Heidrick & Struggles International Inc (HSII) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Heidrick & Struggles 2011 third quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time.

Now I would like to turn the call over to Julie Creed, Vice President of Investor Relations and real estate. Please go ahead, ma'am.

Good morning, everyone, and thank you for participating in Heidrick & Struggles' third quarter 2011 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer and Rich Pehlke, our Chief Financial Officer.

As 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.

In today's call, we will be using operating income excluding the goodwill impairment charge and operating margin excluding the impairment charge and restructuring charges. These are non-GAAP financial measures that explain some of our results. A reconciliation between GAAP and non-GAAP financial measures can be found on slide 28 of our supporting slides.

Also, we will be making forward statements on today's call and ask that you please refer to the Safe Harbor language contained in our news release and on slide 1 of our presentation. Our slide numbers refer to the slide numbers in the bottom right-hand corner of each slide.

At this point, I'll turn the call over to you, Kevin. Please start on slide 2.

Thank you, Julie. Good morning, everyone, and thank you for joining today's call. We obviously had a number of things happen in the third quarter, but I wanted to state at the beginning how pleased I am with our operating performance. It was quite encouraging and in line with our expectations.

Net revenue in the quarter of $142 million was up 13% compared to last year and flat sequentially. The Americas had a good quarter, up 15% year-over-year and flat sequentially, and Europe was up 36% year-over-year and about 10% sequentially.

Revenue in Asia-Pacific was down 13% year-over-year and the same amount sequentially. This region had tough comparisons against last year's third quarter, which was a record high revenue quarter. Asia was also the most affected by weak demand in the financial services practice.

From a practice perspective, the industrial and consumer practices were the key drivers of reported year-over-year growth, up 39% and 24%, respectively. The life sciences practice also had a great quarter, up 27% year-over-year as well as sequentially. The financial services practice offset some of that growth, being down 12% year-over-year and down 4% sequentially. This decline was mostly in Asia-Pacific and to a lesser extent in Europe. In fact, in the Americas the financial services practice achieved year-over-year and sequential growth.

Of from a functional practice perspective, the financial officers and the marketing and sales and strategy officers' practices, which happen to be the largest functional practices, both had great quarters with billed fees of up 25% and 24%, respectively, compared to last year's third quarter.

Looking at slide 4, net revenue from leadership consulting services increased 31% year-over-year and 5% sequentially. Leadership consulting revenue was 9% of the total net revenue in the third quarter.

Slide 5 shows monthly confirmations or side executive search and leadership consulting projects. Monthly confirmations in 2011 continue to track ahead of 2010 and 2009 levels but are still not consistently getting above the 2008 levels.

Slide 6 is a look at quarterly confirmation trends specific to executive search. Third-quarter search confirmations were 8% higher than last year's third quarter but were down about 10% compared to the second quarter, as has been historically the trend. Executive search confirmations in the first 9 months of 2011 were 6% higher than the first 9 months of 2010.

Turning to slide 7, we ended the quarter with 386 consultants, up by 43 compared to the end of last year's third quarter and the same as at June 30. Globally, our voluntary turnover through September 30 was roughly 6%. Given the restructuring plan we announced on October 11, which included a reduction in force, we would expect the number of consultants at year end to be approximately 340.

Looking at slide 8, productivity as measured by annual net revenue per consultant, held strong at 1.5 million. With the combination of hires made last year who are now reaching higher productivity and a reduction in force that included underperforming consultants, we expect productivity to improve going forward, assuming business remains steady (technical difficulty).

On slide 9, general pricing and average fees per search are trending in the right direction, and we don't see any downturn in the near future. Since the average revenue per search is a calculation of search revenue in the quarter divided by search confirmations in the quarter, it can be lumpy and misleading as revenue lags confirmations each quarter. Therefore, we also provide you with average revenue per search on a trailing 12-month basis.

Now I will turn the call over to you, Rich.

Thanks, Kevin, and good morning, everyone. I would like to take a few moments to discuss some of the key financial and operational results of the quarter.

Starting on slides 10 and 11, salaries and employee benefits expense increased by $11.4 million or 12.9% year-over-year. This increase was in line with the increase in net revenue expected and experienced in 2011 as well as our growth in headcount. In constant currency, salary and employee benefits increased by only 7.2%, or approximately $5 million.

