Good afternoon. This is Heidrick & Struggles’ First Quarter and 2017 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. Instructions will be provided at that time.

Now I will turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead..

Good afternoon, everyone and thank you for participating in Heidrick & Struggles’ 2017 first quarter conference call. Joining me on today’s call is our Acting President and CEO, Krishnan Rajagopalan and our Chief Financial Officer, Rich Pehlke.

During the call today, we’ll be referring to some supporting slides that are available on the IR homepage of our website at heidrick.com and we encourage you to follow along or print them. Today, we’ll be using the terms adjusted diluted earnings per share, 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 our press release on the last page of our financials and in our supporting slide.

Throughout the course of our remarks we will be making forward-looking statements and I 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.

And now Krishnan, I’ll turn the call over to you..

Thank you, Julie and good afternoon everyone. As you saw in our press release in early April, our President and CEO Tracy Wolstencroft is taking a three-month medical leave of that. I'm honoured to be filling in for Tracy while he's out. For those of you who don't know me. I've been with Heidrick & Struggles for 16 years.

Before joining Heidrick, I was a partner in a leading global management consulting firm. I joined Heidrick in 2001 as a search partner in our global technology and services practice and since 2014 I've been on the firm's executive committee. I’ve led to executive search business since 2016.

Heidrick is a talent rich organization with a team oriented culture and we were all aligned in our pursuit of our strategy to deliver premium leadership advisory solutions and insight to leading organizations globally. We wish Tracy well and look forward to the return.

Let me begin with a few remarks about the first quarter, beginning with slide three. The positive momentum of our 2016 third and fourth quarters continued into this quarter. Consolidated net revenue increased almost 8% year-over-year and almost 10% in constant currency.

The sequential decline in revenue compared to the fourth quarter was typical of what we see in the first quarter as a result of lower fourth quarter confirmations during the holiday. Executive Search net revenue increased almost 8% year-over-year. Every region contributed to this growth.

Americas grew 5%, Europe was up 12% or 21% in constant currency and Asia Pacific grew 12%. The consumer markets, healthcare and life sciences, industrial and ENSC [ph] practices each achieved 15 plus percent revenue growth.

Leadership Consulting grew almost 60% year-over-year, mostly related to the acquisitions we made in 2016 which we are still in the process of integrating. We are encouraged by the early acceptance we are seeing of our new advisory framework in accelerating performance.

Culture shaping results in the first quarter were disappointing, revenue was down 31% year-over-year due to slower sign-on of new engagement. This obviously impacted their bottom line as well. With the increasing awareness of how impactful culture is on a business, competition has increased and the corresponding sales cycles of lengthened.

We are actively involved in addressing these market dynamic. Importantly, our growth in consolidated net revenue without a corresponding increase in expenses help drive an improvement in operating income of almost 72% and an increase in adjusted EBITDA of 14%. So 2017 first quarter operating margin was 4.7% and the adjusted EBITDA margin was 8.8%.

We are also growing our base of consultant. As you will see on slide 10, we ended the quarter with 363 executive search partner and principal consultants, 20 leadership consulting partners and 18 culture shaping partner and principal consultant.

In the first quarter as part of our annual review process, we promoted a record 28 people into the search consultant ranks as principals.

This increase in consultant headcount not only reflects our well-established development and training program, but it also reflect the acceleration of the career path in executive search by eliminating one of the four level. It will be important to support our new hires and promotion in order to ensure improving productivity.

Now I’ll turn the call over to Rich to go into more detail on the quarter..

Thanks, Krishnan and good afternoon, everyone. I'll begin with some additional details on the first quarter results beginning on slide 11.

I like what Krishnan said, we are generally pleased with the first quarter results, including revenue growth of almost 8%, as well as the increases in operating income, net income and EPS when adjusted for the impact of the EBT settlement. Let me take a minute to give you some more background on what this is and our thinking behind the settlement.

You may recall from our previous disclosures since 2010, we had been notified by the HMRC, which is the tax authority in the UK, that it was challenging the tax treatment of company contributions to Employee Benefits Trust or EBT between 2002 and 2008.

We have been appealing this notice since maintaining our position that the use of these trust was proper and that our position would be upheld under any challenge. But recently the challenges by the HMRC have been escalating within the UK courts. In the end, we decided it was best to settle and put this behind us.

