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

Stephen Sheldon - William Blair Tobey Sommer - SunTrust Robinson Humphrey Kevin McVeigh - Macquarie.

Good morning, this is the Heidrick & Struggles Second Quarter 2015 Conference Call. This call 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. 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 ma'am..

Good morning, everyone, and my apologies for the technical glitch at the beginning. Thank you for your patience and for the slightly delayed start. Thank you also for participating on our 2015 second 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're going to 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're going to be using the terms adjusted EBITDA and adjusted EBITDA margin. 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 also 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. The slide numbers that we'll be referring to are shown in the bottom right hand corner of each slide.

Tracy, will be covering the first eight slides. Tracy I'll turn the call over to you now..

Thanks Julie and good morning everyone. Let me take a few moments to comment on second quarter results including the impact of currency fluctuations and separately on our consultant headcount.

To give you some context, consolidated net revenue in the second quarter of $133 million showed a reported decline of $3 million or 2% compared to last year’s second quarter. However, excluding the adverse impact of currency fluctuations, consolidated net revenue would have increased about 3% year-over-year or by approximately $3.8 million.

Currency exchange rates negative affected our results in every region, but particularly impacted the quarter results in Europe and Asia. Our Executive Search and Leadership Consulting business in the Americas region had another solid quarter. Reported revenue increase almost 8% year-over-year and 18% sequentially and margins improved.

Trailing 12 month revenue has not been this high in the Americas in the first quarter of 2012. Our financial services, healthcare and life sciences and industrial practices were the primary drivers of growth.

In the last year we've increased headcount by 18 consultants in the Americas and many of the [Senn Delaney] [ph] are already contributing meaningfully to our results, but the key driver of growth in the Americas was the productivity of our seasoned search consultants a number of whom are having an exceptionally strong year.

In contrast, our results in Europe were disappointing. Although second quarter net revenue improved 23% sequentially from the first quarter, net revenue declined by 23% year-over-year. More than half of this decline was a result of currency exchange rates.

Executive search and leadership consulting confirmations, consultant productivity and average fee per executive search were all lower than the same period a year ago. As we work through our challenges in Europe, we have two priorities. One is attracting new talents to the firm in order to accelerate our presence in the region.

To that end, we've hired a number of very experienced consultants in the last few months who are just beginning to make an impact in the market. Second is the connectivity we're reinforcing between Europe and the rest of the firm. We're beginning to see success with specific and targeted clients.

Clearly our results in Europe show that we have to deepen our execution on these two priorities. In Asia Pacific, net revenue grew almost $2 million or about 7% excluding the negative impact of the currency fluctuations.

Despite lower consultant headcount, the region confirmed more searches at higher fees and achieved increased productivity levels for the best results coming from the healthcare and life sciences and industrial practices.

Our culture shaping segment Senn Delaney reported a decline in revenue of $1 million in the second quarter, but achieved the best quarter in its history for new customer signings. It is important to note that increasing number of these wins are resulting from the introduction and collaboration with Heidrick search consultants.

And finally let me comment on consultant headcount. We continue to make progress in growing and upgrading our talent base and the executive search and leadership consulting segment, we ended the second quarter with 325 consultants reflecting 13 new hires and 11 departures.

We continue to invest capital to strengthen a number of practices and geographies. The healthcare and life sciences practice is one example where a targeted focus on hiring resulting in six new consultants in this year alone. I'll turn it over to Rich and I'll come back with a few more comments at the end..

Thanks Tracy and good morning, everyone. I'll begin my comments on second quarter results with Slide 9. Executive search and leadership consulting revenue declined about 2% year-over-year or approximately $2 million. Revenue from culture shaping climbed 11% to $1 million.

On a constant currency basis, executive search and leadership consulting revenue increased almost 4%, while culture shaping declined 10%. I'll remind you that and we commented on this often the quarter-over-quarter variability of the culture shaping segment results reflected size, the timing of project initiations and revenue recognition timing.

