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Edited Transcript of HSII earnings conference call or presentation 23-Apr-18 9:00pm GMT

Q1 2018 Heidrick & Struggles International Inc Earnings Call

Chicago Apr 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Heidrick & Struggles International Inc earnings conference call or presentation Monday, April 23, 2018 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. - President, CEO & Director

* Mark R. Harris

Heidrick & Struggles International, Inc. - CFO & Executive VP

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Conference Call Participants

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* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Timothy John McHugh

William Blair & Company L.L.C., Research Division - Partner & 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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This is the Heidrick & Struggles First Quarter 2018 Quarterly 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 2018 first quarter conference call. Joining me on today's call is our President and CEO, Krishnan Rajagopalan; and our Chief Financial Officer, Mark Harris. We posted our first quarter slides on the IR home page of our website at heidrick.com, and we encourage you to print them for additional context, but we won't be referring to specific page numbers during our opening comments.

Today, we'll 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 in the schedule at the end of our release and in our supporting slides. Throughout the course of our remarks, we'll be making some 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 deck.

And Krishnan, now I'll turn it over to you.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [3]

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Julie, thank you. Good afternoon and thank you for joining our call. Last quarter, we introduced Mark Harris as our incoming CFO following Rich Pehlke's retirement. Mark, it's great to have you here today, now fully entrenched in your role.

As you've seen from our press release, we reported a strong first quarter, continuing on the positive momentum that we saw at year-end, both momentum in the market and momentum inside the firm. On almost every meaningful metric, we reported growth and improvement in year-over-year results. Consolidated net revenue increased 14%. Executive Search revenue was up 17%. Operating income grew 98%. Operating margin improved to 8.2%, and diluted earnings per share was $0.53 compared to $0.03 in last year's first quarter.

I'd like to thank our employees around the world for driving these strong first quarter results. I'm quite proud of what we achieved financially, while executing on a number of strategic and operational initiatives. We finished formally integrating Leadership Consulting and Culture Shaping and launched a new business, Heidrick Consulting. We launched our digital client portal and our new IP-based assessment methodology and are now active with clients globally on both. And we continued executing the restructuring that was announced in early January.

Now let me turn the call over to Mark to further discuss the financial results.

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [4]

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Thank you, Krishnan. And let me reaffirm what was just said, supplemented through financial analytics. At the conclusion, it will be obvious. This was an outstanding first quarter for me to be a part of. Before I get into the results, I'll discuss the impact of the new revenue recognition methodology, commonly referred to as ASC 606. As we previously discussed on earnings calls, the adoption of this standard in the first quarter of 2018 increased our reported consolidated net revenue by $2.5 million compared to the historical method of revenue recognition, or 2% of first quarter's net revenue. The change in methodology mostly affected how we recognize revenue associated with upticks for Executive Search contracts and for licenses related to our proprietary Culture Shaping tools, which we refer to as enterprise agreements, that resulted in an increase in revenue in Executive Search of approximately $3.5 million in the quarter, and a deferral of revenue in Heidrick Consulting of $1 million. For the full year, we're currently expecting the change in revenue recognition will not be material to our consolidated net revenue, but this is all subject to variability in the number, timing, and value of the Executive Search confirmations as well as our clients' use and renewals of our enterprise license agreements.

With that, I'll move on to our results. Consolidated net revenue was up $20 million or 14% year-over-year driven by great results in the Executive Search, which was up 17% year-over-year to $146 million. All of the key Search business KPIs drove these results. For example, search confirmations were up 5% year-over-year with strong performance from Financial Services, Global Technology & Services, and Consumer Markets practices. Productivity and average retainers also improved compared to last year's first quarter. From our segment reporting, you can see we achieved double-digit growth in all regions. Americas was up 12%, Europe was up 36%, and Asia Pacific was up almost 13%.

While Heidrick Consulting did see a revenue retraction of approximately $1.3 million in the first quarter of 2018, $1 million of this decline in revenue was due to the new revenue recognition deferral in the quarter. Irrespective of the revenue decline, we are quite encouraged with what we are seeing in Heidrick Consulting. They are showing steady improvements in the business, including an increase in their pipeline.

