Heidrick & Struggles International Inc (HSII) 2010 Q4 法說會逐字稿

Welcome to the Heidrick & Struggles fourth quarter and 2010 quarterly conference call. At this time, all participants are in a listen-only mode. After management's open remarks, we will open the line for Q&A. (Operator Instructions) At this time, I'd like to turn the call over to Julie Creed, Vice President, Investor Relations.

Good morning, everyone, and thank you for participating in our fourth quarter and 2010 conference call. Participating with me on the call today are Kevin Kelly, our Chief Executive Officer, and Scott Krenz, the 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 will be making forward-looking statements on our call today and ask that you please to 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. He's going to cover slides two through 12 of the presentation that will be close to one hour today.

Thanks, Julie. Good morning, everyone, and thank you for joining today's call. I'll start with some of the headlines of 2010, and then I'll come back at the end of our opening remarks with a review of what we plan to achieve in 2011.

A year ago at this time, we reported 2009 results that included a 36% drop in net revenue, the worst one-year decline in our history. We achieved a break-even operating margin, excluding restructuring charges, but not without extensive cost-cutting actions. But what a difference a year makes. 2010 was much improved. Consolidated net revenue increased 25%, driven by a 15% increase in executive search confirmations, an 8% increase in the average fee per search and a 53% increase in leadership consulting revenue.

In 2009, each region and every industry practice group saw declines. In 2010, each region and industry practice achieved growth. In fact, Asia-Pacific achieved record net revenue of $110.1 million. Consultant productivity increased from $1 million to $1.4 million, slightly shy of our record of $1.5 million achieved in 2007 and 2008. We achieved a 3.6% operating margin, inclusive of a $1.6 million of restructuring charges. And we finished the year with $181.1 million in cash and cash equivalents, compared to $123 million at the end of 2009.

But recovering from a year like 2009 was not without its challenges. For one, our business in Europe did not perform as well as we had expected. Our operations in this region were impacted disproportionately by consultant turnover, which had been quite disruptive to the business. But I have to say, having just been in Europe and spent time with our consultants across the region out there, morale is extremely high, and they're excited about what we can achieve collectively in 2011. We also moved quickly to recruit strategic hires, but we acknowledge that it will take between -- anywhere between 12 and 18 months for these new hires to get fully productive.

Net revenue in Europe in the fourth quarter improved over the third quarter, and as I mentioned, we feel good about our prospects, believing we have turned the corner that region, especially given the improving economic outlook. But we realize that we still have challenges as 2010 revenue grew a modest 6.6% and there was a $600,000 operating loss. We finished the year with 347 consultants, compared to 359 at the end of 2009. And so far in 2011, 22 new consultants have started, and another four are scheduled to start within the next month.

In addition to the investments we made in hiring, we made significant investments in training and development of our people. During the third quarter call, we talked about some of these investments, like holding our first global consultants meeting in three years, our custom leadership education programs with Harvard Business School and Duke, and restarting several training and integration programs. In part, these investments were made in order to maximize the on-boarding experience of our new hires and reduce the time it takes for them to get up to speed much more quickly. But also, it's integral to make sure that they also understand our strategy and what we're trying to do collectively as an organization. But most importantly, these investments are vital to our ability to further integrate our search and leadership consulting capabilities, and this is a key objective for us in 2011.

I'll come back and talk about that later, but now I'll hand it over to Julie and Scott.

Thanks, Kevin.

Between our fourth quarter press release, the slides we posted on our website, and Kevin's opening remarks, we've covered our fourth quarter and 2010 results in some detail. Like in past earnings calls, I'll go through a bit more detail on operating expenses in the fourth quarter.

Please refer to slides 13 and 14. Salaries and employee benefits expense in the fourth quarter of $82.7 million increased by $13.3 million or 19.1% year-over-year. This increase mostly reflects higher performance-related or variable compensation, which increased $10.3 million compared to last year 's fourth quarter. The majority of this $10.3 million increase is a result of higher bonus accruals related to higher net revenue and the net per consultant who are generating that revenue. But as we discussed on the third quarter conference call, about $2 million of the increase is related to a variable component that we added to the consultants' compensation in order to be more competitive in the market.