Fixed compensation expense accounted for $6.1 million of the increase and is due to a 10% year-over-year increase in employee headcount as well as merit increases implemented in early 2011. Performance-related variable compensation accounted for the other $5.3 million increase directly as a result of higher bonus accruals related to the growth in net revenue we are experiencing in 2011.

Turning to slide 12, general and administrative expenses declined year-over-year by $3.7 million or 11.5% and represented 20.6% of net revenue. If we exclude the negative impact of $500,000 due to exchange rate fluctuations, our G&A expenses decreased by 12.8% in the quarter. G&A was also down sequentially as well by $4.5 million or 13%. The decline in G&A was driven by a number of expense reductions. Lower professional fees, lower unbillable travel and entertainment expenses and the decline in general office and administrative expenses were the three largest contributors to the decrease in the quarter.

Now let me give you some more background on the goodwill and intangible asset impairment charge of $26.4 million, all but $400,000 of which was related to our European operations. Much of this goodwill and the intangible assets go back to the merger between Heidrick & Struggles US and the European operations before the IPO in 1999. The valuation of goodwill and intangibles was done independently and it takes into account a number of factors, including growth rates, assets, near-term projections, strategic considerations, etc. The financial, economic and political conditions in the European region are more volatile and carry greater risk. This, coupled with the restructuring we are currently undertaking in the fourth quarter which predominantly relates to our European footprint, has resulted in a valuation that no longer justifies carrying the assets' historical values.

But let me be very clear. Europe is a very important part of our business. We believe that the actions we're taking, including the consolidation of our footprint, will allow us to better leverage our resources and focus our resources and efforts on key markets and on key clients.

Turning to slide 14 and 15, excluding the impairment charge taken in the third quarter, our operating income would have been $13.7 million and the operating margin would have improved to 9.7%, and we are very pleased with his progress. And while we are pleased, we did not achieve these results on an EPS basis, largely due to our effective tax rate. So now I would like to provide more insight as to why our effective tax rate is so high both for the quarter and the 9 months.

The most straightforward way to think about it is that the financials reflect losses and charges that cannot be deducted for tax purposes at this time. The goodwill and intangible asset impairment is an example as we no longer have a tax basis for the asset on our books. Therefore, the impairment of goodwill did not generate any tax benefit.

In addition, there are a number of jurisdictions where we have established valuation allowances against deferred tax benefits, primarily in Europe. Not only does establishing a valuation allowance create a one-time deferred tax expense, but it also does not allow us to recognize current losses as benefits in these jurisdictions.

It's worth noting that the reported tax rate is not our cash tax rate. For example, in 2010 we reported a 56% effective tax rate, which translated to an effective cash tax rate of approximately 42%. For 2011, we expect the cash tax rate will be approximately 46%.

Kevin touched on the regional results from a top-line perspective, but I will talk a bit more about the regional results at the operating income line. Key to the 51% increase in the Americas operating income and the 23% operating margin was the 15% increase in revenue and a slight decline in G&A expenses. Europe's operating income improved to $2.4 million and the operating margin was 6.4%. The biggest contributor to the margin improvement was a 36% revenue growth in the quarter, albeit against a 2010 quarter that was very favorable for comparison purposes. G&A expenses year-over-year also declined slightly.

We are pleased that we are making progress here, and as a result of the actions we're taking in this region we should start to see improving and sustainable margin improvements going forward as cost savings are realized, especially beginning next year.

In Asia-Pacific we had somewhat of the opposite take place, whereby this year's third quarter results are compared to a very strong quarter last year. Operating income declined by $5 million and the operating margin was 10.1%. And just as revenue was the biggest contributor to the improvement in operating margin in the Americas and Europe, the 13% decline in revenue in Asia-Pacific was the primary driver of the lower operating margin. In addition, salaries and employee benefits increased 6% in this region as a result of our investment in new hires, and G&A increased 6% in the region as a result of the number of smaller infrastructure-related items.

We remain confident of our opportunity in this region and its contribution to our growth platform in the months and years ahead. As we have mentioned numerous times, on October 11 we issued a press release which outlined a restructuring plan which we expect to result in annualized savings of $20 million to $25 million. The components of the plan are straightforward and include a 10% reduction in the global workforce, closing of smaller offices to consolidate the Company's footprint and some changes in the operating management structure. We expect to record a restructuring charge in the 2011 fourth quarter of approximately $18 million. We have begun to execute that plan and will continue that work throughout the fourth quarter to bring it to completion.

