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Executives

Julie Creed – VP, IR

Kevin Kelly – CEO

Scott Krenz – CFO

Analysts

Kevin McVeigh – Credit Suisse

Andrew Fones – UBS

Tim McHugh – William Blair

Tobey Sommer – SunTrust Robinson

Mark Marcon – Robert Baird

David Ridley Lane [ph] – Merrill Lynch

David Feinberg – Goldman Sachs

Clint Fendley – Davenport

Heidrick & Struggles International, Inc. (HSII) Q2 2008 Earnings Call Transcript August 6, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the 2008 second quarter 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 follow at that time. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today, Ms. Julie Creed, Vice President, Investor Relations. Please begin.

Julie Creed

Good morning, everyone, and thank you for participating in our 2008 second quarter conference call. Participating on the call today are Kevin Kelly, our Chief Executive Officer; Scott Krenz, our Chief Financial Officer; and Jim Andrejko, our Vice President and Controller.

As a reminder, we will be referring to supporting slides that are available on our website at heidrick.com and we encourage you to follow along or print them. As always, we advise you that this call may not be reproduced or retransmitted without our consent. 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.

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

Kevin Kelly

Thanks, Julie, and thanks to all of you who are taking the time to participate on our call today. Before I get started with the discussion of the second quarter, I’d like to take a minute to official welcome Scott to the company and introduce him to all of you. Although Scott’s official start date was August 4, we are fortunate that he has been integrating himself into Heidrick & Struggles for the last month.

If you are following along with the slides we’ve posted on our website, I’m going to start with slides three through six. We are pleased to be reporting another quarter of growth, both year-over-year and sequentially. Consolidated net revenue in the second quarter was $169.5 million, up 5.9% compared to last year’s second quarter and up 10.7% compared to our first quarter.

On a constant currency basis, net revenue in the quarter was up approximately 2% year-over-year. Net revenue in the Americas region was down 1.4% compared to last year as a result of softness in the consumer goods practice, and to a lesser extent, continued softness in the financial services practice. But the technology, industrial, non-profit practice groups, each achieved double-digit year-over-year growth. And compared to the first quarter, net revenue in Americas increased by almost $10 million or 12%, driven largely by strong performance in the financial services practice.

Europe’s net revenue was up 1.7%, although down approximately 7% on a constant currency basis. All of the industry practice groups in this region achieved double-digit net revenue growth, except financial services, which declined year-over-year and was the one area of softness. Sequentially Europe’s revenue in the second quarter was about the same as the first. And like in the Americas the financial services practice also realized a sequential increase in revenue.

Asia Pacific achieved another record net revenue quarter, up 50.6% on a reported basis or about 41% on a constant currency basis. The financial services, industrial, technology, and business and professional services industry groups were the largest contributors to growth. And compared to the first quarter, Asia Pacific’s net revenue increased 27%. Since there are very few generalizations that we can make about any industry practice in either quarter on all three regions this year, we think slide seven is helpful in showing how each practice group is performing year-to-date compared to last year’s first six months. Every industry practice group except financial services is growing.

Turning to slide eight. Consultant headcount was 408 at June 30 and at the end of March compared to 398 at the end of last year’s second quarter. In the quarter, we added 19 new consultants primarily in the Americas region. 13 are experiencing a search, including six through the acquisitions of Schwab Enterprises and IronHill Partners and the other six were new to search. But offsetting these additions in the second quarter were six consultants who left as part of our ongoing productivity review and five who are reclassified to working as affiliates in our Portuguese operation. And there were a few others who resigned or retired. Year-to-date, voluntary consultant turnover is very low, approximately 4%. And no search consultant has left our firm this year to join another firm or start their own.

Turning to slides nine and ten, executive search confirmations in the second quarter were down 2.1% compared to last year’s second quarter and decreased 2.5% on a sequential basis. On a monthly basis, confirmations have been very steady so far this year with no big inflections. And July trended as expected, given the summer holiday season.

Moving to slide 11, productivity or annualized revenue per executive search consultant increased to a new record of $1.6 million with improvements in every region compared to last year’s second quarter. Increasing productivity has been one of our major initiatives over the past year and a half, and we have every intention of continuing this effort.

Looking at slide 12, the average fee per executive search was $122,200, up 10% compared to last year’s second quarter. The year-to-date average fee per search is also up about 10% compared to the first six months of last year. Referring to slides 13 and 14, second quarter operating income was $18.7 million compared to $19.5 million last year, and the second quarter operating margin was 11% compared to 12.2%.

