Julie Creed - VP of IR and Real Estate Tracy Wolstencroft - CEO Rich Pehlke - CFO.

Kevin McVeigh - Macquarie Tim McHugh - William Blair & Company Tobey Sommer - SunTrust Kevin Steinke - Barrington Research.

Please stand by, we're about to begin. Good morning. This is Heidrick & Struggles Fourth Quarter 2014 Conference Call. This call is being recorded. It may not be reproduced or retransmitted without the company's consent. At this time all participants are in a listen only mode. And later we will conduct a question and answer session.

Instructions will be provided at that time. Now, I will turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead..

Good morning, everyone, and thank you for participating on Heidrick & Struggles fourth quarter and 2014 conference call. Joining me on today's call is our CEO, Tracy Wolstencroft; and Rich Pehlke, our Chief Financial Officer.

As a reminder, we'll be referring to some 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 transmitted without our consent. In today's call, we'll be using the terms adjusted EBITDA and adjusted EBITDA margins.

These are non-GAAP financial measures that we believe better explain some of our results. Reconciliation between GAAP and non-GAAP financial measures can be found on the last page of our press release and on Slide 16 and 34 in our supporting slides.

Throughout the course of our remarks, we'll be making some forward-looking statements and ask that you please refer to the Safe Harbor language contained in our news release and on Slide 1 of our presentation. The slide numbers that we'll be referring to are shown in the bottom right hand corner of each slide. Now Tracy, I'll turn it over to you..

Thanks, Julie, and good morning everyone, and thank you for joining this morning's call. We have much to report in the way of progress this morning as we continue to strengthen our business and improve the foundation for sustainable profitable growth. Our fourth quarter results contributed to a solid year for the firm.

In 2014 all of our key business and financial metrics were improved. We grew consultant headcount confirm more executive searches, improved average revenue per search and increased productivity. These all contributed to growth in net revenue, EBITA and operating margin and net income.

We began our most significant integrated and diversified solutions assignment to date and we launched two assessment tools.

These results represent solid progress towards many of the initial goals we established when I arrived in Heidrick a year ago namely the strength in our business by attracting and retaining exceptional talent and by fostering collaboration and teamwork across our global platform.

We are focused on leveraging what we accomplished in 2014 to deliver an even deeper level of service to our clients, accelerate growth and drive increased shareholder value in 2015 and beyond. Well more to say about priorities for our business after Rich gives you a review of our results in the quarter and for the year..

Thanks Tracy and good morning everyone. I'll spend just a few minutes on the fourth quarter results and more time focused on reviewing the annual results. Please refer to slide 2 through 18.

Our fourth quarter result were as we expected and helped us to deliver a solid 2014, consolidated net revenue in the fourth quarter of a 121.3 million was up 3% or 3.3 million compared to last year fourth quarter. Exchange rates adversely impacted our fourth quarter results in every region but especially Europe.

Excluding the impact of currency consolidated net revenue would have increased 5% year-over-year or approximately 6 million. Executive Search and Leadership Consulting revenue grew about 2% year-over-year, or approximately 2 million. Culture shaping revenue increased 19% or just over 1 million.

In the Executive Search and Leadership Consulting segment the Americas region was the key driver of the fourth quarter year-over-year revenue growth up almost 4 million or 6%. Globally the financial services and consumer markets practices were the drivers of our growth. Productivity was essentially flat.

Specific to executive search, search confirmations in the fourth quarter were flat year-over-year but generated more revenue as a result of an increase in the average revenue per search. Adjusted EBITDA in the fourth quarter improved to 9.5 million compared to 7.4 million in the comparable quarter of last year.

The adjusted EBITDA margin increased to 7.9% compared to 6.3%. Operating income in the fourth quarter improved to 3.8 million and the operating margin increased to 3.1%.

