Good morning. And welcome to the Heidrick & Struggles' Third Quarter 2015 Conference Call. Today's 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. 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 thanks for participating in Heidrick & Struggles' 2015 third 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 www.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 retransmitted without our consent. In today's call, we'll 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 21 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. Tracy will cover the first 12 slides.

And Tracy I'll turn it over to you..

Thanks, Julie. And good morning. I am pleased with our third quarter results. They reflect continued solid progress to strengthen and grow our business. Compared to the same period in 2014, consolidated net revenue increased 10% to $138 million.

Similar to the second quarter currency exchange rates adversely impacted our year-over-year comparison especially in Europe and Asia. Our Executive Research and Leadership Consulting business had a solid quarter excluding the impact of currency every region achieved year-over-year and sequential revenue growth.

The Americas region was the driver of the growth up 20% as reported, or 22% on a constant currency basis. Europe reported a 5% year-over-year decline but excluding the impact of currency would have increased almost 8%. And Asia Pacific reported a 7% increase in revenue; it was up almost 19% in constant currency.

We ended the quarter with 334 Research and Leadership Consultants. The Americas region has steadily grown its consultant base over the last year, adding mostly experienced consultants. Additionally, many of our seasoned consultants in this region are having their best years ever.

The combination has driven year-to-date revenue growth of 13% in the Americas. In Asia we had net 10 consultants in the first nine months and productivity has improved resulting in year-to-date revenue growth in constant currency of almost 14%. By contrast in Europe, our headcount this year is flat.

We are still very focused on targeted hiring initiatives in this region to grow talent base. From a practice perspective, three standout, the healthcare and life sciences, global technology and services and financial services practices were the primary drivers of growth in the third quarter with billings up 89%, 43% and 9% respectively.

The improvement in healthcare and life sciences is not a surprise. Our hiring in this practice over the last year has been very deliberate and targeted ended increasing our market share in the sector that will continue to grow in importance globally. Year-to-date billings in healthcare and life sciences are up 41%.

Our Culture Shaping segment Senn Delaney reported a decline in revenue of $1 million compared to last year's third quarter which was a record revenue quarter for this business. And this year's second quarter Senn Delaney book the record number of new clients.

So what you are seeing in the variability of these results is largely a function of the timing of project executions. We are expecting a stronger fourth quarter for Culture Shaping. As we said in the past, our operational infrastructure can support high revenue growth. With this leverage will falls to the bottom line as revenue improves.

This quarter was a good example of that leverage. Adjusted EBITDA and EBITDA margin improved, operating income and operating margin increased and net income earnings per share were higher. I have more to say after Rich gives you a deeper review of our results for the quarter..

Thanks, Tracy. And good morning, everyone. I'm going to begin my comments on our third quarter results with slide 13 and cover some of our other key financial and operational metrics. All the revenue drivers work together to improve the results in the Executive Research and Leadership Consulting business.

Consultant productivity improved to $1.6 million, 7% year-over-year increase in headcount. On a trailing 12 months basis, consultant productivity has now been at $1.5 million for six quarters in a row, a first since 2008. As shown on Slide 14, Executive Research confirmations in the third quarter were up 13% year-over-year. And turning to Slide 15.

Reported average revenue per search of $121.2 million was down slightly compared to the last year's third quarter. When adjusted for constant currency, the revenue per search was $127.8 million. The trailing 12 months trends would also look much better if not for the impact of currency fluctuations. Turning to Slide 16 and 17.

2014 salaries and employee benefits expense increased approximately $12 million or about 14% to $96 million and represents 69% of net revenue. With the improvement in revenue this quarter, more consultants became bonus eligible explaining most of the $8 million increase in variable compensation.

Fixed compensation expense, up about $4 million reflects an increase in the cost associated with the hiring we did over the last year, especially in the Americas partially offset by the impact of currency in other regions.

As with many of the financial and operational metrics, is often quarter-to-quarter variability in salaries and employee benefits expense based on revenue and company performance in general. We encourage you to look at the year-to-date results as well. Turn to Slide 18.

General and Administrative expenses decline about 8%, or approximately $2 million to just under $30 million for the quarter and represent a 21.5% of net revenue. The decline reflects the impact of foreign currency exchange rate fluctuations as well as lower expenses in a number of areas across the company. Now I'll refer to Slide 19 to 25.