Fixed compensation, which includes fixed salaries and employee benefits as well as stock-based compensation expense, increased $3 million over last year. The increase in the cash component of $5.3 million relates to our restoration of the 5% salary reduction that was in place for 2009 and 8.3% increase in worldwide headcount to meet increased demand, and incentive awards issued in the second quarter. This increase was partially offset by a year-over-year decline in stock-based compensation of $2.2 million, reflecting a reduction in R2s granted in 2009 and 2010, compared to prior years when a portion of consultants' bonus was made in the form of R2s.

Now turning to slide 15, general and administrative expenses increased $4.9 million or 16% from last year's fourth quarter. A portion of this increase relates to structural changes we've made in the Company. Let me give you some context. We are a complex Company with a network of 69 offices in 40 countries, and throughout 2010, we've told you about various initiatives we've undertaken to improve operational efficiency and global service levels internally. Many of these initiatives resulted in the decision to outsource various aspects of business services instead of providing the support internally and locally.

For example, in the last year, we've outsourced a portion of our IT infrastructure, help desk support, most of the internal audit functions, statutory accounting in local, non-US jurisdictions, tax planning, accounts payable for our North American -- real estate operating expenses, as well as a number of training programs. Much of the expense associated with these outsource activities is reflected in G&A but was previously reflected as higher salaries and employee benefits expense and in part contributed to the year-over-year decrease in compensation as a percentage of revenue.

In addition to outsourced infrastructure expenses, there were year-over-year increase investments related to Project Latitude, which is our new search system, hiring initiatives, and training and development programs aimed at improving productivity and firm-wide integration. Project Latitude will start to roll out in August of this year, and some of the leadership development programs were specific to 2010 and will not recur. The biggest offset to the these increases was a continued decline in real estate expense, down $3.6 million year-over-year as we rationalized space and took advantage of market conditions to renegotiate lower rental rates for new and renewed leases.

Now I'll turn the call over to you, Scott.

Thank you, Julie.

Let's start with the 2011 outlook. Slides 18 through 24 will illustrate my comments. For the full year 2011, we are estimating net revenue between $515 million and $545 million. We expect the associated operating margin to be between 6% and 10%.

There are many factors that went into these estimates. The first are the macro drivers. While our worries concerning the double dip recession have receded, we will still harbor some concern about the strength of the economic recovery in Europe. In general terms, we expect steady growth in North America, improving but slow growth in Europe, and continuing strong with somewhat moderating growth in Asia-Pacific.

We are also keeping an eye on some broader sector trends. As I am sure you know, the financial services sector is an important part of our business. Net revenue in this practice is up a very strong 40% over 2009, now representing 31% of total net revenue in 2010. But the banks had a tough fourth quarter, and we have noticed some caution in hiring on their part. As a result, we are expecting moderating growth in this sector in 2011, in the range of 7% to 10% year-over-year, slower growth than we saw in 2010. We are expecting a challenging first quarter for the financial services practice. And is as typical, our first quarter revenue on average represents less than a quarter of our full-year revenue. Looking at the full year, we expect the industrial consumer practices to do well in 2011.

Probably a more important driver of our 2011 outlook was a 19% voluntary consultant turnover we experienced in 2010. We do not anticipate anything approaching this level of turnover in 2011. We ended the year with 347 consultants, compared to 359 at year-end 2009, and this included a near-record number of 60 new hires. The 2010 turnover did not have as much of an impact on 2010 revenue, because our existing consultants really stepped up and significantly increased their productivity to near-record levels. However, it was a drag on margin. 2010 operating income would have been approximately $7 million better if you exclude the impact of new hires.

With the productivity of our seasoned consultants already at a high level, revenue growth is now coming in large part from consultants that joined in 2010 or will join us in 2011, and this is moderating our growth in the near term. As Kevin already mentioned, 22 consultants have joined the firm in the first two months of 2011, with four more scheduled to start. Our goal would be to end the year with approximately a net 10% increase in the total number of consultants. Similar to 2010, this level of hiring will be a margin headwind in 2011. However, it's important to note that as our total number of consultants grows, the proportion of new consultants to seasoned consultants will decline, and the impact on margin will also decline.

