Good morning. This is the Heidrick & Struggles’ First Quarter 2016 Quarterly 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.

[Operator Instructions] I would now like to turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead..

Good afternoon, everyone, and thank you for participating in Heidrick & Struggles first quarter conference call. Joining me on today’s call is our CEO, Tracy Wolstencroft; and our Chief Financial Officer, Rich Pehlke.

During the call today, we will be referring to supporting slides that are available on the IR home page of our website at heidrick.com and we encourage you to follow along or print them. Today we will be using the terms adjusted EBITDA and adjusted EBITDA margin. These are non-GAAP financial measures that we believe better explain some of our results.

A reconciliation between GAAP and non-GAAP financial measures can be found in the last page of our press release and on Slide 20 in our supporting slides.

Throughout the course of our remarks, we will 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.

At this point, Tracy, I’ll turn the call over to you..

Thanks, Julie, and good afternoon, everyone. Today we reported 2016 first quarter results that reflect solid top line growth. Consolidated net revenue increased 13% compared to last year’s first quarter, or 16% on a constant currency basis.

This improvement was largely driven by our Executive Search business, led by strong performance in the Americas and Europe.

The Asia Pacific region’s results reflect the uncertainty in Asian economies, driven largely by disappointing economic growth forecasts coming out of China, and Culture Shaping contributed slight revenue growth in the first quarter.

Our revenue growth in the first quarter did not translate into increased profitability and we reported year-over-year declines in adjusted EBITDA and operating income. There are three main items that impacted profitability in the quarter, including two planned investments intended to accelerate the growth of our non-search businesses.

The first investment was in Leadership Consulting, where we took the opportunity to reposition the business following the acquisitions of Co Company and Decision Strategies International or DSI.

The integration of these acquisitions with the company’s legacy consulting business, allowed us to align resources around the best of our strategic and leadership service offerings.

With this, we incurred $2.1 million of one-time after-tax charges for salary and employee benefits and general and administrative expenses that were severance-related, primarily in Europe. As we noted in the press release, this item alone represented $0.11 of EPS.

I would mention that the integration period of these acquisitions also impacted profitability as the build-up of revenues has not yet offset the expenses we absorbed for both companies. We expect the revenue contribution from both companies to grow beginning in Q2. The second investment was in our Culture Shaping business.

As we indicated in our February call, we are increasing our investment in talent within Senn Delaney to support sustainable growth, while at the same time hiring the next generation of leadership. This quarter, we added five new culture-shaping consultants to build upon our leadership in this segment and support our long-term growth.

These investments, in new and existing talent, resulted in $2.2 million of additional salaries and employee benefits expense in the quarter. Senn Delaney is a profitable business, and while margins will be lower in 2016, we expect the business to gradually return to historical margin levels by 2017.

The third factor impacting profitability in the quarter was Asia Pacific. This region continues to feel the impact of softening economic conditions and market volatility, with uncertainty about the growth prospects in China weighing heavily on investment decisions.

The drop in revenue in this region was more than we anticipated for the first quarter and it had a meaningful impact on profitability. We are encouraged that confirmation trends in the region showed improvement in March. One final comment before I turn the call over to Rich. In 2014 and 2015, we stabilized, rebuilt and reenergized Heidrick & Struggles.

We made significant and important investments in our people, especially in Executive Search, through hiring and development. The impact of those investments is increasingly evident every day, not just in the number and quality of our client engagements, but also in our financial results. Our clients want more advisory services from us.

Building and growing Leadership Consulting and Culture Shaping should drive more sustainable cash flow and margin growth in the future. We will continue to selectively invest and grow both of these businesses as opportunity arises so that they become a more significant part of our overall business mix. Now, let me turn the call over to Rich..

Thanks, Tracy, and good afternoon, everyone. I’ll start with some additional details on the first quarter results beginning on Slide 2. First quarter net revenue was at the high end of our expectations at $130 million, up 13% compared to the last year’s first quarter, and up 16% in constant currency.

The Executive Search and Leadership Consulting segment was the driver of the year-over-year first quarter revenue growth, specifically Americas and Europe had great quarters, achieving growth of 17% and 36% respectively. Asia Pacific was down 13%, reflecting the soft economic conditions that Tracy mentioned.

We’ve added new slides to our deck this quarter, Slides 5, 6 and 7 that reflect the trailing 12-month results for these segments in order to remove some of the quarter-to-quarter variability and give you a better perspective of the run rate of each of these segments.

Referring to Slides 8 and 9, we ended the quarter with 332 Executive Search and Leadership Consulting consultants, of which 313 are specific to Executive Search. And note that beginning in 2016, Leadership Consulting consultants include only Partners.

