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

Kevin Steinke - Barrington Research Tobey Sommer - SunTrust.

Good morning, this is Heidrick & Struggles First Quarter 2015 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. Later we will conduct a question-and-answer session and instructions will be provided at that time.

Now, I'll 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 in Heidrick & Struggles 2015 first quarter conference call. Joining me on today's call is our CEO, Tracy Wolstencroft; and Rich Pehlke, the 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 explains some of our results. A reconciliation between GAAP and non-GAAP financial measures can be found on the last page of our press release and on Slide 20 in our supporting slides.

Throughout the course of our remarks, we'll be making 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 deck. 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 the call over to you..

Thanks Julie, and good morning everyone. As you have seen from our press release, first quarter results were driven by solid performance in the Americas and Asia Pacific regions in our executive search business, as well as from our cultural shaping segment.

Increases in net revenue were the primary driver for the improvements in operating income in each of these segments. Another highlight of the first quarter continuing a trend from last year is that we continue to grow our consultant base.

As a results of hiring and promotions, we ended the quarter with 323 executive search and leadership consultants, an increase of 20 or about 7% compared to year ago. All the new hires in the first quarter were experienced search professionals, many of whom were highlighted in a separate press release issued earlier this morning.

It's worth mentioning that there were only three consultant departures in the first quarter compared to the eleven in the last year’s first quarter.

We are encouraged by the quality and development of our recently hired and promoted consultants, while many are not here at full productivity levels, we believe they will grow increasingly successful on our platform. Some of you our clients, nothing is more important to a firms long term success in attracting, developing and retaining top talent.

We will continue to invest in the development, support and engagement of our people in order to be the employer of choice for highly motivated professionals in our industry. On more to say about our initiatives after Rich gives you a review of our results in the quarter..

Thanks Tracy, and good morning everyone. I will give an overview of the first quarter results and I'll begin on Slide 2. Consolidated net revenue in the first quarter of $150 million was up 4% or $4 million compared to last year’s first quarter.

Exchange rates adversely impacted our first quarter results in every region, as well as cultural shaping, but especially in Europe and Asia pacific. Excluding the impact of currency, consolidated net revenue would have increased 8% year-over-year or approximately $9 million.

Looking at Slide 3, Executive Search and Leadership Consulting revenue grew by 2% year-over-year or approximately $2 million. And revenue from Culture shaping increased 25% or almost $2 million in higher volumes of client work.

We want to remind that because of the size of the culture shaping segment, the timing of project initiations, we will likely continue to see variability in quarterly results from this business segment overtime. Referring to Slide 4 through 9, in the executive search leadership consultant segment, we ended the first quarter with 323 consultants.

America's region was the key driver of the first quarter year-over-year revenue growth, up almost $7 million or 12%. Asia Pacific also had a good quarter of $2 million or 10%. Excluding the impact of currency, net revenue in Asia Pacific grew over $3 million or about 17%.

Revenue in Europe declined $6.6 million or 25%, excluding the impact of currency, revenue declined 14%. The year-over-year decline reflects a combination of lower fourth quarter confirmations and backlog going into the first quarter as well as floors at expected chart in 2015.

Looking at Slide 10 through 14, the financial services and industry practices were the drivers of year-over-year revenue growth globally. Intelligent productivity was essentially flat, specific to executive search, search confirmations in the first quarter were up 2% year-over-year and average revenue per search was up slightly.

Because of the quarter-to-quarter variability, we encourage you to look at the trailing 12 month trends for productivity in average revenue per search. Looking at Slides 15 and 16, 2014 salaries and employee benefits expense increased $2.6 million or about 3% to $78.5 million and represented 68% of net revenue.

Variable compensation increased $2 million mostly as a result of the higher net revenue while fixed compensation expense increased $600,000. Turning to Slide 17, general and administrative expenses declined 13% or $4.4 million and represented 26% of net revenue.

