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Edited Transcript of HSII earnings conference call or presentation 24-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Heidrick & Struggles International Inc Earnings Call

Chicago Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Heidrick & Struggles International Inc earnings conference call or presentation Monday, April 24, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julie Creed

Heidrick & Struggles International, Inc. - VP of IR & Real Estate and Director of Workplace Strategies

* Krishnan Rajagopalan

Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search

* Richard W. Pehlke

Heidrick & Struggles International, Inc. - CFO and EVP

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Conference Call Participants

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* Kevin Damien McVeigh

Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research

* Timothy McHugh

William Blair & Company L.L.C., Research Division - Global Services Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon. This is Heidrick & Struggles' First 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.

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Julie Creed, Heidrick & Struggles International, Inc. - VP of IR & Real Estate and Director of Workplace Strategies [2]

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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 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'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.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [3]

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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 3-month medical leave of absence. I'm honored to be filling in for Tracy while he is 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 & Services practice, and since 2014, I've been on the firm's executive committee.

I've led the Executive Search business since 2016. Heidrick is a talent-rich organization with a team-oriented culture, and we're all aligned in our pursuit of our strategy to deliver premium leadership advisory solutions and insights to leading organizations globally. We wish Tracy well and look forward to his return.

Let me begin with a few remarks about the first quarter beginning with Slide 3. 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 holidays.

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 & Life Sciences, Industrial, and ENSE 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 engagements. 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 have lengthened. We are actively involved in addressing these market dynamics.

Importantly, our growth in consolidated net revenue, without a corresponding increase in expenses, helped drive an improvement in operating income of almost 72% and an increase in adjusted EBITDA of 14%. The 2017 first quarter operating margin was 4.7% and the adjusted EBITDA margin was 8.8%.

We are also growing our base of consultants. 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 consultants. 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 programs, but it also reflects the acceleration of the career path in Executive Search by eliminating one of the four levels. It will be important to support our new hires and promotions in order to ensure improving productivity.

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

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [4]

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

I'll echo 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 U.K., that it was challenging the tax treatment of company contributions to Employee Benefit Trusts, or EBT, between 2002 and 2008.

We have been appealing this notice since maintaining our position that the use of these trusts was proper and that our position would be upheld under any challenge. But recently the challenges by the HMRC have been escalating within the U.K. 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 trusts as well as the obligation by the company. The net settlement for Heidrick was $3.7 million, which is less than the HRMC's (sic) [ HMRC's ] proposed adjustment, which we valued at $4.8 million at December 31, 2016.

Slide 11 shows, in rounded U.S. dollars, how the settlement was recorded on the income statement: $1.5 million of expense is included in salaries and employee benefits; $2.4 million of expense is in other net; 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, while variable compensation expense declined about $300,000, mostly related to the accounting 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 reflects 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 5 through 8, reflect the revenue growth in the Americas, Europe, Asia Pacific and the Leadership Consulting segments, and we benefited from the improved operating leverage in those businesses.

Referring to Slides 14 through 17, net income was $700,000 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 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 31, 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 3 prior years. And $120 million was for variable compensation related to the 2016 performance. And we'll make an additional payment of $10 million in the second quarter related to the 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, we paid $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 this debt as soon as practical.

Cash used in operating activities was $110.5 million compared to $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 are in a great position to continue our investments 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 our 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 rates.

We are forecasting 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 2017, last year's second quarter net revenue would have been $146 million.

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

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [5]

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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 favorable. 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 Heidrick.

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 adviser to help assess and select the best of the 2 teams globally. This project involved 24 of our consultants throughout all 3 regions over a span of 4 months. The client also benefited from the use of our assessment tools developed under our Accelerating performance framework. In subsequent months, Heidrick was engaged in 8 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 adviser.

We feel good about our start to the year. No doubt we are seeing some bumps, like Culture Shaping, but we are growing our consultant base via very little turnover. I'd characterize the business momentum as very sound. The economic environment is vibrant. And we're 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're 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 adviser.

Now Rich and I will be happy to take your questions.

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Questions and Answers

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Operator [1]

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

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Timothy McHugh, William Blair & Company L.L.C., Research Division - Global Services Analyst [2]

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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?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [3]

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Tim, good afternoon. This is Rich. I'll start and I'll turn it back over to Krishnan as well. I think there is a couple of things going on. There is no question. There is 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 now that in terms of people that have left the business, the biggest turnover from 2016, 2017 with 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 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 is also few market conditions, maybe I'll let Krishnan talk a little bit about that as well.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [4]

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Yes. Thank you, Rich, and thanks, Tim, for the question. 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 that 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 well in the fourth -- in the first quarter associated with Culture Shaping.

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Timothy McHugh, William Blair & Company L.L.C., Research Division - Global Services Analyst [5]

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Okay. And just -- is there any reason to think that they count 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?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [6]

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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 then in the context of the competition is what we're working on getting our arms around and working with the teams on.

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [7]

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I think another thing that I'd add, Tim, is that, we still expect an increase in the profitability over the course of the full year as the cost of the act of our compensation related to the onboarding of the new people has come off in 2017. So we do still continue as if -- as business ramps up, continue to see the margin improve and start pointing back towards the direction of the historical margin.

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Timothy McHugh, William Blair & Company L.L.C., Research Division - Global Services Analyst [8]

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Okay. And just, I guess, more broadly on the Leadership plus Culture Shaping businesses, quite a big change from Q4 to Q1, even Q4 versus Q3. So I get there is volatility in the business. But can you -- what's -- is this more of the normal course of production? Or is there, I guess, are we underearning here? And were we overearning, outperforming what you would normally expect in Q4? Is there any way I kind of frame what we should really think is the kind of the more natural run rate of the business at this scale that we have right now.