On Slide 10, Executive Search confirmations globally were up 7% for the quarter, which is the highest first quarter performance in five years. Turning to Slide 11, the Financial Services, Healthcare & Life Sciences, and Global Technology & Services practices drove net revenue growth.

Consultant productivity, as shown on Slide 13, remained at $1.5 million on a trailing 12-month basis and the average revenue per search was higher in the first quarter despite currency headwinds. Turning to Slide 15, the Culture Shaping segment reported a 3% year-over-year increase.

We’ve also added a trailing 12-month slide for this segment to account for the quarter-to-quarter variability of results, which are largely a function of the timing of project execution. Looking at Slide 16, salaries and employee benefits expense increased 16% or $13 million in the first quarter of 2016.

Variable compensation expense accounted for approximately $3 million, primarily related to higher bonus accruals for consultant performance. Fixed compensation expense increased approximately $10 million.

The increase is due to the compensation related to acquisitions and new hires in Search and LC over the last year, the investments in new and existing partners in Culture Shaping as Tracy just described, and severance related to the repositioning of the Leadership Consulting business.

As we mentioned in the release, the impact of our investments in Culture Shaping will be present throughout the year, although to a slightly lesser extent than what we experienced in this quarter. Turning to Slide 17, general and administrative expenses increased 17% or approximately $5 million to $35.2 million in the quarter.

As I mentioned on the February call, a couple million dollars of this increase is related to the ongoing general and administrative expenses assumed with the acquisitions of both Co Company and DSI, which at present includes the cost of independent contractors used to client assignments.

The rest of the increase primarily reflects one-time costs associated with the repositioning of our Leadership Consulting business, and the timing of some G&A expenses related to training, meetings and departmental spending. These latter expenses should not drive a permanent increase in our expense run rate but are more timing related.

Now I’ll refer to Slides 18 through 22. As a result of the factors Tracy noted earlier, adjusted EBITDA and operating income in the first quarter both declined. Absent the expenses for realigning Leadership Consulting and the investments in Culture Shaping, EBITDA and operating income would have both increased year-over-year.

Now referring to Slide 23, those of you who follow us know that our cash position builds throughout the year as we accrue bonuses which are paid out in the following year. In the first quarter, we paid out approximately $136 million to employees. Approximately $10 million relates to the payment of bonuses that were deferred in the three prior years.

And the balance of $126 million was the variable compensation related specifically to 2015 performance. We also paid approximately $9 million in February related to our acquisition of DSI. Reflecting those payments, cash and cash equivalents at March 31, 2016 was $62 million.

Cash used in operating activities was $119 million compared to $88 million in last year’s first quarter. Our cash position, plus the cash we have access to through our revolving credit facility is quite strong and we are in a great position to continue to invest in and grow the business.

Finally, I’ll take a moment to talk about our effective tax rate for both the quarter and the full-year. Our tax rate has always been volatile due to the operating results in many of our foreign jurisdictions, and in some cases we have established valuation allowances. First quarter was no different.

The tax rate of 67% was higher primarily as a result of losses in Europe associated with our repositioning of Leadership Consulting. When normalized through these one-time costs, the effective tax rate would have been 46%, and our full-year effective tax rate is expected to be similar to the prior year tax rate of also 46%.

Now looking out to the second quarter. Our Executive Search backlog is shown on Slide 26, and monthly confirmation trends are shown on Slide 27.

Other factors on which we base our forecast include anticipated fees, the expectations for our Leadership Consulting and Culture Shaping segment assignments, the number of consultants and their productivity, the seasonality of the business, and the current economic climate.

As we experienced in the last several quarters, we continue to expect volatility from foreign currency exchange rates and this could lead to an adverse impact in the year-over-year comparisons of net revenue. We are forecasting 2016 second quarter net revenue of between $145 million and $155 million.

Reported net revenue was $133 million in the second quarter of 2015. I want to mention that as we continue to invest in Leadership Consulting, we will continue to evaluate segment reporting and the presentation of our business in future periods. And with that, I’ll turn the call back over to Tracy..

Okay. Thanks, Rich. Let me summarize by saying through the early part of 2016, we have accomplished much. Our Executive Search business continues to strengthen with Americas and Europe off to strong starts. We’ve integrated two acquisitions into our legacy Leadership Consulting business and realigned the services to increase our impact with clients.

And as I mentioned earlier, we are investing in Culture shaping to build on our leadership in this market and support our long term growth. We continue to lay the foundation for a more diversified business, building on the strength of our most important asset, namely our brand and the access it gives us to clients.

