Korn Ferry (KFY) 2002 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the Korn/Ferry International. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

  • As a reminder, this conference is being recorded.

  • I would now like to turn the conference over to our host Vice President of Investor Relations, Mr. Spencer Davis. Please go ahead.

  • - Vice President Investor Relations

  • Thank you operator and good morning to all of our listeners and welcome to our investor conference call following this morning's announcement of our third quarter's results and the outlook for Q4 results. With me this morning is Paul Reilly, Chief Executive Officer and Don Jordan, Interim Chief Financial Officer.

  • Before I turn the call over to Paul first let me read our cautionary statement to investors. Certain matters to be discussed during this conference call will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that such expectations will be attained. Participants on this call are cautioned to consider the risk related to our assumptions and expectations and not to place undue reliance on such forward-looking statements.

  • With that I'll turn the call over to Paul, who will discuss the quarter just passed and what's ahead. Paul.

  • - Chief Executive Officer

  • Thank you, Spencer. Good morning and thank you all for joining us.

  • This morning I'm going to recap the highlights of our fiscal third quarter, talk a bit about some major regional - major recent operational developments then touch on how we see the rest of the calendar year unfolding. If I were to sum up the state of the human capital industry over the past nine months, I'd say that things had gone from bad to worse, to stabilizing to slightly better. Let me give some historical perspective to this most recent quarter.

  • After three years of unprecedented growth, our business began softening in November of 2000 then dropped dramatically at the start of 2001. Demand was actually just beginning to firm at the end of last Summer then September 11 hit and the market began dropping precipitously again. The good news is that we have seen the worse in North America and are experiencing real stabilization of the market and a slight upward trend in the U.S.

  • I am pleased to tell you that January was our best month this fiscal year in North America and our moving average of confirmations in the U.S. have been trending upward.

  • The news in the U.S. is encouraging but it's still a varied market globally. Europe shows continued softening and appears to be lagging the U.S. mark by about six months. So they are not seeing any recovery yet.

  • Asia substantially leveled off and has been stable. And has held up relatively well given the global market conditions.

  • I'd like to share with your our response to this difficult market, and detail the steps we've taken to lower costs. Keep our best producers and position ourselves for maximum growth when the market comes back fully.

  • To begin with, our core assets is our legion of world class consultants. And we are committed to protecting this asset. In order to keep high producers during this downturn, last August we put in a place, a bonus protection plan to make sure the best producers were compensated despite the economic downturn.

  • We made this commitment with - in tandem with our workforce reduction in February. And in executing a major restructuring in August 2001 that totally resulted in a 30 percent global workforce reduction. The closing of our job direct operations, and the consolidation of our back office functions.

  • We have really been the first to take serious cost cuts. And we have been ahead of the in the industry in reducing our costs, with our first reductions taking place over a year go. As a result of these actions, taken in February and August of 2001, we have eliminated roughly 100,000 - I'm sorry - $100 million in annual operating expense. And put in what we felt was the firm in a strong position to benefit from the economic rebound.

  • When we cut our operations in August, we built a surge capacity about 20 percent with anticipation that the market might rebound in 2002. Since that has not happened, we are once again reducing our cost structure.

  • Our revenue for the quarter if off 41 percent year-over-year and down 14 percent sequentially from the second quarter. Our loss per share for Q3 is 19 cents per share, which is worse than expected, due primarily to four reasons.

  • First, demand in Europe fell sharply in the second quarter. And while we are downsizing operations there, it was virtually impossible to reduce costs quickly enough to offset the drop in revenue due to social charges.

  • Last month we began to further reduce our operations, and we expect to cut our European workforce by approximately 15 percent. These cuts are incremental to those announced last August. And are being made in both Futurestep and Korn/Ferry.

  • Second, we see an ongoing weak demand in the middle market which continue to negatively impact Futurestep's revenue in North America and Europe.

  • Third, we had charges of just over $1 million hit our book this quarter relating to the closing of job direct.

  • Finally we had an additional tax provision, which I'll let Don Jordan give you more details on later.

  • Let me just talk now about our near-term outlook and what we are doing and have done to combat these difficult conditions.

  • To begin with, last week, we announced that we had successfully re-negotiated our credit facility with Bank of America, which provides us adequate liquidity to operate during this down market. We have to continue to accrue a bonus plan to pay our best producers.

  • We have accrued approximately 45 million, or roughly 12 percent of revenue. This compares with 105 million last year, which is roughly 19 percent of our revenue.

  • This year's bonus program is skewed to retain our highest and largest producers.

  • We also recently offered an options swap program to our employees as a long-term incentive program.

  • As noted in our last filing last month, this is a non-diluted program that is intended to keep our major revenue generators. I mentioned earlier we are downsizing our European operations.

  • We have also put in place other cost reduction measures, such as elimination of non-client related travel, reduction of internal meetings and elimination of corporate staff bonuses. Our global operating committee is meeting this week to further focus on gaining market share in the short term, and simultaneously reducing our corporate and regional cost structure to size it for our current run rate.

  • These reductions will further enhance our margins in the future.

  • At Futurestep, we brought in Bob McNabb in December to revitalize our North America operations.

  • Bob was previously the CEO of Corestaff and on the board of Hotjobs. And he knows this space intimately.

  • He has already begun to have an impact, as Futurestep saw an increase in confirmations in February, even as Bob continued to cut costs within the organization.