Salaries and benefits -- salaries and employee benefits, excuse me, saw an increase of $14.2 million from the first quarter 2017, $12.2 million of which was related to an increase in variable compensation given the strong performance in Search on a comparative basis. We also made some strategic additions to consultant headcount in the quarter. We hired 14 new Search consultants to the Heidrick & Struggles family, and we promoted 13 internally to Executive Search Principals.

General and administrative expenses fell by almost 2% or $0.6 million year-over-year. The biggest declines in G&A were related to lower intangible amortization due to the impairments taken last year in the second and fourth quarters. The other 2 big contributors to the decline related to lower bad debt expense and a decline in external client services. These savings were partially offset by increases in office occupancy cost and professional services fees.

We have achieved a sizable improvement in operating income and operating margin in the first quarter of 2018. Operating income increased by $6.5 million, and our operating margin nearly doubled to 8.2% from 4.7% margin in the first quarter of 2017. Further, the effective tax rate in the first quarter fell to 21.3%, largely as a result of discrete events from the 2018 first quarter, including the benefits of the Tax Act, which benefited earnings by approximately $0.05.

Looking at our anticipated adjusted tax strategy, coupled with our internal forecast for the mix of income and applying the new tax rates, we believe our annual effective tax rate will be in the mid-30% range by year-end, excluding onetime items, a good reduction from the adjusted 48.9% tax rate in 2017.

All of this led to one of our strongest first quarter earnings in the history of Heidrick & Struggles. Our net income increased to $10.2 million from $0.7 million in the first quarter of 2017. We delivered diluted earnings per share of $0.53 in the first quarter of 2018, an increase of $0.50 over the first quarter of 2017.

Let me wrap up by briefly discussing some of our balance sheet items. Reflecting the payment of bonus in the first quarter, cash paid for the restructuring as well as our acquisition in Denmark, you will see we ended the first quarter of 2018 with cash and cash equivalents of $73.4 million compared to $68.3 million at the end of the 2017 first quarter. Looking at our cash and cash equivalents net of debt, we ended the 2018 first quarter with $61.4 million compared to $43.3 million at the end of last year's first quarter.

Finally, of the $73.4 million in cash and cash equivalents, $65.8 million is readily available for operational use, while $7.6 million has more limited availability to the currency tax and other factors that make it less efficient to use at this time.

Similar to last year's first quarter, we borrowed $20 million for short-term working capital under our credit agreement and subsequently repaid $8 million in 2018 first quarter. And while the $12 million outstanding is categorized as long-term debt, because our credit agreement expires in 2020, we intend to repay this debt in the second quarter subject to market conditions.

Now let me give you guidance for the second quarter. Our Executive Search backlog remains strong when compared to other first quarters, given our monthly Search confirmations trends and other factors for which we base our forecast, including anticipated fees, the expectations for our Heidrick Consulting assignments, the number of consultants and their relative productivity, the seasonality of business, the anticipated economic climate, and the foreign currency exchange rates, we are forecasting 2018 second quarter net revenue of between $160 million and $170 million. This compares to $152 million in net revenue in last year's second quarter.

With that, I'll turn the call back over to Krishnan, who will give an update on our strategic priorities.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [5]

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Thank you, Mark. We clearly have momentum in the market and in our firm and we're delivering profitable growth. The market for Executive Search remained strong, and we're seeing Heidrick Consulting start to bear fruit following the completion of the integration. On our last call, I mentioned we have 4 priorities for 2018 across the enterprise. I'll briefly update you on each one.

The first priority is growth, increasing the scale and impact of both our business segments. In Search, we continue to strategically bring in new talent to the firm. In the first quarter, we added 27 consultants, of which 13 were promotions to Principal consultants through our training and development programs. We also completed our acquisition in Denmark in early January, and the integration and subsequent performance has met all of our expectations.

In Heidrick Consulting, we're scaling the business to increase our impact with clients building on the success of our platform, Accelerating Performance.

We're investing in new consultant expertise, new service offerings and scalable tools and methodologies. Understanding that this is a business with longer sales cycles and always starts slower in the first quarter, we are pleased with the growing pipeline of client engagements. Some of the services in high demand are leadership development, team effectiveness and organizational transformation. And with the integration complete, we returned to strategic hiring, added 1 consultant in the first quarter, and have hired 4 so far in the second quarter.

