HSII - NASDAQ

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Heidrick & Struggles 2024 Q1 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Suzanne Rosenberg, VP for Investor Relations. You may begin.

Thank you, and welcome to our 2024 first quarter conference call. Joining me today is our CEO, Tom Monahan and CFO, Mark Harris. We posted our accompanying slides on the IR homepage of our website at heidrick.com, and we encourage you to view these slides for additional context. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results. Reconciliations between these non-GAAP financial measures and the most comparable GAAP measures may be found in the earnings press release. Also in our remarks, we may make certain forward-looking statements. We ask that you please refer to the safe harbor language also included in today's press release. Tom, I'll now turn the call over to you.

Thank you, Suzanne. Good afternoon, everyone, and thanks for joining us today. I'm incredibly excited to lead Heidrick & Struggles forward and build upon 71 years of impact. Client organizations are navigating a world of continued economic volatility and geopolitical complexity more than ever before, driving great corporate performance requires discovering, accessing, evaluating and enabling exceptional leadership. The urgency and importance of this need for companies in every industry around the world makes for an ever-expanding addressable market. In this work, I'm also very pleased to be teaming with Tom Murrin his new role as President, in addition to his continued oversight of global executive search. Tom and I have navigated the early onslaught of 2 Toms jokes effectively and are working quickly to get the company positioned for sustained growth and impact. Beyond sharing a first name, Tom and I share a far more important attribute. We both began our Heidrick journey as clients, and we bring first-hand understanding of the client's perspective. We are committed to leveraging this experience with the unmatched expertise of our people to create what we are calling client-led growth. Together with our talented executive team, we are strongly positioned to create long-term shareholder value. Today, we appreciate the opportunity to bring you up to speed in the current performance of our business and the opportunities we see for greater growth, profitability and impact in the future. I'll kick off the call with an overview of our first quarter performance. Next, I'll touch on some themes and observations as well as our priorities to continue growing the scale and overall impact of our firm. Mark will then provide a more detailed discussion of our financial results and outlook for the second quarter. We'll then open the call for your questions. Let me start with financial performance. Our clients continue to face a complex operating environment, which is likely to be the new normal across industries. While this creates a challenging environment for our clients to operate in, it also creates a permanently volatile world where the lots are ever less predictable and so the who's and the house are ever more important. It is a wonderful time to be in the who and how business. In most of our markets, economic growth continues to be solid, albeit at widely different levels. At the same time, a combination of still robust valuations and an uncertain monetary policy are creating real pressure in the C-suite. And of course, many of our major markets are facing elections this year, sometimes exacerbating already pronounced divisions in the workplace and society. Turning to our financial performance. We are committed to transforming client value into shareholder value, and our results demonstrate this. In the first quarter, we delivered strong growth on the top line. Adjusted EBITDA margins were solid even with the growing contribution from our recently accretive and attractive acquisitions of Atreus and B4

Thank you, Tom, and good afternoon and evening to everyone on today's call. As Tom described, our clients are operating in a complex environment, filling pressure at the C-suite and Board level and increasingly facing urgent human capital business needs. This led to our first quarter results, which reflect all of our businesses posting solid growth from the year ago period. We further continue to generate strong top line performance that met the high end of our guidance range and solid adjusted EBITDA margins while maintaining an enviable balance sheet position with 0 debt. From a macro point of view, we expect to have choppiness in our markets in 2024, given the influences causing an uncertain rate cut environment, coupled with geopolitical unrest in key parts of the world and the U.S. presidential election this November. Thus far, we are seeing some of that choppiness in our Asian and European markets. But as our results demonstrate, the Americas have remained relatively isolated so far. With this backdrop, we'll remain optimistic that 2024 will be comparable to the strong performance delivered in 2023. Before speaking to our first quarter results, let me remind all on today's call that these results include a full quarter of both Atreus and B4

[Operator Instructions]. And your first question comes from the line of Tobey Sommer of Truist Securities.