The decline reflects lower professional services fees, lower unbillable travel and the absence of the state franchise tax matter which we had in last year's first quarter.

It is worth noting that in the second quarter we're holding regional operating meetings before our consultants for which we have budgeted approximately $2 million of expense in the quarter.

Now on Slides 18 and 19, adjusted EBITDA in the first quarter improved to $12.3 million compared to $6 million in the comparable quarter of last year, and the adjusted EBITDA margin increased to 10.7% compared to 5.4%.

Because of the quarter variability in our business these two slides don't show the improvement and profitability as well as indicated on Slides 21 and 22. If you look at the trading 12-months of adjusted EBITDA and adjusted EBITDA margin, you can clearly see the improvements that we have achieved.

Operating income in the first quarter improved to $6.7 million and the operating margin increased to 5.8%.

The first quarter year-over-year improvements in adjusted EBITDA and operating income mostly reflect higher net revenue and lower general and administrative expenses which will partially offset by an increase in salaries and employee benefits expense.

Turning to Slide 25 and 26, net income in the first quarter was $.34 million and diluted earnings per share of $0.18 reflect an effective tax rate of 47.5% in the quarter and a full year projected tax rate of approximately 41%. The first quarter and annual rates are based on the expected mix of net income for the year.

We expect to utilize a portion of our net operating loss carry forwards which accounts for some of the improvement in our effective tax rate. Now referring to Slide 27, those of you follow us know that our cash position builds throughout the year as we accrued bonuses which are paid out in the following year.

In the first quarter we paid out approximately $112 million to employees. Approximately $9 million relates to the payment of bonuses that were deferred in the years 2011 through 2013. The balance of $95 million was to variable compensation which related specifically to 2014 performance.

Reflecting those payments, cash and cash equivalents at March 31, 2015 was $107.6 million, or $79.6 million net of debt. Cash years in operating activities was $87.8 million compared to $74.9 million in last year's first quarter.

We also expect to pay approximately $9 million in the second quarter related to the 2014 bonuses primarily due to payroll taxes on those bonus payments. Our cash position is strong and we are in a great position to continue to invest in and grow businesses.

In addition, the financing activities in 2015 is worth reminding you that we're currently planning for higher than average capital expenditures of approximately $11 million this year for office build outs in five of our US offices.

In three of these instances, including our headquarters office in Chicago, we have the opportunity to reduce our rentable square footage by building out a more efficient floor plan which should assist us in lowering our annual lease expense run rate.

Looking forward to the second quarter, our executive search backlog issuance on Slide 28, and monthly confirmation trends are shown on Slide 29. Other factors in which we based our forecast including anticipated fees, the expectations for culture shaping services, the number of consultants in the current economic climate.

As we experienced in the previous two quarters, we are expecting more volatility from currency exchange rates and this could lead to an adversely impact in the year-over-year comparisons of net revenue. We are forecasting second quarter net revenue of between $127 million and $137 million.

Reported net revenue was $136 million in the last year’s second quarter. Slide 31 shows that on a constant currency basis, last year's second quarter net revenue would be $128 million which we believe is a more relevant comparison to our guidance. With that, I'll turn the call back over to you Tracy..

Thanks Rich, we continue to move this company forward and first quarter results reflect progress. Of course we know there is still much room for improvement. Specifically let me speak to our performance in Europe. To be candid, we expected a better start to 2015.

Europe is important to our global footprint and I'm committed to building a stronger, more consistent strategic and commercial presence in this region and restoring its profitability.

As we have been rebuilding our consultant base, we have not yet established a consistent depth of relationships and presence in our European clients as we would like and are capable of achieving. There are two actions that we are taking in order to improve performance.

First, we are investing in our current talent as well as focusing on attracting new experienced talent. Second, we are taking more proactive initiatives to connect and support Europe with our global franchise to bring the best of our front’s capabilities to every client.