I want to mention an exciting new initiative that we announced last week, our Disruptive Innovators Team. We call it a team rather than a practice because their work cuts across all industries. We're beginning to work with innovative emerging companies at the cusp of rapid growth and market disruption. These companies with great ambition, out to change the world with their power of their ideas. They have important needs as they outgrow their startup stages with plans to quickly scale up to $1 billion or more in revenue. We can help these developing organizations succeed in their go-to-market strategies by filling important talent gaps, advising on transformation and change management, and accelerating their growth and development.

Our second priority in 2018 is to accelerate our cross-enterprise collaboration. When we bring the full power of our people and services from both Search and Consulting to our clients, we can achieve the greatest impact for them and drive profitable growth for the firm. This is our biggest initiative as an enterprise and is the major focus of the regional consultant conferences we are hosting in the second quarter. Since the beginning of the year, we've conducted 5 intensive training sessions on our Heidrick Consulting offerings for our Search consultants, we have 3 more coming up over the next month. In these sessions, consultants from both lines of business work together to identify promising opportunities to expand the breadth of our engagements, with clients who only know us for 1 type of service. A pipeline of opportunities is emerging that we are tracking and focused on.

Our third priority is on driving a premium service experience for our clients that will further distinguish Heidrick from its competitors. As I mentioned earlier, we rolled out our digital portal, which embeds our new proprietary assessment framework based on our Accelerating Performance methodology. Over 2/3 of all new engagements to date have adopted this methodology, and the feedback that we've received from clients is outstanding. We view this as a competitive differentiator.

And finally, our fourth priority is to improve -- is to further improve our cost structure. While pleased with the first quarter improvements in operating income, margin and EPS, we continue to make cost management part of our culture and we will not lose this focus.

I want to again thank our employees around the globe for their hard work this quarter. Two things that make this firm great are our people and our culture. I truly believe we are creating new and unique opportunities to win in the market and our people are embracing this strategy. Everyone benefits: clients, employees, the firm and shareholders.

Now we'd 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 our first question will come from Tim McHugh from William Blair.

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

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First, can I just ask, the small acquisition. How many consultants did that add during the quarter for you?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [3]

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Sure. It added 7 consultants in the quarter -- or 6, sorry, 6 consultants.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [4]

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Okay. So can you talk about, I guess, that plus the comment of about 27 hires, and if I look at the reported metrics, it's up 3 sequentially. So how is turnover relative to normal levels?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [5]

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Yes, it's Krishnan here. Look, turnover is a little bit higher than has been normal. We are clearly in a war for talent. But the trend line isn't that surprising to me. Same as what I would say over the last 2 years, we really began to focus on performance management as a firm. And if you look at the slides that you're referring to as well, I think, in the first quarter deck, you see a gradual decrease, like, in fact the last quarter. And in last year, in consultant headcount, much of it due to very deliberate performance management. So we replaced that headcount with outstanding new consultants, and we continue to do that. So the headcount in 1 quarter this year, as you're saying, 3 higher than it was in the past or in the previous quarter. And at the same time, we're promoting from within, and what you'll see is the productivity of the team has gone up as well. So it's exactly a lot of what we wanted in this case.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [6]

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Okay. And is the higher turnover, is that something -- so you mentioned the trend line from last year, did we see that throughout last year? Or is the trend -- I guess, did turnover increase here as you got into 2018?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [7]

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It was pretty gradual throughout Europe. If you look at it, it was pretty consistent. So it was a program that we had established. As I said, there is a war for talent that's out there. We happen to be also recipients of some great talent that's walking into Heidrick & Struggles each and every day.

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Julie Creed, Heidrick & Struggles International, Inc. - VP of IR & Real Estate and Director of Workplace Strategies [8]

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And Tim, first quarter tends to have changes just because it is -- when we pay out bonuses. We had 3 people retire after bonuses this year. We had 2 people who are just -- they didn't leave the firm, they just -- were reclassified out of consultant status. So that's 5 there. So it's not…

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [9]

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Yes, it's not surprising.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [10]

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Two are the numbers? I guess, once -- what was the impact -- so I guess, I was trying to get Executive Search growth on a constant currency basis, I apologize, if you gave that, but I didn't catch it. And then secondly, you mentioned regional consultant conferences happening in the second quarter. In the past, it was more so when you would do 1 big conference, but that sometimes affected G&A. Is that -- do we need to think about that for the second quarter in terms of the cost of those events?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [11]

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I'll grab that for you, Tim. So let me answer your first question, which is in regards to constant FX growth. Search, as you know, came in at 17.1%. Within the constant currency, it would have been about 13%. So again, there was definitely some FX movement in there. The second question in regards to the conferences, et cetera, we amortized that over the period of which we do it. So I don't think you're going to be seeing in Q2 any real noise. As we pertain to the conferences, it will be pretty flat in terms of the way we accrue that and expand it.

