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Heidrick & Struggles (NASDAQ:HSII)

Q1 2010 Earnings Conference Call

April 27, 2010 10:00 AM ET

Executives

Julie Creed – VP, IR

Kevin Kelly – CEO

Scott Krenz – CFO

Analysts

Kevin Mcveigh – Macquarie

Tim McHugh – William Blair & Company

Tobey Summer – SunTrust Robinson

Josh Vogel – Sidoti & Company

Mark Marcon - Robert W. Baird & Co.

Ty Govatos – CL King

Kelly Flynn from Credit Suisse

Presentation

Operator

Good day ladies and gentlemen and welcome to the Heidrick & Struggles First Quarter 2010 Conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. If anyone should require operator assistance during the conference call, please press star then zero on your touchtone telephone. As a reminder this conference call is being recorded.

I would now like to hand the conference over to Ms. Julie Creed, Vice President of Investor Relations. Ma’am, you may begin.

Julie Creed

Good morning everyone and thank you for participating in Heidrick & Struggles first quarter 2010 conference call. Participating with me on the call today are Kevin Kelly, Chief Executive Officer and Scott Krenz, the Chief Financial Officer. As a reminder we’ll be referring to supporting slides that are available on our website at www.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 our Safe Harbor language contained in our news release and on slide one of our presentation.

Now I’ll turn it over to you, Kevin.

Kevin Kelly

Thanks Julie. Good morning and thank you for joining today’s call. For long time, I’ve been looking forward to reporting year-over-year growth and today I’m pleased to be reporting our first quarter of year-over-year revenue growth since the second quarter of 2008. It’s been a long road to recovery and we are not out of the woods. Our improvement in revenue growth is tempered by the fact that we did not meet our operating income objective for the quarter, but the economy in our business are making steady progress.

First I’ll start with a quick overview of some of our key financial and operational metrics in the quarter starting with slide two. Net revenue in the quarter was $113 million up 27.5% compared to last year’s first quarter and up 3.5% sequentially. Every region contributed to the year-over-year sequential growth, but Asia Pacific was especially strong and as we’ve noted in the past calls Europe has been a bit slower to recover from the recession.

Slide three is a view of our monthly confirmations or signed contracts for Executive Search and Leadership Consulting projects. January, February and March confirmations showed slow but steady improvement over the fourth quarter, unlike the fourth quarter were higher than 2009 levels. In fact March confirmations were very closer number to those we record in March of 2008, which is obviously quite encouraging. April is also attracting that come in higher than 2009. Slide four is a look at quarterly confirmation trends specific to Executive Search.

First quarter search confirmations were 26.9% higher than last year’s first quarter and 10.4% higher than the fourth quarter. Every practice except life sciences contributed to year-over-year growth and every practice expect consumer markets achieved sequential growth. So our financial services with the largest contributor to growth every practice is showing improvement.

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

Looking at slide six, productivity which we define as annualized net revenue divided by the average number of consultants during the quarter, improved to $1.2 million, compared to 900,000 last year’s first quarter and $1 million for all of 2009. Given this level relative to our people believe there is still capacity in the system to grow net revenue without corresponding increase and headcount growth.

On slide seven, as you all know the average revenue per search is a simple calculation of revenue in the quarter divided by confirmations in the quarter. And therefore it can be a little confusing as revenue lags confirmations each quarter. As such we’ve decided to provide you with the average revenue per search on a trailing 12 month basis. For Q1, average revenue per search was $100,800 which is essentially flat compared to last quarter.

We do believe that pricing and terms have improved over recent months and we expect the trend to continue but the improvement will likely take a few quarters to be reflected in the averages. Turning to slide eight, the reported operating loss in the quarter was $4.3 million. This loss includes a $4.7 million related to two specific items which are explained in the release and which Julie will go into it in more detail.

