Korn Ferry (KFY) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for stand than by and welcome to the Korn/Ferry Inter national conference call.

At this time all participates are in a listen only mode.

Later we will conduct ay question and answer session.

As a reminder this conference is being recorded.

Before I turn the call over to your host Mr. Paul Reilly, Chairman and CEO, let me first read a cautionary statement to inverse.

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, the company can give mow no assurance that such expectations will be attained.

Participants on this call are cautioned to consider the risks related to the assumptions and expectations and not to place undue reliance on such forward looking statements.

With that, I'll turn the call over to Mr. Reilly.

Please go ahead, Mr. Reilly.

Great.

Thank you.

And good morning.

Thank you all for joining us today.

This morning I'm going to share some highlights on our fourth quarter which ended April 30, 2003.

I'll also recap the results of our full 2003 fiscal year.

I'll then turn it over to our Chief Financial Officer, Gary Burnison, who will provide more details on the financials.

In terms of the most recent quarter, I'd like to start by pointing out that we had our first sequential up tick in revenue in the past nine quarters, and while this is certainly good news, all the data we've seen to date suggests while the economy is strengthen, it's still a tough market.

We believe the reasons for this are as much psychological as they are structural.

Clearly, many of our clients have worked off their excess capacity and their excess work force.

In the past two and a half years more than 2 million private sector jobs have been eliminated yet corporations have been hesitant to re-staff in light of uncertainly global economic and geopolitical conditions we are hopeful that this is starting to change.

The resolution of the Iraqi conflict, the road map for peace in the Middle East, and the evolution of the homeland security efforts in the U.S. have created a more stable climate for investment and growth, and we expect to see clients to become less hesitant about making new hires.

Until that happens, however, the market for executive search will remain challenging.

The height of the market continues to be strong for us.

Despite the weakness in the economy in the overall search market fiscal 2003 was strong in terms of CEO and board level hires.

Our board services were up 15% in quarter 4 over quarter 3 and in the past fiscal year we continue to win high profile assignments for CEO searches including Synergy, Con Seiko, Dollar general, Longs drugs, just to name a few.

This is also been a successful quarter in terms of recruiting which I believe reflects the strength of our brand.

I think that during difficult times there is a flight to quality, and we have benefited from that phenomena.

In the past quarter we have recruited six new senior client part necessary in North America alone, and while it's worthwhile to -- and it's worthwhile to mention that we recently broad aboard John Johnson who previously served as president of Ann Robb(ph) International and is truly one of the senior consultants in our industry.

Another notable achievement in the past quarter is the improvement of our Future Step business.

Future Step's global revenue increased 10% in Q4 over Q3 and Future Step operations showed positive EBITDA for the fir time since inception.

Our Suture Step business, while particularly strong in Asia Pacific, which was particularly strong?

Asia Pacific which had a profitable quarter.

I want to point out that we also were able to eliminate Future Step's minority shareholders which is significant because it allows you considerably more freedom and flexibility in operating the business.

When we look back at the recruitment industry for fiscal year 2003 it was another year characterized by declining demand and contracture in the industry.

We like our competitors have not been spared the turmoil in the marketplace.

The most visible signs of the difficult times was did the demise of a great brand Raymond Burnison in the U.S. which had been a top ten player in our industry for many years.

I am pleased to report that it was by comparison a relatively calm and stable year for Korn/Ferry in the wake of industry upheaval.

We made great progress in reducing our cost structure and strengthening or balance sheet.

In fact, we reduced our total cost base by $78 million versus fiscal year'02 and we ended the year with $83 million in cash and we continue to operate on a positive cash flow basis.

And we have been consistently successful in lowering new senior consultants to our firm.

While we've also made steady progress on pursuing our long-term strategy of providing a broad range of executive human capital services, this past quarter we completed the roll out of our search assessment theology which will be a strong different share in the marketplace and which provides us with a statistically validated assessment tool that can applied to every one of our searches.

We will be launching an aggressive public relations and marketing campaign to support this product in this quarter.

I am pleased that we're able to almost double our number of global integrative accounts this past year, a program which I believe is key to our future and which should pay handsome dividends when the economy, global economy returns.

We will continue to pursue our loan-term strategy of broadening our offers and cementing our integrated relationships with global clients.

We have a is on solid balance sheet, a world leading brand, and a committed team of great consultants in just about every major market on the globe.

Before I turn it over to Gary Burnison, I wanted to share one piece of news in this past quarter that we are particularly proud of.

At its annual meeting on June 20th shareholders of the Sony Corporation will vote on expanded plate of outside board members.

