Q3 2021 Heidrick & Struggles International Inc Earnings Call

October 25, 2021

Good afternoon, I Am Lee today's conference call operator, welcome to the Heidrick <unk> struggles 2021 third quarter conference call joining.

Joining today's call this company's president and CEO Krishnan, recycled pollen and Chief Financial Officer, Mark Harris.

The company is supposed to third quarter slides on the IR homepage of its website at the hatred dotcom.

Management encourage you see to view the slides for additional context.

Please note that in the materials presented today management may refer to non-GAAP financial measures. They believe provide.

<unk> insight into underlying results a reconciliation between GAAP and non-GAAP financial measures may be found in the last schedule of the earnings specialty press release.

Also Andrew remarks management may be making forward looking statements.

And we ask that you. Please refer to the Safe Harbor language contained in today's press release.

Mr about choco pie, that's true the call over to you.

Thank you operator.

Good afternoon, everyone.

We delivered a record third quarter and I couldnt be more excited that heidrick is hitting on all cylinders showing dynamic year over year growth on the top line with more dollars flowing to EBITDA and significant margin expansion on the bottom line.

Likewise.

We compare our performance this quarter to the same pre pandemic period from 2019.

Number one today's results show a dramatic 45% increase in net revenue to a record $264 million.

Number two our adjusted EBITDA is 50% higher at $36 million.

And number three our Q3 EBITDA margin has expanded by 55 basis points versus the third quarter of 2019 to almost 14%.

Each of our three segments executive search and Heidrick consulting and on demand talent contributed to another record breaking quarter and the agility of the heidrick team plus the value of our differentiated products and services, coupled with positive macro trends led to our impressive results.

Our outlook for Q4 is robust and we expect to finish the year strong.

Today I'll start with a few thoughts on our strategic priorities then discuss the important drivers in the quarter and closed noting a promising initiatives. We have underway that we believe is building the heidrick brand.

And laying the foundation for long term shareholder value creation.

On the firm's continuing strategic focus.

We feel very good about the business, we've been building and expanding at Heidrick and we're positive about the future as we look ahead.

We remain intent on increasing the scale and impact of our executive search consulting and new on demand talent business to deliver a unique set of premium services and offerings to our clients.

As we drive forward, our integrated go to market approach.

Our teams across all three of our businesses are collaborating to deepen our client relationships and deliver the best of Heidrick in terms of recruitment.

Talent market insights.

<unk> solutions targeting important human capital opportunities.

And on demand talent.

All to help our clients navigate the many complexities they face and ensuring their leaders.

Teams and organizations are future ready.

And we will soon include broader tech enabled digital offering and are expanding and powerful portfolio.

Here's a snapshot of the drivers of our business growth in Q3.

Okay.

The results, we released today show the impact of our strategic focus and the resiliency and professionalism of the heidrick team.

All in the midst of an environment.

Where demand for our services and offerings is rebounding.

Our net revenue over the last nine months alone of $717 million exceeded the firm's prior annual full year record net revenue figures set in 2018, which bodes well for the rest of the year and for continued momentum in 2022.

In search our net revenue grew by 33% in the third quarter compared to pre pandemic third quarter 2019.

All regions and all industry sector practices showed increases.

The executive search business as robust for us at Heidrick with the number of confirmations, increasing 33% this quarter versus the same quarter in 2019.

For a couple of quarters now and 2021, our productivity per consultant has reached a remarkable and historic pinnacle of $2 4 million per consultant.

This compares very favorably with our previous peak search productivity per consultant, a $1 9 million in 2018 and $1 $7 million in 2019.

Balancing our past trends with our current pace, we see our productivity potentially reverting back to still impressive levels of around 2 million per consultant on.

On average over the long run as we will continue to promote from within.

And higher strategically.

In the meantime, I'm very proud of the amazing agility and capacity of the Heidrick team.

The high volume of business in search is the result of a number of key factors, where change is creating strong demand from our clients and a more diversified revenue stream.

We continue to see lots of change at the top of organizations no matter of new leadership is needed due to dramatically different business conditions or business model transformation multiple factors are driving the search for leadership not only for Ceos, but also across the C suite.

Heidrick is seeking and winning the assignments to fill these roles.

Many searches that are underway due to the huge demand for diverse talent.

As I mentioned on our last call our U S diverse placements, we're tracking at over 50% of our total search work and we're seeing that trajectory continues.

At the board level globally that figures over 60%.

Our sustainability and ESG work continues to grow worldwide as boards and companies face ongoing pressure from stakeholders to focus on issues like climate change sustainability.

Sustainability and other forward looking concerns.

Our search consultants are engaged and filling important positions with highly sought after experienced professionals.

<unk> CIO and data analytic roles.

Chief financial officers and supply chain executive.

For example, we have three to four times the number of supply chain executives search assignments this year versus last year.

And we are increasingly being asked to place more than one director at a time on corporate boards.

In fact, approximately one quarter of all our board engagements include placing more than one board member.

For Heidrick consulting net revenue for the quarter increased by 14% versus the pre pandemic third quarter of 2019 initial projects are developing into longer term initiatives as our consulting clients define SaaS and develop future ready leaders organizations and cultures.

We have a unique ability to serve clients in all facets of their human capital journey and key assignments reflect growing corporate needs in four primary areas.

First with the recognition that top talent is an imperative for success, we have strong demand from clients for hydrogen guidance on matters of leadership assessment and development and follow on support and organization design.

