Q3 2019 Earnings Call
<unk> third quarter earnings conference call.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
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If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Suzanne Rosenberg, Vice President of Investor Relations.
<unk>. Please go ahead Madam.
Good afternoon, everyone and thank you for participating in Heidrick <unk> struggles 2019 third quarter Conference call. Joining me on today's call is our president and CEO Krishnan, Rajagopalan and Chief Financial Officer, Mark Here, we have posted our third quarter slides on the IR homepage of our website at Heidrick Dot com and we incurred.
Do you view them for additional context, but we won't be referring to specific page numbers during your opening comments.
Our materials, we refer to non-GAAP financial measures that we believe provides additional insight into our underlying results.
A reconciliation between GAAP and non-GAAP financial measures can be found in the last schedule of the release.
Also in 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 Krishnan I'll now turn call over to you.
Thank you Suzanne.
Afternoon, everyone and thank you for joining our call.
Before I start speaking to our third quarter performance, Let me welcome Suzanne Rosenberg do the Heidrick family as our new head of Investor Relations.
Dan will be a dedicated resource to the financial community and we are all very excited to have onboard with that I'm pleased to share a teams third quarter accomplishment, we delivered strong quarterly a nine month results as we continued to see consistent demand at the top.
And we executed against our strategy to continue to gain market share.
While in aggregate search is performing up to last years levels, we're seeing some variabilities around the world.
In Europe , there's some macro headwinds embrace it continues to pose a challenge in the region, but our teams are focused and executing across continental Europe as I mentioned last quarter. Several factors continue to play in Asia, including consultant turnover from last year.
Sultan mix.
Generally tough comps compared to last year. Nevertheless, Asia remains a growth opportunity for us as we continue to make strategic hires with more in the pipeline and sharpen our focus on emerging regional issues and as you can see from the numbers. The Americas continues to show no weakness in our market at the top right.
So very excited about welcoming to get one of the leading search firms in Brazil to our heidrick global team.
With this acquisition, which we announced this past September we have significantly expanded our presence in Brazil. In addition to our existing presence in Sao Paulo, We gained a second location in Rio de Janeiro.
We revamped our team and added 13, new consultants, who bring additional in depth local expertise.
Areas such as infrastructure.
Private equity and family owned businesses, along with a wide range of clients.
To get is an excellent fit with heidrick.
Hi cost to get has a strong focus in working at the top and a commitment to delivering premium data driven tech enabled services.
With this acquisition, we did record onetime nonrecurring restructuring charge, which mark will discuss later.
From a larger regional perspective, however, we now have an excellent platform in place to grow throughout Latin America, and achieve our longer term goals for the region.
Particularly given the size.
Scale dimensions of this team.
In addition, we see great opportunities to expand hybrid consultant consulting in this market.
Overall, we continued to keep pace with 20 teens record revenue performance. Our nine months 2019 performance was less than 1% behind our record 2018 revenue achievement and we continued our journey in outstanding search productivity and 1.8 million for consultant on a trailing 12 month.
Just.
As important our results demonstrate Howard team sharp focus on business operations is generating year to date increases.
Operating income operating margin net income and earnings per share all on an adjusted basis, each of which outperformed the same period of 20.
In search we continue to see favorable market demand at the top of organizations, where we play.
While an aggregate I described the market the same as I did last quarter, we aren't seeing a slowdown we aren't seeing acceleration either.
We continue to be a trusted advisor to our clients overall, we believe our success will continue to be driven by our premium diversified portfolio advisory solutions that empower boards of directors and senior executives to leverage top talent and transform their organizations.
We're encouraged by the trends, we're seeing anhydride consulting the third quarter, both new business confirmations in revenue increased over the first and second quarters.
Our growth will continue to be driven by increased collaboration within the firm to bring the full power of Heidrick service offerings to our clients globally.
Last year, approximately 20% of our consulting revenue was driven through search introduction in the first nine months to this year. This has climbed to around 30%.
Much of this growth is being driven by projects focused on culture shaping and leadership development opportunities.
We're also adding to the consulting team would strategic consulting hires around the globe.
The clear differentiator of hydraulics offerings is our data driven and technology enabled talent leadership and culture solutions, which are becoming fully embedded across our business.
This approach has also continued to resonate more strongly with our clients. Some examples.
We've now executed over 8000 searches through weren't tech enabled process that we referred to as to Heidrick way. Our current use of heidrick connect is at 92%.
As part of this process, we are leveraging our proprietary infinity framework assessment methodology.
