Heidrick & Struggles International Inc (HSII) 2013 Q2 法說會逐字稿

Good morning, this is Heidrick & Struggles second-quarter 2013 conference call. This call is being recorded; it may not be reproduced or retransmitted without the Company's consent. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be provided at that time. Now I will turn the call over to Julie Creed, Vice President of Investor Relations and Real Estate. Please go ahead.

Good morning, everyone, and thanks for precipitating in Heidrick & Struggles 2013 second-quarter conference call. Joining me today on today's call is Jory Marino, Interim Chief Executive Officer, and Rich Pehlke, Heidrick & Struggles Chief Financial Officer.

As a reminder, we are referring to supporting slides that are available on our website at Heidrick.com on the IR homepage and we encourage you to follow along or print them. As always we advise you that this call may not be reproduced or retransmitted without our consent.

In today's call will be using terms adjusted EBITDA and adjusted EBITDA margins. 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 on page 3 of our press release and slide 12 in our supporting slides.

We will be making forward-looking statements on today's call 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 are going to be referring to are shown on the bottom right-hand corner of each slide. And now I will turn the call over to you, Jory. Please start on slide 2.

Thanks, Julie, and good morning, everyone, and thank you for joining today's call. As this is my first conference call since being appointed Interim CEO on July 15, and for the benefit of those who may not know me well, I would like to begin today by telling you a little bit about myself.

I bring more than 25 years of search and consulting experience to the role. I was one of the founding partners of Sullivan & Co., a New York-based executive search firm that was acquired by Heidrick & Struggles in 1999. During my tenure with Heidrick & Struggles, I've worked in the financial services practice and have held a number of practice leadership and senior operating roles, including head of the Americas region, since the end of last year where I had responsibility for all business operations in the US, Canada, Mexico and Brazil.

My commitment to this firm, and to the more than 1,400 colleagues we employ worldwide, and to the clients we serve around the world is unwavering. My focus is on moving Heidrick & Struggles forward, fully supporting our vision to build a premier professional services firm focused on serving the leadership needs of the world's top organizations.

Our strategy to build an integrated leadership talent offering is the right one. I Know this first-hand because our clients are asking for more advice on leadership talent and to provide a broader portfolio of talent solutions. And I'm confident our firm can deliver.

Today we reported second-quarter net revenue of $122 million, up 5% from the 2012 second quarter and up 19% compared to our first quarter. The Americas and Asia Pac regions drove this revenue growth, up 11% and 7% respectively year over year. Europe, which continues to operate in a challenging macroeconomic environment, was down 11%.

Our three primary service lines as shown on slide 4 -- Executive Search, Leadership Consulting and Senn Delaney, the culture shaping firm we acquired at the end of last year. The year-over-year increase in net revenue reflected the addition of Senn Delaney and improvement in two of our larger Executive Search practices, financial services and global technology and services.

As you can see on slide 5, second-quarter revenue -- excuse me, second-quarter Executive Search confirmations were up 7% compared to last year's second quarter and increased 10% sequentially compared to the first quarter.

Looking at slide 6, we ended the quarter with 315 consultants in Executive Search and Leadership Consulting. This is down from last year and compared to the first quarter due to a combination of attrition and performance management partially offset by hiring.

We are pleased with the quality of our recruiting this year and the improving productivity of our core consultant base, a priority in all three of our regions. During the first half of 2013 we hired 23 new consultants globally, many of whom were already bringing business to the firm, and we continue to build a strong recruiting pipeline that will allow us to add more consultants to the second half of 2013 and into 2014.

Slide 7 illustrates annualized consultant productivity defined as Executive Search and Leadership Consulting revenue divided by the average number of consultants during the quarter. We are pleased that productivity improved to $1.5 million in the second quarter.

Explained in a slightly different way, in this year's second-quarter an average of 320 consultants produced $117 million of revenue. In last year's second quarter by contrast an average of 350 consultants produced only $116 million of revenue. Overall we believe we have a better performing consultant base today than we did a year ago, which is attributable to increased performance management and our focus on "A" level recruiting.