This is especially resonating in the Americas, Europe, and the middle East for senior and high potential leaders.

Second culture.

Culture assessments in culture shaping are more important than ever as companies manage through hybrid and return to work environment and begin to reenergize and realign their teams.

Third is around D. Eni clients are seeking help defining and aligning on diversity strategies and embedding new ways of working that are equitable and inclusive.

And fourth.

With broad investor expectations, increasing not only for operational success, but also on the ESG front. Our consulting teams are advising boards of directors on our overall strategy and effectiveness.

Turning to our third business segment, you will remember that on April one of this year, we acquired business talent group, where BTG, forming the basis of our move into the compelling adjacency of on demand talent with the leading pioneer in this space with this move heidrick became not only the <unk>, but also the only.

Global leadership advisory firm to offer on demand talent solutions at scale, alongside our search and consulting services.

We are excited about the $24 million contribution to revenue from on demand in Q3, which exceeded our expectations.

In addition to the appeal of our unique high end offering external tailwind such as macroeconomic growth pent up demand and talent shortages contributed to our success in the quarter.

We saw particular strength from on demand clients in financial services.

Consumer goods and healthcare and life Sciences.

While it is still early days, we view this segment as a key driver to our long term value creation.

Total addressable market for on demand referrals is large and growing.

As clients see the need for fast flexible talent get more comfortable with filling their interim human capital and short term project needs with remote or independent professionals.

Critically once our clients recognize the power of on demand offering they keep coming back to us to expand their use of on demand to fill more roles.

We believe we will continue to see strong growth in this sector.

The outstanding effort and acumen exhibited by our Heidrick colleagues plus their disciplined attention to implementing our go to market strategy drove our excellent results again this quarter.

In addition, the dynamic world of work and other external factors, such as new and emerging trends around leadership and culture, plus the massive disruption from COVID-19.

<unk>, an imperative for our clients to re imagine themselves and.

And find new ways of working.

In turn these demands are driving our growth and success.

As our clients continue to seek quality diverse and forward thinking talent. We're there every step of the way with our integrated suite of offerings.

Before I turn the call over to Mark for more detail on the quarter I want to share some background on the start of a new relationship that will help us expand our technology Adjacencies and the heidrick brand over the long term.

At Heidrick as I've said in the past.

We're intensively focused on pursuing technological innovation.

Not only to leverage the way in which we work, but also to differentiate and provide leading edge offerings to our clients.

At the start of a multiyear digital journey with a long term vision that expands heidrick suite of leadership solutions with innovative tech driven digital offerings.

Growth and shareholder value creation.

On this dimension of our transformation.

Still very early days, but we expect we'll be able to share more with you. Perhaps later next year.

For now in the digital Arena, we are delighted with our recently announced partnership with Eightfold AI.

The Silicon Valley based leader in the business of HR Tech and artificial intelligence driven talent solutions and platforms.

With <unk>, we believe we can offer organizations, new more powerful ways to make faster smarter and more inclusive leadership decisions at scale and help them position leaders for optimal business success using an innovative digital first approach with AI driven insights.

Ultimately positioning heidrick is the leader in driving the transformation of leadership.

In addition were very pleased to welcome make bear Chief product officer of Sap's Successfactors to Heidrick <unk> Board of directors.

Undoubtedly makes more than 25 years of experience building and scaling platforms as well as her wealth of SaaS development lifecycle market and innovation experience will provide invaluable contributions from the boardroom as we continue to transform our business.

The Heidrick story is one of growth and innovation.

We continually evolve to keep our core search and consulting business future ready, while we aggressively pursue opportunities and growing adjacent sectors like on demand talent and incubate innovative digital products to continue our transformation.

In closing thank you to the entire Heidrick organization for their continued great work and for the valuable contributions they make each and every day all around the world for our clients.

<unk> team by the talent and human capital initiatives, we enable is core to the value, we generate and delivered to our shareholders.

Now and into the future.

With that over to Mark.

Thank you Christian and good afternoon, everyone. Thank you for joining our call today, let.

Let me Echo Chris' John's comments in that our go to market strategy productivity and focus on innovation together with the favorable external trends have translated into solid financial performance in the third quarter for heidrick.

We've been able to continue our top line, while expanding margins only contributed increasingly more absolute dollars to EBITDA net income and earnings per share. So far in 2021, offsetting new annual records, let alone nine month ending ones.

Further heidrick performance continues to remain strong into the fourth quarter, which I am excited to share with you today.

That has been a past practice I'll start this afternoon with a run through on our third quarter results with most of my comments around sequential trends given the dislocation from the Covid period in the third quarter of 2020, we will make further comments on a few balance sheet items that conclude with our fourth quarter outlook.

Knowing that we'll be happy to take your questions.

Youll recall last quarter, we celebrated the milestone of crossing over $200 million quarterly net revenue Mark for the first time in Heidrick history, and I'm proud to say that not only did we do that again, but we added to it.

Our third quarter net revenue of $263 8 million.

Which was 83, 8% higher than last year's third quarter, and one 5% above the previous quarter and 2021 is a new record for the company.

Even more interestingly is that just the nine months ended September 32021, we had cumulative revenue of $717 $5 million, which is more than any annual achievement in the history of heidrick with three more months to go.

It's truly an exciting time in our growth cycle, which we see continuing into the near future.

Let me give you some insights on the performance by turning to our three business segments.