It’s our intention to grow and scale our service offerings across Search, Leadership Consulting and Culture Shaping. We will measure our success by market share, client satisfaction and profitability. I am energized by the progress I see from Heidrick & Struggles on many fronts.

I am excited about our progress in working at the top, and the types of engagements we are winning and executing. Feedback from our clients, some of the most influential CEOs and Boards around the world assures me that what we are doing is the right strategy.

I am equally energized by the urgency we feel to turn that tangible progress and momentum in the market into sustainable, profitable growth. Now Rich and I will take your questions..

[Operator Instructions] We’ll take our first question from Kevin McVeigh with Macquarie..

Great. Thanks guys. Hey, nice job on the revenue. Tracy, why don’t you give us a sense on the Asia Pacific side, we’re starting to feel like that business bottoms and the type of demand you’re seeing there, is it kind of - in terms of shifting demand, is that kind of U.S.

multinationals pulling back, or is that more localized, and how we should we think about that as that business rebounds?.

Kevin, two comments. One is on the last part, the business as you know, as you pointed out is booked a multinational business, but also an indigenous business in country and I’d say it’s a combination of both. I wouldn’t weigh it one versus the other.

What I would say in Asia, what - when you get a little bit more granular behind the numbers, what you’re seeing is an impact from the financial services sector in particular. Having said that, we have seen momentum in our confirmations in March and we’re continuing to see that.

So I don’t know if I want to call a bottom per se, but certainly we feel an inflection point here with the opening performance. We had a tough end to the last year. That carried through into the first quarter and that’s some of the lack of momentum you saw in first quarter this year..

Got it.

And then as you’re starting to source this talent for the reinvestment, how has it been from a cultural perspective integrating these folks and indoctrinating them into the brand?.

So on the search side, we feel very good about it. The people who have come into United States, the Americas and Europe, selectively in Asia, were able to spend more time than probably in a long time at Heidrick really looking at the talent. We don’t feel a need to hire just to hire. We feel the need to hire the right people.

And so we’re obviously looking at what kind of economic impact can they have in the firm, but we’re also looking at cultural fit. And just over the past year, we feel good about both of those dimensions..

Got it.

And then my last one, I know you’ve not given margin guidance or anything kind of be on revenue, but is there any way to think about kind of sequentially - just a way to frame maybe what the core business would flex and then ultimately what the investments, how that will impact the margins sequentially?.

Sure, I’ll give you as much as I can, Kevin. This is Rich..

Hey Rich..

The core business which is still the primary driver of a lot of our financial results, as you know, tends to be start to little soften in the first quarter, the stronger quarters tend to be second and third. And depending again upon hiring cycles, budget years and factors in the marketplace tails off at the end of the year.

I will say in recent years, we’ve seen some change in trend in that business. A good example is this quarter. I think with the exception of APAC, we saw good strength in the first quarter that we haven't seen in some time. Last year, at the end of the year we saw a good strength in Europe and America, which we haven't seen in some time.

So we’re hoping that we’re getting a little bit more even on a cyclical basis with some of the changes that we’ve made and some of the focus we’ve made on where we’re working and how we’re working.

In the impact of Senn Delaney, as I mentioned in my comments and it also applies a little bit to LC, the nature of the business we’re starting to pursue in both of those areas tends to be a little bit more larger project-oriented and can certainly have revenue recognition patterns that are different than what we would see in Search.

Our hope is always been that we would build those businesses to greater scale and have them more even flow of both revenue and cash flow over the period of the years. We’re not there yet and we’re making progress to get there.

On the profitability side, particularly in 2016, that we talked about today with LC is much more of a one-time nature expense and the run rate and people expense should not be as bigger factor in year-over-year profitability after this year.

It will actually taper down a little bit towards the end of the year, and the hope would be obviously that the revenue would be at a higher run rate as well to mitigate that..

Super helpful. Thank you..

You’re welcome..

Next question comes from Tobey Sommer with SunTrust..

Hi, this is Kwan Kim on for Tobey. Thanks for taking my questions.

First off, how are the new confirmations coming in, and could you tell us what you’re hearing from your consultants and describe the current tone of your customers? How has the tone shifted since the last quarter, given the rebound in the markets?.

Let me just give you an overall sense of what’s going on. I’d say, look, the business out there is as competitive as ever. The opportunities that we’re seeing are healthy and strong, and our goal is overall in the marketplace is to win our share and win more than our share, grow our share.

But in terms of confirmations, Rich, you want to just comment on what’s in there..

Yes, we’re certainly pointing to an estimate in our slide, so they are up just probably in the upper quadrant approaching 400 confirmations with just under 400 confirmations in April.