Turning to slide 8, revenue per search consultant was $109,000 in the second quarter compared to $115,000 in last year's second quarter. However, we believe it is more meaningful to look at this metric on a trailing 12-month basis where it is running at about $113,000, down slightly compared to last year and the first quarter. The decline mostly reflects the mix in confirmations as opposed to anything we are seeing that is fundamentally different in the business today.

Before I turn the call over to Rich who will provide more color on our results, I would like to provide my perspective on the three regions.

The Americas achieved 11% year-over-year growth and 11% sequential growth. Key growth drivers in this region were our Executive Search business and Senn Delaney. In our core business, the financial services and global technology and services practice were the biggest contributors. We've made a lot of progress in this region on a number of fronts since the end of last year and have a lot of momentum on our side.

Asia-Pacific started off a little slow, as we mentioned on our last call, but search confirmations started picking up at the end of the first quarter and have stayed steady above 2012 levels through June. Second-quarter revenue was the highest in seven quarters up 7% year over year and up 27% compared to the first quarter. The growth was broad with more than two-thirds of our offices up year over year.

As already noted, Europe continues to lag. Year over year revenue declined 11%, although compared to the first quarter revenue was improved by 27%. We have a strong leader in place in Europe and have been actively recruiting experience consultants there. In fact, nine of the 23 new hires made through June were in Europe, most of whom were already productive and adding revenue. And that is the key to turning the results in this region around -- more productive consultants.

We feel good about our consultant base and our hiring pipeline and are encouraged about the remainder of 2013. We can assure you that improving Europe's results is one of our key priorities. In fact, I plan to spend a good part of September in this region meeting clients, working with Luis Urbano, the regional leader, and engaging our colleagues in helping to recruit.

With that I'm going to turn it over to Rich, who will provide further detail on the second quarter.

Thanks, Jory, and good morning, everyone. Jory has already provided highlights of the first-quarter results, but I'll add some additional commentary.

Similar to last quarter, the year-over-year comparisons are affected by the inclusion of results for Senn Delaney. Senn Delaney continues to perform as expected. Recall that on our call in May we explained that we were limited in the amount of pre-acquisition deferred revenue that we are able to recognize related to Senn Delaney as a result of purchase accounting. The total amount of this permit difference, or unrecognizable revenue, will be $4.4 million in 2013.

As a result, the $5.4 million of revenue recorded for Senn Delaney in the second quarter would have been $70 million on a standalone basis.

Referring to slides 9 and 10, salaries and employee benefits expense was $83.1 million, up $3.2 million or 4% compared to last year's second quarter. Variable compensation accounted for $2.4 million of the increase, reflecting increases in accruals related to consultant performance. Fixed compensation expense increased $0.8 million. But excluding Senn Delaney fixed compensation expense would have declined $2.6 million primarily due to decreases and guarantees and sign-on bonus expenses, as well as the lower consultant headcount.

Turning to slide 11, general and administrative expenses increased $4.3 million year over year, or 15% to $33.2 million in the second quarter. Of the increase $2.9 million is related to Senn Delaney, which is comprised of their ongoing G&A expense run rate, as well as $1.4 million for intangible asset amortization and another $500,000 associated with the accretion expense of the earnout payment.

Of the remaining $1.4 million increase in G&A it's largely associated with the regional consultant meetings that were held in the Americas and Europe during the second quarter and were not held in the previous year at that time. In addition, we did experience some one-time professional services costs related to the strategic review process the Company undertook.

Now I will refer to slide 12 to 14. Last quarter we introduced adjusted EBITDA and adjusted EBITDA margin discussion for our business. We did this in order to provide you with more meaningful comparative results of our core operations that exclude the non-cash expenses, many of which are specific to the purchase accounting treatment of Senn Delaney.

