Heidrick & Struggles International, Inc.

Good afternoon. I am Blue, today's conference call operator. Welcome to the Hydrix and Struggles 2021 third quarter conference call. Joining today's call is company's president and CEO, Krishnan Rajagopalan, and chief financial officer, Mark Harris. The company has posted third quarter slides on the IR homepage of its website at hydrix.com. Management encourages you 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. Also, in their 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. Rajagopalan, I'll turn the call over to you.

Thank you, Operator. Good afternoon, everyone. We delivered a record third quarter, and I couldn't be more excited that Hydric 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, 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%. Each of our three segments, executive search, hydric consulting, and on-demand talent contributed to another record-breaking quarter, and the agility of the Hydric 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 close noting a promising initiative we have underway that we believe is building the Hydric 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 Hydric, 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 Hydric 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 in ensuring their leaders, teams, and organizations are future ready. And we'll soon include a broader tech-enabled digital offering in our expanding and powerful portfolio. Here's a snapshot of the drivers of our business growth in Q3. The results we released today show the impact of our strategic focus and the resiliency and professionalism of the Hydric 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 figure 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 is robust for us at Hydric with the number of confirmations increasing 33% this quarter versus the same quarter in 2019. For a couple of quarters now in 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 surge productivity per consultant of $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 average over the long run, as we will continue to promote from within and hire strategically. In the meantime, I'm very proud of the amazing agility and capacity of the Hydric 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 if new leadership is needed due to dramatically different business conditions or business model transformation, multiple factors are at work driving the search for leadership, not only for CEOs, but also across the C-suite. Hydric is seeking and winning the assignments to fill these roles. Many searches are underway due to the huge demand for diverse talent. As I mentioned on our last call, our U.S. diverse placements were tracking at over 50% of our total search work, and we're seeing that trajectory continue. At the board level, globally, that figure is 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 in filling important positions with highly sought after experienced professionals, including CIO and data analytic roles, chief financial officers, and supply chain executives. 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. For Hydric 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, assess, 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 Hydric's guidance on matters of leadership assessment and development, and follow-on support in organization design. This is especially resonating in the Americas, Europe, and the Middle East for senior and high potential leaders. Second, culture. Culture assessments and culture shaping are more important than ever as companies manage through hybrid and return-to-work environments and begin to re-energize and realign their teams. Third is around DE&I. 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 overall strategy and effectiveness. Turning to our third business segment, you'll remember that on April 1st of this year, we acquired Business Talent Group, or 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, Hydric became not only the first, 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 tailwinds, 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. The 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 Hydric 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, have created an imperative for our clients to reimagine themselves and find new ways of working. And in turn, these demands are driving our growth and success. As our clients continue to seek quality, diverse, and forward-thinking talent, we're 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 Hydric brand over the long term. At Hydric, 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're at the start of a multi-year digital journey with a long-term vision that expands Hydric's 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're delighted with our recently announced partnership with Eightfold AI, a Silicon Valley-based leader in the business of HR tech and artificial intelligence-driven talent solutions and platforms. With Eightfold AI, we believe we can offer organizations new, more powerful ways to make faster, smarter decisions 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 Hydric as the leader in driving the transformation of leadership. In addition, we're very pleased to welcome Meg Baer, Chief Product Officer of SAP SuccessFactors to Hydric's Board of Directors. Undoubtedly, Meg's 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 Hydric story is one of growth and innovation. We continually evolve to keep our core search and consulting business future-ready and while we aggressively pursue opportunities in growing adjacent sectors like on-demand talent and incubate innovative digital products to continue our transformation. In closing, thank you to the entire Hydric organization for their continued great work and for the valuable contributions they make each and every day all around the world for our clients. The Hydric team, like the talent and human capital initiatives we enable, is core to the value we generate and deliver it to our shareholders now and into the future. With that, over to Mark.