Now I’ll turn the call over to Julie to go into a little more detail on some of the line items that are key to driving operating income and regional results.

Julie Creed

Thanks, Kevin. Turning to slide 15, salaries and employee benefits expense in the second quarter was $117.3 million, up $6.6 million or 6% year-over-year. As a percentage of net revenue, salaries and employee benefits were 69.2%, the same as in last year’s second quarter. Of the increase, fixed salaries and employee benefits expense accounted for $4.7 million and performance-based compensation accounted for the remaining $1.9 million.

The increase in fixed expense was primarily a function of the 9.4% year-over-year increase in our worldwide headcount. The increase in performance related compensation expense mostly related to higher bonus expense as a result of higher net revenue levels. Total stock-based compensation expense in the quarter was $5.9 million, which is down compared to $10.5 million in last year’s second quarter. This decrease largely reflects the change to our 2008 compensation program.

As we discussed on our first quarter conference call, starting with 2008 bonuses, which are payable in March of 2009, the portion of consultants and management’s bonus that was previously paid in restricted stock units will now be paid in cash, although still deferred over three years. The accounting treatment is fairly unchanged. So it’s neutral to P&L. Another reason for the decrease in stock-based compensation expense is that in last year’s second quarter it included expenses associated with the accelerated vesting of restricted stock units for our former Chairman who retired.

Turning to slide 16, general and administrative expenses in the quarter were $33.5 million, an increase of $3.7 million compared to last year’s second quarter. As a percentage of net revenue, G&A expenses were 19.8% compared to 18.7% last year. Similar to first quarter results, the year-over-year increase is primarily related to an increase in premise related costs for new offices and for new renewals since last year’s second quarter, including among others New York, Hong Kong, and Tokyo.

Looking at slide 17 and 18, our net income was $12.7 million and diluted earnings per share was $0.72, reflecting a quarterly effective tax rate of 38%. It’s a bit difficult to compare these results to last year’s second quarter when we had an effective tax rate of 2.3% as a result of our decision to release evaluation allowance related to certain of our foreign tax credits. That gives a tax benefit of $8.5 million in the quarter.

You will note that we have narrowed our expected 2008 full year effective tax rate to range between 38% and 40%, down from 38% to 42%. This is primarily because we have honed our forecast for the mix of book income expected from each jurisdiction based on the first half results, but it also reflects that we are no longer planning to incorporate the foreign branch that we were considering for 2008, which as you know would have had an associated discrete tax charge.

Kevin already gave you insight to revenue trends in each of our three regions, both year-over-year and sequentially. So I’m going to provide color on the operating margin in each region, starting with the Americas on slide 20. Second quarter operating income in the Americas was $12.6 million, which is down 35.3% year-over-year and the operating margin was 14.4% compared to 22% in last year’s first quarter. The decrease in operating income and operating margin is attributed to lower net revenue and increase in salaries and employee benefits and an increase in G&A expense.

The increase in salaries and employee benefits expense reflects several items. The largest is an increase of approximately $1.8 million of discretionary compensation associated with a mix of consultants who are generating revenue in this region. And Scott will explain this expense further in a few minutes. But the increase in salary and employee benefits also reflects expense associated with the amortization of new long-term incentive awards that didn’t exist in 2007, severance for consultants and several others who left as part of our ongoing review of productivity, an increased associate leverage and support staff headcount. The increase in G&A expenses in the Americas region largely relates to premise related costs and renewal of leases for existing offices, the largest being New York.

Now turning to Europe on slide 21, operating income in Europe increased 4% to $7.7 million and the operating margin improved to 14.4% compared to 14.1% last year. The increase in net revenue of $0.9 million in the quarter and a decrease in salary and employee benefits expense were offset by an increase in G&A. The decrease in salary and employee benefits expense is due to lower discretionary compensation and a decrease in consultant headcounts since the second quarter of ’07. But the increase in G&A largely relates to our European regional meeting, which was held during the second quarter, and to a lesser extent, increase in premise related costs and other operating and infrastructure expenses.

And finally, turning to slide 22, in our Asia Pacific region, operating income of $6.6 million increase 27.3% year-over-year and the operating margin was 22.7% compared to 26.8% last year. The increase in net revenue in the quarter of $9.8 million was partially offset by an increase in salary and employee benefits expense and to a lesser extent an increase in G&A expense. As we discussed on the first quarter call, the increase in expenses generally reflects the investments we’ve made in growing this region over the last year.