  • The comment I'll make here, is that if you think the executive search business has been tough, the middle

  • management business has been far worse in this economic downturn.

  • This is a very difficult market segment right now; however, I am confident that Bob is the right leader for North America.

  • In December, I rolled out a long-term strategy of establishing Korn/Ferry as a leading provider of executive human capital services.

  • Our goal is to build multiple large accounts, where we provide a variety of human capital products and services, and I'm pleased to say we are making progress even in this down market.

  • Last week in London we kicked off a new training program called Enterprise Selling Process to our top global account managers.

  • The session focused on state-of-the-art customer relationship management, cross-selling and building systems for global account coordination.

  • This training represents one of the core building blocks of our new strategy, and will be rolled out to all global account managers in the firm.

  • We have also established a new organizational structure for our global markets people. We have identified the key sectors where we believe have the greatest potential that lies for these global accounts, which are financial services, health care, consumer, industrial and technology.

  • We also formally established a CEO and a board practice, which is really the core of our brand.

  • Within these groups we have established our leadership teams, created account managers and have begun training. I am confident that these global accounts will be a key long-term driver of revenue and profitability. As part of our December rollout we named

  • as president of our management assessment business and Gary has building a global organization to drive that business.

  • The results have been impressive and we have signed 20 new management assessment contracts in the past three months. The great news about management assessment is that in addition to the fees it generates, it almost always brings in additional searches. As part of the expansion of the management assessment, we announced our formal entry into the executive coaching business through an alliance with Dr.

  • , who has assembled a global alliance of executive coaching professionals. Dr.

  • is president of

  • , a Nasdaq company and is internationally recognized in the coaching field.

  • We will be offering executive coaching in conjunction with our strategic management assessment, but our focus is on our core business, executive search, which drives our revenue. We had a very positive development in January when the U.S. Department of Transportation hired us to find senior security directors for more than 80 U.S. airport facilities. With this multi-million dollar contract it was a nice boost for our U.S. operations.

  • I know and I've heard from some of you that there has been discussion about consultant turnover. We have had some turnover, but I want to point out that some of these people were asked to leave, some left because they did not get jobs that they'd hoped for in our new structure and some were wooed by our competitors. In term of the impact of the turnover at Korn/Ferry, if you run the numbers, you'll see that among our top 100 fee earners in 2001 and 2002, we lost 10 last fiscal year and only six so far in this current fiscal year.

  • This is well within industry turnover standards and is actually fairly low compared to our history and because we have also been doing selective hiring, the revenue impact should be negligible. Additionally, we have engaged

  • to design a new compensation plan for the next fiscal year and our goal is to develop a plan that will drive business, incentivize growth, retain top performers and reward shareholders. Three weeks ago "The Wall Street Journal" ran a table showing the impact the recession has had on the executive search industry in the U.S.

  • While the news was hardly encouraging, every major firm showed double digit decreases in revenue last calendar year. The news for our shareholders was relatively positive. Korn/Ferry had the lowest reported decline among the big five major firms that the journal profiles.

  • This would indicate that we are taking market share which is not surprising, because of the strength of the brand, the investments we have made in technology. And the depth and breadth of our consultant, it stands to reason that we would out perform the competition even in a tough market.

  • It is worthwhile to note that we gained market share during the last two major downturns.

  • I had a chance to attend the World Economic Forum in New York last month, and to talk with money CEO's of global companies. I also had a chance to sit down the gathering of 25 of the top human resource officers in the Fortune 100 companies last month.

  • The message I received from both groups was strikingly similar. The essence of the message is that innovative companies are looking for long-term partners to help them solve their human capital issues. While there's a surplus of candidates in the marketplace right now, there is still a shortage of what they term, top talent.

  • Identifying, assessing and acquiring, motivating and maintaining that talent will be the growth industry for many years to come. The endorsement of our direction and strategy was overwhelming.

  • But we are very focussed on the short-term. The short-term outlook for this industry is still tough. The good news is that North America is trending upwards due to the recovering demand in the U.S. And make no mistake, the executive search business in the U.S. is the key driver of our revenue and our profits.

  • This is tempered slightly by the difficulties in Latin America, particularly in Argentina and Brazil. Europe has weakened and we expect to see continued decreases in our revenue from the Europeans operations for the short-term.

  • While we are further reducing cost, it takes time for those cost reductions to hit the bottom line. We are anticipating a more robust economic rebound towards the end of the calendar year, but we're not banking on it. And we will continue to tighten the lid on our costs.

  • We will, however, continue to build for the future. And we have put in place a strategic plan that will distance Korn/Ferry from the competition. And ensure our leadership position.

  • Our challenge for the long-term is to maintain and build upon our leadership and executive search, which is the driver of our business. But we must also identify and develop multiple products and services within the human capital sector that our clients need. And know which we can provide through the Korn/Ferry teams and relationships that are established around the globe.

  • With the quality of our consultants, the value of our brand name, and with the processes and structure that we are now putting place, our business can and will grow dramatically and profitably.

  • Particularly when the global economy regains its strengths, as it inevitably will.

  • I see no reason why we cannot return to historic margins once this recovery begins.

  • In the meantime, we will monitor our cash flow, reduce operating costs and protect our best producers. I am confident that we can continue to be a leader in market share growth, and at the same time reduce our overhead structure.

