Heidrick & Struggles International, Inc.

Hello and welcome to the Hydric and Struggles Q4 2023 and year-end earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the conference over to Stephen Horwitz, Interim Head of Investor Relations. Please go ahead.

Thank you, and welcome to our 2023 fourth quarter conference call. As a reminder, Suzanne Rosenberg has been on leave, and thus I am serving as the interim head of IR, having been placed through the on-demand talent group. Suzanne is rejoining the team this week, and we welcome her back. Let's now proceed to today's call. Joining me is our president and CEO, Krishnan Rajagopalan, Chief Financial Officer Mark Harris, and our incoming CEO, Tom Monaghan. We posted our accompanying slides on the IR homepage of our website at hydric.com, and we encourage you to view these slides for additional context to our prepared remarks. Please note that in the materials presented today, we may refer to non-GAAP financial measures that we believe provide additional insight into underlying results. Reconciliations between these non-GAAP financial measures and the most comparable GAAP measures may be found in the earnings press release. Also, in our remarks, we may make certain forward-looking statements. We ask that you please refer to the Safe Harbor language also included in today's press release. Krishnan, I'll now turn the call over to you.

Thank you, Steve. Good afternoon, everyone, and thank you for joining us today. We're very proud of how we performed in 2023. In a year in which our executive search business faced significant headwinds, we still delivered plus $1 billion in revenue by executing on our diversification strategy. One component of that execution was the successful integration of our strategic and accretive acquisitions. We accomplished all of this while remaining diligently focused on our operational profitability as we delivered more than 12% adjusted EBITDA margin and nearly $3 in adjusted diluted EPS for the full year of 2023. In fact, we capped off this impressive year with a strong finish as evidenced by our fourth quarter results. Net revenue was over $253 million more than 7% stronger than last year. This is the second consecutive quarter where we've demonstrated solid year-over-year growth as we return to a more normalized cadence of systematic growth. We also achieved another quarter of double-digit adjusted EBITDA margin, which we've achieved almost every quarter for the last six years. Mark's going to provide more details on our financial performance in a few minutes. Before I drill down into the accomplishments of each of our businesses, let me expand a bit on our diversification, profitability, and some expectations about the coming year. As we discussed, a key component of our long-term strategy is to meaningfully grow our diversified solutions while scaling our search business, and thus delivering a more comprehensive set of leadership advisory services. Together, our diversified solutions grew north of 44% in 2023, which brings the contribution of our non-search business to 24% compared to the 9% contribution in 2018 when we embarked upon the strategy. We also made some important strides in our profitability front. Our adjusted EBITDA margin improved by nearly 100 basis points during the year. In fact, we saw higher margins in our businesses, executive search, on-demand talent, and hybrid consulting. with on-demand talent achieving its first ever full year of positive adjusted EBITDA. As we look ahead to 2024, we will remain relentlessly focused on continuing this growth and profitability momentum, regardless of the economic environment. Not surprisingly, a major topic being discussed in Davos last month was how leaders are preparing for a continued difficult economic environment leading to slower growth. However, many expressed a more optimistic viewpoint than in past months, despite the obvious geopolitical risks that exist. Many CEOs and world leaders in attendance suggested resilience in the economic outlook, pointing to China's reemergence, strengthening of global supply chains, and an expectation that rate hikes could end by the middle of the year. Many in attendance also highlighted fast-growing economies in Latin America, India and the Middle East as softeners to the declines that may be seen in advanced economies. As I reflect on the conversation from Davos and softening in the inflation indicators, I'd argue that there's an increasing probability to return to a growth mindset in the second half of the year. So while these leaders continue to expect and prepare for some level of potential sluggishness, I was encouraged by their focus on topics important to us here at Hydric. such as continued business transformation, sustainability, and the importance of having a strong management team. We met with more than 50 clients over a few days at the conference, and their appetite to engage with us and hear about our broader portfolio of offerings was incredibly strong. This is a type of direct feedback that drives our dedication to be a world-class leadership advisory firm. We pride ourselves on helping our clients find the world's best leaders, create diverse and inclusive cultures, and transform their teams to achieve the highest levels of profitability and performance. Given this interest from so many clients coupled with some improving economic indicators, we believe that there should be less volatility in our business in 2024. With that as a backdrop, let me provide you some color on the fourth quarter performance in each of our businesses. Beginning with executive search, we saw continued stabilization this quarter with multiple trends painting a more optimistic picture. For example, confirmations increased 4% over last year's fourth quarter, with all practice groups exhibiting growth in confirmations. Retainers and average fee on closed engagements remained steady and improved in all geographies. Demand has been most resilient with CEO and CHRO roles. Globally, we are growing search efficiently by optimizing our go-to-market strategy and deepening client relationships. in all industries with a focus on our one hydric strategy. Regionally, we continue to assess white space opportunities in industry sectors and partner with our clients on burgeoning demand areas, such as the implications of AI, sustainability, and DE&I. We're also partnering with clients in technology or digital hybrid roles that we continue to see emerging in every industry practice. As we take a longer-term view and a more comprehensive look at the growth patterns, From the beginning of 2017 until now, we've delivered a very respectable 6% compound annual growth rate. Additionally, Search has been meaningfully profitable, producing north of $50 million in adjusted EBITDA in eight of its last nine quarters, including nearly $55 million this quarter. This profitability is very important to us as it helps us drive investments into our diversified