In the past year, total headcount in this region approximately 34% and we’ve grown our consultant headcount by 36%. The timing of these hires, as you know, means additional fixed costs about corresponding margins if they get up to speed. The decrease in margin also reflects higher infrastructure costs related to the leases for new and existing offices since last year’s 2Q. But as we said in the first quarter call, we will leverage these investments now to drive revenue and margin. In fact, the improvement in this region’s operating margin from 11.9% in the first quarter to 22.7% in the second quarter partially reflects this expected improvement in consultant productivity.

Kevin Kelly

Thanks, Julie. The outlook for our business is based on multi-dimensional perspectives from each region, industry practice, functional practice, and individual consultants. As a global company, we continually combine these views in order to determine what our business will achieve in 2008. Secular trends, demographics, growth in emerging markets, and continued turnover in the C-suite no matter what the economic conditions are, all drive the need for executive recruiting and leadership services. That is why we believe this is a growth business.

Some industries might be softer than others and some regions tougher than others, but the strength of our business model lies in our global footprint. And revenue is on target as of this date to fall within the range of $650 million to $660 million. As for the operating margin, the entire management team remains committed to achieving approximately 13%.

Since being appointed as CFO, Scott has been very focused on our cost structure and the potential for cost savings. So I’d like to turn the call over to him to give you an update on some of our specific initiatives. Scott?

Scott Krenz

Thank you, Kevin. First let me say how excited I am about joining the Heidrick & Struggles team and how pleased I am to be able to participate in today’s call. As you’ve heard, our net revenue was still on track, well within guidance. Although with two quarters completed, we have narrowed the range to $650 million to $660 million.

On the cost side, we’ve had several significant unexpected expenses this year. We will need to offset these increases in where to achieve our target operating margin of approximately 13%. The biggest of these expenses is compensation expense related to the mix of consultants who are producing the revenue. As you know in our business and in many consultant-driven businesses, the compensation model at its basic level is that the more revenue you generate for the firm, the higher percentage you keep as compensation. This year there is a wider discrepancy between the number of consultants generating very high revenue and those working in the lower tiers.

So to date we have accrued approximately $3.5 million in additional compensation expense for this reason. Another expense we are looking to offset is approximately $1.5 million in severance, much of which relates to the former CFO. So to make this up and to protect the firm from future economic uncertainty, we’ve increased our focus on cost savings initiatives. We’ve made progress on the initiatives we discussed with you earlier in the quarter, but it recently instituted additional cost savings initiatives. These include restrictions on travel so that only travel required to generate revenue or that is necessary for the current operations of the firm will be allowed. A new approval process was implemented to assure the effectiveness of this policy. We are postponing until 2009 or in some cases eliminating all industry functional practice, training, and corporate meetings.

Finally, every financed IT marketing and training project or open position, whether capitalized or expensed is being evaluated as we seek to delay or eliminate what is not necessary. The exception is the new search system. This project will not be deferred, as we believe it is critical to the firm’s future. At this time, we estimate that the savings from these additional initiatives could reach $8 million or more. It will be a challenge to fully realize the cost savings and to achieve our operating margin goal. But this is a priority for me and it is priority for the company.

We want to execute the plan that our executive committee set forth for 2008. And I know that we will benefit for the increased discipline and sharper focus on the expense structure. Of course, we can’t predict the future. And our expectations assume that there is no further significant deterioration in the economic conditions in any of our regions. In any event, these actions we are taking are the prudent thing to do.

Kevin Kelly

Thanks, Scott. I hope that we have conveyed that we think this is a growth business. Our global footprints, our brand, and our focus on work at the Board and CEO level gives us comfort in this outlook. And while aggressively pursuing meaningful cost savings in order to pursue our goal for operating margin, we will continue to invest in our business so that Heidrick & Struggles emerges from the economic cycle positioned to be the leader in every practice and in every region.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Kevin McVeigh with Credit Suisse.

Kevin McVeigh – Credit Suisse

Hi, thank you. Nice job on the second quarter. I just wanted to focus on the guidance a little bit. You reduced the high end of the range from $10 million. Could you give us a sense of where that’s coming from? Is it across the Americas, Europe, pretty consistent? Just want to get a sense of where you are seeing kind of slow in trend.

Kevin Kelly

Kevin, how are you? It’s primarily in North America at this point. We are still seeing growth in each region. Asia Pacific, as you saw; Europe continues to be strong; and even in America it continues to be – we continue to see the demand for our services. It’s just we have narrowed it a little bit in North America, which reflects that $10 million.

Kevin McVeigh – Credit Suisse

And then just in terms of – it’s part of the incremental cost or higher comp accruals. Where is that focused? Is it primarily more senior search executives generating additional revenue, or why the incremental accrual? And is that pretty consistent with what you’ve seen in previous cycles?