The improvements in adjusted EBITDA and operating income mostly reflect higher net revenue and lower G&A expenses which were partially offset by an increase in salaries and employee benefits. Now turning to the annual results, I’ll reiterate what Tracy highlighted earlier. 2014 was a good year.

Referring to slide 23 consolidated net revenue increased 7% or 32 million to 494 million in 2014. While foreign currency exchange rates did have an impact in our fourth quarter results the impact on the full year of 2014 net revenue was negligible.

The Executive Search and Leadership Consulting segment grew net revenue 5% year-over-year or approximately 22 million. Europe was the key driver of this growth up almost 90 million or 21% driven by good performance in the UK and Germany.

And despite the adverse impact of the fourth quarter currency exchange rates positively impact the Europe’s result for the year as a whole representing about 3% or 3 million of its revenue growth. The consumer markets, financial services and global technology and services practices were the drivers of growth globally on a practice basis.

Turning to slide 24 we grew our consultant base last year and ended 2014 with 376 Executive Search and Leadership Consulting consultants. Today as a result of our annual promotions process and new hires consultant headcount is at 320. Hiring, training, developing and retaining the best research consultants in the world remain our highest priority.

The increase in the productivity of our consultants in 2014 is shown on slide 25 from 1.4 million to 1.5 million is positive affirmation of these efforts. Specific to Executive Search our core business slides 26 and 27 reflects improvements in the number of searches confirmed in 2014 as well as the average revenue per search.

Our Culture Shaping segment achieved a good year with revenue up 40% or 10 million in 2014. The increase primarily reflects higher volumes of client work but it also reflects that revenue in 2013 excluded 4.1 million of pre-acquisition deferred revenue that we were unable to recognize on the income statement as a result of purchase accounting.

Referring now to slide 28 and 29, 2014 salaries and employee benefit expense was 337.4 million representing 68% of net revenue, compared to 2013 salaries and employee benefit increased 5.6% or about 18 million.

Variable compensation increased 21 million as a result of higher net revenue and improved company performance, while fixed compensation expense declined about 3 million primarily due to lower severance expense.

Turning to slide 30, general and administrative expenses increased 3.3 million or less than 3% to 130.2 million representing 26.3% of net revenue.

The increase reflects net online databases for more efficient search execution higher hiring and staffing fees and state franchise tax matter which all increased G&A these were partially offset by lower professional services fees and lower office expenses.

Moving to slide 32 through 36 adjusted EBITDA on 2014 improved to 48.9 million compared to 39.7 million in 2013. The adjusted EBITDA margin was 9.9% compared to 8.6%. Operating income in 2014 increased to 26.7 million and the operating margin improved to 5.4%. The improvements in both adjusted EBITDA and operating income reflect the higher net revenue.

Turning to slide 37 and 38, net income in 2014 is 6.8 million and diluted earnings per share of $0.37 compare favorably to the net income of 6.3 million and EPS $0.35 despite a higher effective tax rate.

The effective tax rates in both years are higher than statutory rates primarily because of losses incurred that could not be benefited for tax purposes and foreign jurisdictions. Looking at slide 39, cash and cash equivalents at December 31, 2014 was 211.4 million compared to 181.6 million at December 31, 2013.

Cash provided by operating activities was 58.8 million in 2014 compared to 55.9 million in 2013. Those of you follow us knows our cash position builds throughout the year as we accrued bonus payments which are paid out in the following year. In the first quarter of 2015 we will pay out approximately 112 million.

About 9 million relates to the payment of deferred consultant bonuses from the years 2011, 2012 and 2013. The balance of 103 million is a variable compensation which will pay related to 2014 performance.

In addition to our financing activities it's worth noting that we're currently planning for higher than average capital expenditures of approximately 11 million in the coming year primarily for office build outs in five of our U.S. offices.

In three of these instances including our headquarters here in Chicago we have had the opportunity to reduce our rentable square footage by building on a more efficient floor plan, which should help lower our run rate of office occupancy expenses.

