Good day and this is Heidrick & Struggles' Third Quarter 2017 Conference Call. This call is being recorded. It may not be reproduced or retransmitted without the Company's consent. [Operator Instructions]. 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 our 2017 Third Quarter Conference Call. Joining me on the call today is our President and CEO, Krishnan Rajagopalan; and our Chief Financial Officer, Rich Pehlke.

During the call today, we'll be referring to 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 operating income, adjusted operating margin, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share.

These are non-GAAP financial measures that we believe better explain some of our results. 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 slides.

Throughout the course of our remarks, we'll be making forward-looking statements and ask that you please refer to our safe harbor language contained in our news release and on slide one of our presentation. The slide numbers that we'll be referring to are shown in the bottom right-hand corner of each slide.

And Krishnan’s initial comments are going to cover slide three through eight. Krishnan, I'll turn the call over to you now..

Julie, thank you. Good afternoon, everyone, and thank you for joining out call today. I’m really pleased with what our team has accomplished. Our third quarter consolidated results were very good. Net revenue 11% driven by strong year-over-year growth of 14% in executive search.

Operating income increased 17%, the operating margin improved to 8.8% from 8.4%, and diluted earnings per share is $0.43 compared to $0.37 in the last year’s third quarter. Specific to executive search which is still the line share of our total revenue, Americas grew 17% and Europe grew 22% partially offset by a slight decline in Asia Pac of 4%.

Every industry practice group achieved year-over-year growth. We added 16 net additional search consultants or 5% this year. Search confirmations increased 4% in the third quarter and 5% for the first nine months.

Consultant productivity improved slightly to just over $1.6 million in the quarter as we continue to ramp up the large number of hires and promotions made over the last year. The average revenue per search in the quarter and on a trailing 12 month basis were both the highest in the last five quarters.

And the operating margin for executive search was 20% compared to 19% in last year’s third quarter. Leadership consulting grew approximately 2% in the quarter and 29% for the first nine months. As we pointed out in the past, there will be quarter-to-quarter variability in the results of this business as we ramp up from a relatively small base.

Culture shaping net revenue was down compared to last year as we expect, but results improved sequentially compared to the second quarter. We believe that we stabilize this business from a revenue and profitability standpoint and are now focused on driving growth.

Last quarter we announced that we’d be combing our leadership consulting and culture shaping business into one client focus service unit, Heidrick Consulting. Heidrick Consulting will provide our consultants with a clear, cohesive suite of leadership offerings to accelerate our clients’ performance.

We also believe that operating leverage can be improved by combing the two entities. Since that announcement, the number of work screens were formed to focus on key elements of the integration such as product and service development and delivery, our go-to-market strategy, collaboration with search, compensation and general integration requirements.

We hope to complete the integration by the end of the calendar year and launch it at the beginning of 2018. Simultaneous with this integration is an increase focus on my part to work with the leaders of leadership consulting and culture shaping to drive growth in these businesses through hiring, training and strategic marketing initiatives.

Our go-to-market strategy and cross collaboration with the executive search are key elements for the growth strategy. Now I’ll turn it over to Rich for a more detailed look at the quarter and then I’ll come back to discuss some of the priorities of our firm..

Thank you, Krishnan and good afternoon, everyone. Krishnan has given you an overview of the revenue drivers, so I’ll focus my attention in comments of some of the key line items in the income statement in a bit more detail than the press release.

Looking on slide 17, salaries and employee benefits expense in the third quarter increased $13.2 million or 13.8%. Fixed compensation expense increased $1.4 million, well variable compensation increased a $11.8 million.

The increase in fixed compensation reflects compensation of benefits related largely to the acquisitions made in 2006 -- 2016 as well as other investments and new hires primarily in executive search.

The larger increase in variable compensation reflects the increase in executive search revenue and search consultant performance associated with that increase. Turning to slide 18, general and administrative expenses increased $1.1 million to $37.2 million and showed a slight decline compared with the second quarter.

In the third quarter, the two primary drivers of the year-over-year increase were the inclusion of $3.6 million of expenses related to our Global Consultants Meeting held at the end of July and approximately $1 million related to higher occupancy cost in our business.

I’m very pleased that we’re able to largely offset these increases with reductions and other run rate expense and lower than expected acquisition related cost. As you’ll see in slides 19 to 21, operating income increased 16.8% or $2 million to $14 million and the operating margin was 8.8% compared to 8.4% in the last year’s third quarter.