Included in that slate is our own Sakie Fukushima took I seem ah manage than director of our Tokyo office and the member of the Korn/Ferry board of directors.

The nomination of Sakie to the Sony board is a reflection of her personal reputation and he is seen by esteem by which he is held in the marketplace.

I'd now like to turn this over to Gary Burnison who will review our financials in detail.

Thanks Paul.

Good morning, everyone.

Let me start with a few high hits before I get into detail for the quarter.

First, up on results were in line with our expectations.

Fourth quarter fee revenue was $76.1 million which is an increase of $500,000 from the third quarter.

I'd also like to point out that with your outstanding operations in Mexico, fee revenue for the quarter would have been $79 million.

As a reminder we account for Mexico under the equity method of accounting.

The increase in revenue, though small, reflects the first upturn in nine quarters as Paul indicated in his opening remarks.

While the market remains challenging the increase in the significant achievement given the back drop of the war in Iraq and the SARS outbreak.

EBITDA was $5 million for the quarter, an increase of $800,000.

Or almost 20% sequentially.

Fee revenue for the year was $315 million, down $62 million from FY '02 but I'd point out that despite this decline of $62 million, adjusted EBITDA for the year end creased by $14 million to $19 million for all of FY '03.

I think this clearly demonstrates the effectiveness of our rigorous and on ongoing cost reduction efforts, and I want to thank our worldwide partners and colleagues for this achievement.

With Mexico for the year fee revenue was about $328 million.

Net loss for the quarter was $1.7 million or 5 cents per share compared to a net loss of $2.6 million or 7 cents per share in the third quarter, and as a reminder, depreciation in the quarter was $4 million, $16 million annualized.

We expect that to decline in FY ‘04, it should be around $12 million or $13 million for the year.

Excluding structuring and impairment charges the adjusted net loss for the year was $6.6 million compared to $15.7 million last year.

As Paul indicated, our cash balance was almost $83 million at quarter end, which is an increase of $14.3 million from January 31st.

Accounts receivable net of allowances for accounts was $46.7 million at April 30th, a decrease of $1.7 million from the third quarter end.

The number of employees as of April 30th was 1,535, a slight reduction of 15 from January 31st.

Lastly, again, as Paul alluded to, we did eliminate Future Step's outside minority shareholders which will enable us to more aggressively pursue synergies in our businesses and for the ration eyes our processes and infrastructure.

These efforts along with planned reductions of corporate and administrative overhead are expected to result in a charge of $6 million to $8 million in the fiscal first quarter of 2004, the quarter we're in right now, and the annual savings resulting from these actions are estimated to be $9 million to $12 million.

Let's now review the business segments beginning with executive recruiting.

I'll note that the following discussions of our operating results are in an adjusted basis which includes restructuring and impairment charge as applicable.

Executive recruiting fee revenue of $68 million was essentially flat compared to the third quarter.

Operating income for the quarter decline to $5.7 million from $8.4 million sequentially resulting in a decline in the operating margins 12.3% to 8.4%.

North American fee revenue in the quarter was $38.7 million compared to $38.3 million in the third quarter, essentially unchanged.

Operating income declined $900,000 to $4.1 million of 10.5% margin.

Europe fee revenue in the quarter increased $360,000 to $19 million sequentially.

Operating income declined $2.3 million to $300,000.

I point out that the decline is largely due to FX gains realized in the third quarter and they weren't repeated in this current quarter.

Asia Pacific fee revenues declined $448,000 to $8.1 million, primarily due to the SARS outbreak.

Clearly lower hiring activity in the quarter.

Operating income, however, increased slightly as a result of reduction in G&A expense.

Latin America's fee revenue grew $300,000 to $2.1 million or 16% sequentially, and operating income increased by about $400,000, and I'd point out again that that excludes our operations in Mexico.

Across all the regions executive recruiting average fee for engagement in the quarter of $57,000 decline slightly from the third quarter but was offset by an increase in the number of engagements to 1,196.

The annualized fee revenue per consultant was $688,000, an improvement of 4% sequentially.

The number of consultants decreased from 406 at January 31st to 392 at April 30th.

Future step fee revenue of $8.1 million for the quarter increased $700,000 or 10% sequentially.

The operating loss for the quarter narrowed to $440,000 from a loss of $1.3 million in the third quarter.

The improvement is primarily due to the increase in revenue and the continued reduction in operating expenses.

EBITDA for the quarter was positive at $150,000 and as Paul pointed out, that's the first time in future step's history that's had positive cash flow.

Now, let me comment on our outlook.

Fiscal first quarter 2004 fee revenue will likely be until the range of $70 million to $78 million and the operating results will likely be break even to a loss per share of 10 cents, excluding the restructuring charges that I alluded to earlier.

