Good afternoon. This is Heidrick & Struggles’ Third Quarter 2016 Quarterly Conference Call. This call is being recorded. It may not be reproduced or retransmitted without the company’s consent. [Operator Instructions] Now I will turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead..

Good afternoon, everyone and thank you for participating in Heidrick & Struggles’ third quarter 2016 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.

A reconciliation between GAAP and non-GAAP financial measures can be found in the last page of our press release and on Slide 23 in our supporting slides.

Throughout the course of our remarks, we will be making forward-looking statements and I 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 are shown in the bottom right hand corner of each slide.

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

the first, Decision Strategies International and more recently, Philosophy IB, further enhancing our talent, intellectual property and client service capabilities. We are continuing to develop additional client solutions around our methodology branded as accelerating performance.

Accelerating performance helps clients mobilize their talent and adapt quickly in order to maximize the potential and achieve value creation faster than their competitors in a dynamic environment.

On the strength of this methodology, we are competing and winning new business, primarily in Europe for Leadership Advisory projects that worn higher fee levels than we previously could trend. We now need to scale this business profitably and globally on a platform, which we did not have a year ago.

Next year, we should see some increase in profitability that we progress our integration of the three acquisitions and continued to grow the business. So, rate of that improvement will be highly dependent on the pace in which we invest.

Overall, we believe we are building an LC business that has higher growth characteristics in search and upon achieving scale we will have returns that are no less. And finally, Culture Shaping.

This has also been a year of significant investment in Culture Shaping, specifically in new people who are poised to capitalize on what we have today and achieve what we believe this business has a potential of doing in the future.

We singled this investment at the end of last year and then recognizing the financial impact of the additional professionals throughout 2016. The new consultants are now integrated into the business and are up to speed on clients and business development activity.

We have seen tremendous mentoring from the legacy partners which in part has been the reason the revenue has not expanded. We expect to see an operating margin from this business next year in the low to mid-teens.

Assuming revenue growth accelerates, the mix of enterprise revenue and consulting revenue remains balanced and investment and retention costs are less of the factor. And by 2018, we expect that margins should be 20%. In brief, I believe in the diversified leadership solutions platform that we are building.

The combination of Search, Leadership Consulting and Culture Shaping makes Heidrick & Struggles a highly unique and differentiated leadership advisory firm. We believe that Leadership Consulting and Culture Shaping are businesses that can grow and are more resistant to economic and market cycles.

We are able to offer our clients a more meaningful value proposition that goes far beyond the acquisition of talent. And with that, I am going to turn the call over to Rich who will give you further details about the third quarter results..

Thanks, Tracy and good afternoon everyone. I will start with some additional details on third quarter results beginning on Slide 2. Third quarter net revenue of $143.5 million was up 4% compared to last year’s third quarter. The impact of currency exchange rates was less than 1%.

The increase in Executive Search and Leadership Consulting revenue of 4% more than offset the 6% decline in Culture Shaping. Europe continued to show improvement, up 27% or $7 million year-over-year, was a key driver of growth in our Executive Search and Leadership Consulting business.

The acquisitions of Co Company, last October, and JCA Group in August provided more than half of this growth with the balance coming from Heidrick’s legacy business. Revenue from the Americas segment was essentially flat. We have a slow start in the third quarter and I am encouraged that we finished with good momentum in September.

As you will see on Slide 28, our estimate for our October confirmation is on pace – is on a pace that indicates there is still strength in the business and Americas still accounts for the majority of that business. Asia Pacific revenue was down 5% compared to last year’s third quarter.

The decline in revenue reflects the combination of the softness in certain economies like China and practices such as financial services and technology and services during the quarter. It’s worth reminding you when looking at Slides 5, 6 and 7 that these results reflect the trailing 12-month results for the regions.

This removes some of the quarter-to-quarter volatility and gives you a better perspective of the run rate of each of these segments. Referring to Slides 8 and 9, we ended the quarter with 356 Executive Search and Leadership Consulting consultants, of which 334 are Executive Search and 22 are Leadership Consulting.