Our definition of adjusted EBITDA is on slide 12 and page 3 of the press release. Adjusted EBITDA in the 2013 second quarter was $11.9 million resulting in a 9.7% EBITDA margin. For the second quarter of 2012 adjusted EBITDA was $11.2 million also resulting in a 9.7% EBITDA margin.

Moving to slides 15 and 16, we reported net income in the quarter of $1.9 million and diluted earnings per share of $0.11. The effective quarterly tax rate was 61.7% based on full year projected tax rate of approximately 64%. This has increased from the 58% that we anticipated for the full-year tax rate at the end of the first quarter primarily due to updates in the projection and mix of income earned worldwide for 2013.

As a reminder, our effective tax rate is higher than the statutory rate because of losses incurred in certain jurisdictions that we cannot -- that cannot be benefited for tax purposes due to valuation allowances. It's important to remember that our cash effective tax rate is much closer to statutory rates and lives of the tax deferrals I'm referencing do provide us the flexibility for utilization in future periods.

Please turn to slide 17. The cash position remains strong. Cash and cash equivalents at June 30 were $99.7 million. Our cash position net of debt is $61.2 million. We also begin our quarterly repayment process of the debt for the Senn Delaney acquisition on schedule. We expect to continue to build on this cash position throughout the year and, again, we have ample financial flexibility to continue to invest in and grow the business as needed.

While we are pleased with many of the trends and improvements we saw in the second quarter, there is much work left to be done in the second half of the year. As you've seen in our release, and as shown on slide 18, revenue for the first six months of the year is up just 1% compared to the first six month of 2012. Adjusted EBITDA increased 4% and adjusted EBITDA margin improved from 8% to 8.2%.

As in past quarters we provide you the backlog shown on slide 19 and monthly confirmation trends shown on slide 20. While July confirmations aren't final and continue to move on a daily basis, they were impacted by the timing of the Americas regional conference as well as the timing of the Fourth of July holiday in the current year.

As we said in the press release we are forecasting third-quarter net revenue of between $115 million and $125 million. The factors which we base our forecast on include our current backlog, confirmation trends for Executive Search and Leadership Consulting as well as their anticipated fees, the expectations for Senn Delaney, the number of consultants, the current economic climate and stable currency rates.

With that I will turn it back to you, Jory.

Thanks, Rich. The leadership talent industry has changed considerably since I first entered into it more than 25 years ago. We've seen our clients' needs change dramatically and there is no doubt they will continue to evolve. It's our job to stay close to clients and make sure that our service platform aligns with the needs of C-suite and Board level executives. I provided my perspective on the three regions earlier in the call. Now I'll spend a few minutes on our service lines.

Building strength and for Executive Search business is a major priority in the key to our value proposition to clients. By region, our search teams are seeing very big differences in their results. For the first six months of 2013 executive recruiting has grown 6% in the Americas, it has been essentially flat in Asia-Pacific and is down 19% in Europe.

Executive Search, as you know, is the most cyclical of our businesses and it is no surprise that economic conditions in each region support or hinder growth. With that said, we all know what we need to do. We need to have the best people. We need to hire and invest in top level consultant talent all of which we are actively doing across every one of our practices around the world. But we are focused, however, on a few practices where we believe we can make an immediate impact, for example, life sciences and industrial.

Next is Leadership Consulting. We believe that our ability to advise clients across a broader spectrum of leadership issues will ensure our firm's continued long-term growth. Our clients want more and better advice, our solutions today, however, are very customized and in order to serve our clients more effectively we need to be able to deliver more scalable solutions anchored in a defined methodology that is identifiable, repeatable and delivers results. Thus, the main focus in our core Leadership Consulting business will be on assessment, succession planning and top team and Board effectiveness with increasing ability to scale these offerings.

