1Q 2007 Conference Call Script Julie Creed Good morning, everyone, and thank you for participating in our first quarter conference call. On today s call, from Heidrick & Struggles, are Kevin Kelly, Chief Executive Officer, and Eileen Kamerick, our Chief Financial Officer and Chief Administrative Officer. Kevin will start by discussing some of the operational and financial highlights of our first quarter, and then Eileen will review our financial results in a little more detail. As a reminder, there are supporting slides available on our Website at www.heidrick.com to accompany our remarks today. As always, we advise you that this call may not be reproduced or retransmitted without our consent. Also, we ll be making forward-looking statements on today s call and ask that you please refer to our Safe harbor language contained in our news release, dated today, May 2, 2007 which was widely disseminated by the various news wires and other media this morning. The same Safe Harbor language is also on SLIDE 2 of our presentation. And at this point, I ll turn the call over to you, Kevin. Kevin Kelly: Thanks Julie and thanks to all of you who are taking time to participate in our call today. As Julie mentioned, I m going to first highlight the quarterly results, and then I ll come back after Eileen s presentation to give you more insight into some of our current initiatives and how we see 2007 to date. Now, if you are following along with the slides we ve posted on our Website, I m going to start with SLIDE number 3. We had a great revenue quarter. Net revenue of $143.1 million was up 41.0% year-over-year, and up 8.2% over the fourth quarter. Even if we took out the contribution from former Highland Partners consultants of approximately $14 million in net revenue, organic year-over-year revenue growth would have been around 27%. The growth came from all three regions Americas was up 49.5%, Europe up 20.2%, and record net revenue in Asia Pacific was up 66.9% year-overyear. All of our key growth drivers and operational metrics contributed to improved top-line results in the first quarter. Turning to SLIDE 4: Consultant headcount at March 31 was 414, up 24% compared to 333 at March 31, 2006, and up about 7% sequentially. Turning to SLIDES 5 and 6: Executive search confirmations were up 32.6% year-over-year, and were up 24.6% sequentially. The average fee per executive search increased to $96,300 or 5.3% higher than the average fee per search in the first quarter of 2006. Moving to SLIDE 7: We are pleased to report that despite having added 81 consultants in the last year, annualized revenue per executive search consultant remained strong, at $1.3 million. This is actually an increase from last year s first quarter and fourth quarter levels of $1.2 million.
Enabling our new consultants to get up to speed as quickly as possible, and improving the productivity of all our consultants generally, has been-- and will continue to be-- a very high priority for our company. Referring to SLIDES 8 and 9: First quarter operating income almost doubled over last year to $16.3 million, from $8.4 million last year. Our first quarter operating margin increased from 8.3% to 11.4%. And as shown on SLIDES 10 and 11: Net income of $10.1 million was up 70.0% over last year s first quarter net income of $5.9 million. Diluted earnings per common share increased to $0.53, compared to $0.30 last year. With that quick overview of our great first quarter, now I will turn the call over to Eileen to give you more detail on the quarterly results. Eileen Kamerick: Thanks Kevin. Looking at SLIDE 12: Revenue before reimbursements, or net revenue of $143.1 million, increased 41.0% year-over-year, and was up 8.2% sequentially. The impact of foreign currency exchange rates accounted for approximately 5 percentage points of year-overyear growth in the first quarter. As Kevin mentioned, net revenue associated with former Highland Partners consultants represented approximately $14 million in the quarter. Because the HP consultants and their teams are now fully integrated with our teams, with many shared searches, we will no longer provide the approximate net revenue at the consolidated or regional level. Be assured that our expectations for the contributions of this acquisition, as a whole, have been exceeded. Turning to SLIDE 13: Salaries and employee benefits expense in the first quarter was $98.4 million, or 68.7% of net revenue. This expense was up $28.2 million or 40.2% year-over-year. Fixed salaries and employee benefits expense increased $18.3 million and performance-based compensation increased $9.6 million. At the most basic level, this year-over-year increase in salaries and employee benefits expense was a function of a 21% year-over-year increase in our worldwide headcount, including a 24% increase in consultants. Higher expected net revenue levels for 2007 also translate into higher bonus accruals. And as a reminder, the increase over last year also reflects $1.2 million of quarterly expense related to retention RSUs and retention cash bonuses for former Highland Partners consultants. Total stock-based compensation expense in the quarter was $7.6 million compared to $4.9 million in last year s first quarter. This increase is primarily a function of a greater proportion of a consultant s bonus being paid in RSUs. It also reflects that we are in our third year of this program referring to our strategy whereby a portion of consultants and management s bonuses 10%- 20% depending on the level is paid in the form of restricted stock units that vest over 3 years. We are very pleased with how the increase of equity-based compensation programs has been received by our employees. We ve been meeting with our consultants and other employees around the world to further educate them on how shareholders view the business, how we compare to our competition and against other investment alternatives in the