Excluding these two items, operating income was still not as high as we had forecasted due to several unanticipated and accelerated expenses. But now I’m going to turn the call over to Julie for an update on some of the key line items and then Scott and I will go into more detail on our outlook.

Julie Creed

Thanks Kevin. Our press release and our slides posted on our website this morning provide you with all the key financial and operational results of our first quarter. But as usual I’ll give you some additional color on the other line items and the income statement. Starting with slide 10 and 11, salaries and employee benefits expense increased by $3.8 million or 4.8% year-over-year, mostly reflecting the year-over-year increase in net revenue.

Fixed compensation declined $7.8 million; this is offset by performance related variable compensation which increased to $11.5 million compared to last year’s first quarter. The decline in fixed compensation also reflects the 9.5% reduction in our worldwide headcount compared to last year, offset by a few items like our reinstatement of the following came out in the US and severance expenses, some of which related to the reorganization of our corporate support known as Project Philosophy.

The year-over-year increase in the variable compensation is largely the result of higher bonus accruals related to higher net revenue. Total stock based compensation expense in the quarter was $3.6 million, a decline of $2.8 million compared to last year’ first quarter. Salaries and employee benefits expense was 73.1% of net revenue compared to 89% last year’s first quarter. This percentage has historically been highest in the first quarter. Turning to slide 12, general and administrative expenses increased $1.3 million or 4.4% from last year’s first quarter.

The increase reflects the reinstatement or increase in investment in a number of company initiatives including training, business development marketing and then development of our internal search system. Moving to slide 13, during the first quarter we recorded other charges of $4.7 million. As explained in the release $3.2 million of this amount relates to our former London office which we vacated earlier this month, when we moved to a new smaller location. Off the $3.2 million, $1.7 million was additional expense incurred to settle our (inaudible) obligations with the landlord and $1.5 million was occupancy costs and amortization expense that was planned for Q2 but which because of our move date was accelerated into Q1.

As a result nothing will be incurred in Q2 related to our former promises. Remainder of the $4.7 million and other charges is $1.5 million related to an unfavorable judgment entered against the company by an appeals court following a lawsuit filed by a former European employee. And now I’ll turn over to you Scott.

Scott Krenz

Thanks Julie. Although it’s great to see year-over-year and quarter-over-quarter revenue improvement, we are not happy to have missed out operating income though. Like Kevin, I am disappointed especially because the underlined businesses performing about is as expected. Unfortunately we had a large number of difficult to forecast expenses in the quarter. It wasn’t just one thing, it was a mixed bag including severance, professional and legal fees associated with certain employee matters, ending our attempts to sublease our former Wall Street office, couple of sign on payments for strategic hires during the quarter and the $4.7 million for the two items that Julie discussed earlier.

We always anticipate as a certain level of the unexpected. But this quarter was exceptional. If there is any good news in this, is that we have a number of these things behind us and they will not impact future quarters. In particular, $1.5 million related to the London lease was an acceleration into the first quarter of expenses we had planned to hit in the second quarter. We have taken that into account second quarter and full-year guidance. The economy in our business continues to grow. Europe appears to be lagging the rest of the world, in is certainly recovering more slowly than any of us would like. Reading the papers, it appears we are certainly not alone in feeling some uncertainty about the scope and speed of this recovery.

So to underscore what Kevin said, we have been quite cautious and targeted in hiring, in our investment plans and certainly in our view of 2010 growth. Slide 15 shows monthly confirmations. Beginning in October or 2009, monthly confirmations began showing year-over-year improvement. This trend is continued right through March 2010. In fact, March 2010 confirmations very nearly equaled March 2008 missing by just one.

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

Estimating the operating margin is always tougher than revenue. As we recovered from the 2009 recession, our operating income numbers are relatively small. This makes our forecast quite vulnerable to even small and anticipated expenses with the timing of expenses from quarter-to-quarter. With that cautionary note, we are estimating the second quarter operating margin between two and 4%. We took a hard look in 2010 full-year net revenues. After factoring in seasonality, the impact of potential losses from the consultant ranks and the inherence uncertainty in any economic forecast, we do decided to leave our revenue guidance unchanged at 440 to $480 million.