Rather consistent data.
Our offering on digital acceleration continues to gain momentum and we have now expanded from north American clients to a global pipeline of opportunities.
And we're continuing to expand our work at the top not only by placing CEO candidates for their clients, but also by working with those Ceos to accelerate their performance starting from day one.
Several such landmark projects underway.
Moving forward, we are advancing important long term initiatives that we expect will broaden our capabilities and service offerings to drive growth in the years ahead.
The same time, we remain focused on go into the market as one firm with an integrated value proposition distinct suite of capabilities that maximize leader team and organizational performance.
Delivers superior leadership solutions through a unique differentiated client experience.
Before I turn the call over to Mark I'd like to close with how proud I am the contributions from our global team of employees.
At the end of September .
Our employees participated in our first ever global day of service, where we as a firm.
Back to the communities in which we serve raising awareness.
Loan hearing.
And raising funds for nonprofits and organizations focused on education training and other local causes.
It was truly a heart warming and inspiring day.
I want to thank all of our employees not only for the time and commitment to this important milestone, but also for the hard work they contribute each and every day toward advancing our clients agendas.
Now, let me turn the call over to Mark to detailed the quarter.
Thank you Christian on good afternoon, everyone and thank you for joining our call today.
Police report, our third quarter financial results today, where we achieved net revenue of $182.2 million up 5% from the second quarter and marginally down compared to last year's record third quarter by 3%.
Excluding the impacts of exchange rate fluctuations.
Kept pace with last year's record revenue only down 1% on a constant currency basis.
As a management team, we remain actively focused on delivering increases and profitability through to the bottom line, which we achieved again this quarter.
First turning to executive search quarterly revenue declined about 3% year over year.
However, looking at our year to date performance given the quarterly variability we see in our market.
Revenue was essentially flat, but on a constant currency basis search revenue was up 2%. That's ahead of the same period in 2018 outside of exchange rate fluctuations.
And the third quarter on a constant currency basis.
Americas region increased 2.3% driven by strong performance from our teams in the industrial consumer and GTS practices.
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Turning from decreases we saw in our industrial process offset by strong performances in our financial services, GTS and health care life Science practices.
Asia Pacific declined to 17.4% due to decreases in most practices given our loss of 19 consultants in 2018, but offset by the 12, we replaced through promotions a new hires.
Please remember the new consultants will take time to generate full productivity. Therefore, we expect to see their contributions more in 2020, assuming the current macroeconomic and other headwinds will subside sides in Asia.
I'm happy to also report that hydro consulting quarterly revenue increased 3.1% year over year on a constant currency basis and increased 8% sequentially.
Head Count also increase year over year, and we anticipate additional hiring in heidrick consulting to capitalize on the market opportunities we are saying.
I'm also pleased to report.
Core revenues being driven by executive search consultants something we've been working tirelessly on here at hydro.
As a reminder, we started our journey with hydro consulting nearly two years ago through combining or culture shaping and leadership consulting group.
We're pleased positive revenue trends, we have been sitting in both the second and third quarters of 29 team and we look forward to their future contributions moving forward.
Turning to salary and benefits this was lower by $3.5 million or 2.6% compared to last years third quarter.
This was driven by a decrease in fixed compensation of $600000 and variable compensation by $2.8 million, mostly related to lower revenue in the quarter.
On a year to date basis and 29 team.
$1.1 million lower in salary and benefits from the same period and 2018.
General and administrative expenses were 33.1 million, which was the same compared to last year's third quarter.
However, our year to date, GNS expenses $3.9 million or 4% lower than 2018.
Which contributed to the bottom line expansions between the periods.
Biggest improvement came from our continued focus around reducing professional service expenses and travel costs.
And the third quarter, we recorded a onetime nonrecurring.
Restructuring charge of $4.1 million.
The restructuring charge relates to the closing of our legacy Brazil operations, given the acquisition of to get at the end of September .
Charges, primarily related to employee facility and legal costs.
With regards to our new platform, we're expecting our new team in Brazil to be accretive to our bottom line.
In addition, we look forward to growth in Latin America strategic region for hydro.
Excluding the restructuring charges adjusting operating income the third quarter improved $18.6 million.
Adjusted operating margin was 10.2% and on a year to date basis.
Adjusted operating margin was 10.1%.
Finally, adjusted net income for the third quarter was $13.7 million, an adjusted earnings per share it with 70 cents.
On a year to date basis, we're very pleased with the adjusted net income rose.
The $40 million compared to 38.1 million in the same period last year.
