HSII
#<UNK>, there is no specific number that I can give you on this.
I would say this.
You've got a firm right now that's 90% Search and 10% the Consulting practices really dominated by Culture Shaping.
We would like to see that balance over time in the ---+ we are going to do it in stages, but we are going to do it incrementally at ---+ get to 80/20, get to 70/30.
I think when you start to get into the 60/40 range, we're going to hit the mix that we think makes sense.
You have to remember that Heidrick continues to be a very strong search firm and that gives us the right to have the conversation with client, the right to have the access to the top.
And we want that to continue to be a very, very important part of what we do.
When I give you those numbers, I am giving you that over a very healthy period of time.
We are not going to see that for a healthy period of time.
And if we can get into that 80/20 mix as the first place to stop, we'll be happy with that.
We are seeing right now, as you know, the investment in Culture Shaping and the impact that's had on margins as we invest this year.
We have flagged in this, in our conversation today, what kind of margin we think we can get back to with respect to Culture as those investments concluded and we move forward.
And we have indicated in my comments that the best way to think about Leadership Consulting is that that margin over time, when we get to the right scale, we believe those margins will be no less than Search.
We would look for those to be more than Search.
But I'm saying what I think we think is a relatively balanced way to describe it, which is to knit your two questions together, get to a 80% Search/20% Consulting business where the margins on the Consulting side are at least as good as Search.
And we believe when we get to scale have the right to be better.
Yes, the organic growth ---+ the growth was relatively flat on an organic basis in the quarter.
The inclusion of the acquisitions made up the majority of the growth on the revenue side, <UNK>.
I think as we go forward into the fourth quarter that will reverse a little bit in that we'll have contributions from both.
I think as we noted in the comments, I think we would have expected the America segment to be a little bit stronger in the quarter.
And I think because the momentum came at the last half of the quarter, last part of the quarter and October looks relatively good that I think we should see some organic growth in the business.
So it should account for a portion of the growth implied by the guidance.
That's also including some of the new people that aren't acquisition-related as well.
I'm not ---+ from a standpoint of just confirmations, there's a number of things that drive the revenue.
Our confirmation trend has been a reasonable trend over time.
It hasn't been ---+ it certainly has bounced up and down a little bit.
So it certainly would show that ---+ I think if we have strength it'll come from Europe and Americas more than it will Asia Pac.
It has been consistently a little bit off of this year compared to last year for some of the reasons mentioned.
I think from a standpoint of that.
But the other things that really drive some of our growth right now, candidly, and we've talked about this before, is that we get ---+ it's the contribution of upticks, and as we have seen the assignments bill and complete, and in some cases fee revenue come in at the end, they have become an increasingly a larger part of our quarterly revenue.
And so that's across all three regions.
Yes.
Spendable cash is relatively small right now from the standpoint that if you know our accruals through year to date on the balance sheet are down year over year.
I would say our variable compensation accruals, I noted in my remarks, are lower.
So accrued expenses are $128 million at September.
And so that's down year over year.
The cash, we have spent a lot of the free cash on the acquisitions.
I've chosen not to draw on the revolver at this time.
We are ---+ still have plenty of cash because of the accrued bonuses.
As we finish, whether or not and how much we withdraw on the revolver at bonus time will depend upon how we finish the fourth quarter.
<UNK>, I would just add one more comment to your opening question about percentage, which is the most important governor that we are going to look at on that is frankly what's driving it from the client side.
And so I think the right way to think about this is, our first stop is to get to 80/20 between Search and the non-search Consulting businesses.
And it's going to be highly determinative from there about what kind of demand do we build from the client.
We are obviously building this accelerating performance platform out of LC because we do think it does have scalability.
But we are going to pay really close attention to what our clients are telling us about the demand.
And that will have a big impact on how much it changes from there.
Yes.
No, that's a great question, <UNK>.
There's some potential that we will see some squeeze on the margin as we build bonus accrual.
There are a lot of moving parts.