  • I want to thank all of our shareholders and our employees for sticking with us through this downturn.

  • Executive search is fundamentally a sound business, and we all know that it generates healthy returns and strong margins during normal economic times. We have significantly lowered our cost structure, and it is clear that we will reap the benefit of these costs once demand normalizes.

  • I'd now like to turn things over to Don Jordan to give an overview of the financial results for the quarter - Don.

  • Thank you, Paul.

  • Good morning, and thank you for joining us.

  • Consolidated revenues for the third quarter fiscal year 2002 were 93 million, down approximately 41 percent, compared to the same order prior year, and down 14 percent sequentially.

  • This revenue decline affected all business units and all geographies. This continued global revenue softening was due to the worldwide recession, which was initially felt in the U.S. and has also affected Europe and Asia.

  • Revenues for this first nine months were 317 million, compared to 504 million for the same period prior year. Down approximately 37 percent, most predominantly in the U.S.

  • At this time, in terms of outlook guidance, although we see some indications of improving or stabilizing trends, additional economic impacts in Europe and Asia and the continuing global economic uncertainty continue to great a volatile forecast environment. As such, we believe quarter four revenues are likely to be in line with the third quarter.

  • The consolidated net loss for the third quarter was approximately 7.3 million, compared with net income of 6.9 million for the same quarter prior year. Loss per share on a fully diluted basis was 19 cents for the third quarter, and was comprised of 14 cents for core executive search, four cents for Futurestep and a remaining 1 cent for lagging shutdown costs related to JobDirect.

  • EPS for the prior year third quarter was earnings of 18 cents per share and the loss per share for the prior sequential quarter, excluding the restructuring charge, was equivalent to a loss of four cents per share.

  • The decrease from the prior year third quarter and the sequential prior quarter was due to lower revenue partially offset by cost savings realized through our restructuring initiatives.

  • Additionally, there were three important actions, which also affected these results. First the company recorded a tax provision in the current quarter of 2.6 million or seven cents per share, which was comprised of tax provisions relating the U.S. and certain profitable international operations, which could not be offset by losses elsewhere and permanent differences deemed not deductible for tax purposes.

  • Secondly, the prior sequential quarter was impacted positively by five cents per share due to the reversal of the company match of 401(k) contributions from the prior year and first quarter of 2002. Thirdly, the company adopted FASB 142 for goodwill this fiscal year, which impacted current year quarterly results positively by eight cents per share. That's compared to the prior year respective quarters.

  • For EPS guidance purposes based upon the flat revenue forecast for the fourth quarter and giving effect to the Q4 downsizing efforts in Europe, which will result in acute quarter four charge of approximately five million, we are forecasting a Q4 2002 EPS loss in the mid-20s comprised of 10 cents to 14 cents loss per share from operations and approximately 13 cents loss per share for the year of downsizing.

  • The balance sheet at the of Q3 fiscal year 2002 reflects 48 million of cash borrowings against our credit line at Bank of America and approximately 58 million of U.S. and foreign cash balances. The net account receivable balance at the end of Q3 was approximately 60 million and the capital expenditures in the quarter were .9 million.

  • As we announced last week, we reached agreement with Bank of America on a restructured credit facility, which amends our current agreement and provides Korn/Ferry a credit facility of up to 45 million to November 2002. The 45 million includes approximately six million of standby letters of credit and the outstanding cash borrowings of 48 million at the end of the quarter has been reduced to approximately 38 - 39 million currently.

  • Based upon this new agreement, we believe we have sufficient liquidity to satisfy our operating requirements to November of 2002.

  • Now I'll review the business units in detail starting with our core business and executive search. Revenues for executive search for this third quarter were 84 million and 279 million year-to-date. This compares to 135 million and 437 million for the respective prior year period, a decline of approximately 38 percent and 36 percent respectively.

  • Although the U.S. region had the most significant decrease of 40 percent as compared to the prior year comparable quarter both Europe and Asia Pacific were down 37 percent and 33 percent respectively and Latin America was down 29 percent. On a sequential quarterly basis, third quarter revenues were down 13 percent as compared to the second quarter overall geographies.

  • Third quarter EBITDA margins for executive search were approximately 5.6 percent compared to nearly 21 percent for the same quarter prior year. And we're also down compared to 10.1 percent, excluding restructuring charges for the prior sequential quarter.

  • These reductions are primarily due to the respective revenue loss.

  • Operating profits for Q3 were 1.5 million compared with 22.9 million for the prior year comparable quarter. Operating performance also results in losses in Europe of 4.1 million.

  • The number of executive search consultants at quarter end was 483, a reduction of 47 for the prior quarter , and down 97 from the prior year comparable quarter. Average fees per engagement decreased three to four percent both sequentially and year on year. And the number of engagements and revenue per consultant have decreased over 30 percent year-on-year with all regions effected.

  • As evidenced by these metrics our performance results were heavily volume driven, and the fee pricing remained relatively constant.

  • FutuerStep revenues for the third quarter were 9.7 million compared to prior year comparable quarter of 21.1 million, and 12.3 million in Q2 of this fiscal year. On a year-to-date basis, Futurestep revenues were 36.3 million compared to 63.8 million for the same period prior year, lower by approximately 43 percent.