Referring to slides 22 through 24, adjusted EBITDA increased slightly to $18 million compared to $17.5 million in last year’s third quarter. And the associated margin dropped to a 11.2% from 12.2% reflecting a faster pace of growth in the revenue in the equation.

Referring to slides 25 through 28, net income in the third quarter was $8.2 million and diluted earnings per share over $0.43 reflecting an effective tax rate of 42.7% for the quarter and a full year projected tax rate of approximately 8%. That full year rate reflects the differed tax benefit of the impairment charges.

Our 2017 full year estimated tax rate would be closer to 47% adjusted for the impairment charge that we reported in the Q2 and Q1 EBT settlement. Now looking at slide 29, cash and cash equivalents at September 30 was a $105.7 million compared to a $100 million at September 30, 2016.

Cash generated by operating activities was $50.2 million compared to $35.9 million in last year’s third quarter. Our cash position plus the cash we have access through our revolving credit facility remains quite strong and we are in excellent position to continue to invest in and grow the business.

Now looking after the fourth quarter, our executive search backlog is shown on slide 30 and is still quite healthy. We still have a week left in the month of October but our search confirmation trends are shown on slide 31, year-to-date through September search confirmations were up 4.5% compared to 2016.

Other factors in which we based our forecast include our revenue recognition model, anticipated fees, the expectations for our consulting assignments, the number of consultants and their related productivity, the seasonality of the business, the current economic climate and foreign exchange rate fluctuations.

We are forecasting 2017 fourth quarter net revenue of between $150 million and $160 million. Reported net revenue in the fourth quarter of 2016 was a $159.8 million. And with that, I’ll turn the call back over to Krishnan..

Thank you, Rich. One our last call, I summarized the priorities that we aligned our firm around at the Global Consultants Meeting which was held at the end of July. I want to summarize and reiterate those four priorities and speak to the progress we’re making and where we need to be moving faster as well.

Our strategic initiatives must be focused on achieving results towards these priorities. First, we’ll continue to sustain and grow our search business. We’ve invested heavily in this business over the last few years and are seeing the return.

Search revenues up 8% year-to-date and has grown at a compound annual growth rate of 7.5% over the last three years. We’ve added 16 net new search consultants this year and our voluntary consultant turnover has been only 5% year-to-date.

We have good opportunities for growth in the future by continuing to push to work higher at the top of organizations and by focusing on growth markets and healthy economies where we should have a larger presence. The recent announcement of our acquisition in the Nordics is a perfect example of this priority.

Second is our priority to substantially grow the size and scale of Heidrick Consulting. Following the integration of leadership consulting and culture shaping, this will be our focus. Towards these first two priorities, we will go to market in a more thoughtful and joint manner.

We must accelerate the pace of our go-to-market strategy in a more coordinated way offering clients integrated services across search and consulting for greater impact. As part of the Heidrick Consulting integration, one of the most important work streams is focused on the go-to-market strategy.

Outside the integration process, joint account planning between search and consulting is one of my key focus areas. We will need to get this right and do it more aggressively than we have to date.

We have come a long way in aligning the firm around our accelerating performance platform, but I truly believe that further refining the clarity of our offering and go-to-market strategy will not only positively impact clients and consultants, but also enhance our ability to recruit talent into the firm.

Additionally, we’re increasing our commitment to the training, development and mentoring of our consultant teams on our product and service offerings in order to accelerate their path to trusted leadership advisor.

Simultaneous with our commitment to training is my expectation that our best consultants who both capitalize on this knowledge transfer and use it.

We kept off this initiative at the Global Consultants Meeting where multiple sessions were held that focused on products, services and projects where Heidrick has been successful in working at the top across a range of human capital and talent issues.

Following up on the conference, we continue to lead a program for consultants to increase their knowledge of our consulting products and solutions specifically to advance cross selling initiatives. Our third priority is to continue investing in the development of our distinctive IP and more fully leveraged our data and analytics.

Our new assessment methodology incorporates our IP and forms the basis of a consistent language we can use between search and consulting. This is now leading to leadership development projects for the firm.

Today it’s more than 60% of our consultants have been trained on our assessment framework, had to apply it via eight online modules, we will be rolling this out more fully effective January 1, 2018. And last, but definitely not least, we are taking a deep dive into the cost structure required to support the business today and in the future.