Executive search net revenue was $221 $6 million in the third quarter of 2021, just slightly lower by $2 $5 million or one 1% when compared to the second quarter of this year.

Looking at our search results geographically the Americas region was up by about 1% with modest downside contractions of about 5% in Europe, and Asia, when compared to the previous quarter none.

None of those contractions were unexpected due to the summer holidays and restrictions around the Covid Delta variant and other factors.

But the results in those regions, we are still very strong when compared to previous years.

To give you some perspective, when we look at the Americas, Europe, and Asia Executive search performance in the third quarter and compare that to the average of the third quarters in 2018 in 2019, which were record periods for US we saw increases in revenue of 38, 2% 18, 1% and 18, 4% in each region respectively.

Please remember those were not COVID-19 periods, the prior historical highs and we're growing that much more.

As you can see why we believe the third quarter is an exceptional one for heidrick, we've had astonishing performance in 2021.

Further along the topline growth we have achieved new records in adjusted operating margins in executive search, which held near 21% in the third quarter.

We have seen these margins continue to stay at those high levels in both the first and second quarters of this year.

This is the result of continuing strong productivity numbers at $2 4 million per consultant this quarter.

While this achievement is extraordinary than appears to be industry, leading.

Important to remember that this isn't likely to be sustainable given the promotions new hires and work life balance we expect to achieve in 2022.

Therefore, we would expect this to modulate around $2 million per consultant in the near future, which is still better than our previous historical levels and shows what the new normal is shaping up to be.

For Heidrick consulting third quarter net revenue rose to $17 $9 million up four 5% sequentially.

<unk> continues to benefit from collaboration within the company with nearly 50% of assignments in the first nine months of the year coming from leads through the executive search team. In addition to new leads in engagements that are sold directly by the consulting team.

The number of consultants was roughly flat at 66.

Consulting confirmation value was up meaningfully year over year by almost 60% of this declined 12% sequentially. This was due to lower confirmation values in Europe and Asia as a result of seasonality such as August vacations in Europe.

But like in executive search it's important to note that the second quarter was a record confirmation value quarter for heidrick consulting so being off from those highs as expected, but we are seeing continued strength at the end of the third quarter in terms of revenue backlog projects.

Our newest loan demand segment was exceeding expectations, yet again with revenue of $24 $3 million in the third quarter. This was more than double last year. When BTG was a standalone company and almost 30% higher than what was reported in the previous quarter.

We saw a high number of value engagements with higher average initial project value and more engagement extension extending beyond their initial agreement timing.

Now, let me turn to our expenses.

With record setting third quarter net revenue and higher volume of work naturally this comes with higher compensation and other variable costs.

For example, we saw consolidated salaries and benefit expense of $185 9 million in the quarter essentially flat with the previous quarter.

Lower fixed compensation expenses, largely offset by variable compensation increases due to the growth of our business.

When we look at general and administrative expenses, we saw $29 2 million third quarter, an increase of six 6% from the previous quarter's results.

This increase of $1 8 million stemmed from some return to travel build out costs for our new strategic digital capability and other expansion cost to sustain our growth aspirations.

Finally, we saw our cost of service expense increased to $18 7 million in the third quarter compared to $14 $7 million in the previous quarter, which was primarily due to the revenue growth in our on demand talent business segment.

Youll see the company recorded a restructuring credit of $3 $3 million in the third quarter, which related to the early termination of our New York lease. This is beneficial for us given our old lease had a tale of another two plus years and now we're completely released from that financial obligation.

Without the real estate credit adjusted operating income was $30 $1 million in the third quarter, leading to adjusted operating margin of 11, 4% lower than the 12, 3% margin. We had in the previous quarter. This was the result of very strong revenue achievement in our on demand talent business for.

For the segment has near breakeven margins given the stage of growth cycle therein, and higher overall G&A from the growth of our business.

That being said, we like what we see in our long term trends expanding margins.

Where we look at our trailing 12 month consolidated adjusted operating margin, which is at an all time high now.

Except for last year's disruption due to Covid since 2014, our margins have been building steadily over the last 30 quarters. An achievement. We are very proud of at Heidrick.

This is all translated to adjusted EBIT of $36 1 million in the quarter or $102 6 million for the nine months period ended which has already surpassed any previous annual adjusted EBITDA performance.

In fact in 2018, our previous record for Heidrick, we saw annual adjusted EBITDA of $97 million. So were 13, 1% ahead, but still one more quarter to add to it.

The adjusted EBIT margin was 14, 3% year to date compared to the previous high of 12, 7% in 2018, demonstrating the value we deliver to our shareholders. This year.

We finished the quarter with an effective tax rate of 27%, helping us deliver net income of $24 $5 million up 18% from the previous quarter and.

And diluted earnings per share was $1 21 up from $1 three last quarter again looking at our nine months ended diluted earnings per share of $2 97 Youll.

You'll see that this is already an annual record with another quarter to go.

Before turning to our balance sheet I wonder if it gets the moment just to sum up our financial performance through September 2021, and that we are seeing unprecedented record levels of aggregate dollars and our Bottomline achievement with margin expansion around the same.

I believe these achievements and continued success will translate to more shareholder value as we continue to drive the business of heidrick and that becomes understood by the market.

Given our historical EBITDA, and EPS achievements, which our legacy business.

Valued on in the market coupled with our revenue growth in the on demand talent business, where their industry is valued on a revenue multiple due to the growth cycle. We believe this will lead us to increase shareholder value in the future on a sum of the parts basis two.