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Operator [12]

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Our next question will come from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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What are the -- your plans for internal consultant headcount over the balance of the year?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [14]

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Yes, let me take that. Hi, it's Krishnan here. Yes, look, we continue to invest in hiring in a very strategic basis, both in Executive Search and in Heidrick Consulting, and we're very, very careful in doing that, and we're looking for the best talent that we can get, so expect for us to continue to grow that.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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So you're expecting growth? Are there any parameters that you can put around that?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [16]

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Look, I don't think that the growth in headcount is going to be at the level that we have had it in the past from an external hiring perspective, of where we've hired 30, 40 people, so we won't be doing that. So it will be a little bit less than that is what I would say. We've got a great internal talent pipeline that we continue to develop, so we're very confident in that as well.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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Okay. That 30 to 40 that you're referencing, is that -- are those net prior hiring numbers or gross? Just trying to make sure I'm referencing the right historical figures.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [18]

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Yes. I think we used to hire about 40 gross is what I would say.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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Okay. How do you think about productivity here? The average revenue per consultant, whether it's in this quarter or the prior one, at historically elevated levels, how much more do you think you have in terms of capacity of your existing staff?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [20]

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Yes, look, I think there's probably a little bit more room on top of that as we bring in -- as we're changing our leverage model and we're bringing in more principals. That number is not going to spike because the principals will generally be less productive. So in our model, we're bringing in more principals these days.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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Okay. Is that 100,000, 200,000? How do you frame the opportunity for increased productivity?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [22]

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It's Mark. Let me kind of jump in. I'd say, first of all, what Krishnan said was absolutely right. Second comment would be it's a function of mix too, right? So what kind of searches we're doing at the time, et cetera. It's also, I'd say, third, is a function of the market, which is why you're seeing the upward trend. As we all know, we've been in a long economic recovery cycle, et cetera, so we would expect to see exactly what we are seeing in terms of the upward trend. My -- our comment would be the pace of the trend will continue as the growth of the economy continues as the changes that we're watching in terms of the searches that were doing, et cetera, would be a constant growth, if you will, but at some point, clearly, it's going to put plateau itself, if you will, and that's very difficult for us to make an assessment without really understanding kind of where the macro's going to take us to.

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

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Okay. How about -- I missed a figure, I was wondering if you could repeat the sort of spendable cash figure that you mentioned in your prepared remarks? I apologize, my pen wasn't quite fast enough.

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [24]

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That's okay. My team is flashing me to slow down, so it's my fault, not yours. So the answer is, as I'm kind of flipping back in myself there. Okay, here we go. So what I gave was, out of the $73.4 million, $65.8 million would be what I would deem readily available, and then I would say the other $7.6 million, which is the delta between that and the $73.4 million, is just a little bit more limited. I want to be clear on that statement that the cash is there and we can certainly use it, but if we don't need to touch it until we get it kind of more efficient through currency tax, et cetera, it's just one of those that has a little more leakage to it than I would like to do, so that's why we call it kind of less-than-available, I don't want to say unavailable.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [25]

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Sure, sure. Understood. In the $65.8 million, that's a clean number without bonus accruals that need to be subtracted or anything like that?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [26]

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Well, it's as of the end of the period. So as of March, that was the cash balance. We still have, as you know, payments. We got some tax payments on those bonus accruals that go out typically in the second quarter, we always...

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

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I was kind of aiming for what a net number is for spendable cash ex the items that might need to draw on that...

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Julie Creed, Heidrick & Struggles International, Inc. - VP of IR & Real Estate and Director of Workplace Strategies [28]

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It's all spendable. Bonuses are accrued, but that's all spendable.