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [9]

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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. Keep in mind that there is no question the culture results were disappointing for us, but they weren't disappointing in magnitudes of tens of millions of dollars. It was just from a couple of million dollars. And in the case of Leadership consulting, which is more of a normal course, 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 right now we still think that on a trailing 12-month basis, we're still seeing a nice growth in that business. And we still think the more normal run rate is probably somewhere in between where we are this quarter and fourth quarter.

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Operator [10]

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

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [11]

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Send our regards to Tracy too for a speedy recovery. I want to just talk about, Rich, within the context within that revenue guide, is there any way to think about the implied EBITDA associated with that? I know there's fair amount of movement much below the line, but is there any sensitivity of the EBITDA given the revenue range out there?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [12]

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We don't -- 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, it doesn't take a lot to move the needle. That said, what we are encouraged about and I kind of touched that at 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 have 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, 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.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [13]

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Got it. And then any thoughts on -- if you could give us maybe a little more granular number the monthly confirmation trends on the Executive Search, just looks like that slipped a little bit. What was that kind of year-on-year? And just -- is that -- any particular reason for that?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [14]

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

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [15]

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Yes.

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [16]

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Yes, well, again, on a -- probably on a 4-month basis with that number, over the course, it was probably up almost 4 -- 3% to 4% year-over-year. And I'll 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. I wish I could speak to the trends a little bit more.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [17]

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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 years and so there was little bit of absorption that was going on. We are still seeing good number of confirms in April, and we are forecasting that to continue.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [18]

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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 around financials? Is it more revenue or still compliance driven? Just any thoughts on the scope of the work?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [19]

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No radical changes that we've seen over the last year or so 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's somewhat different.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [20]

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Got it. And then Rich, just real quick. The investable cash like usable cash as opposed to just overall?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [21]

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Yes, we still remain pretty strong 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 had 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.

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Operator [22]

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(Operator Instructions) And we will take our next question from Tobey Sommer of SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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Question is 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 some of the geographic representation of monthly confirmation, would there be a different geographically, maybe like the French elections or Brexit actions that would somehow kind of make sense compared to those monthly trends?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [24]

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I think we can go back and look at that. There has been that lens, but I don't really feel that there is a huge difference 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 months. And we have seen impact, for example, in Asia, we saw it last year in the first quarter when China was very soft, and there was uncertainty in China that we saw impact throughout Asia associated with that. We did see more currency-related issues with Brexit is what I would say in that phenomena. But I'm not sure that there is anything more than that, that I've seen in the volatility of confirmations driven by particular issue.

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [25]

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It's an interesting -- Tobey, this is Rich. It's an interesting question. The only thing I can think of that maybe -- might it be even had a slight structural impact on the timing of that is uptick because of the fact that as we think about the role that upticks that played in the completion of the 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, 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 because it can always be recognized the same way. So I'm not sure if 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 it's really onetime confirmations go on client decisions as much as anything, and we've actually been blessed by the factor. I think we've had good luck in making sure that we've had higher completions over the last year or so. And so it just maybe sometimes it's a little bit more lumpy.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [26]

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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.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [27]

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Okay. That's helpful. If I could kind of switch to the record promotions on the changes in categories of consultants, could you expound upon that a little bit? And (inaudible) my last follow-up.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [28]

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Sure. Yes. 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've changed roles and changed training programs to enable people to not have that middle level that we able to migrate through to be a principal or a consultant from being an engagement manager as well. So it's a lot of work that we've been doing in the last 2, 3 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.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

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What's the objective of that change?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [30]

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Yes, the objective is really twofold. One objective, obviously, was to give the 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 then two, with a lot of the emerging technologies and things we see out there, getting some of these people opportunities and develop them to be market facing as well from a client perspective, was an added incentive as well. So those were the 2 objectives.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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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?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [32]

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

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

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Yes, so it's about 80-ish percent.

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [34]

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Yes.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

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Okay. What -- as we look at the business now, you've grown headcount quite a bit, you've -- your internal consultant 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 it's currently constructed?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [36]

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Well, we aren't going to forecast specific margins, Tobey, but directionally, we're trying to grow the margin 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 pull-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'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 leverage support systems of the Leadership Consulting business. So that as we build that revenue, it's more profitable than Search because -- but right now we still use the 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, employing at an operating margin of 20%-plus. And that would go a lot to helping our profitability as well.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [37]

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Right. You kind of dovetailed on my final question. You said Culture Shaping has been a little bit more competitive and some things have changed there. Are you going to kind of return to the prior levels and expand from there via acquisition? And if so, is that a more competitive landscape there?

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Richard W. Pehlke, Heidrick & Struggles International, Inc. - CFO and EVP [38]

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Well, it's certainly, and I think Krishnan touched on this in his early comment, I'll certainly let him add to it, but there are -- there -- the culture is still a very hard space in terms of the leadership discussion in most entities. It doesn't always necessarily get as narrowly focus this Culture Shaping, which is the core strength of what Senn Delaney does. So one of the things we'll do on top of just reinvigorating and working with the Senn Delaney operation as we bring up our new people up to speed is also look at ways to we can either build on our capabilities and should we build on our capabilities for client needs. And that's something I think we have to work with.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [39]

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Yes, let me just amplify on that. I think the cultural conversation is a very big topic and Culture Shaping is just one vein inside of there. And so what we are 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 now, we continue to dive in and get into these other topics as well and investigate those. (inaudible) mentions 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.

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Operator [40]

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And there are no further questions. (Operator Instructions)

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - Acting CEO, EVP and Managing Partner of Executive Search [41]

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

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Operator [42]

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