human capital space, how our valuation is driven by a combination of business and operational metrics, and how they can individually and collectively drive results. Turning back to SLIDE 12: General and administrative expenses in the quarter were $28.4 million, an increase of $5.7 million compared to last year s first quarter, but a decrease of $1.4 million compared to the fourth quarter. As a percentage of net revenue, G&A expenses decreased to 19.9%, compared to 22.4% last year which reflects our ongoing efforts to reduce operating expenses. Considering our acquisition of Highland Partners last October and a yearover-year revenue growth rate of 41.0%, the year-over-year increase in absolute dollars is within our expectations. If we can maintain G&A in the low 20 percent of net revenue level, or lower, we ll be quite pleased. First quarter net income increased 70.0% to $10.1 million, and diluted earnings per share were $0.53, reflecting a quarterly effective tax rate of 45.1%, after discrete items. The discrete items in the first quarter primarily related to our ability to incorporate one of our largest branches, Japan, where we will realize the benefits from a more efficient tax structure in that country going forward. Moving to SLIDES 14 and 15: Cash Flows and balance sheet items-- Cash flow used in operating activities was $68.4 million in the first quarter, compared to $35.3 million in last year s first quarter. The year-over-year increase reflects the fact that we paid all of the 2006 bonus to our employees in March 2007, as opposed to the 2005 bonus when we paid a portion to employees in December and a portion in March. The cash, cash equivalents and short-term investments balance as of March 31 was $151.3 million. The decrease compared to December 31, 2006 again reflects the payment of approximately $98 million in cash bonuses in March 2007. In the first quarter, we repurchased 286,318 shares, at an average price of $47.00, for a total consideration of $13.5 million. There is $25.2 million remaining on the $50 million authorized by our Board in May 2006. Looking at regional results, please turn to the Americas results on SLIDE 16: Net revenue of $83.4 million in the quarter was up 49.5% year-over-year, and up 13.2% sequentially. Strong confirmation trends in this region really helped drive revenue growth in the quarter, with every office and every practice group achieving revenue growth. Productivity and average fee-per-search also contributed to positive year-over-year results. Operating income in the first quarter was $16.7 million, up 70.5% year-over-year, and an increase of 26.7% sequentially. The operating margin improved to 20.0%, compared to 17.5% in last year s first quarter and 17.9% in the fourth quarter. Turning to SLIDE 17. First quarter net revenue in Europe of $42.6 million was up 20.2% year-over-year, but down 6.4% sequentially. In the quarter, the positive impact of foreign currency exchange represented approximately 11 percentage points of the year-over-year revenue growth.
The London office had a great quarter and was the primary driver of revenue growth in the EMEA region. From a practice standpoint, the Health Care, Consumer and Industrial groups were the largest contributors to net revenue. Operating income increased 34.3% in the quarter and increased 67.4% sequentially. The operating margin was 8.9%, compared to 8.0% in last year s first quarter. Consultant headcount in EMEA at March 31 was 129, up 14% over last year. And we have 5 consultants who have just started or who are expected to start in the second quarter. A few weeks ago, we launched the fifth edition of our bi-annual European Corporate Governance report. This report has covered Europe s top 300 companies over the past 8 years and provides a unique perspective on Europe s progress towards improved corporate governance. The media coverage has been very impressive, as has the reception from our clients and potential clients. I d encourage you to visit the home page of our Website to review a copy. Turning next to SLIDE 18 and the Asia Pacific region: This region turned in another record quarter, with $17.2 million in revenue up 66.9% year over year, and up 30.9% sequentially. All but 2 offices in this region turned in at least 42% year-over-year growth, so we are quite diversified there in terms of revenue production. With the completion of the acquisition of Renton James in the Auckland, New Zealand office on January 2, the contribution of the Highland Partners acquisition, and an extensive hiring campaign in the Sydney office, the Australia/New Zealand area showed year-over-year revenue growth of 80% in the first quarter. Operating income of $4.4 million was up 71.3% year over year, and the operating margin was 25.5%, compared to 24.8% last year. Consultant headcount was 52 at the end of the first quarter, up almost 24% compared to a year ago, and up almost 16% from December 31. Hiring in this high-growth region will remain a key priority during the next two quarters. Guidance: As we head into May, we continue to see good business trends and continuing demand for executive search and leadership consulting services. But, as we have reiterated many times, we run the business on an annual basis, because so many of our consultants and our clients also manage their recruiting plans on an annual basis. This is the primary reason that we went to annual guidance in 2006, and because it is becoming the standard in terms of corporate governance. As such, despite a strong first quarter, we are reiterating our expectations to achieve net revenue of between $560 million and $580 million in 2007, representing growth of between 17% and 21% over 2006 net revenue. We are aiming to achieve an operating margin in 2007 of approximately 13%. This operating margin objective reflects several known costs today. In the second quarter, at the beginning of June, we will hold our Worldwide Partners meeting. We expect the meeting will cost approximately $3 million, but we believe it is critical to our business development efforts and key to driving revenue growth through