This year because of the large increase in consultant hiring that we did, our fixed compensation is higher year over -year.
And as a result some of that will actually flip maybe in the fourth quarter, depending upon how we finish the year.
So it's really hard to predict how much.
And so I'm hopeful that if our earnings are more towards the high end of the guidance that that will give us a lot more cover to mitigate that margin pressure as the accruals flip.
But right now that's the big variable.
I'm not sure we would point to any one geography.
I think the kind of experienced all across all of ours, at least in our case.
We've pulled this a lot because we can't really point to one thing.
Because as we saw, July and August kind of soft, we really did worry a little bit about was it a sign of some kind of a cyclical trend or a movement.
September bounced back pretty well.
And so ---+ and as we talked to our folks and see what's out there and see how October is progressing, there's nothing we can really point to that says that there's one driving factor.
So whether or not it could have been client decisions caused by things like Brexit, (inaudible) is certainly one of the factors that would've fallen into play.
But there isn't any one thing that we can point to.
And I don't know if you want to elaborate.
I would just add, as we described, September was a strong month.
October is a darn good month.
It's hard to understand why it evolved the way it did, to your question, <UNK>, other than vertical.
I will just say this.
The dialogue with clients across that four months has remained strong.
So why clients decided to pull back in July and August, we don't have as much precision around that as we would like, let alone to answer your question.
The one thing I pointed to even in my G&A commentary is that we were surprised a little bit by the level of business development expense that we incurred at the end of the quarter.
So that will match up against some of what we saw in September and October coming through because, as <UNK> noted, the level of activity hasn't slowed down at all.
Certainly there seems to be some intensity in conversations around clients.
So we take that as a good sign.
Certainly, the lack of capital markets activity relatively speaking to previous time periods in Asia has impacted financial services activity in that region of the world.
Here there is, certainly as we see on a weekly basis, the regulatory overlay with respect to financial services, which creates an impact on overall demand for talent.
I don't want to overly accentuate those themes beyond what we are seeing right now.
I would just note them as two dimensions that flow through, and certainly impacting those numbers right now.
Thank you, <UNK>.
First of all, <UNK>, I would say that some of this hiring, if you go back to where we were a couple years ago, as I entered the business here at Heidrick, one of the big themes we had was really to stabilize and rebuild as part of that stabilization.
And so, some of this that you see is where we see pockets of opportunity to build a footprint consistent with the overall Heidrick brand.
A great example of that is, obviously, JCA in London where we have a solid business in London, a good business in London, but we saw an opportunity there really to jumpstart in one move the access to the top which we had lacked.
And we could've done that one by one, but we decided it was advantageous to do it with a full team.
And for reasons that we are comfortable with JCA and ourselves, we decided to come together in that acquisition.
So that's probably an example where we advanced that count of consultants probably faster than you would normally see.
And other places where we are adding talent is really adding talent both at the senior basis, but also adding it at the principal basis where we can get leverage into our model.
That is additional to what we've seen in the past where we have principles supporting clients, supporting client teams that we think allow us to position ourselves even more strongly with the client.
All those numbers add up into the count.
So that gives you an overall perspective.
I would say on the capital allocation, look, we continue to look at probably the most difficult equation that any business has, whether it be ours or anyone in the world right now, which is balancing short term and long term.
We know that there is a mathematical pop that can come from buying back stock.
And we certainly look at that and we use that as one metric to measure against the acquisitions that we are making.
But we are not looking to do acquisitions just to do them.
We're looking to do them to align with a client strategy.
And where we see an acquisition that can accelerate what we believe is the right client strategy, we will do them.
Clearly when we do these acquisitions, we're making investments that, at least in our case to date, are going to take longer to show that return versus the quick mathematical pop that can come from buying back shares.
But we think is the more enduring return over time and complementary to our business that really, again, starts with search and starts with the access and the permission that search has in the board room and in the C-Suite.
I'll stop there and see if that addresses your thoughts.
Tough question for us to ask.
I would just say this.