During the third quarter, we acquired 14 consultants through the acquisitions of JCA and Philosophy IB, we hired 16 new consultants. 10 consultants left the firm including four who retired.

Largely reflecting the increase in new consultants and some productivity is shown on Slide 10 was $1.5 million in the quarter and $1.6 million on a trailing 12-month basis.

On Slide 11, we show the increase or decrease of revenue in each of our major industry practices for the third quarter compared to the prior year, but to remove some of the volatility results I would encourage you to also look at Slide 12, where we show the year-to-date the revenue growth of the industry practices compared to the same period of 2015.

Specific to Executive Search, referring to Slides 14 and 15, we confirmed 6% more Executive Searches in the year’s third quarter and average revenue per search worldwide on a trailing 12-month basis is just under $115,000. Turning to Slide 16, the Culture Shaping segment reported 6% year-over-year decline in revenue or about $600,000.

We are also showing trailing 12-month results for this segment to account for the quarter-to-quarter variability, which is largely a function of the timing of project executions. Culture Shaping has also been affected by decline in revenues in one of its most important vertical specialties Energy.

Looking to Slide 17, salaries and employee benefits expense in the third quarter declined less than $400,000 to $95.4 million. Fixed compensation expense increased $7.3 million and reflects compensation related to four acquisitions as well as the investments we made in new and existing talent for all of the businesses.

In the periods of high investment, the fixed portion of our compensation expense will be higher due to the incentives and guarantees as a part of the consultant hiring costs.

And as a result of the higher fixed compensation expense and an increase in the use of third-party consultants and contractors, whose costs are included in general and administrative expenses, variable compensation declined $7.7 million in the quarter, reflecting the overall profitability within the businesses.

Salaries and employee benefits expense was 66.4% of net revenue for the quarter compared to 69.2% in the 2015 third quarter. On a quarterly basis, we can see more variability in this expense line.

However, for the nine months ended September 30, salaries and employee benefits expense was 68.2% in 2016 and 68.5% in 2015, which is consistent with the overall compensation expense levels we expect to see in the business. Now turning to Slide 18, general and administrative expenses increased 21.5% or $6.4 million to $36.2 million.

When half of this increase of $3.2 million reflects costs we absorbed from the acquisitions of Co Company, DSI, JCA Group and Philosophy IB. $3.2 million includes $1.3 million for third party consultants and contractors to execute work for Leadership Consulting Services.

It also includes approximately $700,000 of earned out and intangible amortization expense and $1.2 million of expenses, which are primarily business support and business development.

The balance of the increase in G&A in the quarter could be attributed to the following items; first, higher Professional Services fees reporting Technology implementation, training and development, marketing and audit fees, second, an increase in temporary help in hiring fees, third, an increase in non- bill travel and business development expense and fourth, an increase in Technology subscription costs reflecting additional headcount throughout the business for our cloud based services.

Now I will refer to Slides 19 through 23. Reflecting continued investments in the third quarter to grow the business, operating income declined 7% or $900,000 in the third quarter and operating margin was 8.4% compared to 9.3%. Adjusted EBITDA declined 4% or $700,000 and the adjusted EBITDA margin was 12.2% compared to 13.1%.

Now looking at Slide 24, cash and cash equivalents at September 30 was $100 million compared to $129 million at September 30, 2015. The difference compared to last year reflects the combination of higher cash bonus payments, four acquisitions and contractual payments related to the Senn Delaney acquisition.

Cash generated by operating activities was $35.9 million compared to $43.1 million in the last year’s third quarter. Our ability to generate cash throughout the year, plus the cash we have access to through our revolving credit facility continues to put us in an excellent position to invest in and grow our business.

Referring to Slides 25 and 26, net income in the third quarter of $6.9 million and diluted earnings per share of $0.37, reflects an effective tax rate of 44% in the quarter. For the full year projected tax rate of approximately 48%.