Kevin Kelly

This is actually – it’s a little rare this year and we are seeing it across the board. Historically we’ve seen it in North America to a greater degree, but given our investments over the last couple of years and given the number of consultants we’ve hired in each region and given our continued focus at working at the top, we are seeing it across all four regions today; in Europe, Asia Pacific, Latin America, and here in North America.

Kevin McVeigh – Credit Suisse

Okay. And then one last question and I’ll get back in the queue. The $8 million, is that in annual savings or is that just in the second half of ’08? And is that an addition to earlier cost savings or is that in aggregate?

Scott Krenz

It is both – this is Scott.

Kevin McVeigh – Credit Suisse

Hi, Scott, how are you?

Scott Krenz

It is both related to the second half of the year and it is additional.

Kevin McVeigh – Credit Suisse

Great. Thank you.

Operator

Our next question comes from Andrew Fones with UBS.

Andrew Fones – UBS

Yes, thanks. I was wondering if you could tell us what the impact of IronHill was in the quarter? I think it was in your results for maybe a month. And then what the impact is in your full year guidance for revenue? Thanks.

Kevin Kelly

Andrew, we don’t break it out that way, but I can tell you that we are excited about this acquisition. These guys have been a hit internally from a cultural perspective, but also in leveraging the Heidrick brand in getting together with a lot of our functional practice leads as well. So it’s been a great impact. It’s really days yet, but we just don’t break out that revenue.

Andrew Fones – UBS

Okay, thanks. And then in terms of getting from your current operating margin of 11% to the guidance of 13% for the year, you are currently running at 22%, 23% in Asia Pac. Where should we expect the margin improvement to occur?

Scott Krenz

I think –

Kevin Kelly

Sorry, Scott.

Scott Krenz

Hello, Andrew. You don’t seem to be able to lose me here. We are always talking. But it’s going to be across the board. I mean, these initiatives we’ve taken are global in nature and the entire leadership team irrespective of what region you’re in is committed to them. So I expect to see the results happening across the entire globe.

Andrew Fones – UBS

Okay, thanks. And welcome, Scott.

Operator

Our next question comes from Tim McHugh with William Blair.

Tim McHugh – William Blair

Yes. I was wondering if – you mentioned kind of some of the headwinds in getting to your operating margin guidance. Excluding those two items that you mentioned, would you otherwise be feeling good about being able to hit those targets for the year or is there anything else that kind of holding you back right now?

Kevin Kelly

Hi, Tim, how are you? It’s Kevin. I think given the current environment we’d be confident in hitting the 13%. It’s interesting reflecting on some of the comments we’ve seen over the course of the last couple of days, but the front page of the Financial Times last week – and this is what we are saying to many of our clients – shows that Morgan Stanley is going on a $1 billion recruitment spree. And what we are seeing across the globe, the Chicago Tribune last Sunday – I know you are here in Chicago, Tim – talked about the number of Wall Street bankers that are moving to Chicago now. So there are organizations that view this as a once in a lifetime opportunity to get the best in class professional they can to execute and drive their strategies. And we are not only seeing that in North America, but we are seeing it across the globe. And this provides a huge opportunity. And I know what the unemployment rates predict and I know what the labor market is saying, but at the same time you do have organizations looking at this as an opportunity to upgrade or top-grade their employees.

Tim McHugh – William Blair

Okay. Is it fair – it’s kind of – I can eyeball it from the chart, year-over-year July you would expect – it seems relatively flattish at this point. Is that about right?

Julie Creed

Yes. I mean, you can eyeball it from the chart, the confirmations in July they trend exactly how they have been for many years in terms of July, post June and summer holidays, so slight down from June.

Tim McHugh – William Blair

Okay. And then last call you talked about a backlog kind of ending coming out of the first quarter, do you have what that would be for the second quarter?

Kevin Kelly

We had a more significant backlog given the December confirms coming in. I don’t have that – we can get that number to you if you hold on for a second, Tim.

Tim McHugh – William Blair

Okay then, while you look for that, actually the financial services sequential strength in the US, if you could give a little more color on that too, that would be helpful.