Adjusted EPS for the nine month period also increased to $2.05 compared to $1.96 last year, which benefited from reduced tax rate.
For the full year 2019, we're still expecting an effective tax rate in a low 30% range.
Now I'll turn to our balance sheet.
At the end of the third quarter, our cash and marketable securities increased by $54.7 million to 218.9 million compared to 164.2 million at the end of last years third quarter, an increase of 33%.
We had nothing outstanding on our $175 million credit facility, therefore, giving us nearly $400 million of liquidity at the end of the third quarter.
This positions heidrick incredibly well to be strategic on future opportunities, which we continue to explore in the market of search consulting and potentially new areas outside of our current two core services.
Turning to our fourth quarter of 29 team, we expect that net revenue will range between 170 and $180 million compared to record quarterly revenue of 185.3 million achieved in last year's fourth quarter.
This is based on search backlog at the end of the third quarter, which increased from the second quarter. The typical seasonality of search confirmation trends in the fourth quarter, our expectations for hydro consulting assignments.
Dissipated fees the number of consultants in their productivity.
I mean anticipated economic climate.
In summary, given the global market conditions were facing and 29 team compared to that of 28 team. We're delighted with both a third quarter and year to date performance.
Our management of the business continues to deliver meaningful improvements the bottom line as we can see with our adjusted EPS achievement.
We are within range of our record setting performance in 2018.
Which is a great team accomplishment by all of us So heidrick <unk> struggles.
Finally, given our market position and strengthen liquidity with the elasticities to be very strategic for the right opportunities, which we expect will create further value for our shareholders.
With that we'd be glad to take your question.
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Your first question comes from the line of Tobey Sommer Suntrust. Please go ahead your line is helping.
Thanks. This is Jasper goodbye for Tobey I was hoping you could discuss searched.
And highlight some of the markets, where you might be seeing incremental softness.
Okay.
Sure could you repeat the first part you kind of broke out just for a second there.
Oh, Yes, just hoping you could discuss search demand in Europe , and maybe go through some of the markets, where you might be seeing incremental softness.
Yeah sure, it's a Christian and thanks for that question.
You know if we if we look at your up clearly there are two markets that have been a a bit softer.
This year versus last year.
UK and Germany.
I've been the two major markets, where we've seen some softness.
Hi inside of Europe . So I think those are that the two biggest ones. The rest are sort of humming along.
Similar to last year, some are doing a little bit better, but those are two big markets.
For Europe .
Oh, yeah, great. That's very helpful. I'm, just kind of look into the acquisition of to get I wanted to ask why you're looking at the Brazilian market, specifically and how we should think about <unk> productivity for Brazil versus the rest of the Americas segment.
Yeah, It's Chris and again, thank you.
You know one when we look in Brazil, we see a economy that is growing.
Most of the reports the analysis that we see we see a.
Growth for the foreseeable future over there we see a favorable political environment. We thought we were sub scale and we think that this acquisition.
Allows us to play in the REIT space, and the right scale and to be able to.
Participate in various growth sectors of that economy, as well, which is why.
We decided to invest in Brazil at this time it also gives us the opportunity.
Not only do that but as Mark I mentioned.
To onboard a fantastic team that's a completely aligned with us in terms of their vision of Oh, driving the business and to have a nice platform for Latin America as well. So those are the reasons.
Okay perfect. Thanks, guys.
Look in if he would like to ask a question press star one on your telephone.
Your next question comes from the line of Kevin Stein, Keith with Barrington Research Your line is helping.
Afternoon.
Just one of the follow up on the discussion.
Latin America little bit there.
With the two got acquisition it sounds like you want to use that as a platform.
For.
Expansion in Latin America, maybe it sounds like even beyond Brazil, I mean should we expect.
It'd be more aggressive with organic hiring.
In Latin America going forward.
No problem I'm looking sorry, it's mark here. Thanks for the question.
Right now in terms of Brazil, right. What we've seen is a couple of change is one of the political front secondly is kind of where they're making their investments we see that kind of coming through in the forecast again by different banks as well as the World Bank.
Shifting more to 2.5% and 2020, 2021, and 2022, which again, we thought was a good timing perspective to look at it the to get acquisition was one of very similar company similar in terms of how we operate how we think about the business not just from a search perspective, but also from hydro consulting perspective as well as.
Other initiatives that were thinking through and I think kind of just go back to your point, Kevin as you know, yes. In addition to Brazil.