This compares to net income of $7.5 million and diluted earnings per share of $0.40 in last year’s third quarter, based on lower effective tax rate of 32.7%. The tax rate was higher in this year’s third quarter based on the mix of income from the higher tax jurisdictions.

Now, looking after the fourth quarter, our Executive Search backlog is shown on Slide 27 and monthly confirmation trends are shown on Slide 28.

Other factors on which we base our forecast include anticipated fees, the expectations of our Leadership Consulting and Culture Shaping assignments, the number of consultants and their productivity, the seasonality of the business, the current economic climate and foreign currency exchange rates.

We are forecasting 2016’s fourth quarter net revenue of between $142 million and $152 million. Reported net revenue was $144.5 million in the fourth quarter of 2015. And with that, I will turn the call back over to Tracy..

Thanks Rich. For the first nine months of 2016, consolidated net revenue increased 9% compared to the same period of 2015. We invested heavily in the company this year to build and grow all of our services, Executive Search, Leadership Consulting and Culture Shaping. We made thee acquisitions.

We had a 22 next Search and LC consultants through hiring and acquisitions and vastly improved our ability to provide a scalable Leadership Consulting solution. Even with this level of investing, adjusted EBITDA for the first nine months was $46 million and EBITDA margin was 11%, compared to $44 million and 11.5% in 2015.

We continue to lay the foundation for a more diversified business of Leadership Advisory and Culture solutions, building on the strength of our people, our brand and our content. We believe that our success will create value for our clients, our people and our shareholders.

The challenge we face every day is balancing the cost of our investments and the growth of our business with the return to shareholders.

Achieving a return on these investments and an increase in shareholder value that we expect will take time and yet we fully realize the time is of the essence that will require our committed focus and outstanding operational execution. Now more than ever, organizations need the right leaders to see them through uncertain of all the times.

Leadership talent is being called on across every organization in all geographies. In the last 9 months, we have increased the value proposition that Heidrick brings to its clients and helping them attract and develop their talent. I am excited about the opportunities to fully capitalize on our investments for growth and profitability.

We pause there and open it up to any questions..

Thank you. [Operator Instructions] We will take our first question from Tobey Sommer with SunTrust..

Thank you.

I had a kind of longer term question, what is the long-term goal for the revenue mix between Executive Search, Culture Shaping and Leadership Consulting?.

Tobey, there is no specific number that I can give you in this. I would say that you got a firm right now that’s 90% search and 10% the consulting practice is really dominated by Culture Shaping. We would like to see that balanced over time in the – we are going to do it in stages, but we are going to do it incrementally get to 80-20, get to 70-30.

I think, when you start to get into the 60-40 range, we are going to hit the mix that we think makes sense. If you remember that Heidrick continues to be a very strong search firm and that gives us the right to have the conversation with the 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. So, when I give you those numbers, I am giving you that over a very healthy period of time that we are not going to see that for a healthy period of time. And if we can get into that 80-20 mix is the first place to stop, we will be happy with that..

Okay, thank you.

And then what kind of margin impacts could the associated revenue mix shift have on – what kind of impact do we have on margin?.

We are seeing right now the – 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 our conversation today what kind of margin we think we can get back to with respect to culture as well as investments conclude 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 will look for those to be more than search, but I am saying what I think – we think is a relatively balanced way to describe it, which is to knit your two questions together get to an 80% search, 20% consulting business with the margins on the consulting side or at least as good as search and we believe when we get to scale, have the right to be better..

Okay, thanks.

Couple of numerical questions, just – Rich, what was organic growth in the third quarter and what’s the organic growth assumed in the guidance range, maybe the midpoint for example?.

Yes, the organic growth rate – the growth was relatively flat on an organic basis in the quarter. The acquisitions – the inclusion of the acquisitions made up the majority of the growth of the revenue side, Tobey. I think as we go forward into the fourth quarter, that will reverse a little bit and that will have contributions from both.