The settlement also reflects a partnership with the employees who benefited from the trust, as well as the obligation by the company. The net settlement for Heidrick was $3.7 million, which is less than the HRMC's proposed adjustment which we valued at $4.8 million at December 31, 2016.

Slide 11 shows in rounded US dollars how the settlement was recorded on the income statement, $1.5 million of expenses included in salaries and employee benefit, $2.4 million of expenses in other nets, and there is a credit of $200,000 in the tax provision.

Looking at slide 12, salaries and employee benefits expense in the first quarter increased $6.1 million, or 6.7%. Fixed compensation expense increased $6.4 million. Variable compensation expense declined about $300,000, mostly related to the county for deferred revenue.

The increase in fixed compensation reflects compensation and benefits mostly related to acquisitions made in 2016, as well as other investments in new hires, primarily in executive search. It also reflect the aforementioned EBT settlement in the Executive Search segment, which is the major reason why Europe’s operating income declined year-over-year.

Turning to slide 13, general and administrative expenses increased $930,000 to $36.1 million. The increase reflects G&A from the acquisitions of DSI, JCA Group and Philosophy IB, which also includes the use of third-party consultants and contractors in that category as well.

The improvements in operating income and adjusted EBITDA margin in the first quarter referenced earlier in slides five through eight reflects the revenue growth in the Americas, Europe, Asia Pacific and leadership consulting segments and we benefited from the improved operating leverage in those businesses.

Referring to slides 14 through 17, net income with $700000 in the 2017 first quarter and diluted EPS was $0.03. With an effective tax rate of 84.1% in the quarter and a full year of projected tax rate of 44%. If we were to exclude the $3.7 million settlement, diluted EPS would have been $0.19.

Now referring to slide 18, the March 30 1st 2017 cash and cash equivalents balance was $68.3 million or $43.3 million net of our current debt position.

In the first quarter we made approximately $132 million payment to employees for performance bonuses, approximately $12 million was related to the payment of bonuses that were deferred in three prior years and $120 million was for variable compensation related to the 2016 performance and we will make an additional payment of $10 million in the second quarter related to 2016 bonus payments as well.

In the first quarter, we borrowed $40 million for short term working capital needs under our credit agreement and subsequently repaid $15 million, $25 million remains outstanding and while it is categorized as long term debt because our credit agreement expires in 2020 we intend to repay the debt as soon as practical.

Cash used in operating activities was $110.5 million compared to a $119.2 million in the 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're in a great position and we continue our investment in the growth of our business.

Now let me give you the guidance for the second quarter.

Our Executive Search backlog shown on slide 19 remains healthy, monthly search confirmation trends are shown on slide 20, other factors on which we base our forecast include anticipated fees, the expectations for leadership consulting and culture shaping assignments, the number of consultants and their productivity, the seasonality of the business, the current economic climate and foreign exchange rate.

We are forecasting in 2017 second quarter net revenue of between $153 million and $163 million. Reported net revenue was $148.9 million in the second quarter of 2016, when adjusted for constant currency based on the rates in March of 2017, last year second quarter net revenue would have been $146 million.

With that I'll turn the call back over to Krishnan..

Thank you, Rich. Since late last year I've spent time in Asia, Europe and in many of our offices in the United States. Market conditions in general for our business continue to be favourable. I'm truly energized by the work we're doing for our clients.

We have the ability to offer our clients more insight and services than I've ever seen in my 16 years at Heidrich I'd like to highlight one example of client work that we've been involved with recently.

This work showcases the complexity of assignments we are executing and the power Heidrick & Struggles can deliver by bringing together our global team of consultants and a full skill set of search and leadership advisory services.

In conjunction with the completion of a large acquisition, we were selected by a large S&P 500 multinational company as their global talent advisor to help assess and select the best of the two teams globally. This project involved 24 of our consultants throughout all three regions over a span of four months.

The client also benefited from the use of our assessment tools developed under our accelerating performance framework. In subsequent month, Heidrick was engaged in eight global searches to fill some of the gaps that were identified during our assessment process.

And today we're actively engaged in discussions with this client on topics including diversity and inclusion and leadership development. We are this company's global talent and leadership advisor.

