to $1.5 million, and that varies by region. There is a cap in place on that simultaneously for example, financial services we have caps in place anywhere from $350,000 depending on the level of search up to $500,000. So right now given the caps and given the market, we don't see that could impact us. We are monitoring that and make sure any changes, particularly in the -- I guess in the regulatory environment and legislative environment, it won't have a significant impact on us. We will continue to monitor that. But I think short-term or longer term it is not going to have an impact given the caps we have in place.

Thank you. That is helpful. Last question, talked to you about a little a slower growth given the real strength you had in the US year over year in the first half. Going forward, is some of that slower growth just a function of passing the heavy seasonal period for financial services demand?

Having grown up in the financial services practice, what you see historically is they are extremely busy January through June given the bonus cycle, and then July and August somewhat slower although it depends on the year. Last year for example was an anomaly as well, because financial services really picked up in July and August. And then given the markets and the bonus payouts the following February, we always see an increase in financial services again given we have a three to four-month retainer. We see an increase in financial services again at the end of September, October, November going into the end of the year and back through the first half of the following year. So it does slow down for two months. They don't want to dilute the bonus pool, if you will. But simultaneously, they usually have a target in mind in terms of who they want to bring on board, new businesses they want to get into et cetera going into the end of a year.

Thank you very much.

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

I wanted to ask about the real estate initiative. With regards to that, you mentioned a total figure in terms of how much it was going to cost for this year, but how much have you spent of that so far? And will it be completed by the end of this year?

Let me clarify, Mark. When you say spent, are you talking about CapEx and the fit-out costs? That's really where the expenditure is.

Right.

It is not all real estate.

Yes, it is not all real estate, but a big hunk of it was. The big offices I think largely have been done this year. The one exception to that which we have talked about is here in Chicago which is probably going to be the last one we tackle of our big offices. But London, Paris, New York, DC, all major, major hubs for us have been taken care of. London, Paris, DC, New York are all done. Those are completed.

And maybe a few costs flowing through in Q3, Mark.

So in the -- the full answer is no, we are not done yet. We have taken the view not -- we are not going to restructure property. We are not going to leave property and abandon it in a market where the sublet market is so weak. We have been letting leases run off and handling them as they run off. A substantial number of those did happen this year. Next year -- I forget there are five or six more that are ongoing. They tend to be smaller offices, the big ones being largely behind us. We are still well on track of reducing overall our ongoing rental expense to something like reducing it by a third or something like that . I mean, we have really been very successful in reducing the foot prints. Even when we have been renewing leases, we have been renewing them for substantially smaller square footage than we

I guess what I'm trying to get at is relative to where what we see today in the financials, how different will the first half of next year look based on --

Again, if you are talking CapEx we should quickly return to the roughly 2% to 3% of revenue level. The big projects are behind us. Even some of the big internal projects that have capital expenditure like Latitude, our internal search system. We begin rolling that out in first quarter of next year so the investment is largely this year. So on the capital expenditure side, our expectation is a return to that sort of historical level of 2% to 3% of revenue very quickly. We are talking next year.

If you are looking at rent and depreciation costs for the premises on an ongoing basis, in the third quarter alone, the savings over last year's second -- I'm sorry. Second quarter savings over last quarter was $1 4 million, and we would expect that to continue to improve.

Okay. So how much more could key see come out of G&A?

Well, our goal as we said for a while now is to try and get $10 million out of our real estate expense.

I mean, G&A is -- as you can imagine -- is a grab bag of lots of stuff. Real estate being just one piece of it.

Right.

You know, when we look going forward right now, again, if we are looking at a roughly $500 million contract, just using that as a benchmark, then we're probably looking at an optimum G&A going forward of somewhere around $105 million on that size company. As you scale that company up into the $600 million range, getting back to where we are in 2008, we really introduce more leverage in the G&A. It is not going to go up as much as revenue. A roughly 20% increase in revenue. We would expect G&A maybe to go up $10 million, $12 million something like that. You know, maybe as high as $120 million. So we have introduced leverage in this, and we can expect to continue with that sort of leverage going forward

It is not like we should anticipate -- it sounds like of the $10 million in savings that we are probably going to end up getting on the real estate side, we have probably experienced roughly a little bit more than half of that if we are down -- that basically comes out to $2.5 million per quarter, and we've got $1.4 million that we have saved in Q2 of this year relative to last year. So basically have another third or so to go, right?