I think we – as we noted in the comments, I think we would have expected the Americas 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 portion of the growth implied by the guidance and that’s also included in some of the new people that aren’t acquisition related as well..

Sure.

So if we were able to see the monthly confirmations by geography, we would be able to discern kind of a rebound in the Americas region?.

I am not – from a standpoint of just confirmations is there is 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 and it will come from Europe and Americas more than it will Asia-Pac has been kind of consistently a little bit off of this year compared to the last year for some of the reasons mentioned.

So, I think from a standpoint of that – but the other things that really drive some of our growth right now candidly and we have talked about this before is that we get is the contribution of upticks and as we have seen the assignments build and complete and in some cases, fee revenue coming at the end, they have become an increasingly larger part of our quarterly revenue and so – and that’s across all three regions..

So, do you expect the Americas region improve in September and October, along with the firm?.

Yes..

Okay. Just two other numbers questions, I will get back in the queue. What’s the bonus accrual year-to-date? And then Rich, how would you characterize sort of spendable cash at the end of third quarter? Thanks..

Yes, spendable cash is relatively – is relatively small right now from the standpoint that as 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 $120 million at September. And so that’s down year-over-year.

The cash – we have spent a lot of the free cash on the acquisition, so I have chosen not to draw on the revolver at this time. We 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 finished the fourth quarter..

Thank you very much. I will get back into queue..

Tobey, I will just add one more nonmaterial thing, questions 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.

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 determined from there about what kind of demand that we build from the client.

We are obviously building this accelerating performance platform out of the LC, because we do think it has 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..

Thanks for elaborating, Tracy..

We will take our next question from Tim McHugh with William Blair..

Hi, yes.

First, I just – following up on the bonus question, Rich, the comment that it’s down slightly year-over-year, I guess I am trying to think about how much of a, I guess higher accrual we need in the fourth quarter? I guess revenues up, I think revenue per consultant is still up, so I know you have mentioned this a few moving parts there, but – and I know timing can impact from quarter-to-quarter, but if I am thinking about a margin level for Q4 just trying to reconcile that versus the revenue?.

Yes. No, that’s a great question, Tim. There is 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 consulting and 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 finished the year. So, it’s really hard to predict how much.

And so I am 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..

Okay.

And can you – I mean, to the best you can – I guess the trends that you saw in September and October versus June and July, what changed, I mean we’ve heard similar commentary from Korn Ferry and I’ve heard it from a few staffing companies but it’s not really clear what was happening in I guess June and July other than Brexit but it sounds like it was more U.S.

than it was international markets where you saw slower activity?.

Yes, I am not sure we would point to any one geography, I think we kind of experienced all across – across all of ours that we in our case and you know we prob 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 but you know September bounced back pretty well and so – and as we talk to our folks and see what’s out there and see how October is progressing.

You know there is nothing we can really point to that says that you know there is one – there is one driving factor.

So whether or not it could have been client decision caused by things like Brexit et cetera certainly is certainly one of the factors that would have fallen into play but there isn’t any one thing that we can put to, and I don’t know if you want to leverage..

I would just add, I mean as we described September was a torn [ph] month. October is a darn good month. It’s hard to understand why it evolved the way it did to your question Tim, other than very good, I will just say this the dialog with clients across that four months has remained strong.

So like clients decided to hold back in July and August, we don’t have as much precision around that as we would like to answer your question..

Yes and 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 Tracy noted the level of activity hasn’t slowed down at all and certainly there seems to be some intensity in conversations around client, so we take that as a good sign..

And just you know by vertical financial services I guess was the one that stood out as weaker this quarter.

Does that I guess trend where you saw weakness and then improvement tied to financial services and then is that related to capital markets type activity at all, I guess any more color on that would be helpful?.

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 it on a weekly basis the regulatory overlay with respect to financial services which creates an impact and overall demand for talent, but those I don’t want to overly extenuate 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..

Okay thank you..

Thank you, Tim..