We’re pleased with the cost containment and savings achieved to date but I believe there were savings to be achieved that we should be able to achieve these savings faster, this is a priority.

We firmly believe our clients, our employees and our shareholders will benefit from the implementation of these strategic priorities in the full impact of our integrated and complementary services and from our deeper client relationships. We see great opportunity ahead for Heidrick & Struggles.

We’re moving forward to take full advantage positioning the firm for sustainable profitable growth. I can’t thank our employees enough for their hard work this year and look forward to finish the year strong. Now Rich and I’d be happy to take any questions you may have..

[Operator Instructions] And our first question is from Tobey Sommer with SunTrust..

Hi, this is Kwan Kim on for Tobey, thanks for taking my questions. First off, a question on cash, what is the balance that is available to be invested and otherwise [Inaudible]? Thank you..

Sure. At current rate – at current rate we probably have between 8% of 10% of our cash balance in countries that I would call or in geographic locations where I would say there is restrictions from the standpoint that it’ll be costly to move that money around. And so it’s a very small percentage of our overall cash.

We don’t have any other restrictions beyond that. And then keep in mind, on top of that we have our – or the full balance of our revolving credit facility. So, from the liquidity standpoint there is no issue in the company at all in terms of cash flow..

Thank you.

And could you talk about the environment in Asia Pacific, maybe give us some details on the industry of practices that are sluggish and your expectations for a turnaround there?.

Sure, this is Krishnan, thank you for your question. Look, Asia Pacific is a region where we have a very strong presence, we’re very competitively positioned in that market.

And if I take a step back, it isn’t really one region and really at the end – it is a considered region but it’s hard to put a big umbrella over all of it because there are so many different markets inside of there that are reacting differently in today’s market and have a different set of issues.

We just saw today that finally Korea is having GDP growth, so it’s been a difficult market. We see different dynamics in each of the markets that we see there. So we’re seeing momentum in China, we’re seeing some momentum in Australia, we’re seeing momentum in India.

Some of the markets we’ve seen momentum in Japan as well, and some of the other markets have been a little bit flatter than what we’d like to see.

We’re optimistic on the team but we’re cautious as well because the cost of doing business in Asia has gone up dramatically over the last several years, so we look at hiring and everything there very, very cautiously and look forward to making – continue to make investments in that market..

Thank you very much..

Thank you..

And our next question is from Tim McHugh with William Blair & Company..

Hi guys.

First I guess, never spoke I guess the really strong revenue for search and then also the financial service, is this strength this quarter, are those two connected or was the strength in fees per search upticks or some other factor?.

No, I think they’re connected Tim, overall a couple of things drove the revenue improvement. Across the board I think we saw a good healthy results, especially in Americas and Europe. We just highlighted the financial services practice because I think relative to our other industry verticals, they had very strong results.

So I think that’s certainly was one of our key drivers. We also benefited a little bit from the way the revenue recognition model works as I mentioned in my comments even about guidance, we had a strong backlog coming in that assisted us relative to the third quarter and the timing of when our confirmations happened and compared to a year ago.

So we benefited a little bit of that, and that creates a small amount of pressure if we look in the next year.

Again at the confirmations pace and quality pickup in the fourth quarter, it could lead us towards the higher end of the guidance and that’ll all be determined by the end of the year, but overall it was just a very solid performance pretty much across the board in search..

Okay.

And the financial services, I apologize if I missed it, but is there a particular subsector or reason I guess why it was the strong as it were?.

Again, pretty balance across the board – it was a good bounce..

Yeah, it was [Inaudible] in all regions..

Okay. And leadership I know the caution is to not read too much into anyone quarter but it’s, I guess it was towards the lower end of what we’ve seen for the last at least three quarters.

So, is there anything – anything that you saw that in terms of client behavior or I guess competition or anything in the market place that that gives you pause or are you comfortable through that it’s just kind of normal volatility?.

Look I – there is absolutely nothing in the market place on our leadership offerings that causes us to pause.

There is continued demand, so we spent most of our time there rather than on hiring, right now on retooling, improving productivity of consultants sort of hiring into the parts of the model to be able to reduce our external consulting costs as well.

And we’re now positioned better I think as we kind of emerge out with Heidrick Consultant to continue on hiring and we have an attractive platform and we’ve got a lot of market demand as well. So, there is nothing there to read into it..

Okay, fair enough. Thank you..

Thanks, Tim..

Thanks, Tim..

[Operator Instructions] And our next question comes from Kevin Steinke with Barrington Research..