<unk> 2021 has truly become a pivotal year for heidrick and we believe that can continue into 2022.

Now, let me turn to the balance sheet we.

We ended the quarter with cash and cash equivalents in marketable securities of $348 $3 million, which is $110 $7 million more than the same quarter last year as we discussed before the companys cash position typically builds throughout the year as employee bonuses are accrued in our traditionally pay down in the first quarter of the following year.

Our balance sheet, coupled with the renewed and expanded hydro credit facility of $200 million moves our liquidity to over half of $1 billion.

Clearly a strong balance sheet puts us in a position of considerable strength to pursue continued growth objectives that Christian Arne discussed earlier in our call.

Finally, let me turn to our fourth quarter guidance.

Given the strong performance, we are seeing in our markets and looking at our models. Despite some anticipated and typical holiday slowdown in our business. We believe our first quarter net revenue will be in the range of $255 million to $265 million closing out 2021, very strong of course this could change materially depending on whether we see COVID-19 spikes, how governments and companies.

Please respond as well as impacts from macro in acute business events, such as supply chain shortages inflation and other unforeseen matters.

Time will tell but suffice it to say that we expect to set another quarterly record for the fourth quarter results.

In conclusion as Christian noted at the outset, we're very pleased with our performance showing tremendous growth year over year and sustaining our building momentum sequentially, our strategic initiatives implemented to drive growth in our legacy search consulting businesses plus expansion from our recent on demand talent acquisition in the early days of our Eightfold AI partner.

<unk> are creating springboards for Heidrick continued success.

With that Christian and I would be happy to take your questions.

Later, however deal.

Thank you at this time to ask a question you will need to press Star Wars and your telephone again that is star one to ask a question.

Sorry, your question press the pound key.

Please standby will be compiled.

Ross.

Again that is star one to ask a question.

Your first question comes from the line of Josh Vogel from Sidoti <unk> co.

Your line is now open.

Thank you good afternoon Christian and Mark.

Certainly impressive results I have a couple of questions to start kind of around.

Salt and head count I was curious.

Expectations for.

New consultant hires and promotions from within I guess over the balance of this year and maybe even an early read on next year and just kind of building off that I'm curious, which industries or geographies do you find yourself, perhaps sitting with a high level, that's a little bit later than where you want to be today, given given the end market demand youre seeing.

Yeah, Hey, Josh Thank you for that question.

Look I think we're going to have a strong promotion cycle, we've got great talent and we're expecting to.

Remote from within.

As usual we are in the midst of going through all of that so I don't have all the details on that but.

Great question.

Strong strong performance this year by everybody so.

I think it will be a good promotion cycle for us.

I think if we take a step back.

There obviously are needs in in Europe and Asia.

As what I would say, where we might be a bit lighter than where we'd like to be so we hope to address some of those needs through that but look American is just strong and strong performance everywhere and we will reward those individuals.

As well through the cycle.

I appreciate those insights and I guess, just thinking about the competitive landscape can you talk about any changes or successes that youre seeing.

Ringing talent ABOR aboard basically.

Are there any notable structural shifts you're seeing in the marketplace whether it's.

Comp structures for the consultants or anything with regard to the physical locations given the enablement to be remote just curious general thoughts on that.

Yes.

Feel free to add to this with what you see as well.

Look I don't think I see.

And the competitive landscape.

Too many what I would say structural themes.

We have a lot of conversations going on I think the conversations that we've got going on around the platform that we're building the culture that we've got.

In place here, how we collaborate and how we are tightly focused on still working at the executive levels at the top end.

And driving that success and Thats resonates.

With a lot of people in some different platforms as well.

So that's what I think is creating those conversations I haven't seen anything yet structurally out there that.

Is different.

But the new thing that others are doing that drive that more than.

These things that I'm, saying, so it's about our success and our culture that I see out there.

Great. Thank you and you talked about.

Maybe.

Some compression in consultant productivity understandable, whether it's from coming from promotions or new hires but given the tech enablement of the business model and Youre growing digital capabilities in general.

Do you think there is long term upside.

2 million number on a long term basis.

At the levels you are at today do you think that could be a new base longer term once you're leveraging all the tech enablement and digital capabilities.

Hey, Josh It's Marc let me try to answer that for you and I think in the prepared remarks, which youre going to what I discussed was.

Being at $2 four today really kind of transitioning itself back to around the $2 million, which is obviously ahead from last year.

Year pre Covid 2019 up one seven so the answer is it's in there, but as you and I. Both know the law of averages is always going to play out right. So the market needs to be there the hires that we use which impacts our denominator will have an impact on that number.

As well as just general global expansion, where we think we need to add talent and where that is.

It will probably be outside of America or the U S. At least in particular, which will mean typically lower retainers.

Because productivity and a good way, even though the numbers may look like they're averaging down I think the revenue expansion will be well worth it. So I think when you look at all those factors in play that that's really why it drives itself down it don't internalize that as we're not getting those efficiencies we are but sometimes when you mix. It all together it can be hard to see and we'll try to give you clarity.

As we go through the process.

I appreciate those insights I just wanted to switch gears, maybe this is for you as well Mark.

Looking around.

The on demand talent business, obviously, a really strong result, we're seeing pent up demand talent shortages there.

When we did that a good quarterly base for us to assume that the business can grow off of in other words, another way I guess to ask it is whats baked into your is that Q3 rate baked into your Q4 guidance and I guess, it's also a good time to remind me of what the norm.