As challenging as it is to have two slow months like July and August, we had a whole lot ---+ before I prefer having this conversation with you with September and October with positive momentum and July and August strong and September and October weak.
Where that continues, we've given ---+ the best we can tell you is the forecast that <UNK> described with regard to revenues.
Beyond that into 2017, we are right in the middle of our planning process right now as it relates to 2017 for the balance of this year.
It's obviously something we are very, very focused on.
Overall economic headlines are not the most positive and robust.
That said, what you see happening in the capital markets is generally asymmetric with that.
And so we are like everyone else, trying to figure out how to balance those big macro headlines with the conversations that we are having with our companies, where we see them investing, how they are investing.
You only have to look at what's happening in the market in the last month or so, whether you look this week to AT&T/<UNK>e Warner, whether you look to Bayer and Monsanto.
There is a lot of interest out there in trying to figure out how to grow businesses.
And if they decide that doing it organically is going to take too long, there's some robustness in that merger marker right now which is quite interesting.
And that obviously speaks to confidence.
There's a couple of things.
We've got a couple of initiatives going on inside the Company, number one, where we needed some temporary help, which is we are implementing new HR information system across the business, which was badly needed.
The system that we had is outdated and couldn't even be upgraded anymore.
And we are a people company.
And so we are going to a cloud-based system.
We needed some outside expertise with people with specific skills that needed to come in and help us with that implementation.
That expense hit this quarter and may hit another quarter or two, just as we finish that implementation.
That hit us both in the professional services line as well as in the temporary help line.
In addition we have some hiring fees of just people that we've been adding to the mix in specialty areas, especially that are outside the core of our normal search business, where we actually have to use recruiters, et cetera, to fill out the specialties, as well.
So these were small items individually.
In the aggregate I'm talking about probably close to somewhere around $400,000 to $500,000.
Again, small numbers move our needle a lot.
Those are pretax.
Sure.
I'd say <UNK>, we are a big step up from where we were two years ago, number one.
Two is, in the spirit of the questions that have been asked, we ---+ just about overall economic environment, we don't want to get ahead of ourselves with regard to that and we want to balance that with where we see opportunities to hire talent that are attracted to what Heidrick is building right now.
There are definitely pockets in each industry where we can selectively hire.
But I wouldn't say that we are ---+ we are nowhere near where we were two-plus years ago where we had huge gaps.
I would say right now we are approaching where we can be opportunistic, we're going to do that as opposed to where we absolutely have to go higher.
<UNK>, there's one thing I would add to that conversation is, it's more quality than quantity.
But if you think about the just general needs of the business, and we've said this many times.
In an environment in Executive Search, it's one of the reasons why we believe the portfolio mix has to continues to evolve as well.
Growth in Search is hard to come by.
And so it does ---+ and one of the big drivers of that is the number of people you have in the market who are good.
And so we always are looking for the right talents and places to add the talent that makes sense for the business and are of the caliber and the right culture fit with our people because search is the engine of the business.
<UNK>, I'll just add one other part, which is we are also very committed and have been to promoting from within.
So there is a whole group of people who are moving up the experience curve.
We will be looking at another year where we will make promotions to partner, where we will make promotions to principles.
It's too soon to get into anything other than just stating that in concept.
But we continue to be very focused on that internal promotion path as a way for our people to advance, but also as a way to fill those opportunities in the marketplace.
In a perfect world we would get to a place where we can promote more from within than what we have to do on the outside and keep outside just very opportunistic.
Yes.
<UNK>, I'm going to jump in on this just because a little more detailed maybe then <UNK> would have at his fingertips.
But it's a great question.
It's something that we'll probably be getting even more clarity to as we get to year end and in the next year, because the mix ---+ and I think you said it embedded in your question.
The mix of our business is changing.
And some of the nature of the G&A we are experiencing is changing.
I'll give you an example.
Most of our G&A, which is non-people in our vocabulary right now and we may give further clarity on this in future income statement presentations.
But most of our G&A ---+ all of our G& A is the non-people related expenses.