Tracy mentioned earlier the improvement in revenue flow through to our operating earnings. Adjusted EBITDA in the third quarter improved to $18 million compared to $15 million in the comparable quarter of last year and the adjusted EBITDA margin was 13.1% compared to 11.9%.

Operating income in the third quarter improved $13 million and the operating margin was 9.3%, the highest operating margin we've achieved since the fourth quarter of 2009.

Net income in the third quarter of $7.5 million and diluted earning per share of $0.40 reflect an effective tax rate at 32.7% in the quarter and a full year projected tax rate of approximately 42%. Both the third quarter and annual rates are based on the expected mix of pretax income for the year.

With the improvement in the third quarter results, we were able to use some of our net operating loss carry forwards and had smaller losses in countries with valuation allowances. Now referring to Slide 26. Cash and cash equivalent since September 30, was $129 million compared to $159.5 million at September 30, 2014.

The year-over-year decrease reflects the increase in CapEx related to new office build out. Also on September 30, we repaid in full the outstanding amount of $26.5 million on a term loan facility. You would recall that the debt established when we acquired Senn Delaney nearly three years ago. I feel extremely comfortable with retiring the debt.

Our senior unsecured revolving credit facility that we've established of a $100 million with an optional increase of up to $150 million combined with a strong balance sheet and capital structure, it was a great deal of financial flexibility to grow and invest in our business and meet all of our obligations.

After the close of third quarter on October 1, we acquired Co Company, a London-based advisory boutique specializing in accelerating organizational performance. We paid an initial all cash consideration of $10.4 million.

Looking forward to the third quarter, our executive search backlog is shown in Slide 27 and monthly confirmation trends are shown on Slide 28.

Other factors on which we base our forecast include anticipated fees, the expectations of our leadership consultant assignments and culture shaping services, the number of consultants and their productivity, the seasonality of the business and current economic climate.

As we experienced in the last several quarters, 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 net revenue. We're currently forecasting fourth quarter net revenue of between $128 million and $138 million.

Reported net revenue was $121.3 million in the last year's fourth quarter. And Slide 30 shows it on constant currency basis last year's fourth quarter net revenue would be $116.6 million which we believe is a more relevant comparison against our guidance forecast. With that I'll turn the call back over to Tracy..

Thanks, Rich. Our results this quarter are another good step in the right direction. Yet I know that we are capable of even more. I said last quarter we have four priorities that drive shareholder value namely our talent, the two our client, three our diversified offerings of search leadership consulting and culture shaping and lastly our operations.

Let me quickly review. First our talent. We made meaningful progress attracting, developing and retaining the very best talent. In the third quarter, we hired 22 consultants; the vast majority of them were experienced. In the same period, 13 consultants left the firm, more than half related to performance management.

Our year-to-date total turnover voluntary and involuntary is 8%, compares to 18% in 2014 and 21% in 2013. Even with the hiring we completed this year, our productivity was $1.6 million per consultant in the third quarter. Second our clients.

I am encouraged and impressed by the work we are doing at the top of many most of the important organizations around the world. I meet with clients regularly both current and prospective, and I am humbled by the trust they place on our people across search leadership consulting and culture shaping. The Heidrick brand is strong and growing stronger.

I see our distinct solution resonating in meetings more than ever. I know that we can win more and there is even greater potential to build deeper client relationships, their leadership advisor. Towards our third priority, our distinctive service offering. We took an important step on October 1 with the acquisition of Co Company.

Co Company expands our leadership consulting services and is complimentary to our culture shaping business. I appointed Colin Price, the CEO of Co Company to lead our leadership consulting practice globally.

Colin has spent his career advising senior leaders on key facets of organizational performance as well as building businesses as a leader himself. Colin's directive is very clear. To grow and scale our leadership consulting business to increase our impact with clients.

The team that Colin brings with him from Co Company coupled with our own leadership consultants forms a solid foundation on which to build this business. We continue to make progress on our fourth priority improving operations have built an infrastructure that generates good profit today but can be leveraged even further as we continue to grow.