Seasonality is in the on demand talent business. Thank you.

Oh, absolutely look the average the two quarters that we've been public is around that 2000 $21 million revenue number.

We have built into our Q4 guidance obviously them.

Continuing the trend, but really it's not going to continue into Q4, there definitely is some seasonality holiday season approaching as obviously you know in terms of how they bill in their revenue recognition et cetera is going to be marginally impacted by that I think the real question as we look at 2022, we still have an expectation that as a growth business.

So that's the aspirations. We have is to continue the general growth model, but again and I think you hit it right on which is it's really a function of as the market continues in our opinion to move towards.

The gig economy, and again project interim based work et cetera, and doing more of that which is both the clients as well as the talent wish to continue to explore those types of possibilities. It will be really interesting to see where this growth cycle goes so a lot of optimism on our side regarding on how thats going to grow and it's being executed by.

An outstanding team over on that side. So I think the team over on the on demand space is just really doing a good job of hitting the market very very well and youre seeing that come through in the numbers.

Really helpful and I, just would love to sneak in one more if I may.

It's nice to see the operating loss rapidly narrowing at Heidrick consulting.

Given the tech enablement and the Digitization of the overall business have you kind of reset what you think the quarterly run rate you need to get to for that business to get back into the black.

Great question so.

I know, we shouldn't have shown that tortilla, Josh youre going to push me on that one.

Mike.

It is still very strong that around that $80 million to $85 million annual Mark is where you're going to see the breakeven and better.

And I don't believe anything is changing that landscape there might be some investment opportunities that will certainly give you those numbers.

As we kind of go through it in terms of our future and so you can kind of pro forma those sunk costs out, but just generally speaking in terms of what they're doing today and where they want to grow their business that is still a very very safe bet. So my comment is kind of around if you want a quarterly.

Do that number that'd be about 'twenty, one 'twenty $2 million a quarter, we should start to really get an expectation of seeing some interesting breakeven analytics and then hopefully again as that continues up.

Trend, which we've made comments on as well, we should be able to see margin to the business.

That's great well. Thank you so much taking my questions.

Great to see the business performing so well.

Thanks.

Yeah.

Your next question comes from the line of Tobey Sommer from tourists Securities. Your line is now open.

Wondering if you could elaborate on.

The digital journey and transformation.

And maybe help me understand.

What about the business model and income statement, whether its margins or core growth.

That may change if you're <unk>.

Successfully able to to do what you want to do over the next several years what are the outward signs we would see.

Of that success.

Yes.

Tobey it's Christian.

That's the first part were you speaking about our new digital relationship where were you speaking more broadly than that.

More broadly and then I'm going to have a follow up about the recent.

Recent relations Greg, Yes, so if we continue on.

The tech enablement.

Of all of our current businesses and that's a journey that.

We're committed to and we're driving hard and you youre going to see that again as you've already seen with our ability to take on this productivity.

That we've been able to do from.

In the past I think youll see that stickiness of client relationships, our ability to build out accounts.

Youll be able to see that there and over time, that's going to translate to margin as well so.

So youre going to be able to see that I think on the existing technology journey that we're that we're on with our new relationships and what we're trying to do here.

If I just summarize it I mean, I think we're in a world today, where I kind of say talent, if you want to call it human capital.

Is the capital that now most in demand if you go and I believe if you go to any survey at the end of this year on on from Ceos, and others Youre going to see that pop its head and so theres going to be just emerging.

And Theyre already is expectation that data and insights on talent and executive talent should.

It should be as readily available as we have on other business dimension. So we think that with our IP insights platform and solutions that we're going to build with a company like April. They are we can bridge that gap.

And lead the transformation of leadership as well.

So.

That's that's something that.

I think that we're.

We're headed down the path.

Okay.

Chris Let me just ask it does it does it meaning the business becomes more profitable because.

Les has done less.

Less processes have human intervention.

Or the.

The financial outcomes that your strategy will achieve yes.

So, yes, I think that strategy will create.

New service offerings, and new line of business, so youre going to see.

We're answering some new problems that have been previously solved and bespoke fashion by.

A myriad of companies. Okay. So I think it's a whole new revenue stream that we believe is going to be iron margin as well just given how one addresses those.

That solution set as well so you'll see both.

Okay and then.

Productivity.

Per consulting revenue eventually.

Perhaps comes down to this 2 million figure.

Will.

Your other smaller businesses that are.

Subscale and therefore sub sub.

A an ongoing goal of profitability.

Will those be able to drive.

Drive sufficient margin such that <unk>.

The margin won't have to come down as productivity is coming down or should we think of margin kind of tracking that productivity at some point.

Well everything.

And so far everything is a function of scale right. So I think the answer is on a on a set of service basis on what we're seeing in the prior quarter, if our productivity were to come down and by definition, Yes, we would see some margin creep into that.

Having said that remember when that when the productivity comes down which means the revenue comes down and people are not going through the tiers and the way that we do kind of our.

The payment so to speak those would obviously in zinc also come down so its not exactly a one to one ratio.

Having said that.

Again, as we look at other markets those are going to be very different profitability, depending on how you got the U S versus let's say parts of Latin America, et cetera, which actually can drive even higher margin so to speak because the cost.

It is very different in terms of the revenue costs.

Distributions. So it's always hard to answer that question, because it's really a function of where it's coming from it's not necessarily I would tell you is I am.