Slide 16 shows our quarterly search confirmations, and slide 17 shows our backlog. Our confirmations continue to trend above 2010 levels and, as typical with our business, third-quarter confirmations were lower than the second quarter, so backlog is lower going into the fourth quarter than it was at the end of the previous quarter.

Looking at slides 19 and 20, our outlook for 2011 is basically unchanged from last quarter. We are narrowing our forecast for 2011 net revenue to between $525 million and $540 million, employing fourth-quarter revenue of between $124 million and $139 million. When we normalize are expected operating income and related margin for the one-time charges related to the goodwill impairment charge in the third quarter and the expected restructuring charge in the fourth quarter, we currently expect that our full-year results will fall within the lower end of our guidance range of 6% to 8% operating margin for the full year 2011.

This forecast is based upon the anticipated volume of new executive search and leadership consulting projects, our current backlog, consultant productivity, the seasonality of our business and the uncertainty in the global economic climate and does not include the impact of any potential change in future currency rates.

If you turn to slide 21, cash provided by operating activities was $51 million compared to $31.4 million in the 2010 third quarter, largely driven by improvements we have made in managing working capital. We ended the quarter with $135.5 million in cash and cash equivalents, up from $103.1 million at the end of June, and compares favorably to $122.8 million at the end of last year's third quarter. As a reminder, our cash position builds throughout the year as we accrue for cash bonus payments that will be paid out in March and April 2012. You may recall in the first quarter of 2011 we paid out substantially more in cash for variable compensation than the previous year, which is all funded through our operations and our operating results.

Our cash flow and liquidity are strong. We're well prepared to meet the cash needs of the restructuring actions we're taking, and in fact should see cash benefits begin within the fourth quarter which will somewhat offset the impact of the cost. At any given time, our global cash needs are between $40 million and $60 million annually. Year-to-date, our capital expenditures were $16.1 million related to office buildouts and the new IT search system. For the year, we expect CapEx to finish in the range of $17 million to $19 million. The new search system is currently being rolled out and tested, and our investment in developing the system will taper off starting next year. We expect December 2011 cash and cash equivalents to be at approximately the same level as December 2010.

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

Thanks, Rich. We are pleased with our third quarter results from an operating perspective and are positive about the business going into the fourth quarter of 2012. 2011 will be much improved compared to 2010 results with contribution from many different areas. Five of our six industry practices achieved year-over-year growth through September, and four out of the six functional practices are up year-to-date. We've got numerous examples of where our leadership advisory is working with clients and has helped us win both leadership consulting projects and new search assignments.

Our restructuring initiatives were proactive and taken from a position of strength, and they will make us even stronger as we head into a new year. Heidrick & Struggles has increased its ability to capitalize on improving economic conditions around the world. If they do not improve, we still have a better cost structure from which to operate. We also have the most talented search and leadership consulting teams in the business. I would like to thank them for their hard work so far this year.

And with that, we will open it up to any questions you all may have.

(Operator instructions) Tobey Sommer, SunTrust.

I was wondering if you could describe how the business and confirmations performed on a geographic basis sequentially in October. You do have a slide with an estimate for confirmations for the month, but I was wondering if you could kind of just give us some color on the geographic.

From the standpoint of -- well, we don't usually break it out totally by geographies. But from a standpoint, we saw the greatest improvement, obviously, in Europe, and that's reflected in the revenue. And we also saw it relatively flat in Asia-Pacific. On a worldwide basis, we basically were flattish.

Yes, the trends are about the same in every region, Tobey. There wasn't a huge (multiple speakers).

There weren't as many big movements one way or the other on a geographic basis.

And that's for the month of October that you are describing, or the quarter?

Oh, no, I'm just talking about the historical quarter.

Okay, yes. My question related to October trends. Thanks.

No; it's too early to speak to that, quite frankly.

Okay, I guess you have an estimate in the slide presentation, so I thought you might be able to offer us some color on that geographically.

Right. We haven't seen anything move in a significant way from any of the geographies that would be meaningful and material to the overall total.

Okay. And as a follow-up on the office, small office closings that you announced earlier in the month, what kind of -- are you planning on serving those geographies but from different locations now, or are you exiting markets entirely?

The short answer is, yes, we will plan to serve, like many other professional services. What we did is we took a long look at some of the competition out there vis-a-vis other professional services firms, looked and analyzed how they serve their clients in these different markets. We look at the macroeconomic environment in Europe, given the forecast over the next 3-plus years, and we took a look at the offices that we have in place and realize that we have a great opportunity to serve our clients from some of these larger offices. We can reallocate and redeploy assets to invest in growth in some of these offices in Europe or other parts of the firm.