Again as Tracy has said, they come in in different patterns but the overall good feeling is that I think we feel good that in line with our guidance and that’s a best way to give you the indication is that we feel that on a year-over-year basis on the revenue line largely driven by Search plus some inclusion of the new LC as it ramps up.

It’s given us some indication that our second quarter should be healthy year-over-year..

Got it.

And regarding the growth in the Global Tech & Healthcare segment, are they a result of stronger event or reflection of more productive headcount additions?.

I think a little bit of both. Certainly in Technology, there has been no hotter industry space.

I think for us in the last couple of years, there is lot of activity going on in client activity around leadership talent that can deal with the world that’s really got tremendous influence from technology, and we’ve got some of the best professionals in the world in that space.

So I think from the standpoint I’m not surprised at all that’s one of our leading sectors.

In Healthcare, we certainly have benefited from the fact that we brought in some strong talent last year, in line with some of the very good talent we already have but we clearly would not as big a factor in that market as we should be and we’re actually making inroads to play at a much higher level in that business because of that change..

One thing I’d add to that is the quality of clients that we’re interacting with and working with and being hired by across both those sectors and others just continues to be moving up..

Thank you very much..

Thank you..

Next question comes from Tim McHugh with William Blair..

Hey guys. A few questions. One, Financial Services is strong as it was, is kind of surprising given the market environment, I guess.

What areas are that strong for you right now?.

Well, Tim, one area is certainly Fin Tech, right. So you have traditional financial institutions where we all read the papers every day, the impacts that are - that is a company in that sector right now but there is no shortage of movement in the financial sector broadly defined.

So if you’re working in the conventional, you’re going to have one story. If you’re working in conventional and you’re working in Fin Tech, you’re going to have another story. So that’s important part of it..

Okay. And then I guess just on the leadership, the expenses tied to that. I get the comment how some of these items that hit the quarter are one-time in nature. But your message, Tracy, is also fairly close that you need to do more of this in some regards that your clients are asking for this and you needed to be a much bigger part of the business.

So how do we think about, I guess, the potential that this is going to be more of a medium-term type of spending that you need to build out this side of the business and we’ll see maybe different things but different levels of expenses or different types of expenses coming through for a couple of years as you build this up..

Well, first of all, Tim, I’d say that we call expenses on an income statement is obviously felt internally here as investment. We really had an investment, for example just take leadership consultant. It’s something that we’ve talked about or the company has talked about for a period of time.

What you see us doing with Co Company, what you see us doing with DSI is we’re eager to basically represent in the marketplace a leadership consulting platform that’s consistent with our brand. We have very good legacy people there, we just don’t have enough of them and we have an opportunity to take our brand and the access it gives us and move up.

So we’re going to keep on doing that, Tim.

I don’t - I’m hesitant to give you a specific timeline because we’re not going to chase an opportunity in the marketplace, but if we see one, we’re going to take it and I don’t know whether that’s going to be - whether that’s going to look like across quarters or across years and you can - yes, you can expect that we’re going to invest more in leadership consulting.

On the Culture Shaping side, we came to the end of - as we get into last year, we realized that the number of clients who are interested in Culture Shaping, who recognized the impact it can have in its overall organization is one that we felt that we’ve got a scalable platform here with Culture Shaping at Senn Delaney.

So we feel we need to invest more in it, and as I said, invest in an external leadership. So again we’re going to do that. We feel good about where we are with these additional five right now. If we find someone else, we think is spectacular, we’re open to it, but we’re not chasing someone right now. We feel good about where that is.

And as we signaled, the investment in those people, the investment in the legacy people, that will continue throughout the remainder of 2016..

Okay.

And just the DSI acquisition, I guess, how much is that assumed to be contributing, I guess, for 2Q and as we go forward here?.

For Q2, it should ramp up pretty quickly to be pretty steady run rate. It’s a good going concern. We don’t forecast individual profitability of our business segments. It’s not too dissimilar in size from purchase price of the Co Company acquisition. And so I think you’ll see a positive - we’re hoping to see a positive contribution of the revenue.

Certainly it’s an outgrowth of the expenses over the course of Q2. We only owned it for literally matter of days in Q1. And as you know in purchase accounting, especially when we buy a business, some of the stuff that’s in the pipeline can get hung up on the balance sheet.

So we’re looking forward to having some full recognition of revenue from both these companies as the year plays out..

Okay. Sounds good. Thanks..

[Operator Instructions] And we next move to Kevin Steinke with Barrington Research..

Good afternoon..

Hi Kevin..