Let's focus on that and I'm not focused on a much focused on that what I like to see is how it trends all the way down to the bottom line, where again our equity.

Shareholders are seeing.

<unk> got nearly $3 EPS year to date, we typically were $2 50, all in for the year before that and that's really where I think youre going to see that accretive value come in because what we're able to achieve is more net income without additional equity shareholder dilution. So to speak is not there and the more we can execute on the strategy.

<unk> that Chris Johns rightly pointing out in terms of potential other products and services. We will continue that path. So I think it's still very very accretive for the shareholders in terms of what we're doing less so again about the operating margin side of it from my perspective.

Okay and then.

Christian I promised you a follow up on the specific new relationships that you have that your press release and discussed in your prepared remarks, I know youre laying down some bright and some bread crumbs as to exactly what that is.

But could you.

Maybe give us an example of what what that will solve and for our customer.

Yes, I mean look I am going to be pretty high level on this just given where we are in.

And some of the bread crumbs and.

And what we're trying to build over here, but I think we'll think about complex problems that are bespoke that.

That.

Executives also face visibility into their DNI pipelines et cetera things like that these are real problems that are occurring in today's world.

And how do we create that.

And how do they understand that that this would be an example, okay, but that's just a small example, and part and.

Parcel to a larger solution set that we could drive, but it will be things like that.

Okay.

And then I have just a broad market question and I'll get back in the queue does.

<unk> is the ability to do remote work at all levels within the organization all the way up to the C suite now how is that influencing.

Wage rates and therefore.

Our fee levels.

I guess it could go both ways, where you can get some more expensive people to do work remote in different locations, but potentially it could go the other way to how is that working in the business.

Yes.

Let me start off with that and Mark you probably have some numbers behind our our searches so I think on the.

On the executive search side.

We don't really see it having a huge impact right now okay.

<unk>.

Our retained earnings and our average fee per search et cetera are all very very strong.

We do see.

Balancing that perhaps on the on demand talent side.

A desire to be able to leverage talent in a different way and driven by the ability to work remotely and talent to be residing remotely as well. So we see another avenue opening up over there as well and all kind of being driven by the same things so.

To kind of see it currently as a net positive for us.

Yes.

Okay.

Just a little bit on the math side of it what we're starting to see in terms of our average retainers and our engagement is trending back to where they kind of worked pre COVID-19, maybe a little bit higher but I wouldn't say meaningfully obviously, it's the volume of work that's generating a lot of the revenue value, but having said that we are seeing uptake.

Uncertain engagement.

<unk> strong.

Again, not so much obviously I was saying that the CEO board side of it but there are the aspects that we're starting to see a little bit of the war on talent kind of creeping itself in but for the most part somebody what I'd tell you is clearly the <unk>.

Peer demand side of it is really what's driving those results for the most part.

Thank you very much.

Your next question comes from the line of Kevin Spanky from Barrington Research. Your line is now open.

Hey, good afternoon.

So we've obviously been talking a lot here about.

The Digitization and the tech enablement of your business model.

With.

Pacific Li with regard to search.

Have you.

Kind of Dove in in terms of.

Productivity metrics.

Sure.

Besides annualized revenue per consultant and how maybe those are changing.

And how sustainable.

Maybe some of those changes or I am thinking of.

The speed at which you can completed an executive search or.

The number of searches per consultant, maybe how much that has improved or could improve given.

Digitization and tech enablement, so I guess any commentary on those specific metrics or any others you might be monitoring would be helpful.

Sure let me try to give you some color on that I think the first one is on your question on the closure rate and the speed at which we're transacting obviously has been accelerated through COVID-19 without people needing to travel on planes and go through the interview process, we've seen our days to close.

Covid, even today fall of about 20%.

In terms of the average days to close we're starting to see a very slight uptick in that for the most part sustaining itself pretty well and we would expect again with zoom and other technologies that are digital assessment ability et cetera, hopefully roll into the fact that we can keep that pretty constant.

And that should obviously help us in terms of that's obviously been quite efficient I think the other element.

Kind of what Youre thinking true Kevin.

When we look at the G&A right. So we saw G&A fall away to 11% as a percentage of revenue where it used to be 18% and almost nearly 25% at its peak before that I don't see us playing in that space in terms of the 18, 19% I think it will be somewhere in the midpoint between the two.

Long term or at least medium term I should say versus long term because we do not see the return back to people flying all over the place.

Or again candidates et cetera, and again in terms of our business development et cetera, everything has been pretty unanimously accepted by doing things.

I assume it's still requires a touch point, so we will see a bit of a climb and that's why I'm using the midpoint of the G&A side of it but we'll.

We will see some of that come back, but not nearly to what it used to be and I think that is what I would call the permanent leverage side of it.

And then as we go through the way that we wanted to digitally transcend ourselves and search and heidrick consulting and on demand talent as well, that's where it's really going to be very very interesting in terms of where we are able to achieve as we kind of go through that in the next 12 to 24 months.

In terms of the platforms that we're trying to create over here and really seeing what that can generate in terms of efficiencies on our core business as well as our potential new business lines up with it.

Okay, Great. That's helpful. Appreciate that.

And when you're you have been talking about.

The normalization.

The $2 million revenue per consultant level I believe you said you see that happening.

In the near term or are we just kind of thinking about.

Should we think about the next promotion cycle kind of first quarter 2022, we will start to normalize to that level or.

I guess it depends on what's happening with revenue and demand as well, but just how are you thinking about it.

In your planning.