In arriving at this forecast, we expect to see continued strong growth in our financial services practice and leadership consulting. Practice and business mix is also one of the variables we took into account. Given our short fall in operating margin in the first quarter, we are slightly lowering our full-year margin guidance from 4 to 6%, to 3 to 5%. Please note this includes the $4.7 million of Q1 other charges that we talked about earlier. The full-year margin continues to be impact by a number of things. Restoration of employee benefits, the restart of much needed company initiatives which were postponed in 2009, and the hiring of additional staff to target areas.

The difficult part in protecting our effective tax rate is forecasting the mix of earnings in 40 countries. We anticipate the full-year effect for tax rate to be approximately 48%. This rate has been much impacted by unbenefited losses and several foreign jurisdictions and by the non-deductibility of some of the cause associated with vacating our formal London office. If you turn to slide 20, cash used in operating activities was $32.2 million and we ended the quarter with $81.2 in cash and cash equivalence.

As is always the case, our first quarter reflects the payment of bonuses. In the first quarter, we paid approximately $45 million in bonuses. Almost all of it going to our revenue producing consultants. This compares to 2009, when total bonus payments were $133 million. We anticipate a payment in the second quarter of approximately $2 million related to the payroll taxes on 2009 bonuses in non-US countries. Bonus payments behind us, we expect positive operating cash flow for the remainder of the year. As I said in February strengthening the balance sheet is a key goal for 2010. We expect 2010 free cash flow between 10 and $20 million. To remind everyone, free cash flow is net of increases in accrued bonuses and capital expenditures.

Firstly because of the fit us required for new offices in some of our major markets, London, Paris, Scotland, Washington D.C. to name a few. CapEx in 2010 is going to be higher than our normal two to 3% of revenue. We expect 2010, CapEx to be between $26 million and $28 million. We will continue to refine this during the year based on the timing of leases signed and the start of the fit outs. These fit out costs are a result of the real estate’s strategy which by 2011 is expected to reduce our annual rental expense by approximately one-third.

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

Kevin Kelly

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

We completed some great marquee searches this quarter including Board Members for ADP and Legg Mason, the CEO of DirectTV, and the CFO of Bank of America. We are currently working on three prestigious searches for Kleiner Perkins for three different companies in their Greentech space. These hires will shape the future of these companies and we are honored to be treated as a partner of Kleiner Perkins in securing their management talent.

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

We worked with one of the leading US home builders who is seeking a competitive advantage to their executive talent management as that very inherited industry seeks to rebound. We assisted a leading real estate firm in selecting an internal candidate to lead a fast growing business which they are spinning off. And we saw the highly innovative leadership development engagement to one of the leading industrial firms in the world demonstrating our ability to not only help clients with identifying their top talent, but developing it as well.

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

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

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

At this point, I would be happy to take any questions that you all might have.

Question-and-Answer Session

Operator

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

Kevin Mcveigh – Macquarie

Great, thank you. I wonder if we could just talk about the margin guidance a little bit for 2010, given that the financial services seems to be coming in stronger to some of the other segments, I would have thought the profitability within financial services is stronger than some of the other segments. Can you just talk about specifically what drove those cuts, and if it looks kind of the midpoint, is about a 100 basis points, Scott you did a nice job framing what those components were? But if you just kind of frame that a little bit, is it a third, a third, a third or where those 100 basis points really came from. Thanks.

Scott Krenz

Somewhere along the line I lost you there Kevin. Why don’t we go through this again and maybe I can pick it up. I’m being particularly dense this morning.

Kevin Mcveigh – Macquarie

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

Scott Krenz

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

I will say that all the group there probably severance which shows up in our – in our compensation line was the single biggest issue there and that related to carrying out some of the plans we have been talking about for quite a while here in restructuring our corporate organization here and then there were a couple of other things which happened during the year, so that that’s the biggest single item, but the rest of it is really a lot of stuff.

We chose essentially to reflect this in the full-year guidance, which is why we came down slightly on that. The rest of the year we were pretty much we expect to be where we were the last time we talked.

Kevin Mcveigh – Macquarie

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

Scott Krenz

Absolutely, yes we have included that, we are not trying to exclude it in any way.

Kevin Mcveigh – Macquarie

Got it, that’s helpful. Okay I will get back in queue. Thank you.

Operator

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

Tim McHugh – William Blair & Company

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

Scott Krenz

It’s not, it’s really what we expected which is why the difference between where we reported and what we had anticipated when we gave guidance was this list of sort of other things I mentioned. The biggest thing impacting it is, understand, 2009 was a very bad year. And as we have mentioned before, roughly half of our consultants were under water during the year, last year 2009.

Things have picked up markedly and that means that it’s lifted just about everybody up there and that is reflected in the amount of accrual for the bonuses. The other thing to note is that we estimate accrual bonuses on a full-year basis. So we estimate here and then take a pro rata share of that full-year estimate. So what you are really seeing is I think the change between a remarkably bad year 2009 and what is looking to be a relatively good year, certainly not back at the levels we saw in 2008, but still a remarkable turnaround from 2009, and that’s reflected in the amount we will be paying our people which we pay them for production, and we are simply producing a lot more.

Tim McHugh – William Blair & Company

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

Kevin Kelly

Well if you look at – let me take a step back Tim, if you look at 2001, 2002, after the last downturn, we as an organization cut too deeply and too broadly, and we didn’t invest in training and development, we didn’t invest in our people at the time. We made it as Scott just mentioned, we made it a concerted effort last year to make sure that we kept capacity in the system, because we knew eventually the market would pick up and we have some fantastic consultants out there who quite frankly just had a very difficult year as many across the globe did.

If you recall 2007, 2008, productivity was roughly $1.5 million on average. And at that time, we had consultants who were far above and beyond $3 million to $4 million in revenue. So we believed that as an organization and our goal collectively is to drive that number between $1.8 million and $2 million and we think that’s very feasible, and that’s globally particularly as wages continue to increase and revenue per search increases as well.

And I think as we mentioned or I mentioned in my comments, you will see that reflected probably more or so in the third and fourth quarter. But given number one, the capacity in the system, number two the average fee per executive search, and a consultant pool we have out there, we are quite – and the tools we are putting in place today, we are quite confident we can bring that number up to $1.8 million to $2 million.

Tim McHugh – William Blair & Company

So to get up to those levels so you would, your assumption, it sounds like as though you will get back to and then exceed the revenue per search numbers that you were at back in ‘07 and ’08 when you got to the $1.5 million.

Kevin Kelly

Absolutely. And I think we have seen a lot of that come through particularly with our financial services practice over the course of the last three months to four months, and our CEO and Board practice, and in conjunction with our leadership consulting business as well, where we know that if every search we do that entails both leadership consulting and executive search, there’s a significant increase in fees and client retention.

Tim McHugh – William Blair & Company

Okay thank you.

Operator

Our next question comes from Tobey Summer with SunTrust Robinson.

Tobey Summer – SunTrust Robinson

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

Kevin Kelly

Tobey, first of all yes we are, it is slow, but we are seeing an increase in compensation again across the globe. First we saw in Asia-Pacific, which quite frankly has come back the strongest and it’s starting to happen in North America. Additionally, headcount will increase. We are as we mentioned, I mentioned and Scott mentioned in the remarks taking a hard look and across the globe. We are going to recruit in Asia, we are going to recruit in – we have gaps in Europe right now and we actually have gaps in every geography and we want to continue to invest in our leadership consulting business.

We have a number of potential hires in the queue right now, but we want to make sure they fit in culturally and they fit a longer term with the strategy, they are going to be effective and hit the ground running as soon as possible. So we do have a very stringent recruiting practice and plan place right now driven by our global practice leaders.

Now, I don’t think we will hire 50 this year, but we definitely will invest in not only developing our people but also making sure that we fill the gaps globally of our industry sector and geography.

Tobey Summer – SunTrust Robinson

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

Kevin Kelly

Well I think you probably, I am surmising that one of the ways you are looking at this is taking the average revenue per consultant and (inaudible) by you know 380 or 400 to get a revenue number.

One thing to keep in mind is that we have a lot of capacity in the system right now as Scott mentioned, so there are a lot of consultants out there that are having fantastic year this year that quite frankly again given the falloff on our business last year had a challenging year last year.

So first and foremost, I think you will see a huge uplift just given the capacity we have in the system. And then secondly through selective hiring, we will see an increase there as well. But we want to make sure that we cover the industry and functions that we have that are vacant right now.

Scott Krenz

Yes, there is a number of factors when you look into the second half of the year. And I think that if you look at the numbers, I think the high end of the guidance probably is one if you just start annualizing first quarter you began, getting closer to X or Y, why do we keep the low end at 440, and that’s where the factors that I mentioned before, if we have some key levers amongst our high producers that could impact us and slow us for a time, we worry a little bit about the economy particularly in Europe and we actively believe and had a discussion the other day about the potential impact of say Greece on the recovery and the EU, and could that impact us.

And so there’s a number of unknowns out there and I think it just led us to take as we mentioned whether it’s in our hiring, whether it’s in our investments, whether it’s in forecasting the growth to still be relatively cautious.

Tobey Summer – SunTrust Robinson

Thanks. I'll ask one other question, I’ll get back in the queue. In terms of – have you taken any steps to mitigate the risk of big performers leaving and if so could you share any of those with us? Thanks.

Scott Krenz

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

Kevin Kelly

I would just say that it'll be like – I think there was a survey last year by one of the top consultants (inaudible) number one in terms of which (inaudible) CEO is mine. In fact 97% were concerned about employee retention, and like our clients were concerned about that as well. I think and, of course, I'm going to be biased that we have the best people in the industry. We've been the only firm quite frankly that has spent a lot of time on training and development over the years to develop the next generation. And so, of course, we're going to be a target of many of our competitors, many of whom some specifically are throwing around a lot of money right now but we try to make this a great place to work, we try to really work on enhancing the brand and making sure that those people in the organization particularly at all levels feel value. So we'll continue to do that.

Operator

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

Mark Marcon – Robert W. Baird

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

Scott Krenz

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

Mark Marcon – Robert W. Baird

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

Kevin Kelly

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

Mark Marcon – Robert W. Baird

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

Scott Krenz

One, to clarify the real estate charge, $3.7 million divided roughly in half and half of that was unfortunately a complete surprise in the sense that we had accrued for a certain level of repairs and putting the old office back to its former place and unfortunately we couldn't come to an agreement with the landlord and we ended up paying more than we had expected and that is certainly a onetime charge, it's certainly unanticipated and won't reverse. I mean that's not a timing entry, that's real. The remainder approximately $1.5 million is truly an acceleration from quarter to quarter although that really relates to the first.

Our plans were to put the building back to where it was, which we had accrued for and turn it back to the landlord in the second quarter when we would have recognized those charges because we finally came to a settlement with the landlord and finalized it. We actually walked away from property entirely earlier than we'd expected and it just moved it into the first quarter and that is a timing change and it helps us obviously in the first quarter. The rest of the things I had mentioned are pretty much, they're both one time but they're not timing. They will stay with us for the rest of the year and that is reflected in the small reduction we made to the full year operating margin.