Most of ours falls really in four lines right now that are really material to the business.
Number One is our occupancy expense across our business, which is just basically the existence of our offices.
That's been almost a flat expense for a long period of time.
The second one is our professional services where we engage the help of people outside the Company to either assist us or do critical things that we need done.
One example on the corporate side, obviously, is things like audit fees and tax work, et cetera, and throughout our various geographies.
Internally we use professional services fee for things like I talked about, technology implementation, marketing support and expense.
We've got some tremendous marketing initiatives going on right now with our leadership consulting business that are extremely going to be well done, well received, client impacting where we are using the help of some outside people to help get that done.
The third major line is the outside contractor expense.
I think really that is really much more of a cost of sales type of expense that really probably doesn't belong in G&A.
And we are looking at that for longer term presentation, because that's really temporary help to fulfill consulting engagements, just because we haven't been able to leverage up the team fast enough.
And so it's hurting our margin in two ways.
Number one, it's making G&A look bigger.
And number two, it's a higher cost than if we had our own people.
As <UNK> mentioned, over time as we scale that business more appropriately, the cost of that leveraged support will go down.
And it will not be a G&A expense, it will really be a cost of services expense.
And then the final thing is the travel and entertainment and business development expense.
This is one of the fine lines we always walk, because we encourage our people to be in touch with clients.
We want them out there market-facing, talking the business, getting knowledgeable about all three lines of business, and having deeper conversation with clients.
That's part of the strategy.
And that actually ---+ and we saw a little blip in that, again, not huge dollars.
It happens to be large dollars in our income statement presentation because the numbers are kind of small.
But we're talking about like an increase of about $0.5 million Companywide for the quarter.
And so it's those types of things that are what's driving the G&A increase.
The other thing I would say is that relative to the folding in of the acquisitions, a lot of the acquisition G&A cost was those outside contractors, and that will have clarity over time.
The balance of that, things like earn-out and intangible amortization, that will wane off over time because of the timing of the acquisitions and we must accrue for the earn-outs.
And so as we become an acquirer, if we continue to acquire, you'll still see that be.
If we don't do that many acquisitions, that expense will wane over time and it will not be a sustainable expense.
And then the third thing is regular G&A.
We are all four acquisitions combined, we probably have an aggregate of about just over $1.2 million ---+ just about $1.2 million of combined expense for the four businesses in the quarter.
Some of that will go away.
There are some of the smaller companies we are in the process of integrating them now onto our platform, and their back office will go away.
These are not big back offices, so there's not millions and millions of dollars of operating synergies.
For the most part it's relatively small.
But we are going to make anything that we can go away as quickly as possible.
And a lot of that could trail off by the end of the year.
<UNK>, the reason I highlighted it is when you are a Company of our size, you obviously have to watch scale.
Small dollars can be big percentages.
So when we see that, it's my way of flagging to you and to the broader investment community that when we see a number move with those kind of percentages, we focus on it.
We don't just look at the hard dollar and dismiss it to scale.
We focus, okay, how can we make this better.
That's why I raised it, because we want you to know that we are focused on it and ideally we want to bring that number down.
It's going to be part of the income statement whether or not it's in G&A or some other line of presentation.
That's what I don't know yet, <UNK>.
But it certainly going to be there because I don't think we can hire fast enough.
And I'm not sure we want to hire that fast.
I'd rather have the leverage support trail the growth of the business development people a little bit.
We have an excellent network of professionals who are very flexible.
And as we build this business it's almost in our best interest to be flexible on that instead of building hard costs into the business.
We're trying to balance that with the work that we have.
And as that business grows, we are going to continue to monitor it.
In this particular case it's more related to a couple of situations that, one, is certainly oil price decline.
The other is more from an M&A point of view, and what the client is really allowed to do from a regulatory point of view.
More broadly, the energy space, whether it be in our industrial area or whether it be in Cultural Shaping, is one that we are keeping a close eye on because of what's happening to overall energy prices and how that's moving the needle.