Julie already talked at some length about G&A. But to repeat some of what she said, 2009 and 2010 saw us catching up from years of underinvestment in our infrastructure and human capital. In 2011, we expect G&A to be lower by roughly $9 million, compared to 2010. This represents a return on the investment we have made in reengineering internal systems, real estate consolidation, and the outsourcing we previously mentioned. This reduction will be achieved in spite of our planned 2011 investments, the largest being on our internal system in advance of its August implementation. Our goal is to further reduce G&A to $110 million to $115 million in 2012 and $105 million to $110 million in 2013.

In the first quarter, we are estimating net revenue between $122 million and $128 million. We expect the operating margin to be between 1% and 5%. As you know, first quarter margin has historically been a challenge for a number of reasons. As I mentioned earlier, it tends to be our lowest net revenue quarter, so there is less leverage on operating income. Additionally, as with most professional services companies, US payroll taxes kick back in in the first quarter.

Turning to slide 24, our cash position continued to improve in 2010. Net cash provided by operating activities was $83.5 million, compared to cash used by operating activities of $72.7 million in 2009. As Kevin mentioned earlier, we ended the year with $181.1 million in cash and cash equivalents, compared to $123 million at the end of 2009. In March and April, we expect to pay approximately $90 million in variable compensation. This compares to March 2010, when we paid approximately $47 million in bonuses.

Free cash flow in 2010, which is net of the increase in accrued bonuses and capital expenditures, was approximately $25 million, and we are currently estimating 2011 free cash flow in the range of $25 million to $40 million. Capital expenditures in 2010 came in slightly lower than expected at approximately $18 million, mostly as a result of timing of two large office renovations. We are estimating 2011 capital expenditures to be in the range of $17 million to $21 million, driven by office bid-outs in renovations and a new IT search system.

Finally, let me talk about the tax rate. The effective tax rate in the fourth quarter was 47.3% and for the year was 55.8%. The rates were higher than we were expecting at the end of third quarter as a result of higher than expected unbenefited losses in several foreign jurisdictions, the non-deductibility of certain costs and tax costs associated with the domestic inclusion of foreign earnings. Despite the 2011 annual rate, our long-term goal is still 40%, and in the fourth quarter, we began a major tax planning exercise. Based on current estimates, we anticipate the 2011 full-year effective tax rate to be in the range of 42% to 50%. As the year progresses, we'll be able to refine that number for you.

And with that, I'll turn it back to you, Kevin.

Thank you, Scott.

I'd like to talk about some of our key initiatives for 2011. Since the beginning of 2009, we have been working together to change our business model in order to remain relevant with our key stakeholders and to become an integrated leadership advisory firm. The great news is we've made tremendous progress in the last two years. Our employees advocate the strategy, the media recognizes our strategy, and clients love our integrated offering. Our financial results demonstrate our progress. In fact, the biggest hurdle for us in growing leadership consulting services even faster is a capacity restraint. That comes from hiring great consultants who can work in the CEO and board level in the leadership advisory area.

But despite the progress we've made, much work remains in achieving our vision. Therefore, a key initiative in 2011 is continued integration of our leadership consulting services and search teams working seamlessly together. Our hiring efforts are also quite focused on leadership consulting in 2011 in order to increase our capacity for new work. We've revitalized our Strategic Partners Program with new organizational structure and leadership, and under our industry-aligned structure, the program will focus on building broader and deeper relationships with our most meaningful global clients.

Internally, as we've mentioned, we will place greater emphasis on tighter control of G&A expenses by implementing more disciplined and transparent controls. And with improving economic conditions, our expectations for productivity continue to increase. We are proactively managing underperformers and continuously improve our processes for bringing new consultants up to speed quickly.

And finally, there's our European business. We are implementing a combination of revenue-driving initiatives and cost controls.