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [29]

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It's all spendable. It's all cash that we can spend, that's in the market.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

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From a longer-term perspective, I just want to ask a strategic one, and then I'll get back in the queue. How do you -- what kind of revenue mix in margin profile do you want and expect the business to have over the medium or long term? I'll let you [nearer] time frame?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [31]

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Margin profile...

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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What kind of EBITDA margins do you think you have? And what's the mix between Search and Consulting?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [33]

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It's Krishnan here. So let me just at least take you to the top level. We need to scale up our Heidrick Consulting offering, and we think it needs to, at least, double in size, if not go a little bit greater than that, so that's what we're trying to target from a growth perspective in the long term. So those are the kinds of -- as to the impact of that on the financials, as we continue to evolve that, I think we'll have some greater clarity on the impact that, that's going to have. But size-wise and mix-wise, that's what I would say.

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [34]

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Right. And to give -- to answer your on point, in the first year, we had adjusted EBIT margin of about 11.5%, which was up from 8.8% in Q1 last year. So like operating income margin that we've been talking about, both are increasing in the right direction of what we are trying to achieve. And I think to kind of jump on what Krishnan said, the guidance -- excuse me, the thoughts we would have is that, that 11.5% will continue as we focus on our process, as we focus on the business, both in Consulting and Search. Our goal is to maintain the growth.

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

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Did 1Q reflect the entire cost savings initiative? Or is there some sort of incremental carryover impact that benefits 2Q or the remaining quarters of 2018?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [36]

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Sure. So the answer is we're -- as Krishnan pointed out, we're still very much in the process of the announced restructuring that we did in January of this year. So we're going through completion. My comment would be, all of which would probably complete itself within the end of the second quarter. And then Q3 and Q4 will be more pure without that noise within the P&L. So it's still very much a work in progress because we knew what it's going to take, again, through the jurisdictions that we're in, some time to ensure that we did the appropriate restructuring in terms of the announcements and getting up the P&L.

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

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Is there any way to numerically ballpark how much hit the quarter versus how much is yet to come?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [38]

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No. I think the only way that I would make the comment is the $11 million to $13 million that we gave in terms of the annualized savings is still very much the goal that we have in terms of what we think financially it will be. And it's a little difficult, again, because kind of for 2 reasons: number one, as you know, cash is fungible with growth, becomes on-boarding, becomes other things, so it does get a little bit of noise associated to it. And as we rightly say, the second comment would be because we're in the midst of it, it's difficult in terms of what's quantifiable in Q1 versus Q2 and onward and upward through Q3 and 4. But I would tell you we're certainly more than 2/3 of the way through the process in Q1, and then there'd be -- the rest of it, to do, so to speak, in Q2.

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Operator [39]

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(Operator Instructions) Our next question will come from Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [40]

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So I wanted to follow up on the discussion about the restructuring savings there. You mentioned 4 -- I believe, 4 new Heidrick Consulting consultants added thus far in the second quarter. So are we -- does that represent just the beginning of -- you beginning to reinvest those savings as you had talked about on the last call, wanting to reinvest a good portion of those savings?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [41]

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Yes. Look, I think it represents an opportunity for us in the market to be able to grow Heidrick Consulting at the right pace and right time. So it's difficult to find the best consultants. And we were Heidrick & Struggles but we look very, very hard for that type of talent, and that was afforded to us. So we're trying to balance that with the program here. And if we don't see the best people available, we won't make those hires.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [42]

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Okay. You also talked about seeing a good pickup in the Heidrick Consulting pipeline. I don't know if you could talk a little bit more about, maybe the size of the projects you're seeing, if that's any change from what you've seen in the past, and maybe projected timing of one of -- some of this new business might start to flow through to your results?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [43]