Good afternoon. So, the culture shaping business you called out as having stabilized, just wondering what gives you the sense or the confident that that business is now stabilized, and I believe you mentioned, you know, a position to grow going forward..

Sure, thank you for your question. Look, I think that when you take a step back and you look at the culture business, it’s selling projects that take up relatively long lead time. And you need a funnel of opportunities to drive that, and that’s what we lost in the fourth quarter of 2016.

And we’ve done a very nice job of reestablishing the pipeline, and we’ve also started looking at some new pipelines for growth as well, we’re working with as a partner with other advisory firms as their culture arm on a project – on several projects as well.

And in addition, it’s been a year since we hired all the new consultants and they’re really ramping up well, and making progress in the business. So, that’s what gives us the confidence to say that the business is now stable and as we look at our pipeline and look ahead we feel lot more confidence in that..

Okay, that’s helpful. And then just touching on couple of the strategic priorities that you’ve outlined here.

In terms of growing in size – growing the size and scale of Heidrick Consulting, have you kind of thought through plans of what that entails in terms of hiring or how much hiring or the timing or is it just kind of, be kind of opportunistic as we go along?.

Yeah, it’s definitely not going to be opportunistic as we go along. So we’re finalizing the integration and putting together the growth plans for that business. So, if the integration completes, we will be able to articulate that better but it’s definitely not going to be opportunistic.

We have a plan, a hiring plan that we will have that surrounds that and various pockets that we’ll be looking to grow it in..

Okay. And I believe you said in your work on the integration of leadership and culture into the Heidrick Consulting business that – that you mentioned one of the pieces of integration was just establishing compensation, structure.

I think have you built any incentives for driving the integrated go-to-market strategy and the whole cross sell between search and consulting or what all of those the compensation entail?.

Yeah, I’ll take the – a quick stab and then Rich if you want to go deeper. We have a cross incentive collaboration program that we’ve got established between search and consulting, so we do have something in place.

And we need to educate people a bit more on that without a question as particular as cross train, but it’s something in place that appears to be working..

Yeah, and the other thing I would just add to that Kevin is that if we’re thinking about that design and it’s very much one of the most active work streams in the integration, we do have two businesses that had slightly different compensation models and they’re all – and they’re both different from the search compensation model.

And so we’re making sure that at the end of the day that, we do the right things that attract the right type of consultants and drive the right type of behaviors that we need to grow and establish that business. Well at the same time, bringing some profitability overtime back to the business in its entirety.

So, that’s a tricky equation because as you know in all parts of our business, we invest through the income statement and not through the balance sheet for the most part, so we’re doing a lot of work on that right now.

But the good news is, is that very much as those business operate today for the most part the incentives are driven off the profitability and the growth of the business and we intended trying keep that type of the structure..

All right.

And then, the deep dive into the cost structure that you mentioned, just wondering how far along you are into that process and if there is any timeline for kind of result or a conclusion on that objective?.

Yeah, it’s never done fast enough. And as my boss [Inaudible] this through the table for me so I can tell you that, so that’s the timeline question.

Look, I think we’re pleased at what, you know, we had a pretty calm quarter this quarter, and we were able to absorb the full hit of the expense of the partner meeting and basically have pretty stagnant growth in G&A line.

And when you take out some of the things that have driven the increase in our G&A line over the past few years with all the acquisitions with inclusion of external client services and some intangible depreciation – amortization etcetera, we’ve had kind of a pretty modest growth in the G&A line over the last few years and we constantly look at it.

That’s said, we’ve got to deeper. And as we have more clarity about how we are integrating these acquisitions, how we’re integrating our fails in marketing channels in our go-to-market strategy, we’re going to have to fund some of those initiatives off of our expense base.

And so we’re challenging ourselves to go further and faster and that’s what we’re going to continue to do..

Okay, fair enough. Thanks for taking the questions..

Thanks Kevin..

Thank you..

[Operator Instructions] It appears we have no further questions at this time. I’d like to turn the conference back over to speakers for any additional or closing remarks..

Thank you. To close, I again like to just thank our team for their outstanding work. I recognize that we have a large opportunity ahead of us here at Heidrick. We’ve got lots of work to realize that, and we need to move faster to get there.

I’m completely energized however by this opportunity ahead of us and the challenges that we have to reach those objectives, and look forward to reaching those faster as well. Thank you very much for being on our call today..

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