Mark Marcon – Robert W. Baird

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

Kevin Kelly

I think a lot of it has to do with -- if you look at last time, Mark, and I think it's one of the slides and if you look -- we're three -- last time we're at this revenue level we were three years after the recovery. I think as we mentioned on the last call, there's a lot of things that we reinstated this year, excuse me not this year, this quarter. So a lot of that we attribute to that. I mean in terms of individuals potentially leaving I think that personally is less of an impact because as I mentioned before as well Scott mentioned we have a great bench number one and the capacity in the system that going back to my point of making sure that we just didn't cut but we invested and maintained, our consultant population is something that again, we wanted to do because we have great people. So, I think it's less there and more of what we're seeing in terms of reinstating the 401(k), some of the other investments in marketing and training development etcetera that we reinstated this year. So that and I wish I could explain French law to you but unfortunately I can't do that in terms of the $1.5 million but the -- again, we're very positive in the outlook for the year, it's just being somewhat conservative.

Mark Marcon – Robert W. Baird

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

Kevin Kelly

Well, we have -- again, I've been talking about this, it seems like since I joined the company but we're now seeing the real results of it is we have instituted a real estate strategy, which we're now executing which is significantly reducing the square footage, significantly increasing the efficiency of our offices and also introducing a standard feel to the offices wherever you are in the world. So there is payoff. But every time you move into one of these, you need to spend some money to fit them out and get them up to stop.

The London office is a perfect example. We've moved into a new office there, it's a beautiful office. I was just there the last couple of weeks but not only is it really nice, it's more efficient. We're going to save roughly $10 million over the term of the lease on that but it does take a little bit of upfront investment to get there. We are not restructuring property at the moment. We're not walking away from leases but as leases expire we are taking them into our new standards and bringing them into this common sort of feel we've got or this common look we're instituting for these offices and it just so happens that we had a number of big ones come up this year.

London is our second largest office. We have Paris, which is certainly one of our top 10 offices. DC is probably in our top 10 as well and it's a fairly large office and then we're anticipating taking some action here in Chicago, which is our third largest office, all of which will produce very large long-term benefits in the P&L but you just need to put a little capital into them more upfront.

Mark Marcon – Robert W. Baird

What's the – I mean relative to the 26th to 28th that you're going to spend what would the ultimate savings be?

Kevin Kelly

Well, we're going to take out roughly $10 million a year, repeat it I mean $10 million every year for as long as you can see in terms of increased efficiency here. So I mean it's pretty quick payback and obviously that 26 to 28 gets amortized over the lease term as well. So from a P&L standpoint, this is very beneficial.

Mark Marcon – Robert W. Baird

Okay, great, thank you.

Operator

(Operator Instructions) Our next question comes from Ty Govatos from CL King.

Ty Govatos – CL King

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

Kevin Kelly

It includes them.

Ty Govatos – CL King

So if I took that out, we're still really talking 4% to 6%.

Kevin Kelly

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

Ty Govatos – CL King

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

Kevin Kelly

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

Ty Govatos – CL King

Okay, that's the other way of skinning the cat. Okay, thanks an awful lot.

Operator

Our next question comes from Kelly Flynn from Credit Suisse.

Kelly Flynn – Credit Suisse

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

Kevin Kelly

Of those specific ones I talked about yes, that's true, I mean specific to events in the first quarter.

Kelly Flynn – Credit Suisse

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

Kevin Kelly

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

Kelly Flynn – Credit Suisse

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

Kevin Kelly

No.

Kelly Flynn – Credit Suisse

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

Kevin Kelly

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

Kelly Flynn – Credit Suisse

Okay, great. And then for the confirmation’s growth, I know you referenced the levels were similar to March ’08, but what about the year-over-year growth. Can you tell us how it progressed through the quarter? Trying to get a sense of how much it may have accelerated at the quarter one.

Kevin Kelly

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

Kelly Flynn – Credit Suisse

Okay. So from a year-over-year growth perspective, you are seeing it’s holding the growth rate, it’s not so much accelerating.

Kevin Kelly

No, we are – it’s not accelerating. It’s improving and I think we said somewhere here that it’s improving slowly, but it is improving. But it’s not thing dramatic.

Kelly Flynn – Credit Suisse

Okay, great. And then finally just a quick one, I think you give the annual tax rate guidance, can you give the second quarter tax rate? Should we use the same?

Kevin Kelly

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

Kelly Flynn – Credit Suisse

Okay, great. Thanks a lot.

Operator

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

Tobey Summer – SunTrust Robinson

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

Kevin Kelly

I think it’s a few things. So first I will start on the search side, happen to be in discussions with, I think we are – few of us trapped in London last week, but met a number of CEOs over there. And what we are hearing consistently is, okay, we have gotten through the crisis, we let go 1,000 people, we are not going to hire 1,000 back, we are going to hire 500 back. And there is pent up demand there which skill sets do we need to get us through the next 12, 24, 36 months. So one would be pent up demand, plus new skills needed to help execute strategies going forward.

Simultaneously what we are seeing is a big pickup in our leadership consulting business, because given the fact that they may have laid off a 1,000, but there is only 500, how you get the best of the people that you now have in the organization. So how do you work on a retention scheme for them, a development scheme for them, and assessment scheme for them to make sure that you have the leadership in place to actually help you execute your strategies. So we are seeing this across the board. There is some growth again in financial services has picked up, the technology has picked up, consumer goods, but you are also seeing it not only by practice, but by geography as well.

So some organizations tend to want to expand again into different markets right now and we are helping with that as well. Plus with the – on the M&A front, when we saw a slight pickup last year, we are also with a number of organization on assessing both sides in terms of finding out who will be or who are the best leaders to take the organization forward. So I think it’s a combination of many things Tobey that we are seeing across the globe and it depends again on each market and each practice and each function in which we are operating.

Tobey Summer – SunTrust Robinson

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

Kevin Kelly

It’s a great question and absolutely we are one of a few firms who can actually provide organizations with the skills and talent they need to expand in what we are seeing and we saw last year and the trend we continue to see is, we used to historically help American companies and European companies expand into other parts of the globe, be that Latin America, be that Asia, et cetera, or other parts of Europe and North America.

What we have seen is this continued trend of a number of global organizations, Chinese, Indian, Japanese, et cetera expand into other parts, whether it would be Europe, whether it would be North America, so we are seeing that. And given the strength of our consultants not only here in North America, but the strength of our consultants in both Asia-Pacific, Latin America, and Europe, and the strength of our relationships, that’s really helped us and as we have come out of the downturn.

Tobey Summer – SunTrust Robinson

Thank you very much.

Operator

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

Josh Vogel – Sidoti & Company

Thank you, good morning. I was just curious, do you still expect the six comp to trend back to the mid 60% overtime?

Kevin Kelly

Given the significant revenue falloff, obviously it’s scrapped up over the last couple of years. Our goal collectively would to bring that number downward, probably somewhere to the mid-to-high 65% to 66%, 67%, but simultaneously making sure that we do reward our consultants and our people the best we can particularly in the industry. I mean our goal is to collectively bring down the salary and employee benefits, the fixed component of that but making sure that we do invest and we pay and reward our people the best we can given the competitiveness in the marketplace.

Kelly Flynn – Credit Suisse

And I apologize if you had addressed this already, I may have missed it, but are there any other pending law suits with former employees that we should know about?

Scott Krenz

Not at this time.

Operator

Our next question comes from Kevin McVeigh, Macquarie.

Kevin McVeigh – Macquarie

How big is the leadership consultant business right now as a percentage of revenue?