We will go next to Kevin McVeigh with Deutsche Bank..

Great, thanks. Hi, Tracy, Rich.

I wonder if you could just give us a sense overall in capital allocation, you folks have been pretty aggressive on the M&A side, actually we bracket that in with buyback you know particular given where the stock is and just along those lines you know given the cross current list couple three, four months, what gives you the confidence in terms of you must be seeing something internally that gives you the confidence to go out and make those hires and do those tuck-in acquisitions just any thoughts on that, is it purely just client conversation and just along those lines Tracy, how are clients starting to position for 2017, I would imagine you starting out some initial conversations in terms of where budget goes in 2017?.

So first of all Kevin I would say that you know some of this hiring, now if you go back to where we were a couple of years ago as I entered the business here at Heidrick, one of the big themes we had was really to stabilize and rebuilt 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 and a great example that is obviously JCA in London, where you know 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 have done that one by one but we decided it was advantageous to do with the full team and for reasons that we are comfortable with JCA and ourselves we decided to come to give in that acquisition.

So that’s partly an example where we advance that count of consultants probably faster than you would normally see.

In other places where we are adding talent is really adding talent both at the senior basis but also adding it at the principle basis where we can get leverage into our model that is additional to what we have 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 and so that gives you an overall perspective. I would say on the capital allocation, look we continue to look at the –probably the most difficult equation that any business has whether it would 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’re making. But we are not looking to do acquisitions just to do it.

We are 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 the – what 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 boardroom and in the suite.

I will stop there and see that it addresses your thoughts..

It does and that’s just very helpful.

Any thoughts on kind of the preliminary conversations into 2017 and it’s interesting because your kind of commentary on the July, August pause and then reacceleration in September is really being echoed and you know was that – do you expect that to kind of follow to over the balance of Q4 and then into 2017 as well?.

Yes, tough question was that, so we just say that as – it’s challenging it is to have two slow months by July and August with a whole lot – we prefer having this conversation with you with September and October with positive momentum than July and August strong and September and October weak where that continues you know we’ve given the – the best we can tell you is the forecast that Rich described with regard to revenues beyond that in the 2017 you know we are right in the middle of our planning process right now as it relates to 2017 for the balance of this year and it’s obviously something we are very, very focused on you know overall economic headlines are not the most positive and robust.

That said, what you see happen 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 and you only have to look at what’s happening in the market in the last, the last month or so whether you know look this week to AT&T Time Warner whether you look to bear in Monsanto.

There is a lot of interest out there and trying to figure out how to grow businesses. And if they decide that doing it organically is going to take too long. There is some robustness in that merger market right now, which is quite interesting that obviously speaks to confidence..

Okay, no doubt.

And then one last one on the numbers, you talked about a step up in temporary help expansion professional fees, what drove that?.

Couple of things, we have 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. So we needed some outside expertise with people with specific skills that need to come in and help us with that implementation.

That expense hit this quarter and may hit another quarter or two quarters just as we finished that implementation, that hit us both in the professional services line as well as in the temporary helpline.

In addition, we have some hiring fees of just people that we have 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, etcetera to fill out the specialties as well. So these were small items individually in the aggregate.

I am talking about how we closed December around $400,000 to $500,000. Again, small numbers move our needle a lot..

Yes.

And that’s after tax rates, the $400,000 to $500,000?.

Well, those are pre-tax..

Pre-tax. Okay, thanks so much..

Sure..

We will go next to Kevin Steinke with Barrington Research..

Good afternoon.

So it sounds like you are going to continue to be quite aggressive on adding Leadership Consultants and people on the Culture Shaping side, but you also talked about opportunistic hiring on the Search side to fill in certain pockets and you highlighted JCA is one example of that, also adding people through acquisition, so just wondering when you look at the Search side, how many pockets you still see that to fill-in as you rebuild the consultant base either by geography or industry or any other way you would like to characterize it?.