You see this in our third quarter results. We will continue to invest in technology, systems and processes that will help increase the productivity of our consultants, support product development and scale our operations in leadership consulting and culture shaping to further drive profitability.

By attracting and retaining the best professionals in the business, enhancing our overall client experience with distinctive service offerings and improving operations, we will continue to grow and strengthen our business around the world and provide greater return to our shareholders. We pause there, Rich and I are happy to take questions..

Tim, we are ready..

[Operator Instructions] And I go to our first question from Kevin McVeigh with Macquarie..

Great. Hey, thanks and great job. Want to get a sense just to really nice leverage in the culture shaping business. Any sense of where we think those margins can go and you get more leverage out of the model? How should we think about that and just obviously nice ramp up in hiring too.

Any sense of how that's splits between the search and LC business as well be helpful..

Okay, good morning, Kevin. Thank you for questions, this is Rich. From the standpoint of culture shaping, I think a couple of things drove profit profitability. First of all, that -- we've already said that was pretty strong operating margin business.

We are in the final years of earn out from the acquisition so I know the team has been focused on making sure that they deliver the profitability of the deal they have incentives to do so. So I am sure that has something to do with making sure that we are running the varied league business right now.

But having said that we are also working with the team to actually invest and grow the business. I actually think that over time we might see a little bit of erosion in that margin by a point or two just from the standpoint we are going to continue to invest to grow that business. The team is committed to do that.

So I still look for that business over time to average probably more between 25% and 30% type of margins as we go forward. And hopefully and we are seeing signs of this and Tracy indicated a little bit like in the call. While the project implementation has to be lumpy the pipeline looks very strong.

And we think the top line can grow next quarter as well as over the coming year.

On the other businesses, we've said all along that as we constructively continue to invest in LC, we are going to -- we are extremely pleased with the acquisition of Co Company and with the addition of Colin Price and how we are thinking about the business model going forward.

We are going to be much more selectively targeting how we do business, the type of assignments we do, the type of project profitability we are going to bring to those projects. I think it will actually be good thing for our consultants. I think we are going to see many of our consultants flourish in this environment.

And actually do better and that will be more profitable business model. That business should be a business that sends off 20% plus margin and we haven't done that historically so because we haven't had the scale. So I think we are going to see over time as we continue to invest in that business, that be a bigger contributor to the overall pie.

As I mentioned in my remarks, we are not going to hold back in terms of hiring talent. Tracy indicated that talent is his key priority for driving the value of this business. We believe that strongly.

We are investing our people both in the -- heavily in our people both who are here today as well as also that are joining us but I think the biggest difference we've far most selective in the quality rather than the quantity of the types of people that have joined the firm.

And we've seen and that's paid off in terms of where our results as well as integration as well as better teaming with the clients and I think that reflects the greater value you receive in the search businesses as well..

Got it. That's helpful.

And just any thoughts just what tax rate we should introduce in near term as we are thinking about the model in the back half of the year?.

Well, I think I indicated in the comments about the 42% rate currently projected, as you know over time that the rate has gone up and down like a yoyo sometimes but I think we've seen pretty steady performance. We've seen Europe start to come down a little bit which is one of the biggest drivers of volatility of that rate.

Asia Pacific is performing well. So we are seeing good results scenario whether either more valuation allowances or maybe we are on the borderline of having their established new ones or contribute to existing one. So we've always been a company that has been able to use its carry forwards and its tax credits.

We haven't lost any in my time here and the team has done an outstanding job in managing that. And more importantly we have got a performance that's key to that. So as we build our scale the good news is that I think that increase future cash flow and profitability as well and bottom line earnings if we are successful in executing the strategy..

We go next to Tim McHugh with William Blair..

Hey, good morning, it's Steven Sheldon for Tim. First really brilliant performance in healthcare and life sciences.

What kind of engagements are you seeing higher demand for there? And is that practice more heavily weighted towards a certain region? I would assume it would be obviously more weighted towards the Americas but how does that break down regionally?.

Stephen, Tracy. Couple of thoughts. One is in general I would say that the healthcare, life sciences business tracks, we are seeing broadly across a firm in terms of strongest performance in the Americas and then it goes from there Europe and Asia. Your trend in healthcare and life sciences, no difference in the overall business.