  • This revenue decline was largely due to the U.S. economy as all ready discussed with an additional erosion in Europe. Despite the significant revenue erosion, operating losses were approximately 3.1 million in the third quarter compared with over 4.6 million for the prior year quarter. And 4.1 million, excluding restructuring charges for Q2 this fiscal year.

  • The reduction in losses despite the revenue erosion is indicative of the cost savings we have realized from the restructuring initiative which were designed to align the cost structure to a reduced revenue level.

  • The overall performance of the company is largely dependent on the health of the global economy. We have been proactive in managing our cost structure and minimizing our cash burn rate. And have made substantial cost savings overall.

  • Once the economy begins to show strong signs of recovery, we believe we will in a position to profitably benefit from the demand for our services.

  • Those conclude management's prepared remarks. And I'll now turn the call back to Spencer. Thank you.

  • - Chief Executive Officer

  • OK. Thanks, Don. I'll now toss - turn the call over the operator so we can begin to take your questions.

  • .

  • Operator

  • Thank you. Ladies and gentlemen, if you wish to ask a question, please press one on your touch-tone phone.

  • You will hear a tone indicating that you've been placed into queue. And you may remove yourself from queue at any time by pressing the pound key. If you are on a speakerphone, please pick up your handset before pressing the number.

  • And our first question will come from the line of

  • , please go ahead.

  • Good morning, this is

  • for

  • .

  • I was wondering - I was interested to hear how things improved in January.

  • I was wondering if you could perhaps also discuss what you saw in February. And I have a follow-up question - thanks.

  • - Chief Executive Officer

  • Well I think that in January we had a record number of commitments, which are signed contracts. Really, our biggest month globally, but particularly in the U.S., where we had a huge volume of contracts.

  • The first couple weeks of February were a little slower. Not unusual in the close of quarter.

  • But then we had a big week - one of our biggest weeks probably for the fiscal year. So I'd say that February is indicative that we would be on our forecast to North America.

  • But again, if you talk to the consultants, activity is up everywhere across the board.

  • OK, thanks.

  • That's interesting.

  • And then, I guess, if you could also

  • if you have the number there - if you could give me your cash flow from operations, and perhaps also your current accrued compensation balance.

  • The free cash flow for the quarter?

  • Yes, please.

  • It was about 2 million. That's after restructuring payments, which would be in that number.

  • OK.

  • And the accrued compensation balance?

  • - Chief Executive Officer

  • Pardon me?

  • Your accrued compensation balance?

  • Yes, the accrued bonuses is about 30 million.

  • 30? Thanks a lot.

  • Operator

  • And our next question will come from the line of

  • from

  • Capital - please go ahead.

  • Yes, good morning.

  • I have two questions. One is, just can you - can you give us some sense as what the - the covenants are on the new credit facility?

  • Is it based on trailing cash flow or - you know, how much room do you have, in other words, if the business doesn't improve to maintain that line of credit?

  • And then, secondly, on the - you know, in terms of the consultants, you talked about your top 100 consultants, but how is that - how is the middle tier of consultants doing in terms of retention?

  • Because I would think that you have, you know, those hundred top guys and then, you know, maybe - you know, a hundred bottom people and then a lot of people in the middle that are relatively important as well. Thanks.

  • - Chief Executive Officer

  • I would say, first, the covenants were based on a flat line projection with the bank.

  • And then the covenants were discounted from there. So we - we - you know, our anticipation is that business will be trending up.

  • We gave them a flat line forecast for covenants; they were discounted from there. So we feel we have sufficient operation room not to retain the covenants.

  • They are based on trailing numbers, though.

  • So you took - in other words, the most recent quarter, and assumed that that's kind of how you did over the next few quarters and then it's the covenants go against the trailing four quarters or something like that?

  • - Chief Executive Officer

  • Yes, per covenant - for covenant - purposes, but the covenants were set below those numbers.

  • OK.

  • - Chief Executive Officer

  • So again we did that to and felt that given the outlook to be conservative and to have

  • covenants and the bank was very, you know active and understands the structure of those covenants.

  • OK and then in terms of the - those kind - that you're the - kind of the middle tier consultants.

  • - Chief Executive Officer

  • You know actually I don't have the numbers on hand. I would say that overall our turnover - I would call our discretionary turnover because in the restructuring we've had canceled an awful lot of - you know we canceled a lot of people to leave and do our restructuring.

  • my guess is, without the numbers in front of me, that our historical turnover even the middle ranks is lower than it has been the last two years.

  • It's an interesting phenomena, but if you look at our bonus plan it is definitely skewed. At the lower end there was probably very little bonus or no bonus and then the - to the highest there are pretty full payouts and it's a trailing line in between. And if you look at the numbers it's interesting that if you take the top 25 percent as of the last numbers I looked at, they're only off about 10 percent from last year.

  • The bottom 25 are way off, over 50 percent from last year and then you know you can take quarter by quarter and see that trend. So I think that, you know the top people are producing very well even in this economic downturn and I think there's an awful lot of good people that came up in this business during the economic upturn that have never had to go out, you know and pound the doors for business because the phone was ringing and the environment's different. So you know our retention program clearly is to keep all top performers whether they're lower producers on their way up in the organization or if they're, you know the senior people that are producing now.

  • We make no apologies for it internally and been very clear since August communicating our bonus structure.

  • OK great. Thank you.