We are seeing it both ways.
We are seeing a drop-off in activity on one hand.
On the other hand, we see where there is greater concentrated focus on, do we have the right leadership at the top.
Do we have the right leadership around the board room.
And, therefore, there's an opportunity for a conversation with Heidrick that may not have happened, except for the fact that energy prices dropped and how are they positioning for the future.
It's a balance.
Particularly on Culture Shaping it got hit because of a couple situations.
I would not conclude that's an overall trend for them.
More specific to these situations.
Let me start and I'll all turn to <UNK>.
The most important way to think about Culture Shaping in 2016 is this is a year of investment in talent that is guiding us through the continuing transition from the legacy team and legacy leadership that Senn Delaney has in place with where that business is going.
So there's five new people, as we described, in the beginning of the year that's come into the business.
So there's a certain ramp-up time that each of those five have in terms of making their impact in the marketplace, as well as the impact that comes from the enhanced metric and training they are getting from the legacy partners who otherwise would be in the market full-time.
And so it's the confluence of both of those that's hitting the margins this year.
What you see us saying with respect to margins going forward is more of a return to normal as that new talent becomes productive, as ---+ and as we believe the overall narrative around Culture Shaping continues to be strong in the broader world out there.
And just pause and see if <UNK> would add to that.
Look, I think that's well said.
I think from the standpoint of how the margins improve going forward, there's a couple things, because the construct behind some of the investments we made were not only investing in some new people, which are now in our run rate, but also in making sure that some of the legacy people were in a mentoring role rather than a pure business development role to make sure that the transaction happened as smoothly as possible and as effectively as possible.
Some of those investments, a lot of them trimmed down significantly after this year, and then a couple tail into next year.
And so we do have history with this Company.
You saw the legacy types of returns that could return on its EBITDA during the first three years of the business.
We expect it to get back to close to those type of margins in the future, but at the same time, giving up maybe a little bit of that margin to fuel more revenue growth than just status quo.
That's the balance we are talking about, <UNK>.
No problem.
Thank you.
They are doing it in, and my answer, <UNK>, is really is anecdotal, right, from what we see in the marketplace as opposed to anything that's happening on the inside.
We certainly see, with the conversation around executive search, is looking to be expanded with regard to, once you are in what other advice can be given to clients.
We're doing it the way we have described.
We see others participating in different ways.
Exactly how much that is, is at the same speed, is a greater speed, is it a lesser speed, how are they doing it.
Don't know.
I think the one you touched on, which is what we are hearing from clients, and when I say what we are hearing, what we are hearing as we are out there engaging with them on the content that we are developing.
And some of the most important content, which I reference is this theme of accelerating performance, which is really working with clients to answer the question not only who is the right person, if you will, the talent and leadership selection business search, but why are they the best and how can we make them better.
In the context of accelerating performance, we are looking at the client, both at the individual leader level, at the team around that leader, and then in selecting this around the entire organization.
That is the essence of what accelerating performance is about at the individual talent and organization level.
And we've developed a series of tools, and we've developed a methodology, which is embedding in that accelerating performances.
There's a white paper that's out there.
You will see a book very shortly with respect to this as well.
So we have invested in it.
And we are engaging with clients in it.
This why I made the reference that where we are seeing that dialogue with the client, either independent of Search or coupled with Search or coupled with Senn Delaney, we are experiencing some very high quality conversations and some very high quality assignments.
And our task now is to work through how do we scale that globally in a smart way with respect to what do our clients need and how do we think about that trade-off of speed and capital.
I just want to thank everyone.
I'll just close by saying that as you can see from our remarks, 2016 is a big investment year for Heidrick across all three of our businesses, Executive Search, Leadership Consulting, and Culture Shaping.
And what you see in this quarter, but also what you see over the past nine months, is how that investment has been made, but also how the returns in the business have kept pace at the same time.
So thank you for your questions, as always.
We'll leave it there and we'll look forward to speaking with you again shortly.
Thanks.