Reviewing slides 10 through 11, the financial services and healthcare and life sciences practices were the drivers of year-over-year revenue growth globally, up 5% and 40% respectively. Billings from the healthcare and life sciences practice reached 10% of our total billings for the quarter, something we hope to maintain and continue to grow.

Referring to Slide 12 through 14, the year-over-year increase in new hires, consulting productivity was down just slightly in the second quarter. Specific to executive search, search confirmations in the second quarter were up 3% year-over-year and the average revenue per search was slightly lower largely due to the impact of currency fluctuations.

Because of the quarter-on-quarter variability, we encourage you to look at the trailing 12 month trends for both productivity and average revenue per search. Looking at Slide 15 and 16, 2014 salaries and employee benefits expense declined $1.4 million or about 2% to $91 million and represented 68% of net revenue.

Variable compensation declined just over $2 million mostly as a result of the lower net revenue as well as the impact of foreign exchange rate fluctuations while fixed compensation expense increased less than $1 million.

Turning to Slide 17, general and administrative expenses increased about 6% or just under $2 million, $33 million and represents 25% of net revenue. The increase as we signaled in our first quarter earnings call, mostly reflects the expenses associated with the partners meetings that we held in all three regions during the quarter.

We also hire professional services fees in the quarter primarily for legal fees related to employing compensation matters. These costs were partially offset by the impact of foreign exchange rate fluctuations. In the third quarter we expect G&A to return to more normalized levels.

Now on Slides 18 through 20, adjusted EBITDA in the second quarter decreased to $14 million compared to $19 million in the comparable quarter of last year and the adjusted EBITDA margin was 10.5% compared to 13.9%. Operating income in the second quarter declined $9 million and the operating margin was 6.9%.

The second quarter year-over-year declines in both adjusted EBITDA and operating income mostly reflect the lower net revenue and higher G&A expenses, which were partially offset by the decline in salary and employee benefits.

Turning to Slide 23 and 24, net income in the second quarter of $5 million and diluted earnings per share of $0.27 reflect an effective tax rate of 45.6% in the quarter and a full year projected tax rate of approximately 45%.

The second quarter and annual rates were based on the expected mix of net income for the year and are lower in 2015 due to the valuation allowances that were established in 2014. In addition, 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 25, cash and cash equivalents of June 30 was $119.9 million compared to $123.4 million. Year-over-year decrease primarily reflects the increase in capital expenditures related to new office build-outs. Net of debt, cash and cash equivalents at June 30, increased to $93.4 million compared to $90.9 million on June 30, 2014.

On June 30 and reflected on our balance sheet for this quarter, we closed an amended credit agreement for a senior unsecured revolving credit facility an aggregate amount of $100 million with an optional increase in the credit facility of up to $150 million in aggregate principal amount.

Prior to this agreement our revolving credit agreement was $75 million and we had a $26.5 million outstanding on a term loan facility used for the funding of the Senn Delaney acquisition.

The $6 million of short term debt on our June 30, balance sheet reflects our intention to continue the payment schedule we've been following under the previous credit agreement. We also added two new banks to the facility.

So the combination of this new facility along with our balance sheet and capital structure give us a great deal of financial flexibility to continue to grow and invest in our business. Looking forward to the third quarter, our executive search backlog is shown in Slide 26 and monthly confirmation trends are shown on Slide 27.

Other factors on which we base our forecast include the anticipated fees, the expectations of our culture shaping and services, the number of consultants and the current economic climate.

As we experienced in last several quarters we've been expecting and we continue to expect more volatility from foreign currency exchange rates and this could lead to an adverse impact in the year-over-year comparisons to revenue. We're forecasting third quarter net revenue of between $130 million and $140 million.

Reported net revenue was $125.8 million in the last year's third quarter. Slide 31 shows that on a constant currency basis, last year’s third quarter net revenue would be $120 million, which we believe is a more relevant comparison to use against our guidance. With that I'll turn the call back Tracy..