Overall, and as I mentioned earlier, we make great strides building our consultant base throughout the year. We are strengthening our capabilities across our functional and industry practices with the addition of experienced consultants globally.

For example, in just the last six weeks, we hired four partners in our healthcare and life sciences practice including the new global head.

As important is hiring is to growing this firm, it's even more important to provide an environmental spirited collaboration, learning and client service in order for consultants to become increasingly successful in productive on our platform. Ensuring this happens is a critical factor in our near term success.

In this regard we are holding regional meetings this quarter and move away worldwide partners meeting. But first, later this week in Chicago brings together the Americas team.

It will focus on building on our momentum, ensuring best practices to ensure we are delivering at a high level for our clients in every sector with of bringing our people together in these meetings goes well beyond the time and expense commitment. In my brief time here I felt the power of connectivity that comes from the work we do together.

It is some of the best of our culture. Every day I find energy in thinking about Heidrick is and what it can be from three perspectives; our people, our clients and our shareholders.

Our business opportunity is becoming more vast and consequential than ever before in large part due to a world that is more unpredictable and more complex, and therefore poses an increased premium on leadership. We will continue to invest in the best people and in our capabilities.

I'm equally committed to increasing the quality and impact of the client work we do. Our clients are moving fast, and we must be with them strategically across the globe at the pace they demand, they will measure us by the value of our service and this in turn will determine our success.

While the steps and progress we have shared with you today continue to move us in the right direction, we have much to do to capture the full value of the opportunity before us.

I feel and share the urgency and importance of this opportunity and it feels my passion to bring out the best of what Heidrick & Struggles offers which will led to more consistent and impactful growth. At this time Rich and I are happy to answer any questions you have..

[Operator Instructions] And we'll take our first question of day from Tim McHugh with William Blair & Company. Please go ahead..

Good morning, it's Steven [ph] for Tim.

First on the headcount, I think you said this but just wanted to confirm, if the eleven hires that you announced today, those are already included in 1Q and in headcount, is that correct?.

Half of them are, about half started after the quarter..

Okay.

And then, I think you than gave the three departures, how many promotions did you have in the first quarter?.

About a dozen promotions in the first quarter..

Okay, great. And then it looks like you got a quite bit of leverage on G&A expenses from the word professional fees, and travel related expenses, among other things.

How sustainable do you view that leverage and just in a general sense, how should we think about full year G&A expenses compared to last year, it could be actually down from levels of 2014?.

Sure, couple of things, thanks for all those questions Steven. As we've said many times, we're constantly and diligently going after G&A every time we can, particularly non-available G&A both in the field, as well as the corporate level.

Having said that and what you saw in the first quarter was better for couple reasons as I indicated in my remarks, we had some onetime items in the last years number which made us look a lot better on year-over-year basis.

As far as the run rate perspectives the $30 million this quarter is pretty reflective of the run rate we did, we will have some bumps along the way for example the second quarter we have indicated that we're going to have the partner and regional meetings across our regions which will bump up our non-billable travel to about $2 million of expense between median expense which travel, that will come at different time than our partner meeting last year which was largely in the third quarter.

So you will see some quarter to quarter variability. But I am quite confident that I think we can hold to G&A platform relatively to loan growth if any compared to the prior year.

We've said many times that the platform itself can handle a lot more revenue, so it's very leveragable, and as we continue to build our consultant base and drive consultant productivity and client productivity across the regions in the globe, there is no - we shouldn’t see a big increase in G&A expenses..

Okay, great, thank you..

And the next question comes from Kevin Steinke with Barrington Research. Please go ahead..

Good morning, thank for the comments.

Good morning to you, thanks for the comments on Europe and I know you had slower than expected there and it sound like there is some internal things you want to fix but could you attribute any of that to the macro environment as well?.

Keven, there is a mix here, there is certainly a macroenvironment but what you're hearing in my remarks is that we don’t want to put out performance back of what is happening externally, these are things that we have to do and that’s what we are hearing in my comments, we should be aware of the macro factors but we're also aware that there is momentum, there is positive momentum.