solutions. Turning to our diversified solutions. In on-demand talent, we are very excited that we posted record fourth quarter revenue with 84% year-over-year growth, along with positive adjusted EBITDA, as we continue to benefit from the Atreus acquisition. From an industry standpoint, there has been no surprise to the slowdowns in the banking and professional services sectors, while our life sciences and consumer practices appear to be poised for a stronger year in 2024. In addition, we're seeing growth in demand for interim executives, driven in part by shifting needs and executive skills to weather a changing environment. We're also delivering continued growth from the Hydric Search Channel, which tends to drive more interim needs, as it is a natural complement to search. Within the interim executive segment, we are achieving growth in the CFO office for both interim CFOs and for placements within the CFO's office such as FP&A, for example. These trends reflect the significant and changing pressures on the CFO office in this environment. As we look at the many opportunities ahead, we'd like to welcome Sunny Ackerman as our new global managing partner of OGT. Her experience in technology, professional services, and human capital solutions will help drive the next phase of growth. Moving on to another key component of our diversified solutions offering, Hydric Consulting also delivered a record revenue quarter after achieving approximately 36% year-over-year growth. This growth is driven by a combination of organic growth and the acquisition of B40. Our consulting business also achieved positive adjusted EBITDA margin, reaching almost 4% this quarter as we begin to see the benefits of scale within this business. We've seen continued strength in demand for culture and leadership assessment projects. Clients appear to be acting more decisively as they learn to effectively operate through difficult conditions. This is having a positive impact on our business, with early first quarter demand patterns exhibiting more strength than we saw a year ago. Comparing the business to last year's fourth quarter, we increased our consultant headcount from 70 to 89, and confirmations increased by about 3% all positive signs. Finally, as part of the OneHYDRIC strategy and similar to our on-demand talent business, more than 40% of these projects were referred by our search business, evidence of the OneHYDRIC strategy. And finally, I want to discuss HYDRIC Digital. As I shared last quarter, we converted one of our first early access partners from our HYDRIC Navigator pilot program into a three-year subscription. I'm also happy to share that we recently signed another subscription customer directly without going through the beta process. The signing of this enterprise customer that has tens of thousands of employees and is approaching 20 billion in revenue is another early proof point in the digital opportunity ahead of us. And we have several more exciting potential customers in the pipeline. We continue to receive positive reactions from additional early adopters. and are working with them to incorporate their feedback with the expectation that many of them will convert to subscription customers over time. Let me expand on one aspect of the Navigator platform, which is assessments. Earlier this year, we surveyed several hundred non-HR executives to determine how to make better use of assessments. There were several key insights derived from the survey, including that an effective assessment process improves team dynamics, the promotion process, and retention. Our Hydric Navigator product can be a game changer when it comes to improving the assessment process. In fact, over a dozen clients are now leveraging our new digital assessment platform. Companies continue to move closer to understanding that they must treat their leadership pipeline as a strategic asset and that our comprehensive suite of leadership advisory offerings helps them accomplish that goal. Now let me share an example of a client taking advantage of our OneHydric strategy which strategically links all our businesses together. This example is that of a large company that needed to split into two independent publicly traded companies. They needed support in making the best placement decisions, tapping into internal and external candidates. There was the added pressure of needing to fill important positions fast, but with an eye towards sophisticated talent who understood the challenges of operating in a public company environment. Our approach was to leverage our industry functional and leadership expertise to define forward-looking leadership success profiles. Additionally, our consulting teams needed to assess the current leaders to provide insights into fit and growth potential with market calibration. We also helped the client retain key talent while closing critical gaps to our search team. We were able to differentiate ourselves by blending our leadership advisory and search market perspectives providing a digital platform that allowed for the real-time matching of talent and opportunity, plus a holistic framework that covers experience, growth potential, and culture impact. This is really a great example of how the many facets of our OneHydric strategy work together strategically to provide our clients with the best possible outcome. Now, before I conclude my remarks, let's touch on the recent announcement of my planned retirement from Hydric. I'll be stepping down as president and CEO from the board effective March the 4th. Tom Monahan will be stepping into the role of CEO and board member at that time, with Tom Murray, currently the global managing partner of our search business, stepping into the role of president. This was the culmination of a systematic, deliberate succession plan driven by our board meant to maximize the potential for continued success. The establishment of separate CEO and president roles will enable us to drive even greater focus on executing across our businesses and expanding our capabilities to deliver broader, more comprehensive offerings for talent and human capital challenges. All of this reflects our commitment to driving growth, profitability, and the diversification in our business. With that, let me share a few thoughts on Tom Monaghan, who I've known for nearly 20 years. Tom is a visionary executive with a deep passion for the leadership arena and a long-time Hydric & Struggles client who understands and respects our culture and will bring a fresh perspective not only to build on our core strengths but also steer our strategic course to unlock transformative growth and shareholder value. Tom's extensive background leading global companies with integrated services, technology, and analytics is perfectly suited to his role of shaping and executing our growth and diversification strategy, as well as leading our Hydric digital business. Tom, would you like to say a couple of words before I conclude my remarks?