Scott Krenz

Last year, so we saw a growth of 11%, right now it’s close to 7% and we believe that eventually will be anywhere from 18% to 20% of the revenue globally and that's the plan that we are executing on. We have seen and continue to see demand across the globe. We have continued to invest in our current consultant population to train them. But given the demand that we have out there, the biggest challenge we have and it’s a great question because our continued focus is on the CEO and Board sweep or the C-level sweep and as we have looked across the globe at adding and/or investing in the business, it’s much more challenging to invest and find individuals and/or organizations that can focus on the C-level, it’s much easier to see leadership consulting organizations that go through the HR route and/or focused on the lower level.

So we will continue to invest. We are looking at recruiting and potential acquisitions down the road in that space but it has to be at the right level.

Operator

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

Mark Marcon - Robert W. Baird

Follow-up question with regards margin levels. Certainly understand what's going in Europe but could you talk a little bit about what – how we should think about the margins that we saw in the first quarter in the Americas given the revenue level relative to what you have experienced previously and how the margins are turning out?

Scott Krenz

Well, let me point out in Europe, when you look at the margin for Europe in our segment reporting, I am sure you have figured that bulk of the 4.7, it all falls within Europe. So –

Mark Marcon - Robert W. Baird

Yes, understood. That's why I was asking about the Americas.

Scott Krenz

Going forward, I mean we are quite – given the – let me back up and answer this, given the work we have done on fixed costs, which has been really quite extensive and very successful around here, like most of these companies, we have become very sensitive to revenue impact. So, if revenue picks up in the U.S., which we anticipate it will, we should see fairly significant margin expansion in the U.S. I mean that's just the nature of the company right now. So if the U.S. recovery continues the pace or even accelerate here, then we should see a similar pickup in the North America segment.

Mark Marcon - Robert W. Baird

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

Kevin Kelly

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

Mark Marcon - Robert W. Baird

Okay, and then from a longer term perspective, Kevin, do you – last call we talked about getting to mid-to-high teens long term. Is that still doable or are there things that we are seeing from certain competitors that perhaps EBITDA?

Kevin Kelly

Mark, actually I would say to you that we probably as an organization are more confident than we have ever been to particularly given the back office and the infrastructure and all the hard work Scott’s done with the finance function, in our real estate, etcetera that we are very confident, in fact, more confident than ever that we can reach that high – mid-to-high teen number.

Mark Marcon - Robert W. Baird

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

Scott Krenz

We are starting to talk about getting back to the levels we were in 2008, so into the 600s. Then you see us starting at – we start seeing double digits and I mentioned this in the last call somewhere in sort of the mid 500 range. You get into double digits and then it just ramps up from there.

Mark Marcon - Robert W. Baird

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

Scott Krenz

Let me get to buybacks and I will let Kevin talk about the acquisitions. I mean as I reiterated this quarter, our focus right now is putting money back into our work chest here and gaining more financial flexibility than we currently have although we are not in a bad way. Last year cash on hand bottomed at about $65 million in June and then it has been going up since then. So being in the 80s where we are right now is not a bad place given that bonuses are behind us. But this year will be a year or putting more money in our work chest and strengthening the balance sheet.

So it’s not when our buybacks are our top priority by any stretch of the imagination.

Kevin Kelly

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

Scott Krenz

A couple of things I will add, one is we definitely have enough financial flexibility here to execute an investment plan and to grow this business and to look at opportunities which are out there. I mean we are not cash wrapped by any stretch of the imagination here. Secondly, because of the nature of the type of acquisitions we make, it’s very important that there would be incentives here that they both stay and they continue to produce. And as such, most of them are structured with substantial earnouts and these substantial earnouts are there for a reason, to keep people focused on growing to keep them loyal to the company and move forward. And that simply means is although purchase price might be fairly substantial, the actual cash impact is spread over a number of years.

So I mean there is no structural reason that we cannot grow the business and respond to opportunities that are in the marketplace. Having said that, we are being cautious about in making sure they fit in culturally, we are making sure they fit into our strategy. And we are being very I guess taking – (the way out) was taking a really hard look at the prices we are paying on these things in the current market.

Kevin Kelly

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

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today, you may all disconnect. Have a wonderful day.

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