In Europe right now there is - overall Europe right now is experiencing the benefits of lower price of energy although where currency and interest rate, and so there is a lot of positive momentum that's in that economy right now that don't want to dismiss, thus macroeconomic factors is all that comes up to speed but there is some internal issues that we have to work too and that's what I'm referencing..

Okay, thanks for that comment and then Asia Pacific, conversely had a nice quarter relatively to the last several quarters in terms of growth and margins and also you added some consultants there so, any commentary on what’s going on in Asia and the sustainability of trend there?.

Well in Asia we had a healthier turnover in 2014 for a number of reasons, not the least of which was targeted actions that we had to take with respective consultants so enhanced stability coming into 2015 with the team that we have on the ground.

And the connections they are making both within the region but also across the globe, and positive momentum in the Asia is being felt right now..

Okay good.

Rich, you made a comment about - you talked about many times before typical variability and culture shaping due to project timing, is that - do you see any specific variability going into the second quarter here or is that just more of a general comment?.

I think it's a general comment because we've indicated many times that the general and overall size in margins and profitability in this business in that half has changed because of the scale of the business with an annual turnover running between $30 million and $35 million, it will come - it's very much is that the direction of the client because much of the work is directly client related and for example, you can plan the start of project on Tuesday and the client says, you know what, I need to do it three weeks from now.

And that could affect revenue recognition in all kinds of issues like that. So we're still very comfortable with the size, scale and direction of the business but trying to get in the quarter predictability of the revenue string, that's what we're just indication.

So no real change in the direction of profitability in the business, it's just we want to want to make sure that you will not only see smoothness in the revenue trends because of the revenue recognition..

That's also us looking at that business on trailing 12 months in terms of variability..

Okay, perfect.

And are you adding to culture shaping and leadership consulting now in terms of headcount or any success there in addition to search consultants?.

We certainly want to grow that business, we've been working with the leadership team of culture shaping, there the last year of the deal earned out as you can imagine, they are very focused on making sure they deliver the business plan relative to the end of written acquisition.

At the same time we've committed and the plan for additional investment, that's a business that we can still take further across both our platform and across our geographies. It's a very hot topic among our clients, Tracy has mentioned many times, the work we've done on leadership signature and executive search profile.

There are cultural profiles that are - that was integrated now into our search business, so there is lots of opportunities to grow that business..

And to say in addition to the culture shaping which Rich described, on the leadership consulting, this is the third part of your question we reengage with clients on leadership consulting assignments, we do some of the very best work that I see done here at Heidrick, which the focus that we have - we can take that work and now create at much more scale and that is going to require investment on our part in leadership consulting but again, much of the work that we do leadership consulting differentiates Heidrick with our client, add value to our clients result, and some of the very best that I have seen at the front..

Okay great, and you highlighted the ads that you made in healthcare and lifesciences and I believe that's an area you have been wanting to beep up a little bit, so how do you feel about how they practice areas stands now and what other industry areas might you target for hiring?.

Yes, so the reason that we highlighted is that something we have spoken about it in past calls as being an area where we knew we had to invest and we had to find the right team.

There have been a number of opportunities in the marketplace for us to now attract that right team which was very good about the people who we have a recently joined the Heidrick, they - I have been with a number of them in the last couple of weeks, they are seamlessly in the organization, and the impact they are having, both with the existing healthcare and lifescience team is positive, and the reach of the client is positive.

So all that, we have very constructive and positive thoughts. The other area that we talk about is investment is industrials, we have taken one more folks, we will need to take down more and that globally for some more reasons. Again we've got a market out there which is - might come to reference.

The more complex the world, the more valuable the work, the more unpredictable, and more opportunities there is for us to have a conversation regarding talent and leadership talent in particular in the industrial slice of that and the world of common issue is huge. So more investment there to come..