I would say, Kevin, we are a big step up from where we were 3 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 ourselves with regard to that and we want to balance that with where we see opportunities to hire talent that that are attracted to where the 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 2-plus years ago where we had huge gaps. I would say right now, we are approaching where we can be opportunistic. We are going to do that as opposed to where we actually have to go higher..

It’s more, Kevin, the one thing I would add to that conversation is its more quality than quantity. But if you think about the just general needs of the business and we have said this many times in an environment in the Executive Search. And it’s one of the reasons why we believe that portfolio makes sense to continue 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 have – are looking for the right talent 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..

Kevin, I will just add one another 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 or we will make promotions to principles 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. So 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..

Okay. Yes, that’s really helpful commentary.

And Tracy, I think in your prepared comments, you talked about the G&A expense levels maybe being one area where you felt a little bit short, although a lot of that also sign of like it was driven by your own activities to grow the business in terms of making acquisitions and also just the mix shift of the business, the Leadership Consulting where you are using third-party contractors, so I mean is there an opportunity to streamline some of that G&A post these acquisitions or is it just also a function of growing into that expense phase with the acquired businesses or how would you see maybe G&A levels either as on an absolute basis or as a percent of revenue improving going forward?.

Yes. Kevin, I am going to jump in on this just because a little bit more detail, maybe than Tracy would have at his fingertips, but it’s a great question. And it’s something that we will probably be giving you even more clarity to as we get to year end and in the next year because of the mix.

And I think you said it’s embedded in your question, the mix of our business is changing. And some of the nature of the G&A, we are experiencing the changing. I will give you an example.

Most of our G&A, which is non-people in our vocabulary, right now and we may get 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 and most of us fall 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 and that’s been almost the flat expense for a long period of time. The second one is our Professional Services where we engage to help people outside the company to either assist us to do critical things that we need done.

One example on the corporate side obviously is things like audit fees and tax work, etcetera and throughout our various geographies.

But internally, we use Professional Services fees for things like I talked about technology implementation, marketing, support and expense we get 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 and I think really – that really is much more of a cost of sales type of expense, really causing some long 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 have 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 that we around people in it.

And as Tracy mentioned over time, as we scale that business more appropriately, the cost of that leverage support will go down and it will not be a G&A expense or will really it be a cost of services expense. And then the final thing is the travel and entertainment and business development expense.

And 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 and market facing, talking the business, giving knowledge of all – about all three lines of business and having deeper conversation with clients and 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. We are talking about like an increase of about $0.5 million company-wide for a quarter. But – so those types of things that are what’s driving G&A increase.

The other thing I would say is that relative to the closing in of the acquisitions. Lot of the acquisition G&A costs 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 recoup for the earn out and so as we become an acquirer, if we continue to acquire you will still see that be if we go to that many acquisitions that expense will wane over time, it will not be a sustainable expense and then the third thing is there are regular G&A.

For all four acquisitions combined we probably have an aggregate of about just over – just about $1.2 million of combined expense for the four businesses in the quarter and some of that will go away.

You know there are some of the smaller companies were in the process of integrating them now under our platform and they are back office look away but these are not big back offices.

So there is now 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..

Kevin, the reason I highlighted it is when you are a company of our size you obviously have to watch scale and you know small dollars can be big percentages.

So when we see that it’s my way of flagging to you into the boarder investment community that you know we see a number of move with those kind of percentages, we focus on it, we don’t just look at the hard dollar and just specific to scale.

We focus okay how can we make this better and so that’s why I raised it because we wanted to know that we are focused on it and ideally we want to bring that number down..

Okay, yes fair enough. That makes sense.

I guess on the – you know the contractor portion of G&A cost as you said Rich as you scale the business that will diminish or go into cost of services although I guess should we think about that being part of the G&A for at least a few quarters going forward, you know as you are going through this transition and kind of scaling up leadership consulting?.

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, Kevin.

But it certainly going to be there because I don’t think we can hire fast enough and I am not sure we want to hire that fast, I would have the leverage support trail the growth of the business development people 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 cost into the business. So we are trying to balance that with the work that we have and as that business grows, we are going to continue to monitor..