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So the pipeline, as you know, in Heidrick Consulting, we announced the new Heidrick Consulting at the beginning of this year. We start to develop and working on that pipeline, so to speak. We have an economic objective of what we are trying to achieve, and my comment in the statement was the pipeline was looking good, it was really coming from the fact that the traction that we have has been very good and at least to this point, strong. It's difficult to -- again, we want to be a little bit competitive sensitive to giving out too much information as it relates to Heidrick Consulting. I would tell you that -- you hit on an excellent point, which is when are you going to see the revenue, and my answer would be how long is a piece of string? And I mean that from a standpoint of the new revenue recognition standard has so many difficulties before you kind of get through and that's why I mentioned we had a $1 million deferral in Heidrick Consulting in terms of the new revenue recognition standard. It's becoming -- it's almost irrespective how much you bill, it's just a standard, which in terms, makes you evaluate over your -- the way you need to recognize it. So hard for me to answer especially with 606, but I would imagine you'll start to see that progress again in Q2 and Q3 as the pipeline really starts to show itself through the P&L.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [44]

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Look, we're beginning to see a lot of green shoots, as I call them, that come up as a result of the collaboration that we're driving across between Search and between Consulting. I can give you a couple of examples of some of the things that we're beginning to see. Many companies are now beginning to, what I call pivot towards growth. And as they do that, the CEOs have put in place that strategy, but they realize that, that strategy required a significant change and upgrade, not in leadership skills and often culture as well, and this is leading to work for us both in the leadership development and culture shaping buckets that we see. I'll give you an example. Energy sector, a company that was pivoting again from cost-containment to more of a growth strategy, the new CEO quickly realized the culture needed to change and through our established relationships in Search, we're able to open the door and we have a very large Culture Shaping project that's been launched over there. Second area of the growth that we're seeing is, for example, with PE firms. They're realizing that they need to get their hand around the talent equation in their investments far sooner than later. So we're involved with PE firms now and in their portfolio of companies across the full deal cycle. Sort of with a pre-due diligence model on talent and post-due diligence on talent and culture in Search and everything that we do. They sort of have an M&A playbook and we're part of that M&A playbook, is what I would say. So our teams and tools are being engaged on every deal that they consider, and these are the kinds of things that we're trying to drive across the enterprise.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [45]

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Okay, that's helpful. You just mentioned kind of a pivot to growth among your client base. How dramatic of a pivot is that, that you're seeing? And I'm just kind of curious if that's a little bit surprising that, that pivot is just happening now, given where we are in the economic cycle. So I guess any comments on that would be helpful.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [46]

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Look, I mean, we think -- look, we've seen a steady growth. I think, when I see pivot to growth, it's sort of the recognition that human capital is a big asset, it's part of the growth. So the pivot to growth happens and their strategy and a whole bunch of other things that companies do, and I think the human capital equation is what's really, over the last couple of quarters, beginning to come through in that growth agenda for these companies.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [47]

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Okay. Could you just touch a little bit more on the client portal that you talked about? The launch of that and also the opportunity to make your relationships perhaps more sticky through that portal?

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [48]

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Sure, yes. So we talked about this a little bit before, but just to go a click deeper. So we have rolled out -- and when we think about it, it's not just the client portal, which it is, but it sort of wraps our proprietary assessment framework around it. So we take our Accelerating Performance framework, which has, inside of it, what we call the drive factors for performance and it embeds it inside of there. And it is quite sticky. I think our -- there's a large opportunity here. Our global clients like 1 standardized approach, they like 1 way of being able to conduct their business. The IP behind it is quite strong as well. So it stands that test as well. So I think it represents a real opportunity for competitive differentiation for us.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [49]

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Okay, great. Just one last question here on the numbers. Was the HRMC (sic) [HMRC] tax settlement, was that -- is that included in 8.8% adjusted EBITDA margin that you reported for 1Q '17?

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Mark R. Harris, Heidrick & Struggles International, Inc. - CFO & Executive VP [50]

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Yes.

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Operator [51]

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(Operator Instructions) We have no further questions at this time, I would like to turn the call back over to Heidrick & Struggles for closing remarks.

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Krishnan Rajagopalan, Heidrick & Struggles International, Inc. - President, CEO & Director [52]

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Great. This is Krishnan. Thank you. Let me close by offering a few quick summary thoughts. Number one, we're very excited about the progress we're making. Number two, as you can tell, we have a talented and motivated team at Heidrick & Struggles that is driving results. And number three, as we focus on the remainder of the year, we will continue to drive profitable growth by driving collaboration to support the growth of both Consulting and Search, and by continuing to drive the implementation of IP and technology-enabled solutions. Thank you very much for joining our call today.

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Operator [53]

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That does conclude our conference for today. Thank you for your participation.