Senn Delaney is a huge arrow in our quiver and a distinct competitive differentiator. The ability to provide culture shaping has a didn't meaningfully to our dialogue with clients and for those consultants who have worked with Senn Delaney, it has added substantial value to their clients. The integration is going well and we are very pleased with the quality of the Senn Delaney team and the interactions we have across both service lines.

Senn Delaney has qualified more than 100 sales leads from Heidrick & Struggles consultants which has led to more than 38 opportunities. As well, Senn Delaney's relationships in the C suite have led to at least six opportunities for Heidrick & Struggles. Working together we are delivering more value to our clients which in turn will be accretive to our Company over time.

Our focus going forward will be to continue to execute against our strategy to achieve more profitable growth. We have a solid service platform, worldwide reach and outstanding consulting teams. But we can do better.

We are already seeing the results of our efforts to upgrade the quality of our consultant base as evidenced by productivity and we are committed to creating an environment that supports our people and offers them the best opportunity for success. We intend to be the employer of choice by driving a high-performing team culture where people want to work.

In our view, our strategy is the right one; we now simply need to execute. Serving our clients by delivering superior results will generate stronger performance for our Company and enhance shareholder value. I have the utmost respect and confidence in my colleagues in Chicago and around the world. Together, we will move Heidrick & Struggles forward.

Operator, at this time, Rich and I would be happy to take any questions.

(Operator Instructions). Tobey Sommer, SunTrust.

Hi, this is Frank in for Toby. I wanted to ask a little bit more about the financial services sector. Can you give us some color on what you are seeing there in terms of what outlook is in guidance and maybe a little bit of color on the backlog?

Yes, I think there are a couple of things there. First of all, as you know, I have practiced my entire search career in financial services so I have a pretty good handle on the ebbs and flows of the business. No surprise the three years preceding 2013 were tough; however, what we've seen is a solidification actually in all three regions in financial services with the most notable uplift in the Americas.

There has been growth in our consumer and commercial banking practices, there has been growth in our -- excuse me, in our core Investment Banking process. And we've seen tremendous uplift in our infrastructure work that we do in financial services particularly around risk management and compliance.

So the legal risk compliance function, our commercial and consumer banking business and our core Investment Banking business has actually all seen an uplift. Layering onto that has been significant growth in wealth and asset management. So across all three regions that has been pretty much the story.

Okay, great. That's helpful. And then if we look at the expense side in terms of compensation expense, where do you see that going in terms of the mix of variable versus fixed or do you have any goals further out in terms of what you would like to see the movement there be?

Sure, Frank, this is Rich. Yes, from a goal perspective, as you know, we try and manage overall compensation expense as a percentage of revenue. We look to try and keep that in the mid to high 60s overall as a business. A lot of times we can't control that on an interim basis or as a lot will depend upon individual consulting productivity.

Our model is such that fixed compensation rolls into variable compensation or discretionary compensation as the year progresses and as our consultants move along the structure of the tiers. And so, it's the expectation really that fixed compensation, especially from a producer standpoint, really rolls into a net variable compensation, becomes an offset, if you will, of the total compensation equation. And that continues to build as the year goes on and depends upon the individual productivity.

The encouraging thing that we reported in the second quarter is that, again, we have been able to make additional compensation accruals related to consultant performance, which reflects the increase in productivity. We are not exactly where we need to be as an overall company in terms of individual productivity, we would like to see it go a little higher. And there certainly some people that are well above that average range and some people that still need to pull up the bootstraps a little bit. But overall we are pleased in the direction it is going.

All right, great. Thank you very much.

Tim McHugh, William Blair.

Hi, this is Stephen Sheldon in for Tim. I first wanted to touch on turnover and kind of just see how it trended over the quarter. And then more specifically, you've seen two quarters of fairly strong sequential headcount declines in the Americas. Is there anything in particular that is going on there? Is it more voluntary or involuntary? Any color there would be appreciated.