Heidrick & Struggles has proven for almost 60 years its reputation for filling high-impact positions with leaders in companies around the world. We have successfully evolved our mission, from helping our clients to hire the best talent to helping our clients build and maintain the best leadership teams in the world. Today we are not only recruiting individuals to fill specific roles, we are doing much more. We're helping our clients assess their leadership capacity, facilitating continuous acquisition of new talents, assisting in their on-boarding capabilities, and help to secure retention of those leaders.

I'd like to finish by thanking our employees listening to this call for their commitment and hard work in 2010, and 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 might have. Thanks.

(Operator Instructions) I'm showing our first question comes from Mark Marcon from RW Baird. Your line is open.

Hi. Good morning.

I was wondering, Scott, if you could just repeat the 2011, '12, and '13 SG&A targets. And specifically, you know, as you go through the years with the declines, where the declines in the spend will come from. And then I have a follow-up.

I was hoping you wouldn't catch that. Apparently not. Anyhow, let me repeat it.

So you know, our goal is to be down about $9 million, approximately $9 million year-over-year from 2010 to 2011. And then we're targeting a G&A number of $110 million to $115 million in 2012 and $105 million to $110 million in 2013.

Where's it coming from? It's really a continuation of all the things we've been doing for the last two years here, a lot of them coming to fruition as we get through this period where we have turned the place literally upside down. We've implemented a completely new real estate strategy, which is paying huge dividends to us. We've put in new systems and processes here which give us much better visibility on spend and controlling that and our driving efficiencies. And then we're getting through some periods where we really were playing some catch-up and we were investing in some very significant things in terms of our IT infrastructure our human capital, we had neglected training for a number of years here and really got caught up on that.

So as that gets to more of a regularized run rate going forward, we can see ourselves bringing the level of G&A down despite anticipating obviously a growth in the top line.

Great.

Then it sounded like some of the things that were -- were now part of SG&A were previously being reflected in terms of compensation. Can you talk about targets for compensation as well?

Well, that we've talked about -- on many occasions that we're looking at something which is probably between 65% and 70%, depending upon revenue size and where we are in the cycle, the economic cycle here. That's not new news, and that sort of stays where it's been.

It's important, though, to note that the key driver there is efficiency, it is the revenue per consultant. A lot of things come together in that number. As we drive that number up, we see more and more dropping to the bottom line relative to the compensation we pay. So we pay a lot of attention to that number. And this year, we got that back as something which was near our record peak and we hope -- and I know it's one of Kevin's key initiatives here to continue to drive that upwards.

Great.

Can you just talk about where's the total bonus accrual at this point, and how much will get paid out in March?

Approximately $90 million is what we anticipate.

Great.

And then any comments about the early signs of the productivity levels from the new consultants who just came on and how well they're performing?

Mark, it's Kevin. How are you?

I'm well, thanks. How are you?

Good.

Yes, actually, I think the exciting part is collectively all of our leaders across the firm, specifically the global practice leaders, have one of their KPIs to really develop and bring our consultants on at a much faster pace. If you look at -- let me break it into two pieces. Leadership consulting, as I mentioned earlier, the biggest challenge we have there is really delivery and capacity. Most of our consultants in that area have hit the ground running right away, given the increased demand in those services.

On the search side, we spent most of our time looking at high-quality producers and boutiques last year, because I think our research showed that they speed up, or get up to speed much faster than historically recruiting from direct competitors. And we have seen very positive signs of that taking hold. So, we're pretty excited about the $1.5 million -- breaking through the $1.5 million revenue per consultant number this year, and hopefully we'll continue to see that go in an upward trend. But yes, we're seeing early signs and very good signs of these consultants get up to speed at a much faster pace.

Great. Thank you.

I'm showing our next question comes from Tim McHugh from William Blair & Company. Your line is open.

Yes. Can you talk about the turnover? You made a comment that you wouldn't expect it to be as large this year as last year, and so I guess the question is what are you expecting? And then in the near term, you mentioned, I think it was, the 22 new consultants. Was that a net number, or was that a gross number? And if it's a gross number, what's kind of the offset? Just trying to get a sense for what -- Q1.

First of all, Tim, it's Kevin.