Number two I think healthcare and life sciences is a good example of to view the overall takeaway from this quarter which is when you put the right people with our brand in front of clients that have been targeted good things happen.

And we have the benefit of some pretty good tailwinds in general and the economy particularly in the Americas and that obviously helps. But healthcare and life sciences as you know from almost any daily reading of the paper, there is a lot happening in that sector in the United States and globally.

And that creates opportunities as well as challenges with respect to leadership and that's where Heidrick can play a role..

Okay.

And then on the G&A leverage, how much of the year-over-year decrease as a percent of revenue is due to foreign exchange rate? And can you give some more color on what else is driving that decline as a percentage of revenue?.

Yes. I think about -- a good rule thumb as we have been experiencing in the foreign currency fluctuations about half of the delta usually is in foreign currency. I think we are pretty close on that metric. I don't think it's as much in absolute decrease really a whole in terms of kind of overall G&A.

We've talked to you before about certain timing and different expenses like partner meetings et cetera that merry up second quarter to the third quarter et cetera.

At the end of the day, our team and I have been fortunate my time here to have the cooperation of our people both in the field of corporate, they do a very good job of treating the money like their own. And I am very proud of work they do.

Generally, we try and make sure that we in court and encourage expenses behalf of the clients, and the work that we do, we are very conscious of corporate that we want to drive productivity and make sure that our spent is driving things that will help be more productive over time. It is not always easy.

We are a public company with compliance issues, we have other issues. Day to day operations, from the most part we put together a great people who understand how to get the most out of every dollar.

And as a result, we've been kind of holding constant with G&A a line around the $30 million mark, give or take unless we get anomaly like a high professional services quarter or meeting expense. So there is nothing magical to it. I am very pleased that on a strong quarter like this, we didn't see it rise.

And that confirms what we believe all along is that the platform we have can hold bigger base of consultants and revenue as well as contributions from our other businesses and I think that's a very good sign.

Because I think as we continue to invest in global revenue stream that the net incremental change in expense will be less and we will achieve greater scale in profitability..

Okay, great. Then on the Senn Delaney commentary for stronger fourth quarter.

Are you expecting that on a sequential basis or is that more on a year-over-year basis?.

I think on sequential basis. I think we should see we are expecting to see that quarter be a little probably the better quarter of the year..

Okay. And then I guess one more if I can. Just talking about -- you talked about you are still going to hire some more in Europe. Is it generally getting harder to find talent in Europe than it has been? I guess over the last few years..

I wouldn't say it is harder. I would say that as we develop more momentum globally as a firm and as people see where we are working with clients that we hadn't before or working at a different level within clients we haven't before, and they recognize that there is a teaming that's going on around the world to make that happen.

So the client maybe domiciled in Europe and it maybe in a more coordination within Europe to tackle that particular client, or coordination between Europe and another region to address that client. As we see more of those, it becomes at the margin easier but as we said before and it is -- maybe globally there is a broader role of Colin out there.

And we certainly participate in that. But at the margin I would say that a bit easier as Heidrick performance in the market place. And so our story just has more confidence in the market place with the talents that's making us..

[Operator Instructions] We will go next to Tobey Sommer with SunTrust..

Thank you. Just curious at this point of the cycle are you starting to see executive compensation inflation? I saw that the fees ticked up but I know sometimes that can be mix issue as opposed to just apples-to-apples inflation? Thanks..

I would be careful on calling any trend here. I would go back to my earlier comment with respect to broader work for Colin out there in the world. Finding people, who can drive profitable growth in the world that we are in right now, certainly has a premium on it. And so with those executives are identified and recruited and retained.

There is a very keen interest and making sure that they are paid in a way that compensates for that. So we had a formal trend and I probably hesitate a bit in saying that but certainly is consistent with the broader work for talent that we are seeing generally in the economy particularly in the United States..

Thanks.

As differently did kind of upticks kind of occur more regularly or the compensation to fill the job is little higher than originally scoped out?.

Yes. We went to a period last year and somewhat this year where we did see very healthy trends in upticks. It kind of levels after bit, there are still an important part of the overall revenue contribution. But sometimes that can be structural in terms of the deal versus necessary type of competition of the individual as well.

