Several economic key indicators point to an economic turnaround. The conference board in the US reported that consumer confidence jumped 14 percent between July and August. The Index has more than doubled since March and now stands at 54.1. The Wall Street Journal revised after another stare into its crystal ball its earlier pessimism about the economy as reported in July, when it wrote the economy would loose 70000 jobs a month next year. The figure is now revised to 27000. Go figure.

In my view, the number of search assignments in the region of 36 countries where we have offices, is rising steadily since March. Though some of those countries, notably the ones in Central Asia, can be described as "non-integrated" emerging markets and follow their own dynamics, the rise in assignments is evenly spread across the geography. US multinationals are one by one awaking from their nuclear winter slumber, realizing downsizing, terminating, reducing and reengineering cuts costs, but also the prospects for future revenue growth.

Shurely it won't be a nuclear autumn. Stay tuned.

Reuters reported that UBS raised its outlook on 4 US employment stocks.

NAME RIC RATING

New Old

Heidrick & Struggles International (HSII.O) Neutral Sell

Korn/Ferry International (KFY.N) Neutral Sell

Robert Half International Inc (RHI.N) Buy Neutral

Manpower Inc (MAN.N) Buy Neutral

What does this mean ?

Staffing companies became "Buy", while the two leading executive search firms are now "Neutral". Yawn. Yes, the market is "steadying", and the overall outlook of opinion makers turns optimistic.

I was in a conference last week in Istanbul featuring Prof. Steve Hanke on the Economic Crisis, its causes, effects and the so-called "New World Order" resulting out of it. Professor Hanke, a former economics advisor to US presidents, saw light at the end of the tunnel - though he started his speech claiming that 95% of what you read about economics is wrong.

Yes, the overall psychological mood, the absolutely necessary requirement and ingredient for economic recovery, is improving. Now what about the upgrades of the venerable analysts? A "Sell" simply means get rid of the stock, the upgrade to "Neutral" is an upgrade to an euphemism saying just the same. Don't spend your dimes buying those stocks.

My take is that the pain for Korn Flakes and Heidrick & Struggling will continue, and worsen. Both will undoubtly report results that trail behind the "steadying" market. Furthermore, that market itself is by far not a return too good ol' 2006 and 2007. In this light the neutral rating says more about the mindset of the analyst themselves, and reflects a cautious consensus the worst is behind us.

In my previous post I outlined how Heidrick blew away analysts' expectations. The company disclosed a much higher loss, one that was higher than the most pessimistic analyst dreamed to imagine. Besides a loss, Heidrick experienced a sharp revenue drop, and brutally hemorrhaged cash.

The question now is what can be expected for the remainder of 2009. Though I do not have a crystal ball, a broad trend can be discerned. Let's start with the folks of Heidrick.

I quote Mr. Kelly, CEO of Heidrick during the conference call of yesterday:

Even if the level of first quarter search confirmations persists through the remainder of the year, our goal at the operating income line is to run the business at a minimum of breakeven, excluding restructuring charges.

For this the firm will need to cut further costs dramatically; and this will only be possible by laying off people, even closing down offices. The firm for that purposes expects to rake up an additional 6 to 10 Million USD in restructuring charges.

Mr. Kelly again:

Search confirmations hit a low in December and showed a modest but steady improvement through March. However, the improvement was not as strong as we had anticipated and operating losses in each region were a result of a cost structure that, despite cost-cutting initiatives, was not supported by first quarter revenue.

Based on the above we can expect another slight loss excluding restructuring charges. I reckon  when the results of this quarter (Q2 2009) will show how the low of December carried itself through in January and February, ticking up slowly in March.

Therefore part of the revenue of Q1 was generated by Q4 of 2008; as assignments usually take 3-4 months to conclude. The full extent of the pain will become clear in Q2 2009. A small amount of new search assignments in Q2, combined with a further drop in overall search fees (depends how Heidrick will be able to resist slashing prices), does not bode well for Q2. The operational loss will probably between 30 cents and 50 cent per share, with another 40 to 50 cent.

My penny and guess for this quarter is a total loss in the neighbourhood of 80 cent.

In previous posts I casted doubt about the "patting ourselves on the back" optimism press-released from the Executive Search heavy weights Heidrick & Struggles and Korn Ferry.

The results for Heidrick are in, and it is now officially Heidrick & Struggling. The average earnings estimate, predicted by analysts of 3 cent per share turned out to be a whopping  loss of 115 cent per share, going far below the most pessimistic assesment.

How does this translate in real figures?

• A loss of 18.9 Million USD compared to a profit of 7.1 Million USD for Q1 2008. The loss includes restructuring charges.
• A drop of 41.8 % in revenues, most of it in the US (40%) and Europe (46.9%). Consolidated net revenue for the quarter was 89.1 Million USD, down from 153.1 Million USD compared to Q1 2008.
• A drop of 38.4 % in search assignments
• Productivity-billing per consultant dropped significantly, from 1.5 Million USD to 900K USD

One particular alarming item on the balancesheet is how the trend is reflecting in liquidity: Cash and equivalents at March 31, 2009 were 96.4 Million USD, compared to 234.5 Million USD at December 31 2008. Ouch! In one quarter cash reserves dropped roughly 60%.

The average fee also dropped, but not significantly, from 106.700 USD to 98.900 USD - which seems Heidrick is not cutting prices to pull in more searches.

The company already cut expenses by 15% to 126.1 million USD for the quarter, and is now forced into more aggressive cost-cutting initiatives for the rest of the year. Heidrick cut its work force with 11% in January, plans to cut headcount by an additional 8% to 10% in May, and will trim base salaries by 5 percent through a combination of salary cuts, unpaid days off and reduced working hours. As a result the company expects to run another restructuring charge up to 10 Million USD for the next quarter.

My take is that Heidrick will post another loss of the same magnitude the next quarter. I will look into that in more detail tomorrow.

Our good friends at the expensive search firm Korn Flake conducted an equiz, and found that

Despite Acknowledging the 'Severe Recession,' Percentage of Executives Who Believe the Economy is Recovering Nearly Doubled in March

Nearly doubled? Yeah. From 7% to 13%. The moods of the executive participants in the equiz improved.  Do they piggy-back the stock index?

Quoting the above, a thought came up. When global search firms are press-releasing mellow platitudes as news, I believe we are still a long way from hearing champagne bottles uncork on their side of the Atlantic.

Apart from patting their own backs, it seems to me their cheerleader  still suffers from a heavy hangover.

On our side, I can confirm that we see since March a clear and steady growth in search assignments, with the trend accelerating in April. This applies for the region we focus on, mainly CEE and MEA. I have no idea yet if the US or Western Europe follow suit. The possible reasons for this bounce are manifold:

• The multiple non-integrated economies we are active in are somehow resistant to the bug that sickens the US and Western Europe.
• Multinational clients prioritize developing their talent pool in the emerging market zone.
• Global firms are replacing expensive expatriates with less expensive, but equally qualified local talent.
• We kick butt, we are lucky, maybe both. I can't stop wondering what the talent index of Heidrick & Struggeling would predict for our part of the world, anyone?

And now for something completely different.

Mr. Joe Griesedieck, vice chairman and managing director, CEO Services for Korn Flake sees executives as "conflicted" about the relationship between government and business. Anyhow, in his generosity he concludes the press release by sharing with all of us the following gem of executive insight:

“What executives do agree upon is that consumers, business and government all play vital roles in our recovery.”

I could not agree more. Yawn.