Our cash position is strong and we are in a strong position to invest in growing the businesses required as we continue forward. Looking forward to the first quarter, our executive search backlog is shown in slide 40, and monthly confirmation trends are shown on slide 41.

We are forecasting first quarter net revenue of between 108 million and 118 million. As we experienced in the fourth quarter, we are expecting the strengthening dollar in the more volatile foreign currency exchange rates to adversely impact year-over-year comparisons of net revenue more than we've seen in recent past quarters.

We expect that at constant currency rates first quarter net revenue growth should be at or above the year-over-year growth rate we experienced in the fourth quarter. Other factors on which we based our forecast include our current backlog, our monthly [confirmation] trends for executive search and leadership consulting.

We anticipate [these] expectations for a culture saving services and the number of consultants in the current economic climate. And with that I'll turn the call back over to Tracy..

Thanks Rich. As I said at the start of the call, we accomplished much in 2014. By virtually every measure we improved our business. We're starting 2015 with great people, deeper client relationships and more integrated service offering, two new assessment tools and importantly a stronger spirit. The firm is in a better position than we were a year ago.

That said, there is still opportunity to improve and a strong desire to accelerate growth and drive increased shareholder value by building on what we achieved in 2014. For example, as we've said on every earnings call our people are our top priority.

We will continue to invest, develop and grow our practices and add geographical reach will receive profitable opportunity. In addition to hiring, we see good potential for the consultants we have added and promoted over the last few years, has become increasingly successful and productive on our platform.

Ensuring this happens is a critical factor in our near term success. The results of opportunity to increase both the depth, breadth of our service capabilities through our clients. We will grow our [range of\ consulting capabilities and culture shaping expertise globally.

We are selectively looking to build our capabilities to deliver a diversified range of service offerings that can be tailored to our clients to more fully meet their talent and leadership needs.

For example, last quarter we told you about two new assessment tools we developed namely executive culture profile and leadership signature, both have been very well received by clients as our consultants use them to assess leadership style and fit.

The one observation that I've been reminded of over and over again since joining Heidrick & Struggles is that our business is more relevant than ever. Last month [a group from us from Heidrick] that with scores of global leaders across every industry at the World Economic Forum in Davos, Switzerland.

This year the teams have purposeful leadership, culture change, diversity, hiring top talent and assessment strategies were top of mind. Every session and every conversation we had reinforced the demand for leadership, demand for [exceptional] leadership they can operate in an uncertain world.

And not just to Davos, revisits from our clients every single day. So there is no doubt that what we do is in vital need and a more comprehensive and profitable approach to leadership advisory is valued. In closing we are better than we were a year ago but still not yet where we want to be.

We see the potential of our firm and what it for our clients, our people and our shareholders, time to be in our business. We will wisely invest and capitalize in the market opportunity including people who can help us continue to improve our ability to serve as clients and deliver return to shareholders.

I'd like to thank all of our nearly 1,500 colleague for our 2014 results. The past year has gone by very quickly and I am pleased with the renewed energy and dedication.

With a new sense of confidence and Heidrick & Struggles they have embraced our vision to got to market as one firm trusted advisor providing diversified leadership solutions to the world's leading organizations. It's a great opportunity had for Heidrick and for our clients we are privileged to serve.

At this time Rich and I are happy to take your questions..

[Operator Instructions] And we'll take our first question from Kevin McVeigh with Macquarie..

I wonder can you give us a sense of how the fixed versus variable should trend as we think about '15 versus '14. And just what type of adjusted EBITDA you're making nice progress on that front should we think about as we think about '15 to the thinking or sending just directional then..

Yes we've had a nice steady trend of changing the composition of the fixed and discretionary comp and when you think about the nature of our businesses that's exactly where we want to be. And we've made some structural changes and we will continue to emphasize this shift as we go forward.