Hi. You talked about the strengthening of the Search business, particularly in the U.S. and Europe.

Would you attribute that mostly to just what you’re doing internally in terms of your hiring and the people you’re adding, or is it more market-driven? What’s - how would you characterize that dynamic overall in terms of the strengthening of the Search business?.

Can I go back to comment I made earlier that the business is as competitive, intensely competitive as ever. At the same time we are seeing our at best, right.

We are seeing an opportunity to compete in more situations, not less, both as a function of the increasing consulting community that we have, as well as the success we’re having in any number of searches across any number of sectors.

So I would say the market is holding and our performance in that market is strong, as you pointed out, particularly in the Americas and Europe. And as I’m sure everyone recognizes on this call, Europe in the first quarter of this year is stronger and we all know it’s off of a pretty weak comparison in the first quarter of 2015.

So we’re delighted with the way our European team has responded. We’re also delighted in the continuing cross collaboration that happens across markets and across regions which also helps the net activity. So that would be the way I’d describe the overall market..

Okay. That’s good to hear. And in terms of the integration of the two recent leadership consulting acquisitions, Co and DSI, just wondering what that integration accomplishes in terms of your ability to go out and better sell the capabilities that you acquired.

I mean, do you now have a better platform that all of your consultants can sell, or how much more needs to be done to really sell that as an integrated offering in terms of what you acquired?.

Yes, the opportunity in general is probably best captured by saying what it does is that it widens the aperture for us with the client, meaning it widens the conversation we can have with the client.

Obviously it’s a super important conversation that we’re having around talent and around search and around who is the right person or right group of people in order to enhance the team of clients, but now we have the opportunity to broaden that dialog to not only answer the question of who but also answer the question of how can we help make that team better.

And that’s where Leadership Consulting coupled with Culture Shaping work with not only the team - the individual level, the team level, but also the organizational level. So they feed on each other. It’s early days, right. We don’t have this integrated across the firm and all the way that we believe we will.

It is some of the opening moves here, particularly with Co Company under Colin’s leadership now for the Leadership Consulting, the addition of DSI, the continued investment in Culture Shaping under Jim Hart.

We’re broadening that conversation with the client having a more strategic conversation, but it’s still early days in terms of everyone at the firm being as fluent in that as we expect them to bring over time..

All right. That’s helpful. And I guess, Rich, you mentioned just some timing related G&A expenses in terms of training, meetings et cetera.

Could you maybe quantify that a little bit more, if possible?.

Sure. We probably had about a little over $1 million worth of our expenses that we would normally see spread out over the year accelerate closer to the first quarter or in the first quarter.

A couple of reasons, number one, we did some - along the lines of the very platform that Tracy was referring to, as we are bringing in these acquisitions, we had reason to bring some of our top people together to talk about the platform, talk about the offerings and help them engage constructively with the assets we had acquired, so that’s certainly caused some travel expense, while not at the level of say a global partners meeting, certainly we brought some key people together from around the world.

In addition, we’ve been - and we’ve talked about this in other calls, we’re going to continue to ramp up our training and development in building our own consultant base and developing our capabilities within core search and we advance some of that sooner rather than later, again mainly driven by market demand and the fact that we need these people engaged very quickly with our best people because we have an opportunity to leverage their strengths in what we’re seeing in the marketplace and the demand coming through, and we also had a small piece of legal expense that probably was a little bit more than we expected during the quarter.

Those things will even out over the course of the year. So like I said, those things will not - it should not drive our annual run rate any higher..

One thing I would quickly add is there are more people, more terrific people that we need to bring together inside the firm who were unable to participate in this initial round. So we’ve got a continuing education here particularly as we broaden the platforms that we’re putting in front of our clients.

We’ve got more work to do in terms of bringing people up the curve on that..

Okay. Fair enough. Thanks for taking my questions..

Thanks Kevin..

[Operator Instructions] And with no further questions in queue, I’ll turn the conference back over to management for closing remarks..

Yes, I’ll just close by saying I want to thank everyone for their participation today. Well, you see as the first quarter is clearly an investment in our business.

You’ve seen that in the search business, in particular during my first two years, you’ve seen the results that has in terms of the impact in the marketplace, particularly in the Americas and Europe as noted in the first quarter. We’re going to continue that in Search.

That is our core business that will remain and we want to do nothing but strengthen that.

At the same time, you’re seeing the investment in Culture Shaping and Leadership Consulting because we’re responding to our clients, responding to what we believe is a market demand, and we look forward to communicating the results of all that in the quarters to come. Why don’t we leave it there? Thank you. Thank you all..

And ladies and gentlemen, that does conclude today’s conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day..