Kevin Kelly

Sure. If you recall on the first quarter call, we talked about investments we are making and how we are using this as an opportunity to capture market share, particularly in the areas of financial services where we didn’t have critical mass. We did make those investments in the first quarter. And we are seeing the results really hitting our books in the second quarter and I think we’ll continue to see that through the course of the next year, not necessarily just in financial services, but also in other industry practices as well. Also, given financial services bonuses are paid in March, and you’ve seen this historically over the last couple of years, you have investment banks or banks looking to recruit after they lose individuals based on their bonus payout. So they tend to join sometime in May or June. So you are seeing the impact there. In terms of the backlog, it was roughly $73 million going into the first quarter. We have it’s about $71 million going into the third quarter, Tim.

Tim McHugh – William Blair

Okay. And then lastly, I guess especially with Scott having joined, your views on share repurchases going forward at this point?

Kevin Kelly

Tim, why is that especially since Scott’s rejoined?

Tim McHugh – William Blair

Every CFO has a different view.

Kevin Kelly

Every CFO has a different view. That’s not something I think consistent with this company and consistent with just about every company I’ve been associated with, not something we talk about in advance. That’s a decision, which gets made based upon investment opportunities the company has in front of them as well as what we think will be ultimately the best thing for the shareholders. As you can see from our press release, we do have $28 million remaining under our authorization. And we know it’s there and we’ll do the right thing.

Tim McHugh – William Blair

Okay, great. Thanks guys.

Operator

Our next question comes from Tobey Sommer with SunTrust Robinson.

Tobey Sommer – SunTrust Robinson

Thank you. I wanted to follow up on the last question. You talked about after typical bonus season in financial services, people moving and that makes sense. Was the typical seasonal pattern of what you saw in April and May similar to previous years?

Kevin Kelly

Tobey, yes, we’ve gone back the last number of years and taken a look at what happens in financial services. And you do see an increase in revenue in the May and June time frame, primarily because when you book a search, it could take anywhere from three to four months. And we also have the upticks as we’ve discussed before, the differential between what the perceived compensation is and what the actual compensation is once the individual joins.

Tobey Sommer – SunTrust Robinson

Okay, that makes sense. In terms of headcount, which was kind of held flat sequentially, what’s your outlook there over the next several quarters? Just kind of philosophically, are you taking the screws on productivity, despite the fact that productivity actually improved pretty nicely? Any additional scrutiny you will applying to any underperformers within the group?

Kevin Kelly

If you recall, last year, 2007 was the first year that Heidrick & Struggles actually went through a performance review and took out a group of underperforming consultants. And we’ll continue to do that on a quarterly basis. Now what we have talked about consistently is if, for example, we get to remain at 409 and drive productivity from 1.6 to 1.8, we’d be extremely happy with that, just continuing to focus on making our consultants more productive. However, we don’t think that’s realistic, particularly given that we want to capture market share. So if there are areas such as media and entertainment, asset management, energy, diversity, technology where we can go out and recruit individuals in this market, then we are going to continue to do that. Particularly in some of the emerging markets like Central and Eastern Europe, Russia, the Middle East, and parts of Asia such as India and China, we’ll continue to recruit there. So I think it’s a two-pronged approach of driving productivity and continuing to recruit consultants that can actually add value to those areas that aren’t presently covered.

Tobey Sommer – SunTrust Robinson

Thank you. That’s very helpful. Just one more question, I’ll get back in the queue. When looking at your pretty ample balance sheet at this point, you’ve got a lot of things in front of you. But on the M&A front, I was wondering if you could comment about whether private valuations for opportunities seem to be coming in and whether the sellers are being influenced by an outlook that might include a potential increase in the capital gains rate next year. Thanks.

Kevin Kelly

I think that’s a long way around to say if we are finding a – and correct me if I’m wrong, Tobey. But I think what you are asking there is, were you expecting a better M&A sort of environment with people looking to close transactions to avoid the taxes. Is that your question?

Tobey Sommer – SunTrust Robinson

That would be one of the questions. And then, any comment you could have about sellers’ expectations coming down with public market valuations in addition to that, that would be great.

Kevin Kelly

Whether better valuations. Well, yes, we continue to look at acquisitions primarily in those areas that are going to help us grow the business and give a better return to shareholders. To a degree, Tobey, what we are seeing is the same thing that is happening to us. We continue to drive revenue across the globe. You have a lot of boutiques that we are looking at others organizations who continue to see strong results in these markets, although coming down somewhat, they haven’t come off significantly. And at the same time, it depends on the organization whether or not they want to get the transaction. Of course, they would like to get it, given the reference to the tax implications next year, but of course they would like to get it closed this year if possible. But going into 2008, if we see an opportunity on the acquisition front that’s going to help our business, we’ll take a hard look at it as well.

Tobey Sommer – SunTrust Robinson

Thank you very much.