This is Jasper Bibb on for Tobey. I wanted to ask about Search confirmations. I think, 11% over the fourth quarter historically. I'm pretty sure you get a bit of a seasonal tailwind there sequentially. So how do you characterize the new business trend versus your expectations for the first quarter?

Sure. Happy to try to jump on. In terms of the first quarter, yes, I think we were a little bit surprised. Usually in the fourth quarter, we drop off, as you roughly pointed out, you have in the United States, Thanksgiving November holiday and then globally, you have the other holidays that hit you in December and really the summer becomes more of a shutdown month, so to speak. So Q1 always usually has a pretty good strength to it. In terms of our expectations, they were -- we came in much better than what we had expected. We're very happy in terms of the strength of the general market that we saw in the Americas. Europe was pretty much spot on in terms of what we expected and specific was a little bit behind what we expected. So overall, just had a very good sense of what we're seeing. We have similar expectations, which is in our guidance in terms of what we think we'll see in Q2 but I think Q3, as you rightly will know it slows up a bit because the month of all gets in Europe, a lot of people take that time off as well as the U.S. mid-July to end of August. And then we run right back into Q4, it really kind of slowing down, so to speak, because again, not just the holidays, but because most people, if they have open engagements might want to wait until the bonus runs that kind of take off and curtail those as well as generally in terms of people not really looking at the same time. So it's just a typical Q4 typical is slow, although.Again, in '21, that didn't hold up, but there was reasons for it.

Got it. And then curious if you could stratify what Search Demand might look like for CEO and Board searches relative to the rest of the positions you're looking for.

In terms of the positions or in terms of the market?

I guess the market would be fair. Yes.

Yes, I think that's it. So I'd say the board searches are pretty much on their pace of cages that we normally would see in terms of how those are looking. So I don't think we've seen anything in the data that describes to us that it's either higher or lower of what we normally see in market. CEO practice definitely a little bit stronger than we've seen historically and generally in the market that we're starting to kind of see come through. Well, there's been some pretty good data on there in terms of time and seat as well as aging in the CEO suite. So we would expect that to kind of continue to have -- we expect it to have good strength as we think through '24. Again, some of the compness in the market can curtail that a bit, but right now, we're not seeing a lot of it at that level. And I think it's probably, again, other ways downstream when it'll be more on the BP side of it that we're starting to see a little bit more of a slowdown, so to speak, than the sea level at least as of right now.

Yes. Just to add some color there, Mark. If you think of a CEO who's been in the seat for 5 years today, they've been through a pandemic, a spike inflation, they've been through some stuff. So there is -- I don't know whether it's dog years or whatever, but CEOs are feeling like they've -- their calendar in chair understates what the work they've had to do in the past cycle.

Absolutely.

Got it. Last one for me. I don't know if you gave any color on R&D spending plans, what you're expecting over the balance of the year, just given where you are with the heavy progress?

Our expectation is Q1 will maintain its kind of cadence through Q2, 3 and 4 at a similar level. I don't think we're going to see a major slow-up. And remember, it was kind of interesting when we had this conversation a couple of years ago, we'd say normally, you would start to see that kind of curtail itself down. And we caution that with unless something new happens in the market that we need to invest our time into. And the reason I say that is because AI has become something that we are now obviously seriously putting our thoughts, energy and money behind. So I say that until the next great 1, 2 to 3 years. I mean, the technology advancement, especially as it applies to Heidrick is pretty cool and how we can use that in terms of gaining leverage into the company, into the business. So right now, I'd say, maintain that cadence, that's probably the right thing to do. And then some -- whatever the next AI interesting technology development that could be really applicable to our business, we're going to invest in and we think it's really important for our investors to do that and make some open at the same time.

The other point I'll make there is the same win that complicates our life in terms of making sure we're deploying AI and service to our clients, hits our clients very hard and that they're looking for new roles, new types of leadership, new ways of organic. So this upheaval certainly has us working hard, but the good news is it does create some secular long-term demand for people to think about the talent they need and how they organize to get after this opportunity.

Your next question comes from Kevin Steinke with Barrington Research.

