HSII
#Good afternoon, everyone, and thank you for participating in Heidrick & Struggles first quarter conference call.
Joining me on today's call is our CEO, <UNK> <UNK>; and our Chief Financial Officer, <UNK> <UNK>.
During the call today, we'll referring to supporting slides that are available on the IR homepage of our website at heidrick.com.
We'd 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 on the last page of our press release and on slide 20 in our supporting slides.
Throughout the course of our remarks, we'll 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're going to be referring to are shown the bottom right-hand corner on each slide.
At this point, <UNK>, I will turn the call over to you.
Thanks, <UNK>, 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 continued 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.
Our first investment was in Leadership Consulting.
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 those 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 <UNK>.
In 2014 in 2015 we stabilized, rebuilt, and re-energized 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 number of 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 <UNK>.
Thanks, <UNK>, and good afternoon everyone.
I'll start with 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 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 as <UNK> mentioned.
We've added new slides to our deck this quarter.
Slides 5, 6, and 7 that reflect the trailing 12 months 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 Technologies & 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 the 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 <UNK> 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 acquisition of both Co Company and DSI, which at present includes the cost of independent contractors used on 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 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 <UNK> 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 payments of bonuses that were deferred in the three prior years.
And the balance of $126 million was the variable compensation related specific 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, were $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 is always been volatile due to the operating results in many of our foreign jurisdictions, and in some cases we have established valuation allowances.
The 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 for 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, the Executive Search backlog is shown in slide 26, and the 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 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 2015.
I want to mention that as we continue to invest in Leadership Consulting, we will continue to evaluate segment reporting in the presentation of our business in future periods.
And with that, I'll turn the call back over to <UNK>.
Okay, thanks, <UNK>.
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 to strong starts.
We've integrated two acquisitions into our legacy Leadership Consulting business, and realigned 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, mainly 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'm energized by the progress I see from Heidrick & Struggles on many fronts.
I'm excited about our progress working at the top and the types 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.
And I'm equally energized by the urgency we feel to turn that tangible progress and momentum in the market into sustainable, profitable growth.
We will pause, and then <UNK> and I will take your questions.
<UNK>, two comments.
One is on the last part, the business as you know, as you point out, is a multinational business but also an indigenous business in country, and I'd say it's a combination of both.
I wouldn't weight it one versus the other.
What I would say in Asia, when you get a little bit more granular behind 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 some of the lack of momentum we saw in first quarter of this year.
So on the Search side, we feel very good about it.
The people who have come into the United States, the Americas, in Europe, selectively in Asia, we're able to spend more time than probably in a long time at Heidrick really looking at the talent.
You know, we don't feel the need to hire just to hire.
We feel the need to hire the right people.
So we're obviously looking at what kind of economic impact you may have on the firm, but we're also looking at cultural fit.
And just over the past year, we feel good about both of those dimensions.
Sure, I'll give you as much as I can, <UNK>.
It's <UNK>.
The core business, which is still the primary driver of a lot of our financial results, as you know, tends to be, start a little soft in the first quarter, the stronger quarters tend to be second and third.
And depending again upon hiring cycles, budget years, and the factors of 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 good strength in Europe and America which we hadn't seen in some time.
So we're hoping that we're getting a little bit more even on cyclical basis, and with some of the changes that we've made in some of the focus we've made and where we're working and how we're working.
And the impact of Senn Delaney, as I mentioned in my comments, you know, and it also applies a little bit to LC, the nature of the business that we're starting to pursue in both of those areas tends to be a little bit more larger project oriented, and it can certainly have revenue recognition patterns that are different than what we would see in Search.
Our hope has always been that we would build those businesses to greater scale, and have a more even flow of both revenue and cash flow over the period of the years.
We're not there yet, but we're making progress to get there.
On the profitability side, particularly in 2016, the event we talked about today with LC, it's much more of a one-time nature expense, and the run rate on people expense should not be as big a factor in year-over-year profitability after this year.
It'll 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.
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 are seeing are healthy and strong.
And our goal is overall in the marketplace is to win our share, and win more than our share, and grow our share.
But in terms of confirmations, <UNK>, you just want to comment on what's ---+
Yes, we're certainly pointing to an estimate in our slides that are up just probably in the upper quadrant approaching [400] confirmations, with just under 400 confirmations in April.
You know, again, as <UNK> said, they come in, in different patterns but the overall good feeling is, is that I think we feel good that, in line with our guidance, and that's the 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, has given us some indication that our second quarter should be healthy year-over-year.
I think a little bit of both.
Certainly in technology, there's been no hotter industry space I think for us in the last couple of years.
There's a lot of activity going on in client activity around leadership talent that can deal with a world that's really got tremendous influence from technology.
And so, 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 were not as big a factor in that market as we should be.
And we're actually making inroads to play at much higher level in that business because of that change.
Let me add to that, is the quality of clients that we're interacting with and working with and being hired by, across both of those sectors and others, just continues to be moving up.
Well Tim, one area's certainly Fintech, right, so you have traditional financial institutions where, we all read the papers every day, the impacts that are ---+ that is accompanying 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 Fintech, you're going to have another story.
So that's an important part of it.
First of all, Tim, I'd say that what we call expenses on an income statement is obviously, it's felt internally here as investment.
We really had an investment ---+ for example, just take Leadership Consulting, something that we've talked about, the company's 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, you know, very good legacy people there, we just don't have enough of them.
And we have a 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, what that's going to look like across quarters or across years.
But yes, you can expect that we're going to invest in more Leadership Consulting.
On the Culture Shaping side, we came to the end of ---+ you know, as we get into last year, we realized that the number of clients who are interested in Culture Shaping.
Who recognize the impact it can have in its overall organization, is one that, you know, we felt that we've got a scalable platform here with Culture Shaping at Senn Delaney, but we feel we need to invest more in it, and as I said, invest in the next turn of leadership, so again, we're going to do that.
We feel good with 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 signalled the investment in those people, the investment in the legacy people, that will continue throughout the remainder of 2016.
For Q2, it should ramp up pretty quickly to be a 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.
So I think you'll see a positive, you know, we're hoping to see a positive contribution of the revenue certainly it's an outgrowth of the expenses over the course of Q2.
You know, we only owned it for literally a matter of days in Q1.
So, 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.
I go back to the comment I made earlier that the business is as competitive, as 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 point out, particularly in the Americas.
In 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'd be the way I describe the overall market.
Yes, the opportunity in general is probably best captured by saying what it does is 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 a client.
But now we have the opportunity to broaden that dialogue, 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, works at not only 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 in all the ways that we believe we will.
It is, some of the opening moves here, particularly with Co Company, under Colin's leadership now for Leadership Consulting, the addition of DSI, the continued investment in Culture Shaping under Jim Hart.
We're broadening that conversation with a 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 be over time.
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, you know, along the lines of the [varied] platform that <UNK> was referring to, and as we're 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 certainly caused some travel expense, while not at the level, say, of global partners meeting, certainly, we brought some key people together from around the world.
In addition, and we talked about this on other calls, we're going to continue to ramp up our training and development, you know, in building our own consultant base and developing our capabilities within [core] Search.
And we advanced 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 are seeing in the marketplace and with demand coming through.
And we also have 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 should not drive our annual run rate any higher.
One thing I would quickly add is that 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.
I'll just close by saying I want to thank everyone for their participation today.
What you see in 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 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 investment in Culture Shaping and Leadership Consulting, because we're responding to our clients, responding to what we believe is the 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.