Operator

Our next question comes from Mark Marcon from Robert Baird.

Mark Marcon – Robert Baird

Good morning, Kevin and Julie. And welcome, Scott. On the recruiting environment, can you talk a little bit about what the distinct challenges are in terms of recruiting experienced consultants to come over at this point in this cycle and how you will look at that? There are some people who would argue that we are at the peak of the current cycle and that things are likely to slow. When you look at how much you are going to pay somebody, when you should go after them, how do you think about that?

Kevin Kelly

Mark, first of all, it’s Kevin. Hope you are well. The way we look at it is, it has to fit a specific niche at Heidrick & Struggles. And specifically what I mean by that is we can’t go out and recruit somebody from a direct competitor if they are working for a different client base because it would be like hiring a consultant that’s new to search. To ramp up speed for them would be 12 to 18 months. And what I mean by that is we work for a select group of clients and we have an off-limits issue with those clients. So for example, if we are working for three consumer goods organizations as a firm and they happen to beat a direct competitor working for three different organizations, then they would come over here and not be able to work with the same client base because we are already engaged and involved with working with three global or strategic partners at Heidrick & Struggles. So that’s a long way of saying that. When we go out and we are consistently looking at recruiting great consultants here, we have to make sure that they fit a specific niche that’s not covered by our consultant base right now. And that’s why we are continuing to focus on recruiting MBAs, promoting from within, and developing our own consultants as well.

Mark Marcon – Robert Baird

I guess what I was trying to get at was, you know, many people would argue that we are at the peak of the cycle and that things are starting to roll over. What I’m trying to understand is, to what extent – if you believe that, to what extent does that influence the additions that you would bring into the organization?

Kevin Kelly

If it helps – I guess one of the ways to look at is, are we over-paying to bring somebody in at this point in time? You never know. I mean, it’s a perceived value or the value we actually get out of hiring somebody and whether or not under the Heidrick brand we can drive significantly greater amounts of revenue. So at this point in time, we are systematically – we have a greater recruiting process in place, a great talent process in place, and we are making sure that – we don’t want to overpay for anyone in this market, but if we can leverage their experience and their client base, then we’ll bring them into the firm.

Mark Marcon – Robert Baird

It doesn’t sound like you would pull back in terms of recruiting based on where we are cyclically at this point?

Kevin Kelly

Not for the right people.

Mark Marcon – Robert Baird

Okay. And how about on the acquisition front? Would you pull back or would you–?

Kevin Kelly

We are continuing right now. We continue to look at the acquisitions as we speak.

Mark Marcon – Robert Baird

Okay. In terms of Europe, can you talk a little bit about the trends that you saw there? It looks like on a constant currency basis we were down 7%. Did that worsen as the quarter progressed? Or how should we think about that?

Kevin Kelly

I don’t have the answer right now on that, Mark. I can get back to you on that. But specifically what we are seeing in Europe is continued demand for our business. We are seeing great demand in some of the emerging markets, Central and Eastern Europe. Russia is continuing to grow. And even as we’ve spoken about before, countries such as Germany, France, we see continued growth in demand there. So, it’s only financial services that was off and it was off year-over-year.

Mark Marcon – Robert Baird

Okay. And that was probably primarily located in the UK?

Kevin Kelly

Right.

Mark Marcon – Robert Baird

Okay. So it sounds like everything else continues to do well. And just have a few pockets of weakness and it sounds like we should be able to offset that.

Kevin Kelly

We believe so. And just going back to Europe, even with the effects the margin improved from 14.1% to 14.4%.

Mark Marcon – Robert Baird

Okay, great. I’ll jump back in the queue.

Kevin Kelly

Thank you.

Operator

Our next question comes from Michel Morin with Merrill Lynch.

David Ridley Lane – Merrill Lynch

Hi, this is David Ridley Lane [ph] for Michel. Looking at consultant headcount in Europe, could you sort of provide some color around that? And also any outlook you have around headcount in Europe?

Kevin Kelly

What were you looking at specifically in terms of headcount in Europe?

David Ridley Lane – Merrill Lynch

Consultant headcount in Europe fell. I forget the number of heads quarter-over-quarter.

Kevin Kelly

The same thing happened in Europe has happened in North America. We continue to view consultants that aren’t as productive as others. We had six. But one thing to remember is also that five of those consultants, as I mentioned in the call earlier, were part of our Lisbon operation that is now an affiliate. So they are still engaged or involved with Heidrick & Struggles. We moved them off full-time status into an affiliate status. So that was five out of six that were referring to.

David Ridley Lane – Merrill Lynch

Is that review of the non – or lower productive heads review sort of done now or is that continuing?

Kevin Kelly

It’s going to be ongoing. Last year we did it over a period of six weeks. We decided that as any good organization will do or continue to do. We want to do on an ongoing basis.

David Ridley Lane – Merrill Lynch

And then could you explain some of the puts and takes on the Asian margins this quarter?

Kevin Kelly

Well, I think you saw – as we had spoken about in the last call, we made a significant investment in people in the first quarter. And we were also hit by some of the real estate renewed leases that we took on in Singapore, Shanghai, Sydney, Tokyo, and Hong Kong in the first quarter. So what you are seeing now is the investments, David, that we made in Q1 following through into the second quarter and we are continuing to grow the business out there and I think you will continue to see that trend.

David Ridley Lane – Merrill Lynch

Great. So, as the revenues grow, you would expect further operating margin expansion throughout the rest of 2008?

Kevin Kelly

Yes, we would, but we are still continuing to invest in the business. And as you can imagine, in one of the fastest growing regions in the world, real estate continues to be a challenge there. So we will continue to see margin expansion, but we want to make sure we invest in the business as well.

David Ridley Lane – Merrill Lynch

All right. Thanks.

Operator

Our next question comes from David Feinberg with Goldman Sachs.

David Feinberg – Goldman Sachs

Good morning. (inaudible)

Kevin Kelly

David, yes.

David Feinberg – Goldman Sachs

Sorry. Just one point of clarification. Your prepared comments about Europe about financial services being the only end market that’s down year-over-year, I was trying to figure out – are you talking on a constant currency basis or on an as reported basis?

Julie Creed

As reported.

David Feinberg – Goldman Sachs

And so if I look at it on constant currency basis, how do those numbers change?

Julie Creed

Well, I could apply the same exchange rate to every single practice, but –

David Feinberg – Goldman Sachs

None of them – I guess the question is, none of the other practices turned negative, correct?

Julie Creed

Everything was up except financial services.

David Feinberg – Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from Clint Fendley with Davenport.

Clint Fendley – Davenport

Good morning, Kevin, Scott, Julie. Circling back to the July confirmations, I mean, recognizing the July, it’s typically down on a seasonal pattern. Could you guys provide any more details on a geographic basis as to what you are seeing out there?

Kevin Kelly

Sure. I mean, what happens, Clint, in having spent the three years in Europe, I can attest to this that most Europeans go on vacation in July to the tune of two, maybe three weeks. We’ve seen that year-over-year. And August tends to be vacation time here at North America. So the confirms are directly impacted by the vacation season each year. And just as a point of clarification, we still saw strong results in North America and Asia, and they were just where we expected them to be in Europe given the vacation season.

Clint Fendley – Davenport

Was there anything different or unusual in the financial services area this year, just apart from the typical seasonal pattern that would expect?

Kevin Kelly

No, not so far. And that again alluding to that Financial Times article last week about Morgan Stanley and the Tribune article, we continue to see demand in financial services.

Clint Fendley – Davenport

I guess, Kevin, when we look at the weakness that we are seeing in the financial services area, it feels similar to the downturn we had in technology a few years ago and that we still have growth in most of all areas, but significant weakness in one single vertical. I mean, recognizing that you weren’t leading the firm back then, I mean, how do you Heidrick managing differently this time around? And if you could speak to just your views on the retention of your search consultants, especially if you consider the possibility of a prolonged downturn here?

Kevin Kelly

Clint, you are asking me one of my favorite questions. The financial services – if you look at our technology practice – and I was with the firm in 2000. So, if you look at our financial services practice today, it’s a much different business than our technology practice was in 2000. Number one, from a geographical perspective. Number two, technology was a $150 million business in 2000, of which $75 million to $80 million of that was Internet driven. And as a completely different business than we are seeing in investment banking, capital markets, asset management et cetera. So you had a number of – we had approximately 90 to 100 more consultants at the time. They were – our Menlo Park office I think at 40 consultants at that time chasing mostly dot-com searches. So it’s a completely different business. So when that Internet business went away, there was a direct impact in the correlation to the results that we saw at that period in time. If we look at what we have done as an organization from a management perspective over the course of the last three to five years, we have really focused on our cost base. And you can see that by being very prudent in the hires [ph] that we’ve made, we have a training and development program in place that I think second to none in the search industry. And that’s in all four regions. We have hired some great people over the last couple of years. We’ve driven productivity up from $1.2 million to $1.6 million over the course of the last four years. We’ve focused on making sure that margins – we do see the margin expansion in Europe as we committed and we are at 14.2%. We believe we’ll get to the high teens. We continue to drive that margin there while simultaneously focusing on capturing market share. So there is a huge difference in our technology – what happened to the technology practice in 2000 versus what’s happening in financial services today. If we were going to see a similar thing happen, we would have seen the financial services practice fall off the cliff about six months ago as it was perceived to, not seeing growth, the growth that we’ve seen sequentially quarter-on-quarter here in 2008.