So I am staying with Tracy on this one. It is hard to call it a trend. It's certainly is a bigger factor of our life today..

What kind of contribution would the acquisition make to the fourth quarter?.

We are not going to project individual businesses. I think we will get a slight contribution in revenue to the fourth quarter but not overly material to the business. And then as we think through next year we are going through our planning cycle.

We will probably have more to say about the overall leadership consulting business and where we are expected to go..

Could you talk about what the size of the business was like fairly 12 months or something like that?.

None at this time and frankly and the reason I am kind of avoiding that is as we think through what we are going to do with the business, the history is less relevant to the future because candidly this is much more about building the right type of business than it is about what's a business we acquired.

It is boutique with three or four partners, there is a very good team that comes with Colin, they do very good work but we are really in the process right now of integrating our business and our pure leadership consulting business with him, it will really be kind of the new beginning I think for us..

I think another way to say is we are acquiring talent and a culture here. That is focused on working at the top that is vary sync with the leadership consultants that we have.

And as we've described we think -- the way to think about this is what we are having coming down the road here as we integrate Colin and his team in Co Company with our leadership consultants..

Okay. Just two last questions for me. One on the Senn Delaney.

Is the business model there -- does it have dedicated sales force or is some of the quarter-to-quarter variation a function of some individual selling new services and then kind of going back to execute on those projects or is there a standalone sales force that can kind of drive growth perhaps a little bit more linear fashion?.

They are dedicated consultants inside Senn Delaney specific to the culture shaping process what we have begun to see this year with increased momentum is the opportunity with the culture shaping consultants and the search consultant and the leadership consulting folks are working together more closely.

The whole piece of the combination and the partnership with Senn Delaney was to layer that into our broader leadership offering. And we've started to see that momentum build in 2015.

So to answer your question of course they have their own consultant force as Rich described that is a team that we are investing in and adding to because of demand that we see out there for culture shaping, about Senn Delaney coordination and collaboration between the culture shaping and the search consultants that has been enhanced this year..

Perfect. Two last questions for me. Did you have any comments about what the tax rate might look like going forward beyond the fourth quarter even a range? And then from mix standpoint strategically how do you view the business now executive research versus other consulting services and what might that mix look like over the medium term? Thanks..

Okay, well, let's try on the tax rate first. I would love to see the tax rate hover around that 40% or just above 40% line for the near term until we achieve greater scale and better growth in our international markets, can we --we won't see a drop any lower than that in the foreseeable future. I just would like it to be more constant.

And I am encouraged by what we've seen this year. I'll make a slight comment about the mix and I certainly turn it over to Tracy.

One of the things we are anxious to get to is obviously having a different mix of business both for revenue volatility, financial risk, business risk et cetera and one of the things we are going to continue to evaluate as we go forward and build the plan for next year and the years beyond which we are in the processes of doing right now is how we scope and invest into the leadership consulting side of the business.

Does that will be a combination of both organic and possibly inorganic opportunities along the way that will further enhance that platform and development. But so we don't have a magic slate anywhere so this is going to be x because reality is it goes back to what I said about our people. We are much more focused on quality than quantity.

And in this game talent is extremely important. And so the pace of growth and the investment of growth are really going to be gauged by what we can find in terms of the talent to execute the business that we want..

And my comment to add to that is we don't have a specific number for you in terms of how that business across search, culture shaping and leadership consultants are going to breakdown. What we can tell you is that what we are reacting to and the reason why we purchased Co Company is we are reacting to our clients.

And our clients are telling us that they trust with respect to search and they are -- and they trust us with respect to all three businesses. And as they look at our businesses and where they see Heidrick add value they are asking for more from leadership consulting and they are asking for culture shaping. So we are responding to that.

So the best way to answer at this point is that our strategy as always begins with our clients and is listening to them, that's determine how we do it. And that's what you are beginning to see here a bit with this Co Company. And that's more of a directional statement than hard numbers at this point..

And at this time there are no other questions in the queue. I'll turn it back to our presenters for any closing remarks..

Okay. If there are no other questions, thank you for your time this morning and your questions and listening. Have a good rest of the week. Thank you..

And this does conclude today's conference call. We appreciate your participation..