Thanks Rich for a few concluding thoughts. First our outlook for the third quarter is encouraging. We're capable of a more balanced performance from our regions. To be clear, that we require enhanced focus and attention on the part of our operating leadership. Second we've made important progress, which serves as a strong foundation moving forward.

The quality of talent hired over the last year, the new business we have won and the integration with Senn Delaney are some of the key highlights. Most importantly the firm has a clear understanding of our purpose that is we help our clients change the world one leadership team at a time and the values that connect to that purpose.

But we still have work to do. I gaze our progress and our initiatives through the lens of four proprieties that all drive shareholder value; mainly our talent, our clients, our integrated or diversified offering and our operations.

First we have done a better job by retaining our talent while recruiting in hiring to increase and upgrade our global team of consultants and the speed in which we're integrating them into the firm.

Second I continue to see firsthand and equally struck by the quality of work that our clients ask us to perform and the expertise and thoughtfulness that we bring to every engagement. I am always impressed when I see the power of Heidrick work with clients around the world.

Third our brand permission with clients is increasingly leading to opportunities for Heidrick's diversified solutions. We're bringing our clients top talent solutions that go beyond search to include culture shaping and leadership consulting to help our leaders succeed.

The distinctiveness of our solutions is being noticed in the market including by the Howard Business Review, which recently published an article featuring our proprietary assessment tool specifically Leadership Signature.

And fourth, operationally we continue to diligently invest and refine our services and technology to assure an efficient and profitable platform that can be scaled to grow with us. These four priorities are talent, our clients, integrated solutions, and operations will continue to focus our attention and energy.

Quite simply by attracting and retaining the best professionals in the business and enchaining the overall client experience we’ll further strengthen our business around the world and provide greater return to our shareholders. We'll pause there. Rich and I are happy to answer any questions..

[Operator Instructions] We'll take our first question from Tim McHugh with William Blair..

Hi good morning it's Stephen Sheldon for Tim. First I just wanted to ask more about turnover, it looks it trended out a little this quarter with 11 compared with at least three in the year ago period or in the first quarter.

So has there has been any change in the dynamics underlying the turnover and by that I mean are you seeing more lower performing consultants versus higher performing consultants or higher turnover in certain regions or verticals just any color there?.

Hi Steve, it's Julie Creed. The voluntary -- the terminations of the levers in the quarter were a combination as always of both voluntary resignations. We had two retirements this quarter and some performance management. So there’s really no trend or uptick year-to-date. We're still under about 4% turnover rate for the year.

So we still feel great about that..

Okay..

I'll just echo on this that we feel good about the talent that we've taken on both the quantity and most importantly the quality of talent that has been attracted to Heidrick and that gives us latitude with respect to talent internally where we think there is opportunity to improve the quality of the position and so you're seeing a balance here..

Okay. That’s helpful. Your third quarter guidance seems to assume a sequential revenue increase at the midpoint, which I think is a little against the normal seasonal pattern given summer vacations extra.

So now your confirmations have been trending up over the last few months but is there anything else underlying that guidance that gives you confidence about this sequential revenue increase?.

Yes. This is Rich. Good morning. Stephen. A couple of things. Number one, couple of factors again we take into account the holistic view of what's happening across the business. We had a very strong June in our confirmations.

As you can see in the information provided and that gives us very good backlog going into the quarter and I do believe that I think we're going to see the continued momentum particularly in the Americas region. I think we've got opportunity to improve the run rate in Europe albeit that it's seasonally our lowest quarter usually in Q3.

Candidly the timing of some of the activity in Europe has been a little bit lumpy this year and so we're hoping that we can make up some of the ground that we lost in the first half of the year.

So I think the combination really of the market strength, some of the new people that we brought on Board who are making an impact very quickly are all factored into that guidance number and that's why I think Tracy indicated that we're a little encouraged about where that is in the short term..

Okay. Great. Thank you..

The next question comes from Tobey Sommer at SunTrust..

Thanks. I was wondering if you could give us a little bit more color or context on the record orders that you have in Senn Delaney maybe I am unfamiliar with kind of the seasonal pattern that may or may not exist and what do you think is kind of driving that in particular, thanks..