We don't see in terms of kind of the current market conditions at least what we're experiencing at heidrick.

A big drop off.

We still talk to our clients, we're still getting a lot of data, saying that it still seems to be full court press. Obviously, we gave a guidance number I think thats.

Assuming we come out within that range.

That's still showing very very good strength in the Q4, and we will see obviously, it's always hard to purchase market you wanted to but we do think that'll that'll continuous pace, yes, the promotional side of it will impact the denominator in the trailing 12 months, so its not necessarily spike down it'll average back down on its own even if we kept to those levels.

But I think what we're really trying to say is look as you assume this kind of normalizes. If I can use that word Q4 next year, that's really where I think again, if I do the math it would kind of come down to that $2 million and potentially really hold at that level again because of the efficiencies and the way that we do our searches days to close and ability to help people do more.

Without obviously over over taxing them is really what we're trying to achieve.

Okay, Yeah, great that's helpful.

I guess just lastly.

You've touched on it quite a bit but just.

You mentioned there that the demand is still strong.

And some of the factors you see going on here in terms of.

The demand picture leadership changes a lot of leadership changes in the C suite.

<unk>.

<unk> inclusion.

Are you thinking about these as having some some real kind of multiyear legs in terms of.

The growth in demand cycle or.

I guess okay.

Sure.

Are you feeling like we are in the earlier or later innings of some.

Yes.

Yeah.

Yes, Kevin It's Krishnan here, yes, I still think we are in the early innings of that okay.

Sustainability very early innings.

We've made some nice progress on on DNI weights.

Early innings on that there is still digital transformation.

Thats occurring.

And many industries still theres lots of.

Private equity capital, that's still sitting out on the sidelines.

Theres a lot of.

Things going on in their new trends out there as well that we can capture so.

This is.

There are trend lines out there that we.

We will continue for a bit.

Okay.

Okay. That's helpful. Thanks, a lot for taking the questions I appreciate relations on the results.

Got that.

As there are no further questions at this time I'll now turn the conference back to Mr. Rich Alco pollen for closing remarks.

Thank you for joining us clearly the results we announced today were outstanding we're working very hard to continue to deliver growth and value to heidrick clients into our shareholders all within the framework of our strategic pillars that we've spoken to before.

First growing the scale and impact of both our search and consulting lines of business and delivering that premium services experience.

Second expanding the development of leadership solutions and capabilities to address new and ongoing client imperatives, such as beyond demand talent space and third investing in new product development and strategic expansion into adjacent.

In complementary areas with innovative tech driven offerings as well.

We look forward to updating you again next quarter until then thank you all so much and take care.

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

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Good afternoon, I Am Lee today's conference call operator, welcome to the Heidrick <unk> struggles 2021 third quarter conference call joining today's call as company's President and CEO Krishnan, <unk> and Chief Financial Officer, Mark Harris.

The company has posted third quarter slides on the IR homepage of its website at <unk> Dot com.

Management encourage you see to view the slides for additional context.

Please note that in the materials presented today management may refer to non-GAAP financial measures. They believe provide additional insight into underlying results a reconciliation between GAAP and non-GAAP financial measures may be found in the last schedule of the earnings press release the press release.

So Andrew remarks management may be making forward looking statements.

And they ask that you. Please refer to the Safe Harbor language contained in today's press release Mr.

Mr. <unk> I'll turn the call over to you.

Thank you operator.

Good afternoon, everyone.

Likewise if.

If we compare our performance this quarter to the same pre pandemic period from 2019.

Number one today's results show a dramatic 45% increase in net revenue to a record $264 million.

Number two our adjusted EBITDA is 50% higher at $36 million.

And number three our Q3 EBITDA margin has expanded by 55 basis points versus the third quarter of 2019 to almost 14%.

Okay.

Each of our three segments executive search and Heidrick consulting and on demand talent contributed to another record breaking quarter and the agility of the heidrick team plus the value of our differentiated products and services coupled with positive macro trends led to our impressive results our outlook for Q.

Four is robust and we expect to finish the year strong.

And laying the foundation for long term shareholder value creation.

Okay.

On the firm's continuing strategic focus.

We feel very good about the business, we've been building and expanding at Heidrick and we're positive about the future as we look ahead.

We remain intent on increasing the scale and impact of our executive search consulting.

And new on demand talent business to deliver a unique set of premium services and offerings to our clients.

As we drive forward our integrated go to market approach our teams across all three of our businesses are collaborating to deepen our client relationships and deliver the best of Heidrick in terms of recruitment.

Talent market insights.

Advisory solutions targeting important human capital opportunities and on demand talent.

All to help our clients navigate the many complexities they face and ensuring their leaders.

Teams and organizations are future ready.

And we will soon include broader tech enabled digital offering and are expanding and powerful portfolio.

Here's a snapshot of the drivers of our business growth in Q3.

Okay.

The results, we released today show the impact of our strategic focus and the resiliency and professionalism of the heidrick team.

All in the midst of an environment.

Where demand for our services and offerings is rebounding.

In search our net revenue grew by 33% in the third quarter compared to pre pandemic third quarter 2019.

All regions and all industry sector practices showed increases.

The executive search business as robust for us at Heidrick with the number of confirmations, increasing 33% this quarter versus the same quarter in 2019.

For a couple of quarters now and 2021, our productivity per consultant has reached a remarkable and historic pinnacle of $2 4 million per consultant.