Thank you, Krishnan, and good afternoon, everyone. Thank you for joining our call today. Let me echo Krishnan'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 Hydrex. We've been able to continue our top line while expanding margins, and we contributed increasingly more absolute dollars to EBITDA net income and earnings per share so far in 2021, all setting new annual records, let alone nine-month ending ones. Further, Hydric's performance continues to remain strong into the fourth quarter, which I'm excited to share with you today. As has been a past practice, I'll start this afternoon with a run through 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, I'll make further comments on a few balance sheet items, then conclude with our fourth quarter outlook. Following that, we'll be happy to take your questions. You'll recall last quarter we celebrated the milestone of crossing over a $200 million quarterly net revenue mark for the first time in Hydrex 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 1.5% above the previous quarter in 2021, is a new record for the company. Even more interestingly is that for just the nine months ended, September 30th, 2021, we had cumulative revenue of $717.5 million, which is more than any annual achievement in the history of Hydric, 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 1.1% 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 of those contractions were unexpected due to the summer holidays, the restrictions around the COVID Delta variant, and other factors, but the results in those regions were 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 and 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 periods, but prior historical highs, and we are growing that much more. Thus, you can see why we believe the third quarter is an exceptional one for Hydric. we've had astonishing performance in 2021. Further along the top line growth, we have achieved new records and 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 continually strong productivity numbers at $2.4 million per consultant this quarter. While this achievement is extraordinary and appears to be industry leading, It's 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 Hydra Consulting's third quarter, net revenue rose to $17.9 million, up 4.5% sequentially. Consulting 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 and engagements that are sold directly by the consulting team. The number of consultants was roughly flat at 66, and consulting confirmation value was up meaningfully year over year by almost 60%, but 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 an executive search, it's important to note that the second quarter was a record confirmation value quarter for Hydra Consulting, so being off on those highs is expected, but we're seeing continued strength at the end of the third quarter in terms of revenue backlog projects. Our newest on-demand segment was exceeding expectations yet again with revenue of $24.3 million in the third quarter. This is 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 extensions 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 were largely offset by variable compensation increases due to the growth of our business. When we look at general administrative expenses, we saw $29.2 million in the third quarter, an increase of 6.6% 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 costs to sustain our growth aspirations. Finally, we saw our cost of service expense increase 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. You'll 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 was beneficial for us given our old lease had a tail 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 12.3% margin we had in the previous quarter. This was the result of very strong revenue achievement in our on-demand talent business, where this segment has near break-even margins given the stage of growth cycle they're in, and higher overall GNA 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 the 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 Hydrate. This is all translated to adjusted EBITDA of $36.1 million in the quarter, or $102.6 million for the nine-month period ended, which has already surpassed any previous annual adjusted EBITDA performance. In fact, in 2018, our previous record for Hydric, we saw annual adjusted EBITDA of $90.7 million, so we were 13.1% ahead with still one more quarter to add to it. The adjusted EBITDA margin was 14.3% year-to-date compared to the previous high of 12.7% in 2018, demonstrating the value we delivered 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 diluted earnings per share was $1.21, up from $1.03 last quarter. Again, when looking at our nine-month ended diluted earnings per share of $2.97, you'll see that this is already an annual record with another quarter to go. Before turning to our balance sheet, I want to take a moment just to sum up our financial performance through September 2021. and that we're seeing unprecedented record levels of aggregate dollars in our bottom line 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 Hydric, and that becomes understood by the market. Given our historical EBITDA and EPS achievements, which our legacy business are 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. 2021 has truly become a pivotal year for Hydric, and we believe that can continue into 2022. Now let me turn to the balance sheet. We ended the quarter with cash and cash equivalents and marketable securities of $348.3 million, which is $110.7 million more than the same quarter last year. As we discussed before, The company's cash position typically builds throughout the year as employee bonuses are accrued and are traditionally paid out in the first quarter of the following year. Our balance sheet, coupled with the renewed and expanded Hydra credit facility of $200 million, moves our liquidity to over half a billion dollars. Clearly, our strong balance sheet puts us in a position of considerable strength to pursue the continued growth objectives that Krishnan 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 fourth quarter net revenue will be in the range of $255 to $265 million, closing out 2021 very strong. Of course, this can change materially depending on whether we see COVID spikes, how governments and companies respond, as well as impacts on macro and 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 Kristan noted at the outset, we're very pleased with our performance, showing tremendous growth year over year, and sustaining or 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, and the early days of our eight-fold AI partnership are creating springboards for Hydric's continued success. With that, Christian and I would be happy to take your questions. Operator, over to you.