Sure. Good morning, Tobey. Couple of things and we've said this many times in large part because of the scale of Senn Delaney a $0.5 million or $1 million variance in timing of revenue can skew the percentages pretty big. Overall we feel very good about what's happening in that business as we indicated that very strong quarter in customer signings.

And what drives the revenue recognition there just from a mechanical standpoint it's very often than on a project assignment, we'll see about 15% to 20% come in the first couple of months and then over the balance of the next 6 to 12 months, we'll see a majority of the revenue come in and then it will trail off after about the 18 month period and then depending upon whether or not there is some enterprise agreement, could lead to a different revenue cycle that is of even higher margin as you kind of get into the infrastructure if you will of the learning systems within client companies.

So it can really vary by size, by type of engagement. The encouraging thing that's been happening there is number one the team has done a great job. So Senn Delaney moved up to its billing. We feel very good about the business.

We continue to have better integration with the core Heidrick Search Consulting business, Search and Leadership Consulting business.

We're seeing more engagements now come from introductions and cooperative pitches and business development among all of our service lines and so as a result, I think the momentum is very positive and I think we're continuing to invest to make sure we can fuel the growth of that business because there is a tremendous interest in the topic of culture and the talent space right now and we certainly have one of the best businesses in that space and I think Tracy can give you a little more color..

The overall I'll just underscore. There is two places where the culture shaping impact was happening. One is while that Senn Delaney basically brought to Heidrick when we required them where the deepening of the joint interaction with those clients is paying off.

We're seeing a couple of situations in particular where Senn Delaney's work has only gotten deeper coupled with the relationship that Heidrick also had together with them. The second is just new clients. As Rich referenced, there are any number of topics that we're seeing among Senior Management teams.

Culture is certainly a very strong one and the dialogue that we can now bring to our Heidrick clients where Senn Delaney has not been, we're seeing more and more interest there and that we're seeing a number of client signings in the second quarter..

Okay. That kind of leads me to a follow-up, given the relative success you had in what you’re seeing in the market and kind of having this business co-habitat with the Executive Search business, do you have appetite to add assessment and evaluation kind of training ability to your portfolio of businesses..

With respect to culture or more broadly?.

More broadly frankly..

So this is part of the initiative behind leadership signature, the online assessment, but I would say more broadly, we have asked Krishnan Rajagopalan who runs our practices globally to also take on the leadership for leadership consulting internally for exactly the reason behind your question, which is we see the interest on the part of not only placing an executive, but also working with the team around those executives as something that’s increasing and we want more linkage and more drive internally between the search business and the assessment and succession business.

And so that’s one of the reasons why we have asked in the second quarter we've asked Krishnan to take on that responsibility added responsibility to drive further with our consulting team the assessment and succession and talent development with regard to helping our clients and our clients are asking for it..

Thank you.

I had a question for you about the hiring environment, there has been a particular I guess a boutique out in the marketplace that’s had a tough road and I am wondering whether there are still opportunities for Heidrick to take advantage perhaps of that weakness or the majority of your interaction and opportunity to do so has probably already been consummated? Thank you..

Well we’re talking about the same one. Clearly Heidrick and I think some of our competitors have benefited in terms of the talent opportunities that that company created for all of us. We have certainly been very focused on that and a number of our new people come from -- come from that firm as well as others.

In general, we started this March in terms of this nearly high quality talent that we're bringing on to the firm in the past year and everyone we get we feel both terrific about them individually, but we also feel even better about taking on more. So the award for talent out there is as competitive as that has ever been.

So when we see an opportunity such as you travel in the market we pound sign it, but we’re not the only ones out there jumping on it..

Just two quick questions, are you seeing any more prevalence of upticks as you fill executive slots in fill a confirmation and Julie isn’t 2Q just seasonably a little bit higher level of turnover sequentially versus 1Q because bonuses are paid out typical to what happens in the financial service industry as well..