  • Operator

  • OK, and our next call will come from the line of

  • with Morgan Stanley please go ahead.

  • Hi guys. This is

  • for

  • .

  • Just had a couple of questions related to cash. If you could talk a little bit, I mean there are a lot of moving parts, but if you could talk a little bit about what you expect the cash outlays are from now through the bonus payments in July? Do you expect to have enough cash?

  • And given that there's' been discussion that your cash is disbursed in many countries and there are issues about patriation of capital and the costs there. In addition to that, how do you plan to raise the capital if you do need to get additional money? And then I guess lastly from this long laundry list, what do you expect to be your trough level of cash at the end of the next two quarters?

  • - Chief Executive Officer

  • Let me address kind of generally the question. And maybe Don on the projection.

  • Clearly our negotiations with the bank and restructuring, one of the clear things we wanted was to have cash through our bonus program. And our facility was structured in order to do that.

  • And again we projected even though our field is projecting an upturn in revenues we have projected for cash planning purposes a flat line from this quarter.

  • We do have other sources of cash outside even operations. We have tax refunds coming in, a rather large one that we'll be filing for. And if we need it, we even have life insurance policies that the company owns. So there's another roughly $10 million of cash that we could draw from as a back up.

  • So there are other sources we don't want to use, but they're available to us. So we do have projected cash balances through the bonus period. Even taking regard to the dispersion throughout the world. And we've modeled very, very detailed.

  • You know, again with the bank, that's what took so long in the restructuring.

  • And in terms of the cash expenses, I guess Don, was going to talk about that.

  • Yes. We think - from the executive search operations we are generating cash.

  • And I think as Paul said, you - we have to look - or we have looked at this in terms of our North America situation versus our international situation. On a total global basis it would appear we have enough cash.

  • On an international basis, I think there's adequate cash.

  • North America, we believe there's adequate cash as well to hold tighter. As Paul said, there's other sources that we haven't factored into the forecast but are out there.

  • One is a tax refund for - that we will be filing probably Q1 of next year, well late Q1, late in to

  • . And that's estimated to be about 10 to 12 million of a refund. And so we'd expect to get that probably Q2, possible Q3. It has to go through some sort of review because it's so large.

  • As well as we have some other funds. From operations we are forecasting, you know, apart from these external sources that we will have sufficient cash. And if we had to we could go after these other sources. So there are some options for us.

  • Thanks.

  • Operator

  • And our next question will come from the line of

  • with Merrill Lynch, please go ahead.

  • Good morning.

  • Can you tell us what interest rates you're paying on that line of credit from B of A right now?

  • It's prim plus three and three-quarters.

  • OK. And if I just, you know, focussing on the cash, you had 48 million of borrowing down to 39 now.

  • - Chief Executive Officer

  • Right.

  • So I would assume your cash and short-term investments also decreased by about nine.

  • Yeah. Actually, if we look at the balances today, I think we're probably about 50 million.

  • Fifty million?

  • And how much cash do you think you'll use in the fourth quarter?

  • Well, the bonuses in North America are estimated to be about just the low 20s.

  • - Chief Executive Officer

  • We'll generate cash in the fourth quarter.

  • Yes, we'll generate cash, that's the biggest

  • , though.

  • - Chief Executive Officer

  • Yes. The bonuses are paid, though, first quarter.

  • We've believe the bonus is adequately covered.

  • Well I'm not sure I understand. You're projecting a loss for the fourth quarter.

  • I presume that that means that - just if I'm looking at cash flow from operations, I'd presume that that's a use of cash. Don't you pay bonuses in July?

  • Yeah, I'm sorry, I misspoke. It is a July payment.

  • In the fourth quarter, you know, we believe we're going to be - are you talking about North America only?

  • No, the full - full company.

  • The full company, we're going to generate about 16 million of cash. Thirteen of that is coming from the executive operations.

  • Futurestep is using cash of about 3 million. And we have also - we did get a tax refund in already of about 3 million, and we're anticipating some borrowings on our life insurance policies.

  • There should be some external funding coming in.

  • - Chief Executive Officer

  • You have to remember that fourth quarter is our cash generation - biggest cash generation quarter because the executive search bonuses are based on billing collected through that year end.

  • So there's a lot of collection going on?

  • - Chief Executive Officer

  • Yeah, there's a lot of collection going on in that quarter.

  • So, essentially, it's a collection of that 60 million in receivables you have out there.

  • But that's the incentive, because they'll get

  • on that.

  • OK.

  • So you should have somewhere around 63 million in cash.

  • Right now you've got a bonus accrual of roughly 45 million as - you know, assuming...

  • We're estimating our

  • cash at the end of the quarter will be in the low 60s.

  • OK.

  • So you've got enough cash to pay what you've accrued so far, and assuming another 25 percent in the fourth quarter.

  • But then there's - there's zero, and you've got - kind of left - and you've got - the note has to be repaid fall of '02?

  • It will be the...

  • - Chief Executive Officer

  • Yes, we will have to renegotiate our bank facility or replace it.

  • OK.

  • - Chief Executive Officer

  • And we are looking at all those alternatives, both with the bank and other sources.

  • OK.

  • All right, thank you.

  • Operator

  • And our next question will come from the line of

  • with Suntrust

  • .

  • Please go ahead.

  • Good morning.