Okay, great and one last question form me.

Rich, just any thoughts on the tax rate and the sustainability of this lower tax rate not only in 2015 but is we think beyond this year?.

Right, yes, this very great question, it's indicating my remarks currently were predicting that the - tax rate would finish the year somewhere in it low 40s, if that's sustained itself then it allows us to use some of tax loss carry forward more efficiently and brings off the balance sheet which we've said many times is a great way for us to increase our cash flow and our profitability.

It's heavily dependent obviously on some of the planned increases and profitability in some of our European countries as well as in Asia. Countries like Germany, for example, where we are off to a slower start but we do expect to recover.

So my expectation is that I think we will have a more normalized tax rate for the year currently than we've seen in the last couple..

Okay. Thank you..

Thank you, Kevin..

[Operator Instructions] And we'll go to Tobey Sommer with SunTrust. Please go ahead..

I wanted to ask some - kind of get your perspective on the hiring environment for internal consultants. Just to kind of in light of your follow-on press release, bringing in a pretty decent-sized cadre in recent months of seasoned folks, what are your prospects and plans to continue hiring for the balance of the year? Thanks..

So Tobey - sorry. Talent and our people, as we described, is our highest priority. And we are actively out there in the market across all the practices and across regions talking with talent in the marketplace broadly defined that we think we can attract to Heidrick and add value to our client relationships.

We've been aggressive out of the blocks in 2015. And the pace that we are taking on talent is not necessarily one that we are looking to project out for four more quarters or three more quarters. But we are going to assume and take on talent as we see people who will fit with this organization.

There's more that we will do in healthcare and life sciences. There's more that we will do in industrials. There's more that we will do in Europe, and this speaks to the comment that I made about where Europe is performing out of the blocks here, not at the level that we were looking for. We will do the same in Asia.

So we've got our priorities, but I would say the pace here is one that we feel great about, but I wouldn't necessarily multiply it by four..

Okay. That makes sense. I've got another question about margins, which were pretty strong, I think, in the quarter. And I understand you've got your meeting in 2Q.

But is there anything about 3Q and 4Q of note on the cost side that would prevent the Company from kind of returning back to this kind of level of profitability in the back half of the year?.

we will invest in talent in those segments as well..

Okay. Thank you. Just two follows-ups, if I could, and then I'll get back in the queue.

One is of the new hiring in some of the seasoned people, are they subject to gardening leave, or are they able to contribute relatively quickly to the P&L? And then, Tracy, I was curious on your perspective if you are seeing corporations and companies shift to -- from the cost-cutting programs in focus of the years after the recession towards more revenue growth? And I guess what I associate with that kind of shift would be entering new markets and launching new products and that kind of thing.

Thanks..

To your first question on [indiscernible] it's a mix. There are some people that we are hiring who need to pause before they can come. There are others who can contribute almost right away. So we are seeing a blend on that.

In terms of revenue versus us management, I would say certainly in the United States you feel that there is a keen interest in investing on the part of the corporates and a keen interest in furthering their growth in their top-line growth in particular.

I would say that as you go around the world there is, as my comments earlier referenced, with a weaker currency in Europe and therefore increased competitiveness with a reduction in their energy costs, and then just their interest rate decline.

There is -- and you can see it in what's happening in the broader financial markets, there is a positive view about those trend lines. And so we see corporates trying take advantage of that. And then I would say in Asia, you have obviously, you have what's happening to the growth rate in China.

And while that has come down, people believe that the quality of that growth is strong. And in general, I would say there is constructive optimism out there in terms of the C suites and the boards we are engaging in. These corporates, they definitely want to grow, and they feel that there's a constructive environment right now..

Thank you very much..

[Operator Instructions] And it appears there are no further questions, so would you like to make any closing remarks?.

None more than thank you, everyone, for your time..

Thank you very much. That will conclude our conference for today. I would like to thank everyone for your participation, and have a great afternoon..