So the short answer is, yes, we can and have continued to serve clients from some of these other offices.

How much revenue is associated with the smaller offices that you are targeting at this point?

Well, we can measure off -- the revenue by office. Frankly, we are not even thinking that's material relative to the overall equation in our forecast because of the point that Kevin made. We're going to continue to service those clients throughout the region. So the amount of revenue that may get dropped or lost in the shuffle in not consequential.

I mean, some are one-person offices and in some cases we will keep a consultant and others work from a different office. So it's -- I don't think we can give you a revenue number at this time, but it's immaterial.

And then my last question, and I will get back in the queue -- of the announced headcount reductions of 10%, how do you think that will impact the consultant headcount that you referred to on a quarterly basis versus sort of a G&A type employees that we don't (inaudible).

The overall consultant healthcare is in line with the overall reduction in force. It's within reach of the 10% total on a net basis, maybe slightly higher.

Thank you, I'll get back in the queue.

Tim McHugh, William Blair.

Just wanted to follow up on that last one, just wanted to make sure I heard you correctly. Did you say roughly 340 consultants you expected around year end?

Yes, that would be a reasonable estimate.

Okay, and I think you said the majority of the restructuring charges are -- and the headcount reductions is in Europe. So if I do that math, that implies about 45 people in total might exit in the fourth quarter. And if the majority of that is in Europe, that's a relatively large part of the European market. Is that just -- were there that many people in these small offices? It seems like a pretty large cut to the headcount.

Well, a couple things, Tim, and we are not going to be going into detail about every office and every location. But you need to understand that, of the overall headcount of 10%, the highest percentage was in Europe and the next-highest percentage was in the Americas. And there was a very low amount in Asia-Pacific region.

And the headcount reduction was across all levels of the operation. It did include support people, it did include everything from administrative and EAs, etc. It wasn't just principals and consultants. So from the standpoint of, in some cases, smaller offices might have been far more heavy on support people than they would have been in a principal, for example.

Okay. And can you talk -- I think you had said -- Kevin, I thought you made a comment about you expect the productivity levels you have been seeing lately to -- that they are sustainable, or you can probably continue those in the next quarter. So I know you don't have real long visibility, but they feel sustainable to you, I think you said.

I guess my question is, given the cuts -- I'm assuming these are lower levels of productivity amongst the people you're cutting -- would we expect an improvement? Or, are you saying maybe, given the macro environment or some other factors, we should just kind of -- that lower level of headcount, we should assume similar levels of productivity?

I believe -- we've talked about this before. Obviously, they were skewed to your point about being lower in terms of productivity, a number of the consultants that we moved on. But additionally, I believe that with the number of consultants that are new getting up to speed, and a number, quite frankly, at a much faster pace than anticipated, plus those performers in the organization that continue to do extremely well, we'll see that number increase, the $1.5 million increase.

Okay. And just one more follow-up on the headcount -- as you go into next year, after making these cuts, what is your view on the growth? Are you more in an environment where you're going to wait and see the macro environment, now that you have cut back a little bit, or should we expect headcount to grow from that lower level as we go into next year?

Well, from a standpoint of overall growth, it's a little early. We are early in our planning process, Tim. That will really be driven by the needs of the business. I think, from the standpoint of we're certainly are going to send the message to our people that we are open for business and we want to invest in growth. There are a couple of major markets that are extremely important to us and a couple practice areas that are extremely important to us. But we are going to do it in a very measured way and make sure that we have the balance of resources across the business that meet the current business opportunity and the business climate.

Okay, thank you.

Mark Marcon, RW Baird.

Just to follow up on the prior lines of questioning, so we ended in Europe with 126 consultants. Where will that number be by year end?

Well, we haven't completed all the reductions, Mark, and so we will give you more insight into that by year end. There's some different processes in different regions of the world, so it's going to be preliminary for me to speak to exact numbers. But again, from the standpoint of the overall reduction -- and keep in mind a couple of things. In terms of the overall reduction in force, close to half was in the European region across all -- when you consider all levels of the operation. But when we talk about the principal and consultants level, that was a little bit more balanced across the Americas as well as in Europe. So the final numbers will follow a little bit somewhere between 10% and 15% reduction, probably.

Okay, so it's not like half the consultants that are going to --

No, no.