  • Back to the - the pickup in the U.S. in January, is there anything seasonal about the month of January that would have made that a better month? And then, also, just to kind of get a little bit more color on that, any commentary as to whether you were seeing certain types of industries that were picking up, certain types of positions and again just looking for a little more color on that.

  • - Chief Executive Officer

  • I would say that, you know January I think obviously there's probably some pent up demand factored in for new budgets. So you know we've been cautious, but I think, when you really look the flavor what you see is just a broad base increase with clients talking about new positions.

  • And think the - historically the top positions have been moving pretty well, but now what we're seeing is more broader hiring your discussion to hiring. So again I would - you know the industries that have continued to do well through this downturn, biotech, health care, not for profit. You know the industries that were heavily impacted obviously were financial services and technology, which are our two biggest segments.

  • I think across the board in most industry segments you're seeing further discussion and pickup and that's why we kind operate in a dual approach as I've talked about is we are going to size the cost basis kind of on our current run rates and you know and then ride the upturn. I think we feel the upturn coming, but we're not going to bank on it. So it's kind of dual strategy right now.

  • Is it certain? You know I'd think after we get three or four months of increases behind our belts, we'd tell you the trends there.

  • This is the first time that I think all indications say in North America, the business is recovering, but you know it's still not a long enough trend to tell you that it's - that it's - happening.

  • OK, and to follow up on that while the U.S., you know appears to be recovering just to be clear on this are you saying that Europe at this point is still sliding?

  • - Chief Executive Officer

  • Yeah Europe is sliding. It's been sequentially sliding almost every month and although we think most of the slide is over we're projecting a further slide to be conservative kind of in our numbers going forward. So but we are seeing a slide in Europe and it's affecting different economies at different times.

  • And you had mentioned earlier something to the effect a six month lag, would that imply then that if the U.S. is beginning to pickup now that Europe might pickup following the summer?

  • - Chief Executive Officer

  • Yeah I would say that, you know we look at the strategy when I came here, we took a pretty big I think drastic cost reduction program, which was unheard of in our industry. But we told you were making a bet on the size of the size of the business.

  • Clearly what's happened is the business is even worse than we - than I even anticipated coming in fairly conservatively.

  • When you looked at Europe obviously, you know cost reduction programs in Europe, because of social charges, are much more expensive, the numbers seem to have been stabilizing and not heading down at the same pace that we saw in the Americas so we took a bet and waited.

  • And obviously looking back, you know, everyone is always, you know, the proverbial wisdom is that Europe lags the U.S. by six months.

  • We didn't see it then. So we didn't take as much of the cost as we thought we should have on the first round as we did in the Americas. And now we're taking that step.

  • So in terms, if you look at the employment numbers in Europe, I mean they're actually kind of encouraging right now, but we don't see that as a trend in our business. So we're adjusting the cost basis to the present level of business.

  • Am I right, Paul, my recollection that the months of July and I think August particularly are seasonally very slow months in Europe. So is this kind of shift now to September as being kind of a pivotal month in that economy, in that sector for you?

  • - Chief Executive Officer

  • For all of us that have worked in Europe we understand that lots of Europe closes in August. So it is a very difficult time to do business. It slows down here, but it stops almost there.

  • So yeah, I think September is obviously a big bell weather month in Europe.

  • And final question, you had mentioned, and congratulations by the way on the nice traction and your assessment business. But you said that there are some examples where it is generating search work. Any concrete examples there Paul?

  • - Chief Executive Officer

  • Yeah, I mean we could go through a number of clients. I'm not going to disclose them. But I mean we're saying on average that we sell stuff when it's a stand alone product. But there's been a number of companies where we've generated six to 10 searches as a result of the assessment.

  • Now we've positioned our assessment business to be standalone. We don't go into assess people to find search work. I mean we actually go in to help the company replace the people and the best jobs. And what happens very often isn't through assessment they lay off people.

  • I mean what happens through assessment is they replace people or position them, it creates other openings.

  • And again, part our strategy is by providing those services that help lock in our executive search business. So it's happened in almost every single case where we've provided it.

  • Thank you very much.

  • Operator

  • And our next question come from the line of

  • with DJS Security, please go ahead.

  • Hi, this is

  • for

  • .

  • Question, the repricing of the options was there a basically cash savings for that? Or is more just to retain the best people?

  • - Chief Executive Officer

  • It was really a retention program. We did it where it was a, you know,

  • that was slightly accretive. But it was not a cash program. It was a - just to get people the opportunity to look at their options and reprice them according to the swap ratios or to retain them. So it was really a non cash event.

  • And have you seen positive benefits from it?

  • - Chief Executive Officer

  • Well, you know, we just put the program out, and we obviously

  • for full disclosure across our earnings call. But I think we've all ready gotten 40 letters intending to swap already. And, you know, they're not even due for another couple of weeks.

  • So, yeah, I mean, there's been great discussion. Some places, it's harder in the world because of tax issues or your taxed on options and - you know, but most places have been very, very positive about it.

  • And, you know, we'll see the results.

  • I think for as early as it is even before the earnings calls to get the response we got was very positive.

  • OK, thanks.

  • Operator

  • And our next question will come from the line of

  • with Lehman Brothers.

  • Please go ahead.

  • Hi, this is

  • sitting in for

  • .

  • I had a couple of quick questions. First, I was wondering if you could quantify your fixed cost base as you exited the fiscal third quarter.