So I would look for it to continue to kind of trend downward, it won't be a rapid decline but it should be a steady decline that would certainly be our desire. Because really if you think about it, the more we make our consultants successful on our platform they really roll over into a higher discretionary comp and that’s really where we want to be.

So I think you're going to see the trend continue. I think that’s by holding date salaries and check were may be in some jurisdictions reducing them and then driving the average incentive relative to overall production.

As far as EBITA trends we don’t forecast anything but next year quarter, but clearly what I think we hope 2014 result shows that we've had a tremendous emphasis companywide now and improving the quality of our growth and quality of our earnings.

And we're proud of what that does I think we highlighted over the last couple of years because of the Senn Delaney acquisition EBITA because it more closely reflects the trend in our cash flow and the generation of the a real cash earnings, we'd like to see that number stay up in the area that it is or possibly even grow and much will depend upon the pace of the revenue growth..

Is the mix of compensation on the Senn Delaney side similar to the core search business in terms of the fix versus variable or is there any way to just push that a little bit more just directionally?.

It’s a different business model than search, it approaches a little bit more of a -- not a traditional consulting but a consulting type mix.

What you'll see happen in the future of Senn Delaney what would be our hope is that we plan to invest in that business both in terms of some of the legacy people as well as some new people because we think culture is very relevant today's world and we'd like to ramp up of that growth of that business more globally.

So we're going put some money into that business to invest in people so while the mix overall probably won't change dramatically fixed versus variable in the business model. I think overall we'd like to competition go up in that business because we're in trying growth..

Got it and then just a last question I'll jump back in. The office changes in terms of it sounds like certain one any sense of what the cost savings will be as a result of that..

They are going down I can give you a one clear example which is one of our biggest ones is here in Chicago. We're moving from approximately 80,000 square feet to about 55,000 square feet which is a big change.

And represents a savings of about $1 million a year that’s offset by a little bit of the build out cost that we'll experience as we ramp up the CapEx.

And I think it's been evident in our financials over the past couple of years every chance we can we move our occupancy expense to a more traditional model what's happening in professional services today. We don’t quite go as far as a lot of consulting companies where we do hotel in concept or anything like that.

But certainly we are becoming more efficient use of our space because we rather put the dollars towards our people than office space and so that’s really behind the trend. That’s offset sometime by a factor in some of our markets we are in expensive markets we're major financial centers across the world.

And right now some of the markets are rising in cost. So overall I think you not going to see dramatic moves but we're going continue to manage this efficiently as possible..

And we'll take our next question comes from Tim McHugh with William Blair & Company..

I guess onetime, I think you just made -- I think you said generally for EBITDA margins you hope to kind of maintain them or possibly even expand them a little bit, I guess not to nitpick but I guess, and I know you’re not giving specific guidance but I would have thought there is still a fair amount of margin improvement, and so your comment was softer I guess than I would have thought at this point so and I want to just understand I mean, do you view this as more of the stable level of margins now and so if you get margin expansion to create but the focus is more on top-line or, how you’re thinking about the margin as it exists today relative to where you want to be I guess..

Sure. Good morning. Couple of things, I don’t -- necessarily will be directionally softer forecast but you know very well that what’s going to drive the operating leverage in our business is really the top line.

But we’ve set the platform up with our expense basis to hold a great -- revenue if we see the top line growth accelerate across all regions it’s certainly has the potential to drive our margins higher, because our platform can certainly hold a lot more revenue that we generate today.

So we’re set up for good operating leverage but it’s really more, it’s not as contingent upon direct expense management as it is among the topline, and that's -- at the end of the day that’s what’s going to be the key..

Okay.

I guess I mean relative to that you talk about investing first in Senn Delaney as well as I guess productivity levels are high, is there a level of investment needed up front here to accelerate that, that growth rate -- or have you already been make enough?.

No, well look, we’ve made some but we certainly have satisfied and at least earmark in 2015 some investment dollars to bolster both Senn Delaney as well as continue to build up the core business.