If you just touch on the choppy environment you're seeing in Asia and Europe a bit more, and what's leading to that choppiness. And it sounds like at this point, you expect Americas to be strong, but I guess you'd kind of be on the lookout to have that also start to impact Americas. But just any thoughts on the overall environment overseas in the U.S. and globally.

Look, we're incredibly well positioned with great teams in those regions. So we're very -- as you would guess, very close to clients and what's going on there. And there's some real economic shop around the world right now, safety obvious, you have geopolitical events. You have macroeconomic factors that are swinging around a lot, and those are hitting some markets more than others. We feel great about our position in those markets. We feel great about the teams on the ground. And we are going to compete for and drive value even in choppy markets.So -- but I'd say on balance, the macro drops a little higher outside the U.S. than it is inside the U.S. right now. Mark, anything you want to add there?

[Indiscernible]. Nothing to add. That's great.

Okay. I may have missed it, but maybe an update on progress with Heidrick Navigator and in addition to that, the kind of the development road map for additional digital products and services in the future.

That's a great way. That's exactly how we think about the question, which is Navigator is a terrific platform, which, on its own, obviously lots to intersect tightly with key client workflows. And it's built to be a platform on which other digital products can be launched. So an easy example that Mark talked about was the Enterprise assessment platform. We are -- we now have the ability to start to do assessment at scale, bring our IP to life regularly across broader populations, and that's really, really a great tool. So beyond that, we're going to -- like anyone else, we probably can introduce new products faster than we can get them in front of our clients. So we're going to be thoughtful and measured around delivering that road map. But right now, we feel very good about the value props we're able to put in front of clients and we're tight. It's great because it's very consistent with what they expect of us that links us more tightly to their everyday work.

Okay. Great. And Mark, just on the cost of services line, you talked about that being tied to on-demand talent. And just at what point do you think you can maybe start to get some expense leverage on that line? Or what would be the catalyst to do so?

So we started to get a little bit on that, Kevin. So we started to see that it used to be $0.70, that's kind of come down to $0.65. Atreus really kind of helps us achieve I think they've done some really interesting stuff. I think the question on the table really is, look, how can you really make a meaningful change, move the needle, especially as it pertains to increasing margins of the business, so to speak. And my commentary there is scale is going to help considerably on the bottom line of things, trying to get that EBITDA up in the double digits. And I think the technology is the other angle, I don't think people should discount that. The more we can evolve both in terms of their CRM and how we can integrate that across everything that we do and make it one CRM because right now, it's been through acquisitions, so we still need to do that. That's what you're starting to see in some of that R&D line item is really going to change the pace for us. We've got great vision on Tom Monahan, Tom Murrin, myself, the team, [indiscernible] cetera, really start to sit down a footprint on paper on what we think that's going to have to look like as well as Heidrick consulting as well as in other parts of our business is to come to one platform, one Hedrick, and I think that's going to be important. I think that's going to get us there. And I don't think it's -- I don't think it's as far as a way as people would anticipate. I mean, again, when you do something like this, you'd expect a couple of years, 2, 3 years of really getting all the bugs worked out, et cetera, and making sure it's up and running and it's been a shame that we want. And hopefully, it's got a really cool AI component to it. That's the other element that we're trying to think through. I think that all comes together the right way, that's where you're going to see a meaningful shift in that number.

Okay. And Tom, you articulated a vision of growing the business more quickly and expanding margins consistently. And you mentioned the phrase client-led growth. I know early days, but any thoughts on how that all ties together over the longer term.

Sure. I mean I expect -- our goal is to grow all our businesses, right? So I think obviously, we have maintaining our status as the most trusted partner to the Board and C-Suite is really important, and that means growing search and tightly linking that to our executive assessment businesses. Those are top of the house businesses. And we see huge opportunities to grow our on-demand talent and our Heidrick Consulting offer areas. There's a lot going on there. The big simple headline is the client need, we have massive client need. I've never heard a company in my career in business, say, we have all the right leaders in all the right roles doing all the right stuff. So there's never -- that's the thought I've never heard any thought bubble I've never heard any CEO articulate out loud. And when they look at the drivers of performance, they land invariably on people being the most important element of great performance. So there's huge market demand. We have an exceptional team globally. We have incredible IP. And our job in leadership is to just more routinely and reliably make it easy for clients to access more and more of that -- our great talent, great advice and great IP as they build their own businesses. And there's, as I said, through clarifying where exactly we're going to play, simplifying work, so our people can do their jobs more effectively and then amplifying our great stories, we think we can really drive growth in all our businesses.