-- that are going to be out of Europe?

No.

I think that's what was confusing to some people, is at one point it sounded like on this conference call you were saying we're going to go from 385 to 340, and then the majority is going to occur in Europe. And you had 126 people at quarter end in Europe. And so I think that's probably why people are asking the same question over and over again.

Okay, sorry for the confusion, then. But relative to the total amount of people, it's closer to half, but not the number of consultants.

Okay, so we're looking at a 10% to 15% reduction in terms of number of consultants in Europe?

And our goal -- just to reiterate what Richard is saying, it's Kevin -- is that we evaluate every office and every consultant over there, look at productivity, look at profitability because, as you know, the European business has been a challenge and a drag on the margin for the last two, three quarters. And so when you looked at this, how we serve clients, how we can be more effective in the marketplace and how we can, quite frankly, can drive the margin and be more profitable over there. And so the last thing we want to do is impede on that.

So we are coming out of this with -- feeling very confident we're going to have a much more profitable business, and the consultants that we have in place in Europe are going to be highly productive.

That's really helpful, and that certainly makes a lot of sense, because Europe historically has been a drag. So what would be the goal in terms of where you could get margins to in Europe? What would be ideal from your perspective?

Well, at one point in time, if you go back to 2006-2007 levels, we were up to 11%-12%. And we're fairly confident that we can get back up there as well. And with the combination of leadership consulting and executive search, again, descending on the global macroeconomic environment, we are confident that we can see margins in the low to mid teens, in aggregate across the firm.

Okay. And then, with regards to -- what are you hearing out of there right now, given all the headlines?

Well, everyone has concerns, given all the headlines relative to business opportunities. But at the same point, we continue to see business opportunity. And the biggest factor that has impacted our business from the overall global economy, not just in Europe, is the amount of investment spending versus just normal succession or replacement hires that happened in the C-Suite. So we still need to see investment spending grow dramatically, to drive real top-line growth as fast as we would like to see it. And obviously, with all the sovereign risk and the political risk in Europe, it makes decisions go longer. Whether it's putting capital to work, whether it's making definitive moves in terms of growing operations, etc., and so it impacts the pace of growth as well.

But again, our people in place still see opportunity. Our practices still see opportunity, but we are making sure that we maximize our resources and focus them on the key opportunities and on the key clients.

Okay, great. Can you talk a little bit about what the situation is in Asia? Because that's the one geography that most people assume is growing the most, and the track over there has been a little bit different than what one would expect. And I know you had some tough comps, so I appreciate that.

I was going to mention that. I was just in Asia 3-plus weeks ago. The drag you see is Tokyo has had an impact on us. We have increased a number of investments vis-a-vis hiring. And quite frankly, most of the top producers in the firm last year were in financial services and in Asia-Pacific, and we have done a lot of buildouts there. And quite frankly, the lag we saw in the third quarter is, as you know in financial services, not trying to dilute the bonus pool as you ramp up, again, to recruit in the start of the new year.

So I think a combination of not only Japan but financial services has impacted that region, whereas in other practices -- industrial, consumer, etc. -- have really held their ground. I know from conference calls this week with practice leaders and some of the regional heads that they do and are fairly positive going into the fourth quarter that we will see somewhat of a rebound across the region in terms of fees.

Great, thanks, I'll jump back in the queue.

Kevin McVeigh, Macquarie.

Nice job in the quarter. Kevin, I wonder if you could help us directionally. What really drove the strength -- just following up on Mark's question -- in Europe, given all the uncertainty out there? You saw a real nice acceleration in Q3.

Well, again, we have a great balance sheet right now. We wanted to come at this from a position of strength. We've spent a lot of time looking at analyzing our business globally, where we want to look to invest as we enter a new year, as we go through the budgeting cycle. We looked at our footprint, we analyzed other professional services firms. We had roughly 20-plus offices in Europe. Did that make sense? We had some countries, we had 3 and 4 offices in, and you can serve your -- given that most of our consultants spend time on airplanes and on the road, it makes sense to have a number of offices that sat sometimes three-quarters or halfway full.

We also analyzed the number of consultants we have over there, productivity vis-a-vis other regions, productivity vis-a-vis other countries, and said why don't we take a hard look as we've discussed for a number of years at the business but take a look, whether it's Spain, whether it's Greece, whether it's Italy; is the European situation going to improve? And, quite frankly, we wanted to focus on driving our margin up and giving a higher return to shareholders.