This compares very favorably with our previous peak search productivity per consultant, a $1 9 million in 2018, and $1 7 million in 2019.

Balancing our past trends with our current pace, we see our productivity potentially reverting back to still impressive levels of around 2 million per consultant on.

On average over the long run as we will continue to promote from within.

And higher strategically.

In the meantime, I'm very proud of the amazing agility and capacity of the Heidrick team.

The high volume of business in search is the result of a number of key factors, where change is creating strong demand from our clients and a more diversified revenue stream.

We continue to see lots of change at the top of organizations.

New leadership is needed due to dramatically different business conditions or business model transformation multiple factors are driving the search for leadership not only for Ceos, but also across the C suite.

<unk> is seeking and winning the assignments to fill these roles.

Many searches that are underway due to the huge demand for diverse talent.

As I mentioned on our last call our U S diverse placements, we're tracking at over 50% of our total search work and we're seeing that trajectory continues at.

At the board level globally that figures over 60%.

Our sustainability and ESG work continues to grow worldwide as boards and companies face ongoing pressure from stakeholders to focus on issues like climate change.

Sustainability and other forward looking concerns.

Our search consultants are engaged and filling important positions with highly sought after experience professionals, including CIO and data analytic roles chief.

Chief financial officers and supply chain executive.

For example, we have three to four times the number of supply chain executive search assignments this year versus last year.

And we are increasingly being asked to place more than one director at a time on corporate boards.

In fact, approximately one quarter of all our board engagements include placing more than one board member.

We have a unique ability to serve clients in all facets of their human capital journey and key assignments reflect growing corporate needs in four primary areas.

First with the recognition that top talent is an imperative for success, we have strong demand from clients for heidrick guidance on matters of leadership assessment and development and follow on support and organization design.

This is especially resonating in the Americas.

Europe, and the middle East for senior and high potential leaders.

Second culture culled.

Culture assessments in culture shaping are more important than ever as companies manage through hybrid and return to work environment and begin to reenergize and realign their teams.

Third is around DNI.

Lions are seeking help defining and aligning on diversity strategy and embedding new ways of working that are equitable and inclusive.

And fourth with broad investor expectations, increasing not only for operational success, but also on the ESG front. Our consulting teams are advising boards of directors on overall strategy and effectiveness.

Global leadership advisory firm to offer on demand talent solutions at scale, alongside our search and consulting services.

We are excited about the $24 million contribution to revenue from on demand in Q3, which exceeded our expectations.

In addition to the appeal of our unique high end offering external tailwind such as macroeconomic growth pent up demand and talent shortages contributed to our success in the quarter we.

We saw particular strength from on demand clients in financial services consumer.

Consumer goods and healthcare and life Sciences.

While it is still early days, we view this segment as a key driver to our long term value creation.

<unk> total addressable market for on demand referrals is large and growing.

As clients see the need for fast flexible talent get more comfortable with filling their interim human capital and short term project needs with remote or independent professionals.

Critically once our clients recognize the power of on demand offering they keep coming back to us to expand their use of on demand to fill more roles.

We believe we will continue to see strong growth in this sector.

The outstanding effort and acumen exhibited by our Heidrick colleagues plus they are disciplined attention to implementing our go to market strategy drove our excellent results again this quarter.

In addition, the dynamic world of work and other external factors, such as new and emerging trends around leadership and culture plus the massive disruption from Covid have created an imperative for our clients to re imagine themselves and.

And find new ways of working.

In turn these demands are driving our growth and success as our clients continue to seek quality diverse and forward thinking talent.

There every step of the way with our integrated suite of offerings.

At Heidrick as I've said in the past, we're intensively focused on pursuing technological innovation.

Not only to leverage the way in which we work, but also to differentiate and provide leading edge offerings to our clients.

We are at the start of a multiyear digital journey with a long term vision that expands heidrick suite of leadership solutions with innovative tech driven digital offerings for future growth and shareholder value creation.

On this dimension of our transformation. It is still very early days, but we expect we'll be able to share more with you. Perhaps later next year.

For now in the digital Arena, we are delighted with our recently announced partnership with Eightfold AI is.

The Silicon Valley based leader in the business of HR Tech and artificial intelligence driven talent solutions and platforms.

Ultimately positioning heidrick is the leader in driving the transformation of leadership.

In addition were very pleased to welcome make bear Chief product officer of Sap's Successfactors to Heidrick <unk> Board of directors.

The Heidrick story is one of growth and innovation.

In closing thank you to the entire Heidrick organization for their continued great work and for their valuable contributions they make each and every day all around the world for our clients.

<unk> team by the talent and human capital initiatives, we enable is core to the value, we generate and delivered to our shareholders.

Now and into the future.

With that over to Mark.

Thank you Christian and good afternoon, everyone. Thank you for joining our call today, Let me Echo Chris' John's comments in that our go to market strategy productivity and focus on innovation together with the favorable external trends have translated into solid financial performance in the third quarter for heidrick.

Further heidrick performance continues to remain strong into the fourth quarter, which I am excited to share with you today.

As has been a past practice I'll start this afternoon with a run through on our <unk>.

Third quarter results with most of my comments around sequential trends given the dislocation from the Covid period in the third quarter of 2020.

We will make further comments on a few balance sheet items that conclude with our fourth quarter outlook.

Following that we'll be happy to take your questions.

Our third quarter net revenue of $263 8 million, which was 83, 8% higher than last year's third quarter, and one 5% above the previous quarter and 2021 is a new record for the company.