We feel good about our start to the year, no doubt we are seeing some bumps like Culture Shaping, but we're growing our consultant base, we have very little turnover. I characterized the business momentum is very sound. The economic environment is vibrant and we are improving profitability and increasing profit margin.

The market for premium leadership talent is a great place to be. We're actively working to increase our presence and effectiveness with clients building on our brand and momentum. We are delivering on our strategy to deepen and expand our presence with clients at the top and to offer more services as a trusted and valued advisor.

Now Rich and I’ll be happy to take your questions..

Stephanie?.

[Operator Instructions] And we will take our first question from Tim McHugh of William Blair & Company..

Yes, thanks.

Just Culture Shaping, can you elaborate on the challenges there and how much of that is related to the transition of the founders out of the business to the best you can tell?.

Hey. Tim. Good afternoon. This is Rich. I'll start and I'll turn it back over to Krishnan then as well. I think there is a couple of things going on there. There is no question there's probably some level of impact just on the ramp up of our transition of our new partners getting up to full speed and continuing that process.

Keep in mind though that in terms of people that have left the business the biggest turnover from 2016 2017 was Jim Hart, who was the President and CEO, Larry Senn, the founder is still active in the business and some of the remaining legacy partners are still part time in the business.

So it's not been a total - total drop, although their time is still winding down over the course of this year. So we think there is probably some impact on that. But I think there's also a few marketing conditions, maybe I'll let Krishnan talk a little bit about that as well..

Yeah. Thank you, Rich. And thanks Tim for the question. You know, what we're seeing is that we are in the middle of many, many conversations on Culture.

So we keep track of that very carefully and it isn't as if the number of opportunities have gone down, but we do see a lot more competitors that are in that field and a lot more different viewpoints that are being provided as well.

So what that ends up doing is it ends up elongating the cycle time to close project and that's really what we feel that we're seeing in the marketplace with them. There is always some lumpiness in small businesses as well. So there could be some lumpiness as long in the first quarter associated with Culture Shaping..

Okay. Just is there any reason to think the count [ph] about more competition there. It sounds like that's probably a not an issue that goes away right away.

Is there any reason to think that changes?.

No I don't think that the more competition is going to change, I think sort of how you have the conversation along with the competition and in the context of the competition is what we're working on getting our arms around and working with the teams on..

I think another thing that I’d add Tim is that you know, we still expect an increase in the profitability over the course of the full year as the cost of the extra compensation related to the you know, on-boarding of the new people has come off in 2017. So we do still continue as the business ramps up.

Continue to see the margins improve and start pointing back towards the direction of the historical margin..

Okay. And just I guess more broadly in the leadership plus culture shaping business, it's quite a big change from Q4 to Q1 and even Q4 versus Q3. So I guess there is some volatility in the business.

But - what's - is this more the normal course of production or is there - I guess are we under earning here and were we over earning, outperforming what you would normally expect in Q4, is there any way to kind of frame what we should really think is the kind of the more natural and run rate of the business at this scale at right now?.

Sure. I think you touched on the key point right at the end of your comment which is scale. and until we get to these businesses up to a larger level of scale I think some of the volatility we're seeing in the revenue run rate will be less apparent.

You know, keep in mind that you know, there is no question the culture results were disappointing for us, but they weren’t [ph] disappointing in magnitude of tens of millions of dollars that was just a couple million dollars.

And in the case the leadership consulting which is more of a normal course you know, the first quarter after a strong quarter like the fourth quarter we tend to see in that business a little bit of absorption of the work and while people are doing some work as well as business development.

So as we continue to add people to that business and investment to that business and have a few more people who are more dedicated to pure business development and less than just also client activity as well, I think we can settle into a more normal rate. But I think we'll still see some volatility in that.

But as of right now we still think that you know, trailing 12 month basis we’re still seeing a nice growth in the business and we still think the more normal run rate is probably somewhere in between where we are this quarter and fourth quarter..

Okay. Thanks a lot..

And we will take our next question from Kevin McVeigh of Deutsche Bank..

Great. Thank you. Hey [indiscernible] to Tracy too for a speedy recovery. Want to just talk about, Rich within the context of the net revenue guide, is there any way to think about the implied EBITDA associated with that.

