Ladies and gentlemen, thank you for standing by, and welcome to the Heidrick & Struggles Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. And without a further ado, I would like to welcome your speaker for today, Ms.

Suzanne Rosenberg. Ma'am, the floor is yours..

Good afternoon, everyone, and thank you for participating in Heidrick & Struggles 2020 fourth quarter conference call. Joining me on today's call is our President and CEO, Krishnan Rajagopalan; and Chief Financial Officer, Mark Harris..

Suzanne, thank you. Good afternoon, everyone. And thank you for taking the time to join our call. By all accounts, 2020 was an unprecedented year, and I couldn't be more proud of our team's ability to meet the moment, demonstrate resilience and work collaboratively. It's often through challenging times that we prove what we're truly capable of.

And I'm so proud of our Heidrick team. Our ability to advise and work with clients in new and different ways has enabled us to more than hold our own in this market. We never stopped innovating. In some ways, the pandemic was an accelerant. We adapted our tools faster. We created virtual solutions and introduced brand new offerings.

In addition to our quick actions and pivots, we were able to reduce our costs while remaining committed to driving our strategic investments in diversification, innovation, data and tech enablement. Importantly, the transformation journey we embarked on several years ago positioned us very well as we entered the pandemic in early 2020.

Prior investments in products and IT infrastructure, digitization of search side of our business and the build out of hybrid consulting has led to higher value-added differentiated solutions for our clients and stickier relationships.

Together, these factors enabled us to outperform the market last year and performed better than we have historically in different recessionary periods. We ended 2020 with a very strong balance sheet, no debt and the strongest liquidity position in the firm's history.

While near-term visibility remains more limited than normal, we began 2021 on our front foot and we will emerge from this pandemic as an even stronger firm, generating enhanced revenue growth, profitability, and cash flow.

Turning to today, the world is still in varying levels of lockdown, but there is a light at the end of the tunnel with new vaccines being introduced and rolled out..

Thank you, Krishnan, and good afternoon, everyone. Thank you for joining our call today. Let me begin by extending my gratitude to our team around the world for the tremendous performance we achieved last year.

Despite the extremely difficult market conditions we faced in 2020, our performance allowed us to end the year on solid ground with a very good balance sheet with over $500 million of liquidity, no debt and continued excellent net cash inflows with nearly $100 million increase in cash in Q4 alone.

This sets the foundation for us to execute our strategy in 2021 as we continue to build new product capabilities to address client imperatives, and expand and enhance the way we serve the executive space..

Our first question comes from the line of Josh Vogel from Sidoti. Your line is open..

Thank you. Good afternoon, Krishnan and Mark. Thanks for taking my questions. Pretty impressive to see how the business held up throughout 2020, looking forward to seeing what 2021 has in store. I’m looking at SG&A, and Mark, you had a comment around driving the business towards sub-80%.

Can you give a little bit more timing, when we think about 2021? Can we set this year, if we take out the plan $4 million to $5 million in restructurings in Q1 and Q2? We understand base of expenses will come back including some T&E.

How should we think about a good level of SG&A spend this year?.

Sure, Josh. And thanks for the compliment. So the G&A side of it, obviously, when we think about 18% or sub-18%, we’re more or less focused on kind of that constant revenue that we have prior to the pandemic. So really that $700 million revenue level, $707 million, I think we had 2019, $716 million we had in the year before 2019 – 2018, excuse me.

And that’s really where we kind of see it. If you remember, when you go back to those years, we were in the 19% plus as a percentage of revenue for G&A, so going sub-18% is really we’re going to see the real estate savings coming through.

We would expect travel to come back when I kind of give those guided numbers, but what you probably won’t see as travel coming back to what it was either. So what we built in the best that we could with our model is, again, some coming back, some not and some of the international travel being there some not.

And we probably won’t see what I would say the new normal, which will still, I would imagine be a fraction of what it was back in 2022 would be my best guess, when we really think the economy and everything will kind of bring itself back into form.

At that point, we would expect again based on our strategy to have the revenue increase that would still be able to leverage that to at that 18% or sub-18% category..

I appreciate the insights there. And it’s good to see the consulting business hold up and especially, as you pivoted and had seen success in a virtual remote environment.

Given the spending cuts and leaner cost structure in general, has that moved the goalposts in with regard to a revenue level or target, we think, consulting needs to get to be breakeven?.

In my view, it’s still a very much hold constant, even though we are doing it through an automated delivery service, the parts that still doesn’t go away is the human element. The amount of people power that we need to drive on successful initiatives with our clients.

So there’ll be some savings so to speak, but I would still imagine in terms of the ramp up and the scale, it’s still going to be in that $80 million to $85 million plus or minus of revenue where we could see the breakeven point and then obviously grabbing the scale from there. So I don’t think you’re going to see a tremendous shift.

I don’t think it’s become auto bot in terms of delivery. That’s not what we mean by that. What we mean by that is, we still have the same amount of people powered, delivering those services just through an automated means, not fully automated in and of itself..

I got you. And just a couple of quick ones around executive search consultants being down about 20 year-over-year. I’m just curious after we count for promotions, just general sense of if this is typical attrition you see during unprecedented global events.

Is there anything out there that drove the year decline?.

I mean, the decline is primarily attrition here, Josh. The decline, if that’s your question was really driven by the restructuring and the cost takeouts that we did, our attrition has been at a really low level. And in the beginning of this year, we’ve now promoted 17 new consultants into the ranks.

So we’ve got our partner promotion process underway right now. And in strategic areas, we continue to hire, in fact, I think just from the beginning of this year, we’ve onboarded already six new consultants. So we’re optimistic on those fronts.

So that number reflected December 31 and where we were and we continue to look ahead positively into the market..

That’s great. And you answered my next and last question, but productivity is partly run around $1.8 million to $1.9 million today, you’re at $1.5 million, you just had some promotions and some hiring.

But do you still think, is that still a target of $1.8 million to $1.9 million for consultant productivity?.

Yes, it’s Krishnan. And Mark, you can augment this. Yes. Look, I think that our aspiration is to get back to about that $1.8 million level. I think that our expansion into some geographies and places where that’s going to be a bit more challenging, we’ll dampen that a bit. I think at least the ramp up of it.

And it’s put as people come on board to our platform and they begin to perform, we expect we can get back to those numbers..

Got you. Appreciate it, Mark. Thank you again for taking my questions..

Thanks, Josh..

Our next question comes from the line of Tobey Sommer from Truist Securities. Your line is open..

Thank you. To ask a margin question from sort of a different angle, what do you think the sort of new EBITDA margin level should be, if this expansion is, if we’re fortunate enough to have a nice multi-year expansion with revenue growth? How does this EBITDA margin kind of compare to prior cycles do you think..

So we looked at it from prior cycles, Tobey. Fair enough question. Kind of we move back to – you can go back to 2012, like, we published our EBITDA margin of around 8%. So we’re in the single digits during the great financial crisis. This time around we’re about 11.3% last quarter, we just talked about being 11.4%, but on the year 11.3%.

So I think in terms of faring through, I think we’ve done again a heck of a job, obviously, that’s adjusted EBITDA margin to speak to. I think what you’re also asking is where does it go from here? Do we get back up to the 12.5%, 13% where we were in 2018 and 2019, obviously we’ll be able to do that.

In terms of the new cost structure, we would expect again, more to be added on top of that in terms of the margin expansion. And then as we start to get through our strategic initiatives, which is what the end goal is to further increase that margin expansion even further.

It’s hard to give you scale on that right now, obviously, we want to be a little bit cautious. We’ll give you a little bit more on Q1 and Q2 as we’re going through it.

But you can bet that’s primarily what we’re really focused on, which is new initiatives, more profitability, enhanced value for our shareholders, and we think that’s really going to pay off pretty well..

Our next question comes from the line of Bryan Wynn from Credit Suisse. Your line is open..

Hey, guys. It’s Bryan on for Kevin. Congrats on the quarter. I appreciate all the comments here about consultant productivity. I think that certainly came in ahead of what we were looking for.

So we're just sort of curious, just how you guys are thinking about sort of balancing the headcount additions here as we move forward post-pandemic versus carrying forward kind of some of the – everything you've learned here just in the virtual service model?.

Yes. Let me take that first and Mark, if you want to add to that, please do. Look, we're thinking about this very strategically in our hiring model. So we've got – we've identified target geographies and expertise where we know we can grow into. Okay, so we look to hiring to those spaces and we've got our – obviously, our normal promotion cycle as well.

So between those two things, we're going to try to balance this thing. And as Mark said, I think really much of the growth still will be people-driven in that at least for search and for consulting individuals required to that, we will be more efficient at how we deliver. Okay.

And that's where we'll see some of the margin improvements come in as a result of that, but it's not going to necessarily be simply just on the headcount side there. I don't know, Mark, if you want to add to that..

Yes. I mean, I would only add that, keep in mind, when we did the downsizing, we talked about that it was less than 10% of our workforce. So we, I think, strategically got the right call that we felt like the market would come back quicker than I think what others had anticipated. That was good.

We're on our productivity side, about 20% off on where our peak productivity used to be. So that means we have room for expansion based on the current cost structure that we have in place. Clearly, we're keeping a very close eye on both as terms of search and Heidrick Consulting.

And as we see the market pick up, we will appropriately scale ourselves accordingly for it. So I think the discipline has been there and we would expect to see that investment. I would expect that 2021 to be an expansion year compared to the COVID 2020 year that we just went through.

But we'll obviously do it in a very disciplined way and I think that's the big takeaway that we have room, we'll expand when we think we're going to need to, to again, make sure that we balance it all out..

Got you. Thanks, guys. Appreciate that..

Thank you..

Our next question comes from the line of Kevin Steinke from Barrington Research. Your line is open..

Hey, good afternoon. So in your prepared comments, you talked quite a bit about moving into adjacent areas, investing in new product development, all through with a tech-enabled approach.

Just wondering if you could talk a little bit more about the types of the products you're looking to build out and related to that what sort of margin profile we should think about these products and offerings having – and what sort of revenue model perhaps? Is there an opportunity for subscription-based offerings, for example?.

Yes. Look, let me take the first half for that question. So look, our technology investments, and we're going to be calling that tech solutions and it's going to remain number one, focused on solving our clients’ most critical problems, which is where the Heidrick brand sits today. Okay. So we have to keep that in mind.

And we spent some time speaking with our clients to understand that.

We recognize with a lot of the work we've done now that with our IP, the data we've begun together, the insights we're driving and kind of an emerging platform that we're forming, that we can leverage that to build solutions or even products that help clients with solving many of these issues.

So Kevin, the brand new ideas, I won't go into those for competitive reasons, but to give you an example of where we're investing and creating technology solutions, just in areas that we've already discussed as an example, take D&I as an example, take culture as an example.

And we tend to work on those issues with the C-suite, okay, predominantly, and there's a whole cascading of those solutions that we can do to impact the entire organization. And how do we do that, deepen the impact of those offerings across the organization and in some of those models, we'll end up becoming subscription models as well.

So I think there is an opportunity to do that. And obviously, we think that those models, Mark, can maybe talk a little bit more than I can here, will obviously be higher margin as well.

So that's the intent, but that it gives you an idea of some of what we're trying to tech enable the solutions that we already see out there that we're working on, the appetite that that C-suite has to want to expand and how we can help them do that..

Okay. That's helpful.

Thinking about Heidrick Consulting, what sort of headcount do you think you need to add to get to kind of that $80 million to $85 million, where you break even, do you have – it sounds like you're not going to have to add it if you're driving greater productivity with consultants that the headcount is not going to have to grow commensurate with revenue, I guess, is that a fair way to think about it?.

I think that's a reasonable way to think about it in that we're trying to improve the productivity there as well, primarily through focusing on larger projects, around larger clients’ agendas, we call those journeys, kind of trying to work on future-ready leaders, future-ready cultures and organizations, and driving this D&I offering as well.

It’s just those being three large umbrellas. So, I don't think that it's a one-for-one, we clearly do need to add capacity in there. So we're looking to do that particularly in areas of high growth, so we will be continuing to grow the headcount, but I think it's fair to think that it's not a one-for-one to be able to drive that..

Okay, good. And then, can you just talk a little bit more about Asia-Pacific? Obviously, you talked about Americas and Europe standing out but some softness in a few countries you mentioned there.

Is that just kind of market-driven or something you wanted to address internally perhaps?.

No. Kevin, it's Mark. We've looked at that. We looked at it from a market competitor mix, et cetera. And I think what's going on in Asia-Pacific is there was this expectation for the most part that Asia would rebound for us and it actually did.

And I think it's kind of faded out in the sense that one, you still have some lockdowns going on in like Singapore and Hong Kong; two, India was very affected by the COVID virus and really slowed down in terms of what was going on there. And I also think you have kind of what I call the MNC slowdown.

So a lot of the bigger organizations have really kind of slowed themselves down. We're seeing pretty constant trends in others. In Asia-Pacific, it doesn't feel like it's an idiosyncratic issue within Heidrick. It definitely feels more systemic within Asia-Pacific. And we'll continue to kind of watch how that develops.

I would imagine as things get back to what I’d call normal, and I use an asterisk with that, I think Asia-Pacific will accelerate because I think then decisions will be a little bit easier for where we target our customers and our clients in Asia-Pacific.

And that'll maybe unlock it a bit more, but it definitely feels like a lot of our – I'll use the word competitors, but a lot of businesses within Asia-Pacific are experiencing the same thing that it rebounded initially quite nicely and then it's really kind of just flatten itself out a bit in terms of getting through it.

And some of that can be attributed to COVID and some of it can be attributed to decisions, still needing to go back to the U.S. or Europe in order to get decisions to be made in Asia-Pacific, unlocking its value..

Okay. Thanks for taking the questions. Appreciate it..

Thank you..

We have a follow-up question coming from Tobey Sommer from Truist. Your line is open..

Thanks. With respect to deploying capital to further your strategy, what are you seeing in terms of valuations given sort of snap back in equity markets and capital markets just about every flavor? Thank you..

That's great, Tobey. I'll try to answer it the way that I would hope to see it. And then I probably turn, and you can ask how it's going to be foreseen. Again, let's assume scale that we properly venture off on the right technologies and the night – the way that we expect our strategy to play out in those verticals.

And the idea, I would imagine at some point like we talked about, we'll use SaaS because that was thrown out earlier in the conversation.

If we have a scalable SaaS business and that's generating SaaS tight margins, I'm imagining from your side, it would be the valuation would expand on some of the parts, right? You have a SaaS business doing this, you have a Executive Search business doing that, Heidrick Consulting, again, assuming scale et cetera would be off to the races in terms of its growth versus other growths, et cetera.

And that's hopefully how it would all kind of come back into the valuation methodology. Clearly, we have the liquidity and the capacity to execute on our strategy. So it's not something where I feel like, again, I don't need to go out and seek leverage or insane amounts of leverage or equity offerings.

Nothing that would impact the shareholder in that sense, because I think we do have a very strong balance sheet to be able to pivot ourselves, and to do it and execute it appropriately.

But the valuation would hopefully come back in both from the execution, the way that we were able to do it, and that is not really increasing equity to do it, we've got the balance sheet and leverage if we so choose, and then hopefully in and of itself the multiples that you would expect to see on those different parts of the business and those journeys, and that would come back into the stock price..

Okay, thank you. Could you tell me what you're seeing and maybe expecting in terms of not just cyclical growth as we come out of a recession and you have an expansion, but maybe some potential secular drivers, like retiring baby boomers.

And I feel that some investor questions about rejiggering of corporate supply chains as a result of trade dispute in recent years, but now pandemic on top of that and what that could mean to demand for Search as well as Consulting? Thanks..

Yes. I think, look, some of the – if we kind of like think about it over the course of the year, look, we're going to see, we believe we're going to see demand come back in pretty much all these areas, all of the verticals that we operate in. So that’s just normal domain that we do think is going to come back.

But underlying that, I think that there's going to be some changes here that we're in too. I think we're going to see, continue to see some spikes in the work at the top in the board-related work that we do with theme such as diversity with sustainability. These are going to continue to drive demand as the top of the house.

We think CEO level activity is likely going to go up a bit as well because COVID made changes at the top, difficult for employers as well as leaders. We think that culture work is going to continue to rise. This is a top concern for leaders, how is their culture fared over the last year really.

And we think that at a macro level, all the D&I work is going to continue to occur as well. We do see, going back into your commentary, linked a little bit to the CEO but broader to the C-suite, we do see likely some more retirements that'll happen in the upcoming year.

A lot of it, because many leaders just wanted to stay with their teams who were thinking about retiring and just kind of now will as the pandemic hopefully work our way out of it, we'll feel more comfortable that their teams are well set in and be able to make their own personal decisions as well. So these are all themes that we do see out there..

Thanks. And last question from me.

Are you seeing incremental demand as a result of D&I rules around board composition? And with respect to D&I demand, is it driving new C-suite and executive positions or sort of sighed out rotation internal among existing seats?.

Yes. Let me take that second question. And so I think what we're seeing there isn't necessarily a whole bunch of new positions, okay? So positions have existed.

I think it's sort of as people begin to think their whole C-Suite succession planning, how to think about the team, how to think about diversity on their team, what the pipelines look like, et cetera.

So I think it's really people understanding and acknowledging that diversity matters and how it impacts the overall performance of the team and trying to go there with that.

So it isn't necessarily a new position, still there are a few companies that may not have had them, but I don't consider those to be necessarily – everybody's trying to come up with this new title.

I mean, I might give you an example separately on, at least in the last couple of years on sustainability, that people established new roles to oversee sustainability. I think on Diversity and Inclusion that already happened five years ago, and whether they were successful or not is the question.

What was your first question again? Let me come back to that one..

I think you kind of addressed it in your answer to the second one. Thank you for your time..

Great. Thank you..

We have no further questions at this time. I will now turn the call over back to Mr. Krishnan Rajagopalan. Sir, you may begin your final comments..

Great, thank you. I'll just be brief here, but thank you everyone for joining our call. We certainly appreciate it. We're optimistic about the year ahead and excited about the new initiatives that we've got in place and are going to be driving this here as well. You've heard us talk about some of those on today's call.

Look, we're still not out of the woods yet. So please be safe and we look forward to speaking with you in the next quarter as well. Thank you..

Thank you again for participating. This concludes today's conference call. You may now disconnect..