We knew going into 2010 that we were going to see some turnover. And we were going to see turnover -- and Scott mentioned this, we've mentioned it in the script -- we've gone through, starting in 2009, a major transformation of our industry. And, to become a leadership advisory firm, it's what our clients want, it's what's really exciting, most of the people in the organization.

But any time you go change or go through change in professional services, you do have turnover, because it starts impacting the processes procedure. It starts impacting culture, in terms of driving our culture to more of a team-oriented collaborative culture. It impacts compensation, in rewarding the right behaviors in a firm, so 2007 was a big year, with 15.7% turnover.

We dropped in 2008. And we did see turnover roughly at 19%. We would see that get back to normal numbers, normal figures, probably around the 10% range on average. And some of that is going to be driven through performance management on our side as well. So we are excited about the people that have come on board. We'll continue to invest in people, particularly in leadership consulting this year, but we expect that number to drop back down to the 10% range.

Okay. And then, do you have a sense for the 22? Was that a net number or a --

22 new consultants have joined this year, and that is -- that's how many have joined. And today, no one -- I don't think anyone's left.

No. In my comment that our target for the year is approximately a 10% year-over-year increase in number, that is a net number. So that would be net of whatever turnover happens during the year, whether voluntary or through performance management.

Okay.

And then my other question would be on the G&A expenses. You're kind of guiding to some pretty significant reductions in the absolute level of spend there over the next few years. To be fair at the start of last year, you kind of -- you made similar comments, and G&A ended up coming in a little higher. Do you feel better about it today, and if so, can you put that in context, maybe why you feel better today versus than when you kind of hoped for this in the past?

Yes, I think there's a couple of things, Tim.

First is, as Julie has mentioned, there's been some structural changes. We've moved things around. And of the $15 million year-over-year increase in G&A from 2009 to 2010, something like a third of that is probably associated with just outsourcing things now so it's classified in G&A, as opposed to up in the compensation line.

And on that side, maybe of the year-over-year decline in percentage of -- compensation percentage of revenue of something, approximately 1% of that is associated with the salaries leaving that area. So that's sort of stabilized things. We're in the process of making that transformation this year. And it's a little hard to estimate that going in, to what that would be. That is in place now.

The second nature thing is that I think we're getting to the end of the investment period that we've gone through, where we have really put a significant amount of money and resources behind redoing our internal systems, a new real estate strategy, IT infrastructure. You name it, we probably have significantly improved it in the last two years. Now that investment falls away, and we begin really just focusing on driving efficiency and improvement.

And then the third thing is that one of the dividends paid by putting in the new financial systems here is really a much, much better view of what the expenditures are. We really have a much better view of our business, where the money is going, and on a much more timely basis than we've had in the past, which, you know, being a financial guy, if you can't measure it, it's hard to control it. Well, now we can measure it and we can control it, and so we'll be driving efficiencies there. And a whole host of things, from travel to what we spend on professional services, a whole range of things.

So I think all of those are what is giving us some confidence to set those targets.

Okay. Thanks, Scott.

And our next question comes from Kevin McVeigh from Macquarie.

Great. Thanks. Thank you. It was very helpful quantifying the SG&A and so on and so forth.

Scott or Kevin, I wonder if you could give us a sense of how you think about margins overall over the next couple of years. And as you -- not getting too far out, but how do you think about operating margins at the peak of the next cycle, as opposed to what you've enjoyed historically?

Great question, Kevin.

We've covered this before, and given the investments we've made, we know we're lagging behind the last time we were at these revenue numbers. And surely, we wanted to make sure that we did what was right for the organization longer term. So as we look out over the next few years, we see getting into the low to mid-teens. As revenue increases, given what we've done from a back office perspective, we're very confident of getting back between 12%, 13%, 14%. 12 -- I think 12.4% plus on average being -- it's going to be 12.8% being the high in 2007. But we're confident we can get between that and close to the mid-teens.

Super. Thanks.

And then, Kevin, your thoughts on the leadership consulting business overall. Are you still comfortable with the same mix, in terms of consulting versus the other parts of the business?