Your next question comes from the line of Marc Riddick with Sidoti.

So I was sort of curious as to with initial views as to when you look into the client mix and industry verticals? Are there any particular that kind of stand out to you as nearer-term opportunities are ones that you feel as though you'd have a better chance of connecting and driving a greater market share with?

Yes. I would always say all of them because I think we've got tremendous teams in each of our vertical areas. Every -- we have the right to win. We have great teams. What I would say, I do think what we're seeing more and more often that gives Heidrick even more and more of a right to win is traditional boundaries between industries get eroded a little bit, and therefore, our strength across the board, in example would be fintech or direct-to-consumer technologies or advanced industrial technologies where our ability to bring strength, let's say, in our technology areas, our depth in understanding AI together with that vertical expertise creates a huge winning value proposition. So I think we look at the world and say, our scale and strength across our verticals enables us to create new combinations and expertise that clients can't get anywhere else. So I think that will show up everywhere because to state the obvious, in the same way I've never heard a CEO say they have all the right leaders doing all the right things in all the right places. I've also not -- never heard a client CEO say anything like, yes, we're deploying technology or my leadership team has the right skills and capabilities to deploy technology across all of our platforms and resources. So we think our scale across areas, our depth in our functional areas, but our ability to collaborate is going to open up tons of new opportunity.

Excellent. And then as you join the chair and have the opportunity to meet folks, Were there any particular key takeaway or 2 that you found in the beginning of your tenure that you would say has been a surprise either positively or negatively, I wouldn't expect you to say negatively, but any particular surprises or stand out that have sort of struck you as you've begun your tenure here?

I mean other than my great CFO partner, right?

Yes. Upward...

But you guys knew that. The -- yes, I think probably the big positive surprises to me are our culture is an asset, and this is an incredibly collaborative culture. And if we think about that to answer my first question was, gee, so often being able to create a cocktail of the important Heidrick assets to meet a client need, whether that's across geographies, across practice areas, across expertise areas and we're bringing together the best search person, the best assessment person in Maria, being able to bridge a client need through on-demand talent, et cetera, that collaborative culture is super, super important. The second thing is the scale of opportunity, which, again, we're aware of -- if you just -- if you could be a fly on the wall of any leadership team or Board meeting anywhere in the world, 25% to 40% of their time is spent talking about leadership and talent. And it, therefore, creates huge budgets, creates huge opportunities. And we see this internally is in a world whether what are getting harder and harder to predict, the who's and how's are ever more important. We were looking last week, a couple of weeks at our conference. We looked at all the kind of IT predictions from mid-2022 and top IT trends and the most important things companies need to be worried about technology. In the middle of 2022, AI didn't show up on any of them. And so our ability to help companies put leadership teams in place, support them, get them working in effective ways. So they can handle massive volatility and change in the end market is a really unique asset. Third thing I'd say, probably the 2 things that kind of travel together. One is, we see an opportunity to make life easier for our teams serving clients, but better productizing our offers by putting in place clearer market messages so people know what Heidrick does and can do. So amping up the volume, simplifying -- clarifying and simplifying on the front end to say how is it easy for someone to understand what Heidrick can do for them and where we can really help and then amplify, which is telling our story ever more lovely so people know to call us first when they have the types of problems we can solve for them. Basically my 3 big -- all positive surprises.

There are no questions. I will now turn the conference back over to Tom for closing remarks.

Thanks, everyone, for dialing in this afternoon and evening. We really appreciate the chance to bring you up to speed on Heidrick & Struggles performance year-to-date and look forward to keeping you up to date as we continue to organize to deliver outstanding client impact and convert that client impact into outstanding shareholder value.