I think it’s fair to say we’d like to be bigger in terms of the number of consultants there we have globally I think Tracy pointed it out in his remarks and I’ll let him comment on further, but I mean I don’t think there is an area that we serve from the client perspective that we couldn’t have more applets unveiled.

And so we see the opportunity due that we’re going to invest because we think we can bring that whole in a good return..

Is there a target for headcount growth, roughly, I mean what’s there as soon as from -- in ’15?.

We don’t publish our hard target for numbers. We certainly want to be up higher.

If you historically look at the company and you think about our platform we have ample room to grow [indiscernible] we’ve even talked about this in the past, if we can start in the short to near term start to get the numbers up in the 325 to 350 range that will be a great move to the company..

Okay.

And then lastly, can I get to Asia Pacific, I apologize if you did this earlier, I missed it but the headcounts been down I guess for two quarters now sequentially and percentage wise for the size of that region a decent amount, can you get something is there a story there that explains what is underlying on those numbers?.

The drift in Asia on those numbers that you’re referencing is largely driven by selective performance issues we have with some consultants. .

Is that certain regions or is it across, I mean with some regions I guess or is it across the --?.

Within Asia it’s two to three specific markets..

We take our next question from Tobey Sommer with SunTrust..

Thank you.

Just a question for you, what gross hires in turnover like in 2014 of the quarter which you really might have?.

Either one Tobey. In the quarter we hire, in the fourth quarter we hired eight and 12 left for one reason and other that will including -- In the year our voluntary turnover which is the number we quote in the past was about 14% I think that’s the number you’re probably looking for but I can give you the ins and outs of that. .

And just to put that in context how does 14% compare to the three years before?.

In 2013 it was 21%..

Okay. Thanks.

Is the couple of markets in Asia where there may be some things, can you address that with relatively small amount of hiring or how should we think about the timeline to be able to kind of turn that ramp?.

Tobey, Asia like every market, improved United States and Europe is gaining a lot of attention at the firm right now. The opportunities in the Asia are both centered around clients to our multinational clients as well as indigenous opportunities in those markets from Australia to Japan.

The numbers that I referenced earlier that have come off is largely we're expecting more from our consultants, there is across the firm increased accountability on each of these consultant with respect to their performance and the impact they're having and where we see opportunities to work with people, to help them have an impact in the marketplace that's our first and highest priority but in those instances where it makes sense for us to part ways we are also doing that..

Okay, thank you for the [fulsome answer].

I was just curious from your customer -- what your customers, what you’re hearing from them particularly in North America, are North American customers shifting more towards revenue growth than sort of top line projects as compared to the cost cutting projects of the years directly following the recession, is there anything visible in your confirmations that you can use to characterize what kind of broad themes are among your customers?.

It's interesting question, my own observation both from being in front of clients but also obviously close to our folks is that it's a real balance between revenue growth and increased productivity, I think that's the insight that you're looking for, it's a real balance between those two and where talent comes out is that the world is just a more volatile, more unpredictable, more complex playing field and so the demands on leadership to effect that growth and to do it in a productive way only increased and there is the broad opportunity as we see it.

So, I wouldn't say it's driven because we're looking for revenue growth versus productivity, I would say that there is a keen focus on both obviously technology comes into play here with your specially the technology business or any business which is every business to which technology applies that continues to be a very big thing..

Right, okay and then one last question for me and I'll get back in the queue.

How do you feel that the firm is positioned from an intellectual property standpoint and kind of assessment standpoint, you cited a couple of tools that were recently developed internally is there much to do in terms of additions and then maybe you should comment about whether the bolstering of the IP can be done effectively through CapEx and kind of internal development and hiring versus acquisitions? Thanks..

Yes, so let me start, then Rich will add a comment here. In general the leadership signature assessment tool that we developed in 2014 has been embraced by our consultants and mostly by our clients, that's going to continue.