Clint Fendley – Davenport

Thank you.

Kevin Kelly

Does that help?

Clint Fendley – Davenport

Yes, very helpful.

Kevin Kelly

Right, thanks.

Operator

Our next question comes from Andrew Fones with UBS.

Andrew Fones – UBS

Yes, thanks. I have a quick follow-up. I guess it looks as though across your practices, technology, and education accelerated from Q1 to Q2 in terms of the year-over-year growth while the others kind of slow. Can you talk about what’s driving the strength in technology and education, and if you wish you kind of comment on the other practices, that would be great? Thanks.

Kevin Kelly

Andrew, one thing that we consistently do is we look at our portfolio of industry practices and functional practices. And when you are skewed towards one such as financial services, we want to make sure – and our goal is, the collective goal not only as an Executive Committee but a Management Committee is to have a broader spectrum of industry practices. Last year we realized that our technology practice wasn’t as strong as it had been historically. Heidrick & Struggles was known for its technology practice. Our life sciences practice wasn’t as strong as it had been or could be. And our education non-profit practice. So if you look at the investments we have made across the globe, and vis-à-vis people and those recruitment – and our recruitment effort and our go-to-market strategy or key account strategy, we are very proud of what we’ve accomplished, not only in life sciences under Graham’s leadership, but also under Verno Tank’s [ph] leadership in technology, and particularly here in North America without its six new consultants in technology and a lot of it are attributed to getting back to basics, going after our key accounts and delivering a better relationship management capability with our clients. And that’s something we’ll continue to do. Financial services remain at 33% of the firm, probably not, and that’s not because financial services is going to fall off the cliff, that’s going to be because we continue to invest in those areas that we don’t have the strength that we believe we need across the globe.

Andrew Fones – UBS

Okay. So in terms of kind of what does appear to have been a difficult quarter in Q2 last year, but a very strong quarter perhaps for you this year in Q2 for technology, you would attribute that mostly to kind of the hires that you’ve made?

Kevin Kelly

We hired a new global head of technology from a competitor last year. We hired a number of consultants in Asia and in North America and technology and in Europe. So it’s adding bench strength and covering those clients that haven’t historically covered.

Andrew Fones – UBS

Okay, thank you.

Operator

Our next question comes from Tobey Sommer with SunTrust Robinson.

Tobey Sommer – SunTrust Robinson

Thank you. I was wondering if you could quantify the contribution of the incremental cost savings initiatives that you’ve instituted for the back half of the year. In other words, just trying to get a sense that the contribution that has to the 13% operating margin for the full year? Thanks.

Kevin Kelly

I think we’ve stated – and we expect it to be $8 million or more in the second half of the year here, all of which we expect to drop to the bottom line. I’m not sure I want to get into the granularity of how much that’s going to come from travel and other areas. Other than to say that in our business, obviously compensations or anything related to open positions and stuff is our biggest expense, and travel is right up there as well as an area where we can do much better, get people off the plains and on phones and on video conferences here. But beyond that, getting into which one is going to contribute how much, I really don’t want to get into that level of granularity.

Tobey Sommer – SunTrust Robinson

Fair enough. In terms of the ranking of your costs, obviously given capital compensation is the largest, is travel kind of third behind real estate generally?

Kevin Kelly

It’s down there, yes, real estate is clearly number two. Real estate is obviously something we are going to look at, but that’s not a short-term item. That’s something which I think there is a lot of room for improvement, which will roll out over the next year, frankly probably next couple of years, given the nature of real estate. Travel falls right into the next category. I think travel IT spend are probably pretty close to each other in sort of the next level of spend, but that’s a fairly significant step down from real estate compensation.

Tobey Sommer – SunTrust Robinson

Thank you very much. Appreciate it.

Operator

I am not showing any other questions at this time.

Kevin Kelly

We’d like to say thank you for joining the call today. Scott, welcome to the firm. And I would like to thank all of our consultants across the globe. We will continue to make a significant impact not only for Heidrick & Struggles but for the regions in which we operate. So, thank you all and we are excited about the business in the next six months. Have a great day.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect. Good day.

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