I know, you know, there's a fair amount of moving parts below the line, but just any sensitivity the EBITDA given the revenue range out there?.

Kevin, we’re still not going to forecast EBITDA in our guidance plan. Yet again, I think in large part because of the nature of our scale of our business and the fact that we can get some volatility within these lines, and you know it doesn't take a lot to move the needle.

That said, what we are encouraged about and I kind of touched on it in my remarks a little bit is that, I think again earlier in the year we're seeing a little bit better operating trends this early in the year than we've seen in recent years.

So that shows that as we've gotten up to a little bit higher level of consultants we've had very little turnover. You know a nice steady run rate of - and Krishnan talked about it in his remarks, relative to the momentum in the business that that generally leads the fact that we can kind of continue to slowly build that EBITDA level..

Got it. And then any thoughts and if you could give us maybe little more granular number, the monthly confirmation trends on the Executive Search.

It looks like that's slipped a little bit, what was that kind of on the year-on-year and just is that - any particular reason for that?.

Are you talking about the April number that we post on the slide?.

Yes..

Well, you know, again, on a – on probably on a four month basis with that number over the course we're probably at almost 3% to 4% a year-over-year and I will let Krishnan give a little more color on it.

So it's not uncommon, especially when we have a big spike like we saw in March that we would have a little bit of down because it's a little bit like I talked about in the consulting businesses. We have to digest a little bit and sometimes it's a little bit of execution versus business development. Wish I could speak to the trend a little bit more..

Yes. Look I think we are seeing a good market out there still for Executive Search. March was a huge month. I think Rich it was probably the biggest month we've had in several year. So they were a little bit of absorption that was going on. We are still seeing good number of confirms in April, and you know we're forecasting that to continue..

Got it. And then just one last one along those lines.

Have you seen any changes in the type of assignments in terms of the scope of work you're doing you know, around financials is it more revenue or still compliance driven? Just any thoughts on the scope of the work?.

No radical changes that we've seen over the last year or so in the - in the scope or type of work. I think that we're seeing more confidential assignments than we have in the past where clients are looking to us to do work quietly. So I think that would probably be the only trend that I'm seeing that somewhat different..

Got it.

And Rich just real quick, the investable cash, like usable cash as opposed to just overall?.

Yeah, we still remain pretty strong you know with the moves we made with our tax structure at the end of the year. And the fact that we will continue to build cash as expected over the course of the year. We have very little cash locked in any jurisdiction. We watch that pretty closely and we're actually in a pretty good shape there.

So most of our cash is usable or to be redeployed within the business pretty quickly..

Okay. Thank you..

Thanks, Kevin..

[Operator Instructions] And we will take our next question from Tobey Sommer of SunTrust..

Hi, Tobey..

Hi, good afternoon. Question about the monthly volatility, just that April and March relationship and even a little bit just kind of zigzagging in February and January.

Over the last year or more in your opinion has there been more monthly volatility, if we were able to see that the - from the geographic representation of monthly confirmation would there be a different geographically you know, maybe like the French elections or Brexit actions that would somehow you know, kind of make sense compared to those monthly trends?.

I think, we go back and look at that - through that lens, but I don't really feel that there is a huge difference in the - in the monthly trends over the last several years. On the volatility, I think there is a relationship as Rich said between where we’ve got very large months and some absorption that we see in the following month.

We have seen impacts you know, for example in Asia we saw it last year in the first quarter when China was very soft and there was uncertainty in China. But we saw impact throughout Asia associated with that. We did see you know more currency related issues with Brexit is what I would say in that that phenomenon.

But I'm not sure that there's anything more than that that I have seen in the volatility of conformations driven by particular issue..

You know, its interesting. Tobey this is Rich. It's an interesting question.

The only thing I can think of that maybe – might even we had a slight structural impact on the timing of that is uptick because of the fact that as we - as we think about you know the roles that upticks have played in the completion of assignments displayed, it has been a little bit more important over the last probably 12 to 18 months in our business.

And so especially after periods of large business development or new assignments you know simultaneously people are also working and making sure we get those done and to bring in the last bit of revenue relative to those piece. It can obviously be recognized the same way.