This is Rich. I’ll take a shot at both questions and if I don’t finish the answer, I can let Julie add anything on the turnover. I will do in the reverse order. We did not see any material movement at the bonus this time relative to our turnover this year at all.

As Julie indicated in her earlier comments, our overall turnover rate on an annualized basis has come down significantly and between the voluntary and involuntary as well as retirements, we're very pleased that kind of what’s happened in the overall retention rates.

So I wouldn’t say it's certainly wasn’t the pattern that Heidrick had experienced for period of years and that’s an encouraging sign. Getting back to the uptakes and the structure of our business, upticks have played a higher role in our revenue over the last couple of quarters. I think it's reflective of a couple of things going on in the market.

Number one I think as award for talent among our clients has intensified even in some of the retainers and initial pricing of retained search has played out in the marketplace, the reality of what the placements are, has led to an higher uptick trend.

And so this combined with the fact that we've had also a higher success rate in placements, which has been a very encouraging sign. I can say the average of the last few years has also led to some positive trends in this area as well. So we're hoping that that's a sustainable trend.

We always watch it very carefully because it has different risk characteristic obviously and different revenue recognition, but overall it's combined with the fact that the talent market is up, the placements are up etcetera, it's a very good thing for us..

Thank you very much..

You're welcome..

[Operator Instructions] The next question comes from Kevin McVeigh of Macquarie..

Hey, how are you? Any sense just longer term kind of margin targets on a blended basis and then maybe split between search and the culture shaping business as we think about '16 into '17 obviously not trying to get too specific on guidance, but just any sense of how we're thinking about the business?.

Well, I'll repeat what I've said many times Kevin. We don't forecast beyond the next quarter revenue because the visibility in this business is about as good as the cloudy day at Willis Tower here in Chicago, but there is a couple of things you got to remember about our business and how we think about it.

First of all number one, and I'll kind of go backwards here from your question, at Senn Delaney the structure of that business hasn’t changed. We've talked about the fact that it's been a healthy about a 30% operating margin business.

We would trade candidly -- we'll trade a little bit of margin as we continue to invest in growing that business because we think the growth of that business on a global scale will really give us dividends both in terms of profitability cash flow and market presence.

So it sort of healthy enough margin that we can feel free to invest and expand that business and we will do so. So we're very comfortable with the structure. It's a very well run company. Tremendous pricing and service discipline been watched across very well on project basis. So we're very pleased with the way that business is structured.

In search, challenge in that business is always on the margin side for us is the fact that the price of talent is high. As we always talk about, our salaries and benefits run up in the high 60s, close to 70% of revenue on a combined company basis.

So the key is that we have to grow revenue and the good news about what we've done over the past few years and it's been demonstrated is that we have a platform today that can accommodate a much greater scale of revenue and activity in support of our business and that marginal profitability of that growth will be higher.

We tend to be a high fixed cost business and as we continue to grow the base of revenue and assuming we hold to our pricing structures in our core competencies and how we execute, marginal profitability of growth will be great if we can keep turnover down and gradually continue to increase consultant headcount base and increase revenue, we'll be in very good shape..

And then Rich, the new hires is the split of six versus variable comp is consistent with the historical model or is that changed?.

Look all the basic structural model is not changed dramatically, what sometimes happens is that you have a situation where either with sign in or guarantees or things that people are walking away from can certainly impact in the bidding and securing of new top talent.

That being said as we've examined where we thought we would be in our fiscal plan for this year against where we are, we're right on the line. We've had no big surprises.

We're actually getting good contribution and Tracy said that the quality of what we've hired in the impact of what we've hired to date in terms of our people and their integration into our culture as well as integration in one of the clients in the marketplace has been very good.

And so we're very encouraged by that and we amortized some of those costs over period of years. So the company can have those investments..

Thank you..

And we have no further phone questions at this time..

Okay. Thank you for your questions and your support. We will speak to you all soon. Thank you..

That concludes today's call. Thank you for your participation. You may now disconnect..