  • And then how you project that will look going into the fourth quarter and into 2003 giving your current restructuring initiatives?

  • Yeah, at the end of Q3 our cost base was about 88 million for our entire business for a consolidated basis.

  • And we're projecting - you know, we have costs going in next quarter. I think it's going to be somewhat the same level, and it should drop thereafter given the cost savings we're going to be receiving from the euro.

  • - Chief Executive Officer

  • And, also, we are - we are spending this weekend with the global operating committee to review all corporate and regional costs. So I'm committed to

  • .

  • We made a bet on the economy, we missed it by a few quarters and we're going to adjust it. So, you know, I think we're in the process of this weekend to get - to further reduce our costs and keep them in line with the size of our business.

  • Would it be fair to assume that the $5 million restructuring in Europe could produce annualized cost savings of a similar $5 million total?

  • Yes.

  • - Chief Executive Officer

  • Yeah, there's a pay-back of those costs or - what are they five to six months, Don? What's the...

  • Probably less than five months.

  • - Chief Executive Officer

  • Yeah.

  • So, I mean, it's - it's - the reason we're going ahead, even given this time, is there's a quick pay-back on those costs, and they'll be reflected in the earnings.

  • And, you know, additionally, we're going to be pushing again to take out some more of the infrastructure costs. Some of that we've actually positioned by consolidating the back offices and getting things together.

  • In step one, we took out a big chunk. But now in operating together with common accounting systems and HR systems and everything, we're able to go to the next level of cost cutting, which we're doing right now to take out even more infrastructure costs.

  • Great.

  • And then just one final question.

  • Regarding your comments to January commitments, you said that that was the highest number of commitments that you received in January. Is that - do you mean in the company's history or just since the downturn started?

  • - Chief Executive Officer

  • No - fiscal year.

  • For fiscal 2002?

  • - Chief Executive Officer

  • Yes.

  • Oh - on a monthly basis?

  • - Chief Executive Officer

  • Yes.

  • OK.

  • Thank you very much.

  • Operator

  • Our next question will come from the line of

  • with

  • .

  • Please go ahead.

  • Yeah Paul on a more positive note here on some of your plus capital services, could you share with us the revenue model as you see it with respect to spread?

  • And also from a marketing standpoint how do you keep from these services being bundled and taken in as part of the search from part of the client as you differentiate your product as opposed to keeping it as a separate revenue stream?

  • - Chief Executive Officer

  • I think that, you know we treat the businesses as separate P&Ls internally. So it's important as we go to the clients and customers that we price them as different services.

  • That's important to the clients because some clients will use one of the products, but not the others. So we are very aggressive in the pricing, in keeping the price integrity of the different products, marketing on the standalone services. That doesn't mean if a company comes in and says I want to buy a huge contract of all three services that we won't sit and talk about, you know because our costs are lower, of how we deliver those,

  • But generally in almost every case they're priced separately and discreet. I think some day this market will move to bundle the outsourced services and the model will change, but we're not seeing that right now. I think one of the things that I'm happiest about is, given the downturn in this market, given that we're in you know the middle management and executive business, the pricing has held up phenomenally well, and the average fee per engagement has, you know almost held this quarter to last is just down very, very slightly.

  • So you know I think it's we just don't allow them to be unbundled.

  • OK. Thank you.

  • - Chief Executive Officer

  • I mean bundled, I'm sorry.

  • Operator

  • And again ladies and gentlemen if you wish to ask a question, please press one at this time. Our next question will come from the line of

  • at Matador Capital Management please go ahead.

  • Yeah good morning, guys.

  • - Chief Executive Officer

  • Good morning.

  • Wanted to talk about a couple of things, one Paul could you address - you mentioned a little bit about the compensation plan, I guess I'm curious, if you look at the mix of cash compensation versus stock, and I know you're retaining

  • on a go forward basis to work on this next year. But can you give us some flavor on how that breakout looks for this year and how it would look next year? And are the consultants, you know if we try to break that down again, these top 100 for example, are they taking more stock and how are you doing on selling them - selling them - on that idea?

  • And I've got a couple of follow-up.

  • - Chief Executive Officer

  • Yeah I would say that first

  • been actively engaged and the goal is to have a plan in for next fiscal year that we want to announce, you know at the beginning of the fiscal year. So this isn't a to-be-done exercise. We're in the throws of the middle of it.

  • We have surveyed all of our people across the globe and we've segmented top producers. We've segmented business segments and regions to really understand the flair. I think that anyone in this business right now, and we're not alone, are a little more sour on options. But I think that's not a phenomenon for the executive recruiting industry it's across the board.

  • And I think our use of options has probably been too wide spread and formulaic versus, you know, focused on more top people. And bigger awards to fewer groups.

  • So I think that's the trend. Where it comes out, I can't say. We're looking at surveying our folks to see what incentives would incent them.

  • We're looking at cash flow models. I mean - and I we're looking at the results on shareholders. And we're right in the middle of it. We finished the survey.

  • In fact, one of the things this weekend is the first presentation of the models and we will continue to model it.

  • So I think obviously people right now get a little more concerned about cash going forward. I said, people in here understand where we are. They understand that are our competitors, no matter what they're saying it's very clear that they're doing the same things in their bonus programs, whether they're private or public.