So I'm not sure it's a material move, but it's just a slow shift in the business a little bit. And maybe that has a little bit of it.

But you know it's really you know, a lot of times confirmations go on client decisions as much as anything and we've actually been blessed by the fact that I think we've had good luck in making sure that we've had higher completions over the last year or so. And so just maybe sometimes its a little bit more....

And we tend to try to average it out and look at it and talk about it from an average perspective as well, in terms of how we look at it..

Okay. Thanks. That's helpful.

If I could turn - switch to the record promotions and the changes in categories of consultants, could you stand upon that a little bit and obviously [indiscernible]?.

Sure. We used to have a category of consultants that we referred to in the rank as associate principal and we eliminated that category, that level.

And we you know changed roles and changed training programs to enable people to not have that middle level and be able to migrate through to be a principal or a consultant from being an engagement manager as well. So its a lot of work that we've been doing the last two three years to create that.

And we pulled the switch on it I guess at the end of last year to eliminate that role and we've been migrating away from that role for the last 18 months in any case..

What’s the objective of that change?.

Yes. The objective is really twofold. The one objective obviously was to give a cleaner career path for our consultants. So we've done I think a nice job of promoting from within and we found that there were some bumps along the road with that program, so one was to do that.

And two, you know with a lot of the emerging technologies and things we see out there, getting some of these people opportunities and develop into the marketplace as well from a client perspective was an added incentive as well. So those are the two objectives..

Just a housekeeping, am I right that the midpoint of your revenue guidance is calling for about stable year-over-year growth compared to 1Q level?.

No I don't think so, I think I adjusted, so if you take the 158 against the 146 would be the comparison..

Yes, about 8ish percent....

Yes..

Okay. What – as we look at the business now if you've grown headcount quite a bit, you have internal consulting headcount diversified as well in recent years. What kind of margin do you think we can get out of this - out of the business as its currently constructed? Thank you..

We’re not going to forecast specific margins Tobey, but directionally we're trying to grow the margin you know and that's been an objective of ours for a long time. And twofold, number one by bringing stability back to the Executive Search business and getting to a scale where we cover the overhead at a better rate.

And I think we're starting to see that flow through on the operating leverage because we kind of always pointed to the fact that we had to kind of get to and maintain and keep growing from the 350 number and I'm pleased with the job that the team has done in terms of getting there and holding relatively steady on the productivity as well as the turnover.

That certainly helped our profitability. On the new business, there is a couple of key and we're - and we've got work to do there.

Number one is still, we’ve got a good scale in the leadership consulting business and scale in the leveraged support systems of the leadership consulting business, so that as we build that revenue it's more profitable than search. But right now we still use a lot of outside contracts and it costs us a little bit of margin.

On the Culture Shaping side we have to get back to the historical run rate, first objective of getting back into that high $30s $40 million range and pointed to an operating margin of 40% plus and that would go a lot to helping our profitability as well..

Right.

You’ve kind of dovetail to my final question, if you said Culture Shaping little bit more competitive, and some things change there, are you going to you know, kind of return to prior levels and expand from there via acquisition and if so, is that a more competitive landscape there?.

Well, its certainly and I think Krishnan touched on this in his earlier comment, and I’ll certainly let him add to it. But Culture is still a very hot space in terms of the leadership discussion in most entities. It doesn't always necessarily get as narrowly focused as Culture Shaping which is the core strength of what’s been, the way he does.

So one of the things we'll do on top of just you know reinvigorating and working with the Senn Delaney operation as we bring up our new people up to speed is also look at ways that we can either build on our capabilities and should we build our capabilities for client needs. And that's something I think we have to work with..

Yes. Let me just amplify on that, I think that the Culture conversation is a very big topic and Culture Shaping is just one being inside of there.

And so what we're discovering is that there is a magnitude of different discussions that one can have and while we stabilize the Culture Shaping side of what we are doing, we continue to dive in and get into these other topics as well and investigate those.

On two dimensions, one standalone, but also in terms of how it supports and helps Culture Shaping as well. So I think there is opportunities over there for us to continue to look at..

Thanks very much..

Thanks, Tobey..

And there are no further questions. [Operator Instructions].

Okay. Thank you everybody for participating in our earnings call. Have a wonderful day. Thank you..

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect..