Heidrick & Struggles International's (HSII) CEO Tracy Wolstencroft on Q4 2015 Results - Earnings Call Transcript

| About: Heidrick & (HSII)

Heidrick & Struggles International, Inc. (NASDAQ:HSII)

Q4 2015 Earnings Conference Call

February 23, 2016 10:00 ET

Executives

Julie Creed - Vice President, Investor Relations and Real Estate

Tracy Wolstencroft - Chief Executive Officer

Rich Pehlke - Chief Financial Officer

Analysts

Tobey Sommer - SunTrust

Kevin Steinke - Barrington Research

Kevin McVeigh - Macquarie

Tim McHugh - William Blair

Operator

Good morning. This is the Heidrick & Struggles Fourth 2015 Conference Call. This call is being recorded and it may not be reproduced or retransmitted without the company’s consent. [Operator Instructions]

And I would now like to turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead.

Julie Creed

Good morning, everyone and thank you for participating in Heidrick & Struggles fourth quarter and 2015 conference call. Joining me on today’s call is our CEO, Tracy Wolstencroft and our Chief Financial Officer, Rich Pehlke. During the call today, we will be referring to supporting slides that are available on the IR homepage of our website at heidrick.com and we encourage you to follow along or print them.

Today, we will be using the terms adjusted EBITDA and adjusted EBITDA margin. These are non-GAAP financial measures that we believe better explain some of our results. The reconciliation between GAAP and non-GAAP financial measures can be found on the last page of our press release and on Slides 12 and 33 in our supporting slides.

Throughout the course of our remarks, we will be making forward-looking statements and ask that you please refer to the Safe Harbor language contained in our news release and on Slide 1 of our presentation. The slide numbers that we will be referring to today are shown in the bottom right hand corner of each slide. Tracy will be covering the first 15 slides starting with Slide 3.

And Tracy, I will turn the call over to you.

Tracy Wolstencroft

Thanks, Julie and good morning. I am pleased to report our results this morning. The fourth quarter contributed to an excellent year for the firm. Employees of Heidrick & Struggles collectively achieved the goals we set last year at this time and our financial results reflect their hard work. We have established clear and positive momentum in the market, but more importantly, our clients are noticing.

In 2015, we focused on four priorities to improve performance and drive shareholder value. Number one, our talent; two, our clients; three, our diversified offering of search, leadership consulting, and culture shaping; and four, our internal operations. As a result of that focus, all of our key business and financial metrics improved in 2015. Some of the highlights include consolidated net revenue was $531 million, an increase of almost 8% over 2014 or 12% in constant currency. We also delivered improvement in profitability. Adjusted EBITDA, adjusted EBITDA margin, operating income and operating margin, all improved again in 2015.

Revenue in executive search and leadership consulting grew 8% or 13% in constant currency. Performance in the Americas region drove this growth. Asia-Pacific contributed as well. Europe’s fourth quarter increase help minimize the region’s full year reported decline in the constant currency. Europe actually grew 4% in 2015. For the first time in at least 10 years, the healthcare and life sciences practice was the largest driver of revenue growth, up 48% year-over-year and represented 10% of total billings. We made meaningful progress in attracting, developing and retaining the very best talent in the industry and ended 2015 with 334 consultants, up 9% year-over-year. Our voluntary turnover was the lowest in 7 years. These are….

Operator

Sir, I am sorry, but your line cut out. We are unable to hear you right now. Please standby until we can reconnect the speakers. We are unable to hear you, sir.

Tracy Wolstencroft

You cannot hear me?

Operator

Now, I can hear you. Thank you. Please go ahead.

Tracy Wolstencroft

I will wrap up here and then if we missed anything we can…

Julie Creed

How much…

Rich Pehlke

How much did you not hear, operator?

Julie Creed

I’d say 2 minutes.

Rich Pehlke

You heard Julie’s intro?

Operator

Yes, Julie’s intro and she turned it over to you and we heard probably part of that.

Julie Creed

Start with once again?

Tracy Wolstencroft

Well, operator, can we have an open line with the participants?

Operator

Yes, just one moment please. Alright, all lines are open.

Tracy Wolstencroft

Okay, great. For all of our false listening and I just entered with a technical glitch. When did folks start stop hearing me?

Rich Pehlke

Tracy, when you finished talking about consultant headcount.

Tracy Wolstencroft

Okay, great. So, let me just repeat that point. We made meaningful progress in attracting developing and retaining some of the best talent and we ended up 2015 at 334 consultants, up 9% year-over-year. And then I went on to say that we confirmed 7% more searches in 2015. Some of the most important work we do was executing around the world with some of the most well-known and respected organizations, which is further served to elevate our brand and the power of Heidrick. I was about to say that culture shaping re-grow our business 5% to 6% in constant currency and separately we paid down $29.5 million of debt, $29.5 million of debt related to our acquisition of Senn Delaney in December 2012. And last, but not least, we acquired a London-based leadership advisory firm, specializing in accelerating organizational performance in October and with that transaction, we gained a new leader for our leadership consulting practice namely Colin Price. These were just a few of the highlights for 2015.

I will get into 2016 after Rich gives you further details on the fourth quarter and 2015.

Rich Pehlke

Thank you, Tracy and good morning everyone. I will start with some inside in the fourth quarter results beginning on Slide 16. Fourth quarter net revenue came in above our expectations at $144.5 million, up 19% compared to last year’s fourth quarter and up 23% in constant currency. Both the executive search and leadership consulting businesses, as well as culture shaping contributed to the growth of 19% and 25% respectively. In the Executive Search and Leadership Consulting segment, revenue grew in all three regions and Americas and Europe were the key drivers in the fourth quarter. Europe achieved sequential improvements in the net revenue throughout the year and finished especially strong. The additional of Co Company in October was partially responsible, but the improvement came from throughout the region in the fourth quarter, with 11 out of 15 offices delivering year-over-year growth.

Globally, executive search confirmations were up 13% for the quarter. In fact, if you look at Slide 22, you will see that fourth quarter confirmations were the highest fourth quarter in 5 years, surpassing our last high watermark of 2011. Turning to Slide 23, the financial services, healthcare and life sciences, and global technology and services practices drove net revenue growth. Consulting productivity as shown on Slide 25, improved to $1.6 million. And the average revenue per search was higher in the fourth quarter despite currency headwinds. Again on Slide 27, our Culture Shaping segment also had a good fourth quarter, up 25%. As we have reminded you the last few quarters, there is quite a bit of quarter-to-quarter variability in the segments results, largely due to a function of the timing of project executions.

Again, on Slides 28 and 29, salaries and employee benefits expense increased 22.4% or $19 million to $104.5 million in the 2015 fourth quarter. Variable compensation expense increased $10 million, primarily related to higher bonus accruals for consultant performance. With the fourth quarter being stronger than expected, more consultants became bonus eligible and some at higher tiers of our payout structure. Fixed compensation expense increased $9 million, largely reflecting higher minimum guarantees and sign-on bonuses for 2015 consultant hires, an increase in headcount and higher stock-based compensation expense. Salary and employee benefits expense was 72.3% of net revenue for the quarter compared to 70.4% in the 2014 fourth quarter.

Turning to Slide 30, general and administrative expenses increased 8.3% or approximately $3 million to $34.8 million in the quarter. The increase primarily reflects the addition of Co Company and also higher professional services fees related mostly to non-recurring projects. As a percentage of net revenue, general and administrative expenses were 24.1% compared to 26.5% in the fourth quarter a year ago.

Now I will refer to Slides 31 through 35. Adjusted EBITDA in the 2015 fourth quarter increased 19% to $11.4 million and the adjusted EBITDA margin was 7.9%, the same as in 2014 fourth quarter. Operating income in the fourth quarter increased 38.9% year-over-year to $5.3 million and operating margins was 3.7%. The year-over-year improvements in adjusted EBITDA and operating income looks like higher net revenue, partially offset by the increases in salaries and employee benefit expense and general and administrative expense increased as well.

Now, turning to annual results, Tracy has hit on most of the 2015 highlights, but I am going to walk through some additional details that aren’t covered in the release. I will start by referring to Slides 36 and 37. 2015 salaries and employee benefits expense was $369 million, representing 69.5% of net revenue. Compared to 2014, salaries and employed benefits expense increased $32 million or 9.5%. In constant currency, the increase was 14.5%. As reported, variable compensation increased $18 million as a result of the higher net revenue and improved company performance. Fixed compensation expense increased $14 million as a result of higher minimum guarantees for 2015 consultant hires, increased headcount, sign-on bonuses and stock-based compensation expense.

Looking at Slide 38, general and administrative expenses declined $2.5 million or about 2% to $128 million and represented 24% of net revenue. The decrease was primarily due to the positive impact of foreign exchange rates across our business as well as lower amortization and accretion expense and the absence of the state franchise tax matter, which we recorded in 2014. These decreases were partially offset by expenses related to the G&A of Co Company, higher IT related cost, legal fees and training cost.

Now referring to Slide 39, cash and cash equivalents at December 31 was $190.5 million compared to $211.4 million at December 31, 2014. It is important to note that cash flow from operations were strong in 2015. During this year, we had a decrease in cash – we have an increase in cash outflows of nearly $50 million related to our debt repayment, acquisition-related payments and capital expenditures for real estate. Yes, we only experienced a decline in cash and cash equivalents of $21 million for the year. Those of you who follow us know that our cash position builds throughout the year as we accrued bonuses, which are paid out in the following year. In March and April, we will pay out approximately $142 million. Of this amount, about $132 million is for variable compensation related to 2015 performance. The remaining $10 million relates to the payment of consultant bonuses that are differed each year for 3 years. Cash provided by operating activities in 2015 was $57.6 million compared to $56.8 million in 2014.

Finally, I want to take a moment to talk about our effective tax rate for both the quarter and the year. Our tax rate has always been volatile due to the operating results in many of the foreign jurisdictions and in some cases we have established valuation allowances. In the fourth quarter, we did finished the year stronger than expected and most of the increase came in regions where we have higher effective tax rates, especially the U.S. During the course of the year as results come in, we are often changing our tax rate accruals to reflect our best estimate of where a taxable income ultimately will fit. So, the effective tax rate for Q4 of 73.6% looks quite high. However, when you look at the full year results, the effective tax rate is 45.7%, which is the lowest rate we have experienced since 2010.

Now, looking now to 2016 and specifically looking at the first quarter, our executive search backlog is shown on Slide 40 and monthly confirmation trends are shown on Slide 41. Other factors on which we based our forecast include anticipated fees, the expectations for our leadership consulting and culture shaping assignments, the number of consultants and their productivity, the seasonality of the business and the current economic climate.

As we experienced in the last several quarters, we continue to expect volatility from foreign currency exchange rates and this could lead to an adverse impact in the year-over-year comparisons of net revenue. We are forecasting 2016 first quarter net revenue of between $120 million and $130 million. Reported net revenue was $115.2 million in the 2015 first quarter. I want to mention that as a result of the acquisition of Co Company at the end of the 2015 and the acquisition of Decision Strategies International earlier this month, we are currently reviewing our 2016 segment reporting and disclosure and we will comment on that further in the future calls.

With that, I will return the call back over to Tracy.

Tracy Wolstencroft

Thanks Rich. As I have said at the start of the call, we accomplished much in 2015, by virtually every measure, we further improved our business. I want to express again, my appreciation to all of my colleagues for the work they are doing to contribute to the success of Heidrick & Struggles. And at the same time, I want to welcome our newest colleagues to the firm. 2016 is off to a healthy start. Our first quarter guidance reflects continued momentum. Reflecting our well-established development and training program, we promoted 14 people into the consultant ranks as principals, effective January 1, we also promoted 17 from principal to partner.

Our culture shaping business has also welcomed five new principals so far this year to build upon our leadership within this market and support our long-term growth. And additionally, we have welcomed four new independent Directors to our Board. Much as we advise our clients, these new Directors exemplify the value of diversity and background and experience. Moreover, they will help us accelerate the strategic agenda occurring at Heidrick. And earlier this month, we announced the acquisition of another leadership advisory firm, Decision Strategies International. Their talent including five partners, their methodologies and tools, complement our global LC business.

Together, this furthers our ability to bring to market a distinct set of capabilities that permit us to engage senior executives and boards around the world. All that said 2016 is opened with market volatility that influences our client’s decisions for investments and expansion. Importantly, we are operating from the stronger foundation. We still have much to accomplish with our clients as we help them to accelerate performance at the leader, leadership team and organizational levels.

Let me highlight the goals for each of our primary services. First in executive search, our objective is to continue our growth momentum to a combination of increasing market share in the Americas, as we build upon the momentum of 2015, continuing to make strides in the growth of our European market presence and strengthening our capabilities in Asia, while strategically focusing on locally based companies. Globally, we will continue to hire selectively, targeting specific practice, functional or geographic gaps, but are not planning the same level of hiring that was accomplished in 2015. There will be a continued focus on improving productivity.

Second for leadership consulting, our goal is to continue to grow and scale the business to increase our impact with clients. We will integrate our advisory presence globally adding the capabilities of Co Company and DSI to the best thinking and processes from our original leadership consulting business. And through organic initiatives and selective acquisitions, we will continue to invest in consultant expertise, new service offerings and scalable tools and methodologies. Our go-to-market theme for leadership consulting services centers on accelerating the performance of our clients. And third, for culture shaping, our focus is to enhance the business by expanding its reach to more search and leadership consulting clients. We are well positioned to take advantage of the growing C-suite demand for our proven culture shaping services from Senn Delaney.

We are making higher investments and are on-boarding the next generation of leadership to address succession, while supporting sustainable growth. In summary, we will continue to add additional capabilities and comprehensive services to complement our core search business and extend our brand. Our clients across all regions want more from Heidrick, not less. Despite the uncertainty we are seeing in today’s economic market conditions, we are encouraged by our client’s appetite for Heidrick’s talent and leadership solutions. Specifically, they want more of our candid insights on leadership and talent trends, connected to their business strategies. They want more creative and agile solutions with increasingly complex and fast changing landscape. And they want more in the world, where they must balance the need to strengthen their own core business, while embracing disruptive change on the leading edges. By attracting and retaining the best professionals in the business, enhancing our overall client experience with distinctive service offerings and improving our operations, we will continue to grow and strengthen our business around the world and provide greater return to our shareholders.

Now, Rich and I will be happy to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take the first question today from Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer

Thank you. I wanted to ask how are new confirmations coming in and kind of what are you hearing from your consultants about the tone of customers given slightly softer macroeconomic data and stock market volatility? Thanks.

Rich Pehlke

Thanks, Tobey. Good morning. This is Rich. I will start with the commentary in that. We don’t get too detailed about our forward-looking thinking, but I will give you some sense. We certainly are seeing the current volatility in the economic conditions factoring the client decisions about what they are doing and what they are thinking about the growth of their business and how they are going to deploy capital. The good news is as we have said many times is that talent is the hot agenda item for most leaderships and boards today. But at the same time, capital deployment certainly has an impact on driving our business. Where we have probably seen the most is as is consistent with what you have read in the news, where we probably see the biggest volatility right now is in the APAC region, simply because of the impact of China and what you see going on there in terms of people thinking about the region itself. And then certainly from a sector standpoint, we have seen more discussions and commentary in areas like financial services, which really are driven by large financial institutions from larger banks and obviously they moved and certainly have an influence on some of that. Having said all that, we are still comfortable with our revenue guidance for Q1. I think we factored some of that in, but certainly as the year goes on we are going to watch that very carefully.

Tobey Sommer

Thanks. And sort of in that same context, you mentioned that you probably would be hiring in 2016, but slower. So, should we expect net growth in internal consultant headcount or just kind of curious on a net basis, maybe what your outlook is for the year?

Rich Pehlke

Yes, I will start and see if Tracy wants to add anything to it. I have said pretty consistently that I still would like to see our consultant headcount land in that 325 to 350 range through the scale of our business. We certainly are comfortable supporting the level of that in our infrastructure in our regional reach. We will continue to hire. We are not – there is no plans to cutback on hiring. I don’t think there is going to be the seismic events that we saw last year with the CT Partner event, but we active everyday in looking for good people and developing good people. And we think there is the demand for that. And certainly, we have a financial capability to support that. But you are absolutely right, I think relative on a year-over-year basis, we are going to be watching that very carefully, but we are continuing to kind of keep our consultant headcount level in that range.

Tracy Wolstencroft

Tobey, I would just add we are in the zone, right where we are in terms of what we think we need to cover the market the way we want. I would say the focus is on quality as much as anything else right now. For the last 2 years, we had to rebuild ranks after we had as a firm lost so much talent. The focus now turns even more sharply to just getting all that we can from our team. As Rich said, we are selectively out there hiring. We are not going to chase talent, but we are going to welcome the right people.

Tobey Sommer

Okay. In terms of the number of consultants that you have, it looks like, let me do my math right, about 9% year-over-year. Within that, is the growth in the – just kind of core executive search consultants, is that a comparable sort of trajectory or is it different, because I know the way you are calculating include leadership consulting as well?

Rich Pehlke

Yes. I am not sure I totally follow the question, Tobey, but I will take a stab and if we were not getting what you want, please come back. But I am going to start with your last comment first, which is you are absolutely right. By the time we come out in the first quarter, we probably will talk about the consultant headcount slightly differently, because in the past we have traditionally folded our leadership consultants – leadership consulting people into the consultant headcount. And if our plans go according to what I can say will [ph], we will probably talk about leadership consulting separately in a different tone than we do and not necessarily on a consultant basis, as heavily emphasized as it is on the search side. Nevertheless, I think at the end of the day, we still would look for a net increase in our consultant base year-over-year for search.

Tobey Sommer

Okay. Thanks. And what I was kind of asking is, is the core just executive search consultant headcount up a comparable 9% to the executive search and leadership –consulting headcount?

Tracy Wolstencroft

Yes. Okay. Now I understand your question better and the answer is yes. It’s still the primary driver of the consultant headcount.

Tobey Sommer

Okay. And then I will just ask one more and I will get back in the queue. It looks like, you had real good growth in the healthcare and life sciences, I am curious is that particularly strong end market or is that maybe also a reflection of headcount additions becoming productive? Thanks.

Tracy Wolstencroft

It’s a combination of increasing the consultants we have in that group to face the market, but also our ability, as our brand continues to strengthen to reach clients at a different level. And that’s, as you know healthcare is a pretty broad space whether you are talking pharma services business, insurance, it’s pretty broad. And so the group we have there is building out across all those sub-sectors. It’s also a very active sector in the broader market and you see that everyday in the front page of the papers, in terms of how they are adjusting to manage care around the world and how they are adjusting in terms of M&A activity as well. So that’s what’s increasing the dialogue as well as the strengthening of our team.

Tobey Sommer

Thank you. I will get back in the queue.

Rich Pehlke

Thank you, Tobey.

Operator

We will now go to Kevin Steinke with Barrington Research.

Tracy Wolstencroft

Good morning Kevin.

Kevin Steinke

Good morning. And I wanted to talk a little bit about Europe, obviously a strong quarter there, it looks like that was primarily driven just by people getting more productive, so is that the case and also how sustainable do you think that improved performances, we have seen some ups and downs in that region over the last couple of years, so just wondering how you are feeling about the region and the sustainability of improvement there?

Tracy Wolstencroft

Kevin, I would say the following Europe was obviously a challenging year for us in 2015. What we saw at the fourth quarter, which you are noting and what we see continuing is the kind of dialogue that we know Heidrick is capable of, with clients both on a quality basis as well as quantity, so that’s positive. At the same time, we are obviously like everyone else, taking a hard look at what’s happening in this macroeconomic environment and where that slowdown is happening, whether it would be in the – or let’s say where the particular challenges are happening. Financial services certainly being one area, there is no shortage of debates happening in Europe that can put a bit of a cloud over just economic projections. So that’s like is in our clients. We are watching that, but we certainly ended the year stronger in Europe and are starting the year stronger in Europe.

Kevin Steinke

Okay, good. And I think, obviously is revenue has improved here the last couple of quarters, you have called out more consultants becoming bonus eligible and driving here higher variable comp, as we move into 2016, does that normalize a little bit now in terms of you have had a lot of the consultant base reach that bonus eligible level and so now the comps or the increase in variable comp kind of slows down next year?

Rich Pehlke

Well, the reality is it just recycles, Kevin. And the way our system works, you wipe the slate clean and start all over again. It’s our desire and make no bones about it, because I know many of our people are listening. I would love for all of our people to be at the peak of the bonus eligibility. I mean that’s our goal every year. Because that means they are doing great work and they are doing a lot of it. And so we are blessed both as a company and as our people, a lot of people did a lot of good work in 2015. When that happens, especially the way it happened this year, the fourth quarter comp expense rise up, because we do a little bit of a catch up for the whole year. Because we look at the whole macro environment and our people are rewarded in part by how the whole company does. So, as our results improved, it also increases the reward for our people both in terms of the amount that they would get as well as the overall pool. So, I would love to be in that position every year. That’s a great problem to have.

And so – but we start the slate clean and as we have said many times, we are a high fixed cost business in terms of having the people and the scope in place, so we have our broad footprint and our people – usually, it takes them a couple of quarters to work up into that level, I was starting to turn fixed into variable and that’s the way our business works. And so that’s why you see the variability many times in our quarterly performance. If you look at our EPS, for example, even for 2015, we may have a lot of our profitability in the first three quarters and fourth quarter, some of our after-tax profitability goes down just because with the increased bonus payments. But at the end of the day, we had the highest EPS we have had in many, many years. So, it’s a great problem to have, but that’s the cyclicality and the way our business works.

Kevin Steinke

Okay, that makes sense. I guess, on the other side of the cost structure there, you talked about higher sign-on bonuses and guarantees in 2015. As you maybe slow the hiring a little bit in 2016 and focus on productivity, do you expect to leverage some of those costs and that helps drive margin expansion next year or in 2016?

Rich Pehlke

Yes, great question, Kevin. Look, I don’t think it will be quite the level that it impacted our business this year because of again the phenomena that we went through in 2015 with the infusion from CT partners. Having said that – and usually that phenomena is about a year in terms of its impact. Most of those people are ramping up and well engaged in operations today. So, we will be getting back to what I would consider a more normal environment. And so it is the fact of life in our business, but at the end of the day, what’s really encouraging is the contribution that they are making and the fact some of the improvement both in Europe as well as some of the practices that we have already talked about have been driven by the fact that we have been able to attract a lot of good people that have had an immediate impact in our business.

Kevin Steinke

Okay. On the G&A side, you said there were some non-recurring projects in there, I don’t know if you want to call any of those out specifically or if any of those continue into the first quarter?

Rich Pehlke

Yes, generally, I don’t expect that there would be a lot of them and again they are very hard to forecast. In many cases, they were legal related. Sometimes, our employee matters, sometimes our client matters. And so just because of the scale and size of our expense base, they tend to stick out. So, we probably had a couple of million dollars worth of non-recurring professional fees, a little bit of it was acquisition-related, the most of it was either IT-related with some consulting as well as some legal expenses. That tends to happen. I will say that our G&A run-rate should increase a little bit on the run-rate basis just because of the acquisition of the two new leadership consulting companies. So, that’s growth related run-rate increase of probably a couple of million dollars on a quarterly basis. We will watch that as it goes on and we will probably get some efficiencies as we integrate the operations, but again they are not of such a large scale that they are going to move the needle. More importantly, we are going to bring immediate client activity, immediate revenue impact and they are both profitable operations.

Kevin Steinke

Okay. And do you have any regional or global meetings planed for 2016?

Tracy Wolstencroft

The answer is, we do. We have a meeting later this quarter in Europe gathering a number of our consultants around the world is not a global partner meeting in the way we have done it some years past. This year, we are going to mix that up. We are going to spend time on more targeted topics with smaller groups and we are going to sprinkle that around the globe.

Kevin Steinke

Okay. So I guess, may be that will contribute a little bit to some incremental G&A in the first quarter?

Rich Pehlke

It might, nothing that’s worth signaling at this point in time. We will certainly, if that changes we will certainly be observant and make sure that we will let you know when it’s coming.

Kevin Steinke

Alright. Just one more question for me. I think Rich, that last quarter, you called out what revenue growth would have been in constant currency, just adjusting the year ago figure for currency, I don’t know if you have the similar analysis for the first quarter guidance?

Rich Pehlke

Right now, we think currency impact in the first quarter is probably in the neighborhood of about 2% to 3%. Again, it’s really hard to call Kevin, because so volatile right now, but it could impact it by a couple of percent.

Kevin Steinke

Okay. Thanks for taking my questions.

Tracy Wolstencroft

Absolutely.

Operator

And next is Kevin McVeigh with Macquarie. Please go ahead.

Rich Pehlke

Good morning.

Kevin McVeigh

Good morning. How are you Rich?

Rich Pehlke

Good.

Kevin McVeigh

Can you just give us a sense, how much the acquisitions contributed to the first guy, are you not stripping them out at this point?

Rich Pehlke

We are not stripping them out. But on a net basis, probably it was a very modest contribution for Co Company in the fourth quarter. We have one quarter of revenue, but probably by the time we had it in all of the acquisition and accretion expense, it was probably flat to be maybe minimally dilutive this one quarter.

Kevin McVeigh

Got it. And then a nice job on the billings, it’s a little bit surprising, what I felt you would have seen a little bit more of weakness in industrial and not as much is education, anything going on there, in terms of just to make sure where things were in, again healthcare look great, financial services look good, just any thoughts on the industrial hanging in as good as it did?

Tracy Wolstencroft

The broader theme there Kevin is really related to the talent re-build that we have had in 2015 and the greater access we have had to clients with that, as well as some of the successes we have had in the industrial space and the currency that gives us to go call in the next client. As you know, every piece of business you do in this business, allows you to leverage to the next one. And as we see momentum across all our businesses, but certainly as we speak to industrial, it just gives you a stronger calling card to go get the next one. And that’s a lot of what you are seeing here as well as you wish the talent.

Kevin McVeigh

Got it. Thanks, Tracy. That’s very helpful. And then in terms of obviously, you guys are parrying through – is there anything you are looking at and this is more to try to [indiscernible] just the macro overall in terms of four conversations with clients, is there a planning, has there been any shift in terms of longer term strategic or just anything that we can point to kind of suite investors a little bit from just a overall macro perspective?

Tracy Wolstencroft

The way I would characterize that is, every client we speak to, in some form is wrestling with two dimensions of their business. One is, how do they strengthen the core in a marketplace, which as you pointed out is volatile I mean at same time how do they embrace what’s the change. There are some clients in some sectors, where that moves forward with much greater clarity than others. We are all like you looking at the opening of 2016 and seeing the volatility, whether it would be how it emanates from Asia, from the energy markets, consequent knock-down effects in financial services, etcetera. We find in our client dialogue that while everyone is focused on it, no one is frozen by it. That may – does that that evolve? We will see. But I would say that every – certainly myself in meetings with clients as well as in meetings with our consultants, we are trying to get a barometer on what you are asking every single day. And it would be very difficult for us to give a broader trend line to what I just described.

Kevin McVeigh

Right. That’s helpful. And then Rich, you mentioned some professional services fees that impacted EPS, how much that impact the earnings in the quarter and could you just give us a little update on what those were?

Rich Pehlke

Yes, I answered this a few minutes ago, but it was some legal fees and some consulting fees that are IT related as well as some acquisition related cost. Obviously, when you do a transaction, you run up a little bit of legal fees there as well and so forth in valuation fees. So, it was couple of million dollars on a non-recurring basis.

Kevin McVeigh

Got it. And then my last mission, to the extent you can give us a range, any sense of where the tax rate should be for ‘16 I know there has been a lot of volatility?

Rich Pehlke

Yes. As I said in my remarks, we have quarter-to-quarter volatility in our tax rate. And over the years, we have had a lot of volatility on an annual basis. I feel a lot more comfortable about where our overall tax structure is and where our position is. As we have a healthy year across the globe, we tend to have a lower effective tax rate. Some of our jurisdictions are very small in scale and certainly their results can influence whether or not their sync [ph] like valuation allowances or short-term deductibility for both tax rate. And that’s why we get such volatility as well as trying to estimate where our income will come from. That said we have had the lowest effective tax rate we have had since 2010, in 2015. Our tax rate for our current business should hover in that low to mid 40s range on a normalized year and that’s kind of where we should for right now as we think about our planning, but it will vary quarter-to-quarter. There is no question, based upon the actual results. And so it’s just the nature of how our business is right now and because of the scale of our business.

Kevin McVeigh

That’s helpful. Thank you very much.

Rich Pehlke

You’re welcome.

Operator

And we will now go to Tim McHugh with William Blair.

Tim McHugh

Yes, thanks. Most of my questions have been asked, but maybe a follow-up on a few of them in a little different way, I guess. You have been asked about margins a few different ways given the professional fees that guarantees and so forth. I guess, overall, if given I know you don’t give full year guidance, but just directionally, are you still expecting margin improvement, I guess? And is 2015 representative of I guess kind of the baseline of what you would expect or was that lower, higher than what we should think about going forward?

Rich Pehlke

Yes, good morning, Jim. This is Rich. I will take a stab at it first. I think 2015, at least as the business is constructed today is a lot closer to where we kind of thought it would be from the standpoint of just the composition of our business. What will drive margin growth in the future is the degree that we scale the businesses like culture shaping and leadership consulting. Those are higher profit margin businesses by construct and it’s our intent to grow those both organically and inorganically as opportunity arises. And it’s in the degree that they became their larger factor in our overall business mix. I think we have the potential for margin growth. On the search side, we are actually, on an operating basis, doing well. I think we have done a lot to improve the expense ratios. I think our people, as we indicated, because of the comp expense, because they are productive, I think we have done a lot to improve our overall operating ratio and at the same time paid very competitive pay for the services of our people. But at the end of the day, we need to grow the businesses outside of search, to complement search and also drive a slightly higher mix to the profit margin and that would be the key to growing the margin. So, absent a lot of growth, I would want to keep the margins at least around where we are today. I would see that as a good result, but at the same time, our intent is to try and grow those businesses over time.

Tim McHugh

And let me ask you on the hiring plans, I guess, adding less people, I guess, hiring not quite as aggressively as last year, is that a reflection of you just see room for productivity, is that a reflection of uncertainty about the market environment and not wanting to hire too aggressively ahead of that or I guess it is – I guess which end of the spectrum is it more a reflection of as we think about…?

Tracy Wolstencroft

Yes. Tim, two comments, just if I go back into the margin comments, the way I characterize 2015, 2015 was a good year for search, it was a very good for Heidrick search, in terms of you look at our U.S. business, you can see what we are doing there. And we are looking to that as we look globally and we are saying to our colleagues around the globe, that’s what we are looking for. Whether or not that leads to margin improvement, I will leave it where Rich did. On the question of hiring, I think it’s a combination of really two things. Number one, we had extraordinary event last year with CT Partners. We took full advantage of that. We do not see that opportunity in 2016 on that type of scale. We are out there, engaged with talent, we are going to hire people, we are going to hire quality people. We are going to hire as many quality people as we can attract, but we are not going to chase them, perhaps with the same vigor that we did in the last couple of years, because we now reached a critical mass. Where second point is, we want that critical mass perform, as Rich said we have people who came out in 2015 were terrific, kind of they hit their full stride yet and they would say that as well. So, there is a little bit of consolidation going on here with the talent that we have acquired consolidation in the sense of just putting them and positioning market to be even more effective. So I don’t think it’s a grand statement on our part with respect to hiring, but what’s going to happen to the economy as much as it is, we think we have done a lot in the last couple of years, we want to absorb that well.

Tim McHugh

Okay, that’s helpful. I guess and then the last question, just if I look at confirmation trends, you are up year-over-year throughout most of 2015 and it looks like early 2016 is slightly below the prior year, is that just Asia in the financial services comments you made or I mean, is it – I mean I guess are you seeing broader than just those environment or those subsets of that…?

Tracy Wolstencroft

I would say the primary contributor is Asia relative to the early trends that we have shown on slide and the financial services comments rolled in as well, because that’s where we hear the most talk and concern relative to, again and again one month doesn’t make a big trend for the year, but it’s certainly, again we always listen to what’s happening in the marketplace, what’s happening with our competitors, etcetera. And I would say that’s probably the biggest influence. Again having said all of that, as we look at what we have factored in, we are still comfortable with the range that we are forecasting. I don’t think – I think our comparisons year-over-year looks a little stronger, obviously because of the way we started out our last year. And the key is, can we sustain the momentum through the whole year and that’s where the comparisons will get tougher, just because the way we finished 2015.

Tim McHugh

Okay, great. Thank you.

Operator

And no one else is in the queue at this time. [Operator Instructions] And we will go back to Kevin Steinke. Please go ahead.

Kevin Steinke

Just one quick follow-up, did you give any information on Decision Strategies International, what sort of revenue contribution you would expect for them or would you just say it’s immaterial?

Rich Pehlke

It’s not immaterial, but we have not given any specifics yet about the size and scope of the business. But as we comment further throughout the year, I think you will see more information about the overall size and scale of our leadership consulting business as we go into 2016.

Kevin Steinke

Alright. And I guess we should think about that adding gross five to the headcount in the first quarter, is that the way to think about it?

Tracy Wolstencroft

Yes, yes.

Kevin Steinke

Okay, alright. Thanks.

Tracy Wolstencroft

Yes, I just would say I think the broader theme on DSI is what you are seeing there with DSI, as you saw with Co Company, is a very targeted purpose around building out our leadership consulting business for 1Q, it’s primary reason our clients want it. They want to know more knowing about who we think is best on search, but how we make them succeed in their positions. And at its core that is a big part of what leadership consulting is about. So, DSI, Co Company, added to leadership consulting under new leadership is about delivering that service with more scale, with more efficiency and with more consistency around the world in terms of what we are engaging the clients on. So, that’s the materiality point beyond any numbers.

Rich Pehlke

And Kevin, just one clarification that I want to make sure you understand relative to the thing you asked me about the headcount. Remember that the headcount for Decision Strategies is leadership consulting that search. And so as we think about that and talk about that in the future, that’s a different type of headcount and it’s a different type of business model than traditional search. So, I would be careful how you use that in that regard.

Kevin Steinke

Okay, sure. I guess as you are reporting it now though, I don’t know, this is the total.

Rich Pehlke

That’s right.

Tracy Wolstencroft

Yes, you got it right now.

Kevin Steinke

Right. Yes, okay. Alright, thanks.

Rich Pehlke

Thank you. Thank you.

Operator

And there are no other questions. So, I would like to turn it back for any additional or closing remarks.

Tracy Wolstencroft

Thank you all for listening and thank you for your questions. Have a good day.

Operator

Thank you very much. That does conclude our conference for today. I would like to thank everyone for your participation.

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