We can see it in the marketplace and we can see that we're going to have to and want to create a few world leadership signature now at 1.0 but 2.0 and beyond so from an IP point of view around that assessment tool is going to increase, the same thing around culture.

Rich described that culture conservations with our clients are expanding and deepening, not the opposite.

And so making sure we are current with that IP is in part what Rich is speaking to when we talk about our plan for 2015, our investment [indiscernible] both with respect to people but also making sure that our IP continues to be edgy is that we're giving our clients our best advice.

So by no means that we done and I would say that I think it's hard to imagine we're ever going to be at a point where we won't have to invest in IP to deliver value added leadership solutions to our clients, whether that being search, whether that being leadership advisory or whether that being culture – Rich -- ..

Yes, it gives the -- idea does that as we invest in IP and think about that going forward we'd want to do it from standpoint of certainly looking at platforms we don’t always have to be large investments but they have to be formidable investments because it's hard to do IP or platform related investments one consultant at a time.

That just is you're going to see all the business the way we need to do it and so we've made sure that we have enough, we've ample fire power, and certainly a strong enough balance sheet or financial position to do what we need to do it should be -- ..

I'd just say, I may mention this in the previous earnings call. Leadership things is not only an assessment tool that we see working in the marketplace but there is also a very important firm to we work together across search across leadership advisory and across culture shaping to come up with a solution in house.

So part of your question is how much can we do this on our own and how much do we have to go outside and that's an example where we certainly are aware of the platforms that are out there. But our [adjournment] was let's build it ourselves and we will continue to do that where we see that kind of opportunity..

And we'll take our next question from Kevin Steinke with Barrington Research. .

Just wanted to follow up a little bit on the Americas. You saw the revenue growth rate improve there in the fourth quarter relative to where it was in the first nine months and also revenue was actually up sequentially despite the typical holiday impact.

So any particular momentum or trend you're seeing in the business within Americas that led to that?.

The Americas finished the year stronger than the balance of the regions and certainly has started off 2015 as kind of the strongest of our region.

So I think the best business overall climate and I think this matches what's you’re seeing in the global economy candidly and what's happening right now is that the business is healthier and stronger in the Americas region than it is elsewhere.

So we're encouraged by that definitely because it's our largest region and I think we're very well positioned there and we still like to continue to invest and make that region bigger as well. So and that would be want to get in the level of opportunities that’s out there.

We haven’t quite seeing the same momentum as Americas as we have in the other regions so far again I think what's influencing Europe beside volatile currency rates which impacts -- which can impact economic activity is also the fact that you just got a macro-environment is costing people to just be a little bit more cautious, given what's happening and as we said many times at least for the near term what happens in UK, France and Germany will drive our Europe operations.

And certainly we've seen some spotty issues relative to the political -- geo-political as well as the overall climate that has nothing to do with our business impact those regions a little bit right now. So we're watching that very closely.

In Asia-Pac I think while the growth hasn’t been strong and robust as many people would have liked it's more steady fees or slightly lower but once we work out a few of these consultant issues we referenced earlier I think we're going to be better positioned in Asia-Pac..

Okay that’s helpful thanks for touching on all the regions there.

Just following up on that encouraging that you expect similar constant currency revenue growth in the first quarter as you saw on the fourth quarter, although it looks like on the one slide that confirmation trends in January and February are kind of flat to down slightly so is that just kind of imply you're seeing higher revenue per search coming through or you expect continued strength in culture shaping?.

I think it reflects exactly what I've just said which is the mix of where the confirmations are. Remember that in our healthiest region we have the highest revenue and fee per search at engagement, it's also where Americas is where we participate in great detail in a much bigger way in culture shaping as well.

So I think the [large] referred to our business is still in a very healthy environment right now. And so I think that’s part of what reflects that..

We have no further questions over the phones at this time..

Okay. Thank you all again for joining us this morning. And we'll talk to you in a couple of months..

This concludes today's conference. We thank you for your participation..