So we decided to take action now from a position of strength, Kevin, versus potentially waiting to see what happens next year and get caught on the back foot.

Understood. And I guess my question was more in the quarter. You saw a real nice re-acceleration in the revenue. Can you just help us understand what drove that?

Absolutely. Last year, we hired a number -- it was a combination of things. Number one, stellar performance in some of the functional practices, our industrial practice and in our consumer goods practice. A very nice comeback, if you will, in our German operations, continued strength in our French and UK operations, any number of consultants that we've hired getting up to speed and ramping up at a much faster pace, which is the trend that I think Tim mentioned earlier vis-a-vis productivity and one we hope to see continue.

Super. And I know 2012 is a little further out. But as you think about the margin profile of the business, and I know there's a lot of macro uncertainty out there. But if you were to base-line a 2% type GDP, what would that equate to in terms of operating margins on a blended basis across the business, given some of the cost actions you have taken?

I'm not going to do a top-of-the-envelope outlook for 2012. We are just not in that position yet. The best thing we can say about 2012 at this time is that, with some of the changes that we are taking right now, we are putting ourselves in a position to try and deliver margin uplift by lowering our fixed base expense and by, again, increasing productivity and our ability to invest in growth in the business.

The real results of next year will be driven by, again, what happens in the economy, how we translate that whole sustainable growth and driving of operations, run rate expenses that are at the proper levels, and realizing those savings through the bottom line. And at the end of the day, it's too early to make that call. Whether I can work off of your GDP estimate or not, the reality is, we still are going to have well over 50 offices and many different economies that we're going to have to factor into our plan for 2012.

Okay, so, Rich, let's think about it this way. What type of baseline assumption do you have the business scaled for in terms of revenue?

Well, this business can hold a lot more revenue right now than we even produce. And more importantly, when you run a business like this you also think about the scalability of your expense line when revenue doesn't come in the door. It's a two-way street; we have to be able to flex in both cases so that we don't let operating leverage work against us as well. We're well prepared to have revenue growth if it's there and turn it into very sustainable uplift and margin. But by the same token, if everything falls off a cliff from political uncertainty -- and in reality, that's not our view, but we don't know. We also have to be prepared to operate in that environment as well. And that's probably even more important.

Okay, thanks.

(Operator instructions) Giri Krishnan, Credit Suisse.

I just have a couple of questions. First, could you speak to any pricing trends you are seeing? I know in the last quarter you had spoken to an expectation for pricing to be, for the rest of the year. Any color on that (technical difficulty) overall?

Sure. We haven't -- at this point in time, I think we're fairly excited about the average revenue for executive search. We went up from 107 to 117. So that was a nice upward trend. And we haven't seen any sign yet at this point in time that we are going to see a decrease in average retainers or average revenue going forward.

Okay. And then with respect to leadership consulting business, I know you have in the past mentioned that you are looking at potentially making acquisitions when it made sense. Are those plans still on? Or can you comment on the pipeline, if you will, that you are seeing?

Sure. We are consistently looking, you know. We have a goal to continue to drive leadership consulting to be 20% of our business. We are at the 9%-plus range right now, and we know that through hiring and scale we can still drive that northward. But at the same time we are looking globally at different acquisitions that dovetail with our strategy of being a leadership advisory firm, and particularly driving business through the CEO and the boardroom, CEO suite, executive suite and the boardroom.

Okay, thank you.

Tobey Sommer.

Could you tell us what the bonus accrual is year-to-date?

Well, currently right now -- geez, I don't know if --

You mean, the bonus expenses on a slide in the back of the deck, Tobey?

Yes, how about the accrual for the bonus payment? Do you have that?

Well, the accruals in the balance sheet will reflect both the accruals for the current year, which relate to the current-year expense, and for all aspects of our compensation. Probably right now, it's probably closer to $60 million to $70 million of accrual for the current year.

Okay, thank you. Do you have any plans with some of the growth in the leadership business to break that out? Are you managing it as an independent business, or is it still well integrated into the search reporting structure?

Well, currently, right now it's integrated into our structure because it is really being incubated within the search business. As Kevin indicated, we have an aspiration to make that a more significant part of our revenue stream. And as we do that, we will look for ways to build the structure and a -- cost structure and investment structure around that business that will be slightly different than search. But for the time being, it really is more closely related to search.