Alright, alright, great.

And then on culture shaping you talked about energy clients having impact on them so you know just wondering I mean is that related to you know oil price fall out and how significant is energy is you know portion of their clients or their revenue for culture shaping?.

In this particular case, it’s more related to 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 was really allowed to do from an authority point of view.

More broadly the energy space whether it be in our industrial area or whether it would be in culture shaping is one that we are keeping a close eye on because of what’s happening to overall energy prices and how that’s neither 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 boardroom and therefore there is an opportunity for a conversation with Heidrick that may not have happened expect for the fact that energy prices dropped and how are they positioned for the future.

So it’s a balance and particular in culture shaping they got hit because of a couple of situations, I would not conclude that’s an overall trend for them more specific to these situations..

Okay, okay fair enough and you know that leads to my next question on culture shaping, is that, you talked about some margin goals for that business in 2017 and 2018, you know margin scaling up over the next couple of years so I guess presumably your – you would be having to assume some decent growth for that business to get to those margins, I don’t know if you want to elaborate on?.

Let me start and I will turn it to Rich.

The most important way to think about culture shaping in 2016, this was a year of invest ment 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 and so there is five new people as we described in the beginning of the year that come into the business.

So there is a certain ramp up time leading to those [indiscernible] in terms of making their impact of the marketplace as well as the impact it comes from the enhanced mentoring and training they are getting from the legacy partners who otherwise would be in the market full time.

And so as the confluence of both of those that’s hitting the margin this year what you see us saying with respect to margins going forward is more of a return to normal as those new talent becomes productivity as and as we believe the overall narrative around culture shaping continues to be strong in the broader world out there.

I will pause here and see Rich would add to that..

No I think, look I think that’s well said.

I think from the standpoint of how the margins improve going forward there is couple of things because you know the construct behind some of the investments we made, we’re 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 tailed 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 and we expect it to get back to close to those types 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 and so that’s the balance we are talking about, Kevin..

Okay, thanks a lot. That makes sense. Thanks for taking my questions..

No problem. Thank you..

We will take a follow-up from Tobey Sommer with SunTrust..

Thanks.

I am curious are the other large and substantial private executive search firms investing similarly into consulting services?.

They are doing it in, and my answer Tobey is really anecdotal right from what we see in the marketplace as opposed to anything that’s happening on the inside but we certainly see where the conversation around executive search is looking to be expanded with regard to once you are in what other advice can be given to client.

We are doing it the way we’ve described. We see others participating in different ways exactly how much that is – is it the same speed, is it at greater speed, is at lesser speed, how are they doing it? Don’t know..

Okay. So I guess maybe for later data. How is Heidrick kind of differentiating itself versus those other substantial competitors if this is being kind of draw out by customers asking for more which make sense. How is your approach creating a differentiated offering versus those…..

I think so one you touched on it which is what we are hearing from clients and when I say what we are hearing, what we are hearing is 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 and search.

But why they have the best and how can we make them better? And in the context we saw during performance, we are looking at the clients both at the individual leader level, at the team around that leader and then in select instances around the entire organization and that is the essence of what accelerating performance is about at the individual talent and organizational level and we have developed a series of tools and we have developed a methodology, which is embedding in that accelerated performance as a whitepaper 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.

And this is why I made the reference that where we are seeing that dialogue with clients, 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 path now is to work through how do we scale that globally in a smart way with respect to what do our talent, what do our clients need and how do we think about the – how do we think about that trade-off of speed and capital..

Thank you very much..

And with no further questions in the queue, I would like to turn the call back over to management for any additional or closing remarks..

Executive Search, Leadership Consulting and Culture Shaping. And what you see in this quarter, but also what you see over the past 9 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 will leave it there and we look forward to speaking with you again shortly. Thanks..

This does conclude today’s conference. We thank you for your participation. You may now disconnect..