Yes, we have a goal to grow this business to be 20% of search revenue by 2014. We presented a plan to the board in 2009, updated it again in 2010. We have an execution plan, and it's very exciting, Kevin.

We, in the succession planning part -- succession planning, don't think we've lost a pitch in succession planning the last nine months of 2010. We have unbelievable examples of our strategy working at the CEO and Board level where two examples where other search firms did a major CEO search and we were brought in to assess the internal and external candidates. So it shows that the strategy's working.

If you look at some of the regulatory changes in Europe, just came back from there, the EEU is going to institute in February and March a rule or regulation where Boards and Directors have to have an external assessment done once every three years. We launched our Board assessment tool last month and have numerous examples in Europe and Asia where we're doing that. Examples of -- three recent examples of helping a large life sciences company, a large financial institution, and a large technology institution who are going through a merger assess their top leaders on both sides and work on development programs. Again, I could give numerous examples on the succession planning side of the equation as well, where we're going in and working for a large $5 billion industrial company on three high potentials in the organization in a succession plan where we work on a development program over the course of the next three years where at the end that they'll choose a successor to the current CEO.

So that's the great news. The challenging side for us is, there's thousands of acquisitions at the mid-level and lower level out there in the human capital area that do assessments, et cetera. That's not where we want to play. We have hired unbelievable people from consulting firms to come into leadership consulting. We're looking at small acquisitions in the leadership consulting space, so it's how do we scale that. We have a program in place, and the exciting news in the leadership consulting side is it, it's working. We see the results, and our consulting base. The consultant revenue has picked up because of that as well, and that's what's great about this integrated approach we've taken the search and leadership consulting.

Super. And then just one more, if I could, and then I'll get back in the queue.

As you think about the mix of -- the service mix overall, it seems like the financial services dipped down a little bit here, is that more cyclical, or do you think net -- is it going to be more than the 30% range, as opposed to the levels you've seen historically?

In terms of growth or in terms of percentage, practice percentage?

Practice percentage. Sorry about that.

Well, our goal would be -- it is cyclical. I grew up in our financial services practice and spent a lot time with the financial services crew. We're entering bonus time, as you know, and so there's always turnover at bonus time. We have, as I think I mentioned on the last call, picked up some major engagements globally from international companies, Asian banks, European banks, Russian banks that are looking to expand in North America and other parts of the world. So, we're still fairly optimistic about our financial services practice growing this year.

To answer your question specifically, I hope, and our collective goal is to bring that 30% number down. Why? Because we are focusing on how do we grow and increase our industrial practice. How do we grow and increase our consumer markets, life sciences practice, et cetera. So, to have a broader, more balanced portfolio of practices going forward is our goal and ambition, and that's where we're going to spend and allocate investment dollars in 2011.

Super. Thank you so much.

Our next question comes from Tobey Sommer from SunTrust. Your line is open.

Thank you.

I wanted to ask you a question about your hiring plans for 2011. If I heard correctly in the conference -- in the prepared remarks, you mentioned you had a handful or something that maybe already started in the first quarter or are about to. And if you could repeat that number, that would be great. And then could you talk just about -- are you comfortable that you have the associated expenses built into your guidance to accommodate that kind of hiring, and maybe explain any kind of variability that could result as a function of that.

Sure.

So we had 22 start already. We have four starting over the course of the next three to four weeks. Our goal collectively is, as we do every year, as we sit down in the fall, we analyze from a practice perspective where our gaps are, and where both geographically and by product. We then budget or have an allocated budget to each global practice managing partner so they know what their hiring plan is, all the way down to how that's going to impact their margins.

So, given the systems and infrastructure we have in place now, we're in a much better position over the course of the last six months to really get a handle on the impact of hiring vis-a-vis margin. And so that's a key focal point for us this year. We want to make sure that we do two things.

Number one, manage out people that aren't producing in the organization while simultaneously continue to hire high-quality consultants, primarily in leadership consulting this year. Because we have a great group of individuals already in the firm. We've added a bunch of other great individuals. We want to continue to do that. We want to make sure that we on-board them appropriately and make sure they get up as quickly as possible to that $1.5 million plus revenue range that we talked about earlier.