It's an integrated -- our strategy is revolving around an integrated approach to executive search and leadership consulting because, as we have seen the data, our retention rates for clients almost doubled. And quite frankly, our pricing increased significantly as well as when we are doing both a combination of leadership consulting, but eventually we will split off that business.

But it's not something we should anticipate for 2012?

Yes; I can't say it's too early because we have aspirations to continue to grow the business and we are looking at acquisitions right now in that are. So it depends on how quickly we scale the business. And so we're looking at that right now.

Okay, fair enough. Associated with the restructuring and the headcount reductions, will there be anything on the flipside in terms of expenses, like retention bonuses or other things to reward some of the better performers? Or are you still just operating in kind of a normal environment with bonuses expected to be paid next year?

Right now, we are operating in an environment where we want to drive profitability of the business which will lift all boats in the sea and drive what we compare employees. For example, the $66 million that I gave you earlier is just the current bonus calculations off of the current year's revenue. In addition, in the accruals, we probably have another $10 million to $20 million of other bonus accruals that have already been accumulated relative to contractual arrangements, performance awards, etc., that are also in our numbers.

At the end of the day, we really want performance to drive the level of bonuses we pay our employees. We are keenly focused on that. And the more we drive profitability and cash flow, the better it is going to be for all of our consultants. And that's our goal.

Thanks very much.

Mark Marcon, RW Baird.

I was wondering if you could comment a little bit more about what you're seeing in financial services in the US, what your expectations are there.

Well, as you know, Mark, we have a very diversified financial services group, anywhere from hedge funds to real estate to private equity to investment banking, capital markets, etc. What we've seen is a big uplift in the operations and infrastructure side. We've seen an increase in the hedge fund side of the business and, quite frankly, the commercial banking side of the business as well.

So we are very proud of what we've done here in financial services. We are looking in some parts of the globe actually to replicate what we've done here, to have more of a broad service offering, particularly in some of the emerging markets like Asia-Pacific. So I would say that we are cautious going into the fourth quarter, as we always are. And as you know historically, going into the first quarter, we are more optimistic about what happens, given the churn we see.

One trend we continue also to see in financial services is that we are serving a number of international clients, a number of global clients who are still looking to use this market as an opportunity to expand globally and hire great talent from some of the larger financial institutions. So those are a couple of the trends that we are continuing to see right now.

Great. And then, if we think about the midpoint of the guidance for the fourth quarter, from a revenue perspective do you think that will be evenly distributed in terms of the sequential trends?

I think we are going to see it relatively even. I still think that you're going to see Americans leading the ship for 2011. I do expect Asia-Pac to be a little bit better in terms of trending than I saw at the end of the third quarter. And as we talk to our people across the board, we are not seeing anything move again, like I indicated earlier, in a major way. It's really more from a practice perspective. We're hoping that our industrial consumer practices still drive the train for the balance of the year, and it looks like that's what's going to happen.

In terms of the savings that we are going to generate from the restructuring, when would we actually see those, do you think?

You will start to see them trickle through the fourth quarter. As I indicated in my remarks, a lot of actions took place in October and will take place through the balance of the quarter. So as those force reductions take place, you will see some of that current fixed comp go away in our cost structure. In addition --

So that's already baked into the guidance? Sorry, I didn't mean to interrupt.

No, that's baked into our guidance for the fourth quarter; that's correct. It's not going to be as meaningful in the fourth quarter as it will be for next year, obviously, because of the timing of some of the changes.

As we model things out, in the past we have had occasions where there have been restructuring announcements and assumptions with regards to savings. And some people have naively assumed that it was all going to drop down to the operating line and there was always some offset in terms of new investments. Would it be wise for us to think about new investments, whether it's in leadership or other areas that might somewhat offset some of the savings? Or is it your anticipation that, all other things being equal, it would drop all down to the bottom line?

Well, our challenge and obviously our goal is to have most of that drop through to the bottom line in terms of savings. In terms of what we think is going to happen will be driven by, again, what I said earlier relative to market opportunity next year. But right now, we have to focus on driving marginal profitability in this Company and increased cash flow. So we are going to be very disciplined in how we approach that and how we talk about new investments. And we want to see the savings come through so that, A, we can reward our people; number two, so that we can reward our investors. And at the end of the day, we need to drive that pretty hard through this business.

Great. And how should we think about potential for share buybacks?