And given the excellence of which they operated and are in Brazil. It makes a lot of sense to think well beyond that in Latin America. So I can't comment specifically on which countries were thinking through but we definitely have some idea generation in terms of expanding the footprint outside of just Brazil, but again, maintaining our discipline in terms of profitability.
Okay. Thanks for that.
I think you also mentioned in the prepared comments when looking at a acquisition opportunities.
Potentially looking at areas outside of your two core service offerings of search and consulting.
I don't know how much you care to expand on that but maybe any any color around that maybe the to others kind of various you'd like to look at to expand your service offerings.
Yeah, It's Christian here so.
Look I think that there's an opportunity for us.
I mean.
In the tech enabled space of intersection of human capital given the data assets and everything that we're doing to continue to expand in that area.
So we're looking through ideas and thoughts.
To be able to drive that and.
And I think that's what we're going to be focusing on.
In terms of the commentary that mark provider on that.
And I think that okay, it's a vibrant opportunity.
We've seen ourselves sort of jumping into that with our heidrick way with everything that we're doing and conversations we're having with clients as well so we.
We think there is something to explore there.
Okay, Great just circling back quickly on two good should we assume that.
Consultant productivity on a U.S. dollar basis is.
Lower than the segment overall currently.
It's my comment would be its marginally lower but remember it say a it's a smaller piece obviously of the greater consolidated effort. So I don't know how much of that you'd really say in the numbers going forward.
Okay sure yet it trying to ask it more from the perspective of the size of the firm, but in terms of revenue, but that seems relatively straight forward I guess so okay.
And I I mean, I guess I was surprised to hear your comment that despite.
Some you know incrementally a little bit of softness in Europe , you actually called out financial services is having a good performance in Europe . So I mean is that just a function of quarter to quarter Choppiness that you talked about last quarter being a little softer so.
In any comment around the financial services sector in Europe .
The only comment I'd make in its I think its hopefully been consistent which as you know when you break Europe down by financial services. It's what you would expect and that is obviously in the UK much lower than what it was last year, but the continental Europe as well as a little bit further up north in Ireland and other places the Netherlands is doing really well for US right now, we're starting to see or.
We have been seeing better performance compared to last year. So it feels like there's just a bit of a shift the overall financial services has been good but obviously when you're trading between.
The UK in other countries, it's different economics completely so but the strength of the confirms seems to still be there. So we're not seeing a real pull back across the board so to speak.
I mean, we are on their off 10%, yes, we were off 10% off some pretty high numbers. So it was down.
Okay, but still kind of holding in there relatively well I guess against some tough comps it sounds like correct.
Right.
Okay, Okay got it.
Lastly, I guess from me was you talked about.
The increasing percentage of across so consulting work coming from the search side.
I'm just wondering.
What the opportunity is for it to work in the other direction.
It would seem like when you're doing some of these larger consulting projects and digital transformation or culture shaping or what have you that.
There was going to be an opportunity to bring in talent.
To support those transformations are those you know cultural transformation so.
How much is that something even look to measure how much you can cross sell search from the consulting side.
Hello. Thank you have to give great question, yes, we absolutely do measure that.
And we and we look at it openly we talk about it and.
And consulting teams done a really nice job of of opening up some new opportunities for US just we don't you know as much talking about on this call just given the nature of the size of each of these businesses and which went impacts which more.
But we're going to continue to focus on that and I think you're absolutely right that there's opportunity there as well.
Okay. Thanks for taking my questions.
Thank you Sir.
There are no further questions at this time I will turn the call back over to Krishnan for closing remarks.
Okay. Thank you very much let me, let me just close by saying and reminding us sort of there are four things that.
We're really been focused on this here that hopefully you all see growing the scale and impact of Heidrick consulting.
And surge, yes, there is some.
Headwinds in the market, but however, we are growing with purpose than you see that with.
Brazil and to get.
The second is all around collaboration.
Bringing the best of Heidrick to our clients and we're continuing to drive that.
Third.
Delivering a premium tech enabled experience to our clients primary focus is on that experience.
Hi products clearly our efficiency gains that we've seen as well as we're creating a data asset as I mentioned.
And then and the bottom line as you can see our fourth.
Cost containment objectives, and just being mindful of that so being financially responsible and I think you're seeing that.
In our results as well.
So thank you all for joining our call.
No I'm lucky to lead such a wonderful teammate heidrick on what I call, such a purposeful journey as well.
We're committed to closing out.
The fourth quarter strong and we look forward to speaking with everybody in the upcoming year as well. Thank you so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.