new practice and key account initiatives. Kevin will tell you a little bit more about our plans for this meeting in a minute. As we announced a few weeks ago, Tom Friel will be retiring as Chairman of the Board on May 24. In the second quarter, there will be a one-time, non-cash charge of approximately $1.2 million associated with the vesting of Tom s outstanding equity in recognition of his 28 years of dedicated service to the Company. Net income and earnings per share are expected to reflect a full-year effective tax rate of between 42 to 48 percent. We know that is a fairly broad range at this point, but we operate in a large number of countries around the world and are currently engaged in several tax planning strategies that could have a one-time impact on our tax rate in 2007, but we expect they will have a positive impact beginning in 2008. We will continue to keep you updated each quarter on these initiatives and their anticipated impact on the effective tax rate going forward. For 2007, we are expecting to generate free cash flow of between $70 million to $75 million, before stock repurchases. We have approximately $25 million available on our share repurchase authorization, and we are continuously looking at all viable options that will maximize our ability to increase shareholder value. With that review of the first quarter and our financial goals for 2007, I ll turn the call back to Kevin. Kevin Kelly: Thanks Eileen. I d like to give you a very brief overview of a few of the initiatives we re looking at in 2007. On our last quarterly conference call, I told you about some of the actions we re taking to accelerate our growth globally, and to increase profitability. I think that our first quarter results demonstrate that these initiatives are working and we ll continue to focus on making sure that these trends continue. As I mentioned at the beginning of the call, we were able to increase productivity rates to $1.3 million in annualized net revenue per executive search consultant in the first quarter. This is a positive sign, given how much hiring we did last year. But like many of our other metrics, this productivity number can vary from quarter to quarter, and we know that our work is not done. One of the keys to accelerating our revenue growth, as well as increasing profitability, is to continue with our on-boarding, training and development programs. Providing our consultants with the support and training along with the right tools and systems is critical to our ability to achieve our goals. Another driver of more profitable revenue growth is our ability to function as single, global firm. This is something that we are pursuing through a number of initiatives, all aimed to encourage and to enable the people in all of our regions to work more closely as teams within practices, instead of teams within regions. With this structure, we will be better aligned with our global clients, and in a stronger position to serve our key accounts.
Let me further explain what I mean by this. While one of this company s key assets is our worldwide presence, we can not risk becoming just a collection of countries. We must serve clients as one, global firm. You ve heard us talk about our focus on global key accounts but let me give you some context of how that program has developed. In 2003, we had 31 global clients who billed more than one million dollars. In 2006, we had 62 global clients who were billed at this level, and we are now on track to having 100 global key accounts this year. One million dollar accounts are great, but $5 and $10 million dollar accounts are even better. Driving our business with more focus on practice teams and their global accounts, instead of through regional teams, will help us be better aligned with our clients. This leads me to some key rationale for hosting our World Wide Partners meeting in June. We realize that 3 million dollars is a substantial expense in the second quarter. However, we see this meeting as a key investment in our people, and in our firm, with an incredible potential for return. Last year alone, we added 81 new consultants. Since we held our last Worldwide Partners meeting in November 2004, we have added about 115 new consultants. This increase is the result of a very deliberate focus on hiring as well as our acquisition of Highland Partners. But our business is one of people networking and connections and part of enabling our consultants to become more productive is to provide them with opportunities to network and connect within our own company. The Worldwide Partners meeting allows our practice and global account teams around the world to engage face-to-face. We know that this investment results in new business. Last year, for example, we had our practice managing partners from EMEA attend the Asia Pacific regional meeting. As a result of this interaction, 14 new, joint searches were created among these teams. There are many other examples of how our regional meetings have resulted in expanded relationships that lead to new business, but for now, let me just assure you that maximizing the return, on our investment in a Worldwide Partners meeting, is what is driving our agenda. We look forward to giving you a summary of the meeting on our second quarter conference call. I ll close by saying that we are very pleased with the record performance we achieved in many parts of our business in the first quarter. And I believe that our continued focus on our key initiatives and our attention to good execution will help ensure our growth and success going forward. Thanks for your time today. At this point in the call, we d welcome your questions. Q&A Session