Well, as I mentioned earlier, we need $40 million to $60 million at any time on an annual basis to run this business. Our cash is spread all over, in many jurisdictions all over the world. I think a more appropriate time for conversations such as that is when we are generating and utilizing some of the tax benefits that currently sit or don't sit because they are netted out in valuation allowances on our balance sheet. We've got to start making more money in some of the places that we operate so that we can drive cash flow generation, and that will put us in a much stronger position to think about things like that.

Great, appreciate the comments.

(Operator instructions) Tim McHugh.

I just wanted to follow up on Mark with one last quick question on the financial services practice. You give some of the sub practices, and I know it starts breaking down into some fine detail, so maybe I'm nitpicking here too much. But it looks like private equity had a really good quarter and asset management was the weaker of the bunch in financial services. Can you give us any more color on what you are seeing there, or was that just the timing of individual searches or some large fees that came in and out of the business?

Private equity is interesting because our private equity practice, which is phenomenal, really drives a lot of revenue through most of the industry practices as well. And one way to think about private equity, when we do private equity and related to financial services, it's mostly investment professionals.

So on the asset and wealth management side, we continue to have a very strong practice there. It's just, again, I believe, Tim, having talked to our people within the practice timing. And so what we will see is November-December usually are months where they -- they meaning -- they being our clients, start ramping up in preparing for their hiring into 2012. So I'm fairly confident we will start seeing an uplift in across-the-board financial services, at least at the end of the year going into the first quarter as bonus cycles come into play.

And then, just to make sure I understood, private equity -- you're basically just saying your response was that you've got a strong practice there and you are just -- you are performing well. Was there anything -- but there is nothing particularly unusual or that you would call out, positive or negative?

No. And if you think about financial services overall, and again, we have a number of different subsectors. At any given time, investment banking, given the M&A activity globally, will really be shooting the lights off, and asset management will be off. At another point in time the asset management group will be on and investment banking will be off. So that's why it's beneficial for us to have this first group of subsectors within financial services.

And what we've seen is a trend in risk, legal and compliance as well as back-office. So that's, again, why we want to -- not only from a financial services practice, but from a leadership consulting and from an industrial practice, a functional practice standpoint, have a broad and diverse portfolio of practices so, if any given one is not performing as well, the others more than offset it.

And Tim, this is Rich. We did make an acquisition in the private equity/venture capital area that actually has worked out very well for us, which has bolstered that practice. In fact, our quarterly results reflect the final earnout payment of that acquisition. So that has actually been a win-win for us in bolstering that practice. So, to amplify Kevin's point, we feel very good about where that is and our ability to grow that portion of the financial services practice.

And then one last one I wanted to sneak in as well is the headcount cuts -- are they by practice area? Is there any -- and I guess dispersion in terms, or are they more weighted towards consumer or financial services or something like that?

That wasn't the way we went about it. There wasn't a specific strategic target, either by location -- it was really an all-encompassing effort that incorporated a lot of variables across all of our businesses.

Okay, thank you.

Mark Marcon.

I just wanted to ask a quick question about the IT system that's coming in place. When is that going to be fully rolled out?

We are in the final test portions of that, Mark. I think we are approaching the end of the high spending eras relative to the development and testing. One of the things that we have to do is decide as we roll it out exactly what pieces of it we are rolling out, because it has financial implications, it has strategic implications, it has control implications in the Sarbanes-Oxley world. So we are working with our IT folks and our search folks right now, but we expect that to happen within the coming months. And we are incorporating all the feedback from the various pilots, etc. So we think that should be in full operation within the balance of 2012, for sure.

Okay. And then CapEx for this full year is projected to be where?

At $17 million to $19 million.

Okay. And how would you think about that for next year?

I think it's going to be lower because I don't think I'm going to have the level of IT spending that I've incorporated this year. And obviously, with the reduction in some of the footprint as well, I think I don't see a lot of big buildouts or anything coming down the pike. So I'm expecting CapEx to be lower this year.

Like something in the $12 million to $15 million range?

That would be my hope, but I don't have the number yet. We are in the planning cycle now, so -- it shouldn't be a major number for a Company like us, though, because it's really leasehold improvements and IT maintenance.

Exactly, great, thank you.

And, ladies and gentlemen, there are no additional questions in the queue. Mr. Kelly, I will turn things back over to you for any additional or closing remarks.

Thank you. I just want to end and say thank you all for joining the call today. I'd also like to thank all of our colleagues across the globe for a very solid third quarter, and I hope you all have a great day.

Thank you. Once again, ladies and gentlemen, that does conclude today's presentation. Thank you for your participation.