Thank you.

In terms of voluntary turnover, I think you mentioned that it was a high of around 19% last year. Could you remind me what a historical range -- a more sort of normal run rate might be? Thanks.

Sure.

2007 was roughly 16%. 2006, 11.5%. 2005 was 9.4%. So that tends to be somewhat cyclical as well. 2008, sorry I skipped that one, was 5%, roughly. So, and again, it depends on the year. And that's somewhat cyclical as well. We would see, on average, a 10% range, as Scott mentioned earlier, to be the norm, and that's what we're expecting in 2011.

Thank you.

From your slides, the one that you have on confirmations, which I believe is 41, it looks like February showed a nice sequential increase over January, at least in terms of an estimate so far. I was wondering if you could comment on the geographic distribution of that pickup?

Well, what we've seen is Asia continues to be buoyant. Europe, which is great news, has picked up again, and North America continues to be steady. So it's across the board.

Within that industry sector, I think financial services slowed a little in January, but it's picked up the second half of February, as we just talked about that being cyclical going into bonus time. But, overall, we're pleased with the balance of confirmations so far into 2011.

Tobey, I'll remind, you know, everyone, I guess, that we manage the business on a practice, not a regional basis anymore.

And the reason is really simple, and that is that if we have a search, it might be booked in Asia-Pacific, but we may have people working on it who could come virtually any place in the globe here to provide the best team to get that search done. So we tend to track it not as much regionally as we tend to track it by practice. And that's really where more -- most of our focus is on, just because it is a global business now and we are one firm that operates globally as an integrated platform.

Thanks. And then two numerical questions for you, Scott.

One, the tax rate, fairly wide range, and I was wondering if you could give us some color as to what would swing it high or low, other than simply higher or lower revenue, I guess. And can we -- do you have efforts under way to, you know, drive that, you know, range in tax expense down over time?

Yes.

The ranges, because of -- because of this Company and how geographically dispersed it is, we're very sensitive to where losses occur in the world and where profits occur in the world. And that can really swing it quite rapidly one way or the other. And it's also relatively difficult to predict, because -- I guess I just set the background for this, because as a global Company, we could easily be utilizing people in a relatively small geographic jurisdiction to work on a search which is booked someplace else contractually. So that's what really causes the range for us. It's really trying to anticipate where in the world the profits are going to come and what that mix of countries is going to be.

Going forward here, we've kicked off in the fourth quarter a major tax planning exercise, which is designed in reducing the overall tax rate and bringing hopefully a little more stability to it. That's well underway, but it's going to be a -- it's going to be a major exercise here all throughout 2011, with the goal of getting down to that range of, you know, 40% or so. And, just given the nature of this Company, we just don't have the sort of things which manufacturers can do about shifting where their manufacturing is in the world to bring it down much lower than that. So I think 40% is a pretty good rate to shoot for, going forward here.

Is that -- in terms of a time frame for getting down to that rate, is that a year or two? What would you assess there?

Yes. It's going to be a couple of years to get down to that rate, because many of the things that we are putting in place are going to take a couple of years to mature. Even after they are put in place, you need to let them run for a couple of years. There's nothing particularly cutting edge here. I mean, it is very classic tax planning exercises about where you keep your intellectual property and things of that sort. So -- but it just takes a couple of years for those things to get in place and to mature and bring the rate down. So we expect positive cash flow from this investment relatively early, maybe even as early in the first year, but when it affects the P&L rate, will take a couple years here.

Thank you very much.

And our next question comes from Giri Krishnan from Credit Suisse. Your line is open.

Thank you.

I guess first off, could you maybe drill down on trends you're seeing in Asia-Pac. What industry or practice areas do you see driving the most growth? And do you have a sense that the growth you're seeing longer term and this year would be more than enough to offset any weaknesses you might see in financial services?

I'm not -- just to reiterate, I don't think we're going to see a major weakness in financial services. I just think the growth -- coming off a year like 2009, where our whole business was off 36% and financial services took a major hit, it's easy that first year to make a quantum leap, if you will, in terms of recovery, particularly in financial services. We expect our financial services practice to still grow this year, but it's not going to grow like it did in 2011. You saw off a much higher base than it was before. And we still see opportunity there.