Thanks, Steve, this is Jory. Look, it has been both, right. In the second quarter we had consultant turnover of 23, 14 of which were voluntary and nine of which were involuntary. I don't think there's any particular drivers of turnover in the second quarter other than the fact that we have been paying a lot more attention to performance management and setting some fairly clear guidelines as to what we expect from our consultant base.

And as anything else, we are also inspecting what we expect in working with our teams around the globe to ensure that our consultant population are achieving their objectives. And where they can't we've made the tough calls. We always have turnover around bonus time so you saw a little bit of that and I think as our business stabilizes on a whole host of levels we will see less turnover in our go forward basis.

I think the other comment I would make would be a light has gotten shined pretty heavily on turnover because historically we haven't recruited as aggressively and as effectively as we can and we put a big push throughout the first -- throughout the past four months starting back in February around the consultant recruiting and I think we are starting to see the results of that as well. So a more robust business, a more stable environment, economic environment combined with better practices in managing and leading our business I think will minimize the turnover on a go-forward basis.

Okay. And then one numbers question. If you look at Senn Delaney on a pro forma or year-over-year basis what was the growth rate there?

I don't really have that directly, but it probably showed modest growth on a year-over-year basis. Again, that is a business that when we acquired it was ranging in the high 20s in terms of annual revenue and we gave indication that we expected it to be about a $30 million business for this year. The important thing is the mix of revenue, it is a high-margin business, it continues to perform as expected.

As they take their clients into longer-term relationships the nature of their business changes because they move really from a consultative solution to a technological solution, which is what builds the higher margin. So the key thing there is the sustainability of both levels of business and we are seeing the right trends in both cases.

Okay, great, thanks.

(Operator Instructions). Kevin Steinke, Barrington Research.

I wanted to just follow up on the consultant headcount, was lower than my expectations but productivity quite a bit ahead and you referenced performance management a few times. And so, is that something that you really stepped up in the second quarter relative to what you had been doing and is that something you expect to continue going forward?

So, the answer is yes and yes. And it really began in the first quarter with my employment as regional leader of the Americas, Luis Urbano's appointment as regional leader of Europe and Steve Mullinjer in his role has historically done a very good job of performance management.

We really work with all of the consulting teams on establishing threshold levels for each level within the Company -- partners, principles, etc. And we set that bar, we clearly communicated that to all of our consultants worldwide and we work collaboratively with our region leaders, our office leaders and our practice leaders to ensure that we were monitoring the performance of the consultant base.

The goal, of course, is to raise productivity across the platform and we'll talk a little bit more about that later. But fundamentally there has been a renewed focus and an increased focus on managing our population more effectively and as opposed to episodically as we may have done in the past.

Okay, great. So this level of about $1.5 million per consultant, is that something that you believe is sustainable?

We would like to see this as sustainable and frankly over time we would like to raise it. When you think about what our target level of business is and where we want to operate in the C suite, it is more appropriate that our productivity be at this level or above over a sustainable long-term period.

Now some of that will depend upon mix and which region of the world may be is contributing a little bit more than others. As you well know from following as for a while, the productivity of an Asia Pac consultant or a European consultant is lower than an America's consultant. But the Americas represents well over right now -- probably a little bit over 50% in of our business, it is are stronger region and the productivity is even higher there.

And as I mentioned earlier, some of our more successful consultants have productivity that is well above this. So it is all about the right mix of talent, it's all about helping our people be successful, engaged and properly utilized and serving clients. And at the end of the day the rest of it takes care of itself.

Okay, and this might be to find of a point, but in terms of the sequential improvement you did see in consultant productivity, is there any way to kind of attribute a portion of that to the demand environment versus your own performance management initiatives?

Kevin, this is Jory. It has been a little of both. We do need -- we thankfully have a more benign economy in the Americas. We still have a challenging economy in Europe and sort of a flat economy in Asia Pac. So, but a more benign economy and the Americas representing better than 50% of our firm's aggregate revenue, we have had that (technical difficulty) to help along productivity.

But also we put a pretty big stake in the ground on what we expect in terms of performance across the population. So when you put the economy and better performance management and frankly better leadership and management across our businesses, I think you will -- that has all been contributing factors to the aggregate.

I'll make one other point to sort of support that, for those of you old enough on the phone to have been a student of Peter Drucker, you know that bottom line on that is people want to come to work to do good and what you have to do is to show them the way and lead the way and then you can increase the performance as well.

Okay, thanks. Now on the search confirmations, your slide shows -- estimated a bit of a decline in confirmations year over year in July. But you also cited some one-time factors that might have affected that. Do you feel like the demand environment continues to be stronger and that you might see a pickup in confirmations as you move throughout the quarter?

I think -- the reason I mentioned that is to make sure that we don't over caution on that but clearly that could change on a daily basis. We have seen a lot of -- as we've said over the last probably 12 to 18 months, a lot of volatility and monthly confirmations, decisions sometimes take a little bit longer and by the time things finally come through.

So our guidance for the quarter reflects our expectations where we think we are going to be -- get a little bit of seasonality, you get a little bit of just nuances of things like the Americas region immediately coming right before the July 4 holiday, which impacted maybe the timing of when some deals get closed.

So I don't think it reflects any kind of a change in long-term trend. I mean we are going to be very anxious to see how the summer season kind of comes through in the Q3 results and we are anticipating -- we are targeting to try and finish strong at the balance of the year.

Okay, just shifting gears a little bit. On the CEO search, I don't know if you would be able to offer any comments on perhaps the profile of a permanent CEO that the Board would be looking for and if that person necessarily would have to have an Executive Search background?

Look, we have read the press releases from our Board and we know that this is a Board driven event. I suspect that they are in the process of formulating exactly the answer to your question. But beyond that we have no comment.

Okay. Just one last housekeeping question in terms of the numbers, do you have the breakout of Senn Delaney contribution to each of the geographic segments?

We do, it is primarily the US I think for the six months it's -- it was about $4.2 million of contribution for the quarter, right?

Yes, in the Americas.

In the Americas, and it was about 4.4 totally for the quarter I think. So a slight contribution to Europe. It's about 90%, 95% US-based.

Okay, great. Well -- sorry, is there anything else? All right, well that is all I had for my questions.

I can get back to you with the exact number, Kevin.

Yes, we will get you the exact number.

I just don't have them right in front of me.

Yes, no problem. All right, thanks for answering my questions.

Randy Reece, Avondale Partners.

First of all, if I look at the productivity from the Americas, how much does that reflect the beginning consultant level entering the quarter versus the level exiting the quarter?

We use an average number throughout the quarter.

Okay, did the change in headcount occur kind of continuously through the quarter or was it (multiple speakers)?

Yes.

Or was it a certain time?

It's pretty continuous.

Can you give any insight as to at what point possibly hiring might overwhelm the amount of pairing that you are doing?

Could you repeat that question because I didn't --.

I caught the question; I will repeat it and, Randy, you were a little bit (technical difficulty) here, so I will repeat it. But I think the question was at what point do we think hiring will overtake kind of the negative attrition in the headcount. And I guess the answer I would offer there is we are pretty aggressively targeting the hiring and development process to build our consultant base.

One of the most important things we can do is to try and (technical difficulty) Randy, I think we are getting a lot of feedback from your phone. If you can maybe put it on mute. All right. One of the most important things we can do as we go through the hiring process and manage our consultant base, there are really two aspects of it.

Number one is obviously to hire experienced consultants and fill out areas of need, as Jory indicated, whether it be by practice or by region. The second is the full utilization and development of our current consultants and associate base. Because one of the things that we are seeing is that a large number of our most productive consultants are very busy.

And as we support them appropriately and are able to put more leverage resources against their work we can increase productivity, increase contribution to the firm and all boats rise as well. So it is going to be a combination of that.

At the end of the day though the key to us reaching our overall headcount target will be stemming the attrition, developing and hiring good people to serve our clients and we are going to continue to do that on a constant basis. That effort never ends on a year-over-year basis.

Yes, the only other thing I would add to that Randy, which really gives you a little context, is year to date our turnover was approximately 9.2%. Clearly we want to keep that number under 10% and aspirationally we have a goal of 8% that we established recently.

So if you do the math on all of that there is a point in the curve where our hiring, because we have a very robust pipeline across all of our regions and it is -- historically we have hired in the first half of the year; we declared this year that we're going to be hiring throughout the year so that we don't have gaps in our ramp up.

So the answer to that question is we keep turnovers to a minimum. We're going to do that through better engagement of our teams around the globe, more connectivity. We certainly will anticipate connecting our regions more aggressively than we've had in the past, so more cross-border collaboration. And utilizing our associate base in a much more effective way.

So you put all of that into the mix -- there is no silver bullet there, but fundamentally all those levers that we will pull will make this a better place to work and a more fun place to work and a more engaging place to work and we believe our consultants will thus have a great stick rate. Is that helpful, Randy?

Yes, thank you.

Tobey Sommer, SunTrust.

Hi, this is Frank. Just had a quick follow-up. I wanted to ask if you have seen any impact of the June 3 announcement of potential strategic alternatives and has been impacted confirmations in your view at all?

Not at all. No impact whatsoever. As I have commented inside the Company, we are focused on our clients, our clients are focused on us, they enjoy the work that we do with them and we've seen absolutely zero degradation. Obviously there were questions as to why or why not, but it had no impact on confirmations at all.

Okay. And to the extent that you can comment -- can you give us any color on that situation and where you stand?

Well, as you may recall from the release a couple weeks ago regarding Jory's appointment, that process has been pretty much closed down. The Board believes the best course for the Company right now is to stay independent as a public company and that is what we are going to do.

All right, great. Thank you very much.

Josh Vogel, Sidoti & Company.

Can you please talk about the margin profile of the consulting work versus executive recruiting? And then also remind us why LCS was soft in Q1 and what drove the sequential improvement?

Sure, the margin profile that we target in the consulting base is twofold. Number one, there is one element of our consultative aspect that feeds very closely to search where some of our mapping and search profile and talent profile work can come either through the Executive Search ranks or the Leadership Consulting ranks. And that is not necessarily an overly high-margin business, but it is more additive to the prospect of doing individual search assignments.

When we get pure consultative assignments, we try and target an operating margin in excess of 20%. It tends to be much more of a time and materials and capability and delivery aspect of the business. And it is a business that, while we don't intend to scale it and an excessive way relative to the size of our Executive Search business, we do need, as Jory pointed out in his comments, to become more scalable in our offerings.

And when we target things like assessment, succession planning and team and Board effectiveness those opportunities -- and we've said this many times and on many calls -- we are going to continue to invest in methodologies and IP and business models that can offer us the availability to scale it across a broader base of consultants and people so that we can provide more client service in that regard and that is how you improve the marginal profitability.

That target marginal profitability of LC is not quite at the level of say a Senn Delaney, which is more like a 30% offering because that uses more technology in the longer-term.

Okay, that's helpful. And with regard to the sequential improvement. did that come mostly from the Americas?

Yes, the big lift was from the Americas and the sequential improvement was 11% if I recall the number correctly in the Americas in terms of growth. That included Senn Delaney, so in our core business I believe it was 6% sequential growth.

And Asia-Pacific also had some sequential growth I believe in LC as well.

They all three -- and leadership (multiple speakers) all three --.

I'm sorry, was asking the question more broadly as it related to the Executive Search business.

And LC was across all three regions.

All three regions.

Okay, great. And I'm just trying to get a better handle on quarter-to-quarter trends. Were there any costs or regional margin pressures that hit up in Q2 that you don't expect to see in Q3?

Yes, look, I think we took a little more G&A pressure than I would like in Q2 and we are going to take a hard look at that. We did have some onetime costs as I indicated both from the travel perspective and the meeting expense perspective of our regional conferences, which last year appeared in Q3 as our global partners meeting.

And then we also had some professional services expenses in Q2 which were largely legal in nature relative to the strategic process. So, there were a few things that I would like to -- I would like to see go better from a trend perspective and we are going to address that pretty directly. Again, it is nothing I concerned about longer-term, but you can't ever let your guard down. And so, I think we have just got to be a little tighter and we are taking a look at everything across the board.

Okay, thank you.

(Operator Instructions). Ty Govatos, TG Research.

A couple of questions, not to belabor the point on the labor cost, but it would seem that a more focused approach, from what you are saying, it would pay you to increase associate cost and probably offset some of that by getting rid of a low producer consultant. But does it also imply that sign-up bonuses might start to go up?

And I guess for you, Rich, second-half bonus accruals, percentage of net revenues close to the first-half average of about 15% or might that be low?

I don't know the percentage offhand, Ty, but I mean I would expect that the bonus accrual expense will continue to build. And again, how I want that is kind of an overall percentage of revenue. Because we do have some discretion on that, but at the end of the day we are going to -- you are going to see it probably go into the 15 to 20 -- probably somewhere in that 15% to 20% range I would say is a fair range.

As for your first point, you are spot on on a couple of things except for the sign-on expense, so let me explain that. Number one, one of the things we are trying to do is migrate towards a model where we -- it is taking more work at the associate and execution level to fulfill searches and we have talked about this for some time.

And so, we have seen associate cost and support costs go up a bit and we've got to leverage that as best we can and make sure we are utilizing that. We have spent a lot of time on capacity reports, utilization reports to make sure that we are engaging, to Jory's point, all our people productively and where the client work is.

And so, I think that has longer-term implications on our business model. As we think about the rate of hiring to get up to our target consultant headcount, for example, if we can continue to raise productivity in the way that we did in the second quarter it is not as important in the pace at which we increase the consultant base but it is very important in terms of the quality of that consultant base as well as the execution polity behind that consultant base. So we are taking a very hard look at it and your point is spot on.

The good news on the hiring front is I think we have done a much more diligent job of making intelligent hires both in terms of the quality of people we brought in and the way we brought them in; much more production oriented in terms of structuring any deals. The wall (technical difficulty) room and just given carte blanche in terms of the huge sign-on bonuses. And I think you have seen that discipline now for well over 12 to 18 months. And it has been a better result for the Company.

And Jory pointed it out, of the people that we've hired in Europe, some of our best-performing consultants in the short-term have been new hires. So the quality of the effort has been much better, our people are doing a better job. We'd just like to see it intensify a little bit better. And so, it's going to be a combination of all of those things.

Okay, can I have a follow-up on some numbers? You said the regional consultant meetings were $1.4 million in the quarter?

No, I think what we said is that a big part of the -- the digital part of the G&A increases related to the meetings. There are a lot of in and outs, but a big part of the additional increase in G&A was related to those.

But it certainly (technical difficulty) $1 million to $2 million of expense in the quarter.

Say that again, $1 million to $2 million?

Yes, it is probably and the range of $1 million to $2 million of expense in the quarter.

For the --.

For two of the meetings, yes.

Would you take a stab at the professional fees?

The professional fees I would say were probably less than $1 million in aggregate.

And that wasn't all related to the --.

It wasn't all related to it, but a good portion of the increase related to the strategic process itself it was less than $1 million.

Okay, thanks. That's helpful.

Is that it?

That is it. I will turn it back to Jory for any additional or closing remarks.

So thank you very much for taking the time to be on this call today. If there are any follow-up questions feel free to direct them to Julie, Rich or myself. And we look forward to the next quarter.

Have a great (technical difficulty), guys, thanks.

Thank you very much. And that does conclude our conference for today. I would like to thank everyone for your participation and you may now disconnect.