Yes. We've got a bit more to go here.

And then it sounds -- I guess what I'm trying to figure out is are there going to be some other expense items that will offset that from this normal compensation-type items that would have to do with improvement in revenue? Or are there any other new initiatives we should plan on?

There are always things we have our eye on which is why I referred back to an overall target number. Figure a $500 million company at roughly $105 million, a $600 million or $650 million company at roughly $120 million in G&A. That is sort of a trend line, a percentage of where we think right now the steady state is. We are going to go back and look at it again because we are not happy staying there. But right now with the initiatives we've got in place, that's where we think we are.

Okay. And can you talk about the productivity levels of the people that you are recruiting in from other firms? What are you seeing in terms of what they are initially able to do, and then as they become part of the system how quickly they are able to elevate their games?

I think there is a mix there, Mark, because we have some that are new to coach. We have some in the leadership consulting area, and we have some -- well not mostly, but some coming from boutiques. What we have seen historically is the ones -- leadership consulting crew are at capacity now, so they will get up to speed very quickly. The consultants that are new to search, depending on where they operate, could take anywhere from 12 to 14 months to get up to speed. When I say get up to speed it is pretty much getting close to the average revenue per consultant. And then we see the individuals from boutiques really step up and actually increase the revenue from the prior organization. So those are the individuals historically we are focused on. It is pretty much a mix.

Great. And can you also talk about the China charge with regard to the other? Just a little color there.

It is nothing more than an accounting adjustment. We went back and looked at the structure of the business and the minority interests because it is in a bunch of different pieces and figured out we had to make a one-time catch-up to account for the minority interests there. It is just an accounting adjustment . It has nothing to do with the business, and it is not an

Okay. Thank you very much.

Thank you. We have a follow-up --

We have time for one more question. It has been an hour. I don't know if anyone else is in the queue.

We have one more follow-up question from Tobey Summer. Your line is open.

Thank you. Just curious if you could give us a little color on how long it may take to get down to that 40% tax rate? Thank you.

Yes, we are probably talking -- well, let me back up. The biggest single issue there will be the return to profitability of certain of our overseas subsidiaries, particularly in Europe. We keep coming back to that, but that is a major driver. We have some loss countries there where it reduces our income, but we get no tax benefit for right now. So really it is that normalization of these overseas subsidiaries, principally in Europe. We are probably talking about 12 months to do that. That's the biggest single driver. Some of the longer term tax initiatives we are looking at have again approximately a 12 month sort of time frame on them to get in place. So we are probably talking about significant progress in 2011 just as the economy in Europe and things improve there and our mix of earnings becomes a little more normal. You know, with 2012 sort of looking for the year when we start really seeing the impact of our tax planning initiatives.

And last question has to do with capital deployment. You did cite cash accumulation as a goal for this year. So wondering if you could give us an update on M&A opportunities and perhaps your thoughts on share repurchase.

Well, let me start with the latter one. As I think I have been pretty consistent , this is a year of building up our cash reserves and strengthening the balance sheet. Right now after having come out of a really quite horrendous 2009, that's our principal focus as opposed to share repurchases. In terms of M&A, we have not specifically commented on that, and I don't intend to change that sort of philosophy. Let's just say that there are a number of things which have come across our radar screen. We continue to be very cautious in looking at them, particularly in this market where it is a little difficult sometimes to assess valuation of companies. People look back at say 2008 and say that's what it should be based on. You've got 2009 and 2010 being a transition year. So as you can see, this year we have done one relatively -- not relatively, very small acquisition which was a tactical one to strengthen an office in New Zealand. We haven't done anything because of, one, our own caution, our focus on building this business organically, and secondly, the difficulty in valuing things in

Is that good, Tobey?

Yes, thank you very much.

Well, thank you for joining today's call. I would like to thank all our consultants across the globe who have continued to engage and drive our leadership strategy. I hope you all have a great day. Thanks a lot.

Ladies and gentlemen, this does conclude the conference. You may all disconnect at this time. Thank you.