  • And, you know, my goal is to make sure that we get our cost structure in line with this year's revenues. So next year, we don't have the issue of whether we're chasing cost. We'll be in a position to be able to have everybody very comfortable of our ability to pay.

  • Now you mentioned, Paul, some of the folks

  • on the senior level, and those numbers don't seem too bad. I guess I'm curious, what is then your take away rate along the high end too? I presume you're having some degree of success on hiring others away or have you?

  • - Chief Executive Officer

  • Yeah, we are having - I would say we've done selective hiring from the competitors. And we are in the midst of discussing with a number of people. The good news of the business is there are no fixed guarantees, which was probably the hallmark of our business in the past.

  • But they're more production oriented kind of incentives for people who join us. And we're looking at selective leadership positions.

  • But we've hired people in. And I think a number of those people will clearly be in the top, you know, 100.

  • They obviously aren't in the top 100 for the last two years, they're new. You know, in the last years, we've hired about six that hit those numbers. And we're still recruiting but very selective.

  • OK.

  • - Chief Executive Officer

  • I think what you're saying is probably an equal trade here and there amongst the firms. I don't think there's any mass movements.

  • But I think a lot of people are unsettled in the industry right now.

  • No you mentioned, and just so I'm clear on this the January trend, was that just executive search that you're talking about in North America? Or is that the total business in North America?

  • - Chief Executive Officer

  • That was the executive search confirmation.

  • OK.

  • - Chief Executive Officer

  • contract.

  • How has that trended in February? I know you mentioned there's some budget issue in January. But have we seen that carry over in February? How is February relative to January?

  • In January, I think we probably about half of what we were in January, February. So slightly above half.

  • OK. You're half - February is half of January in terms of confirmations?

  • Basically.

  • Oh, OK.

  • And one last point, just on the middle market...

  • - Chief Executive Officer

  • Let me...

  • Oh, I'm sorry, Paul. Go ahead.

  • - Chief Executive Officer

  • Let me make one comment. But, you know, what we track - again, we have a

  • business.

  • It's eight-week moving averages.

  • Yeah.

  • - Chief Executive Officer

  • Because those contracts get recognized over, you know, three sequential months. And the eight - and the moving averages clearly have been heading up.

  • OK.

  • And one last point, just on the middle market.

  • Obviously, that's come up hard; you guys have done a great job cutting costs. I guess - what's happened, and as folks like

  • , you know, messed up this market or is it just purely the economy that's out there?

  • And how do you - maybe you can give us kind of what your outlook is for that business and how quickly will that turn out?

  • I would say you have to segment it in two pieces.

  • Our European business has done phenomenally well. It had its first loss last quarter, and it has always been a profitable business.

  • With these downsizings, it should be fine.

  • The America - the North America business has been problematic for us in Futurestep since its inception.

  • And, again, you know, Bob is brand new. But I think the factors are a couple of things. One is, middle management recruiting is clearly down.

  • The second piece is it is a market that has a lot of

  • contingent firms, and the value proposition has to be different.

  • And the reason why that we've been so attracted to Bob and his energy is we've been moving to a - more of a large account outsourcing where we get large contracts versus the one

  • .

  • That has been the formula; Bob understands it. The clients have been extremely receptive, but they've been slow at signing contracts.

  • Not with us, with anybody.

  • OK.

  • And, you know, I think that is the hard thing to do in that business. And, frankly, in North America, I think it will be the slowest to come back, so it's a tough call.

  • OK.

  • Very good, thank you very much guys.

  • Operator

  • We do have a follow-up question from the line of

  • . Please...

  • My follow-up question was asked already - thank you.

  • - Chief Executive Officer

  • All right, operator, we're kind of getting near our end time. Are there any more questions?

  • Operator

  • We do have a follow-up question from the line of

  • .

  • - Chief Executive Officer

  • OK.

  • Let's make this the last question, thank you.

  • Operator

  • Thank you. And please go ahead, sir.

  • Thanks,

  • again. I'll make this quick.

  • I know that the - with the ending of your relationship with the "Wall Street Journal" on your advertising, that

  • - I'm sorry? That you should be saving about $1 million per quarter.

  • Can you give us a sense for how much you can take out of the G&A costs given the current level of activity and the restructuring cost that you have in mind?

  • - Chief Executive Officer

  • You mean for the total business?

  • Right, for the total business. I know the "Wall Street Journal," that was focused on Furturestep, but in general.

  • - Chief Executive Officer

  • Well, you know, I think that you could - you know, actually, we're in the throws of that this weekend. And so I really don't want to - to kind of throw out a number yet.

  • But, you know, my view is, you know, that you look at - if you look at corporate and regional support costs, it's a question of not what's important, but what you can afford while the markets in the - in its current condition.

  • And it's hard, you know it's easy to add overhead, it's a lot harder to cut it when your revenue's down 40 percent. And we took a big chunk out in August and again our feeling was is that the business would be, you know better than it is to date and we're going to go and cut another chunk out and get it back in kind of historical percentage terms.

  • So our leadership's committed. Our people are committed and I think we'll be announcing that number when we get it done.

  • And in terms of like advertising costs specifically?

  • - Chief Executive Officer

  • OK specifically it's - from where were last year it's significantly down.

  • OK, well thanks.

  • - Chief Executive Officer

  • OK operator would you please wrap it up and give the repeat instructions for the call-in?

  • Operator

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