Asia-Pacific overall, there's a couple of things happening. Number one, we see, I was just out there and again in the fall, sat down at a CEO event with the Chinese -- a group of Chinese CEOs, and one of the Chinese CEOs stood up and he said, hey, great news, everybody, the war for talent is over. Talent won. And it shows that there's still a supply-demand issue out there in terms of the leadership. And some of the demographics, whether it was the Cultural Revolution in China, whether it's English language capability, whether it's the technical skills needed out there, there's still huge opportunity across the region in each and every practice in which we operate.

If you couple that with what we're seeing in leadership consulting -- what's fascinating about our leadership consulting business out there is when we assess CEOs and executives of Indian companies and Chinese companies and companies in the Middle East, the first question they ask is, this is fantastic, not how do I compare against somebody in my own organization, but how do I compare against somebody at a GE or a Pepsi Cola, etc. So they're fascinated by that. And historically, when we do assessments and succession planning and development programs in Europe and Asia, the first question we get is, how do I compare against my colleague who sits down the hall.

My point there is that what they're looking at is, how do we compete globally, how do we continue to expand our organizations globally, and that's part two of what we're seeing. We're seeing Indian organizations, Chinese organizations, Korean organizations, other southeast Asia organizations, even Australian organizations, look at capturing market share, both in Europe and North America now. And we're one of a few firms that actually are well-positioned to help them actually acquire that talent across the globe, so that's part two of what we're seeing right now. So we continue to see growth in Asia-Pacific, and again, the biggest challenge we have in Asia is recruiting for ourselves and making sure that we get people up to speed quickly to handle the amount of work that's potentially out there in the Asia-Pacific region.

Okay. That was helpful.

And then, looking at just your guidance, just wanted to clarify. What is sort of the expectation for overall productivity for the year, productivity per consultant? And looking at Europe, what is sort of the expectation for margin trends in 2011?

So in terms of productivity, we've talked about -- we're almost at the historical high of $1.5 million coming out of 2009, where it was much lower. Our goal is to drive that upwards, whether it ends up being $1.6 million or $1.7 million, we don't know, but that's the direction we want to go. And we're fully confident that we can get there, particularly with the investment and our new search system, Latitude, so we think that's going to help on the productivity fronts. In Europe, we believe that and we are confident that we can get margins back up to where they were in 2006 and 2007, so -- and that's our collective goal. We have a clear plan in terms of both cost control and investment in driving top line in the region. And we're going to execute on that this year.

Okay. Thanks a lot.

(Operator Instructions) And our next question comes from Mark Marcon from RW Baird. Your line is open.

A quick follow-up question on Asia. How would you describe your capacity over there? Are you getting stretched, either from either a real estate or from a personnel perspective, or is there still lots of room to grow in terms of what your sustained infrastructure is?

On the infrastructure side, I think we're in a good place. If you look at Hong Kong, we have 75 people in Hong Kong now, Mark, and that's up significantly over the last four or five years. China, we have offices in Shanghai, Chongging, and Beijing, also Singapore, we moved into a new office last year, expanded the office there. So I think we're in great shape. Great shape in Australia as well. The growth we're seeing from the A and Z business is fantastic.

Where we're looking to expand is in India this year and China, continued expansion in India and China, and right now, we're okay. In terms of real estate, it depends on what happens in the region. If we keep growing like we have, it may be an issue in two or three years, but we're still going to invest in that region, and we're excited about our position there, clearly, as a dominant player. And we want to maintain that dominance and continue getting great people on board and serving our clients.

Great. Thank you.

I'm showing no further questions at this time.

Well, thank you very much for joining the call today. Once again, I'd like to thank my colleagues across the globe, who did a great job in 2010 and have had a great start to 2011. Appreciate all of the questions today and you taking the time to spend with us on this call. And we're looking forward to a solid 2011. I hope you all have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference, and you may now disconnect. Everyone have a wonderful day .