Those conclude management's remarks, and now I'll turn it back to Robert so we can begin taking questions.

Ladies and gentlemen, if you wish to ask a question, please press the number 1 on your touch tone phone.

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Once again, if you have a question, please press the 1 at this time.

And our first question comes from Mark Marcon of Wachovia Securities.

Good morning, and congratulations on the better than expected results, particularly given the tough environment.

I'm wondering if you can tell us what you saw in terms of monthly trends through the quarter and also if you can expand your comments to include, you know, May and what you what you have been seeing in terms of June across the globe.

Well, it was not surprising, About six days before the war broke out in March we saw a decline in our business worldwide, and March was very, very soft.

We were happy to see that April rebounded to February levels, and May was about the same as April.

So when you look back over the last several months, we really did see an impact of the war in March as well as the

SARS outbreak in Asia, and since then things have returned to I would characterize it kind of the February levels, Mark.

Any change in terms of confirms or (inaudible)look that.

Well, that's what I was referring to, is confirmation.

Okay.

You know, there's no change in terms of the you average fee or anything like that, but in March worldwide the confirmation, as one would expect, were down.

and, Mark, I would just is that say that March clearly, right before the war, it's almost like business stopped in the U.S. and Europe for a few weeks.

It was amazing how it fell off.

I'd say what we see now is a return back to kind of a stable level that there is clearly a lot of market activity in terms, there is no, sir more activity in terms of people talking.

Consultants seem to think people are much more interested in doing things but, you know, we go through periods of this, and what we do is we kind of keep a conservative view until we see the confirmations come in, and we haven't experience they'd yet.

It's been pretty level.

Activity's up.

Obviously people are feeling better with the stock market.

That's all nice, but we'll let you know when the numbers start going up.

What do you think would be an early indicator of that for your business in terms of confirms actually really picking up?

It's hard to say in this question what's really going to drive that.

I think the early in cares up is activities.

The consultants here are very market-focused and you can tell when they're talking to people and people aren't taking calls, so they're out in the market.

People are certainly talking a lot more, but I can tell you we've been through periods of this before, so people are -- the biggest difference when people ask me what I see in the market is that CEOs continue to be -- are not as pessimistic.

I would say until the first of this -- you know, until up to the war people were saying, well, it could get worse.

What I'm hearing mostly people saying is that the worst is over.

They don't think it's going to get worse, but I don't think they feel a confident in the market upturn.

I think once people really believe that we're in a market recovery, that's when you'll see the confirms pick up.

And can you talk a little bit about what the positive impact from foreign exchange rates was during the quarter?

It was very, very minimal in this quarter.

The prior quarter, Mark, we were benefited about a million bucks, hit the bottom line, but in this quarter is there wasn't much at all to hit the bottom line.

How about on the top line?

The top line, it was probably benefited by maybe $500,000, something like that, in total, across all of our businesses.

You're talking about on a sequential basis, right?

Yes, sequentially, yes.

Great.

And can you expand a little bit on the charge in terms of what specifically it's going to pay for?

Well, we're continuing to look at the efficiency of the way we do things, particularly in the back office functions.

You know, we have reduced expenses by very, very significant amount.

As you can see by my remarks over the year.

And we are going to continue to look at our processes in the back office as well as I highlighted that we eliminated the outside shareholders of future step, and we are going to aggressively pursue synergies more than we could in the past that may end sale further location of businesses and the like in this quarter, but that's going to, I think that's going to really free us up to even be more efficient than we are today.

So that the $9 million to $12 million in savings, how much of that would we see in future step as opposed to the base business and where would that show up in terms of the base business in terms of the P&L?

Well, you know, our expenses are people and brick and mortar, by and large.

Those are the two biggest areas of expense.

And so that would be the two areas where it's going to show up.

In terms of future step versus, you know, executive search, we haven't really penciled that out in any kind of fine detail at this point, so I'd be a little reluctant to tell you a number off the top of my head.

All right.

I'll come back with some other questions in a bit.

Thanks.

Thanks, Mark.

Once again, if you have a question, please press the number 1 at this time.

And our next question comes from the line of Flynn of UBS Securities.

Hi.

This is Andrew Fones for, Kelly Flynn.

I was wondering if you could tell us what bonus accruals were in the fourth quarter and then what you kind of expect to pay out in bonuses in Q1 and Q2.

Andrew, thanks for the question.

The bonus expense for the quarter was about $10 million for the year.

It was about $39 million, and in terms of the payment that we would make against that, I would say that it's going to be in the mid-30s, and that will be paid a great deal of it will be paid in this quarter that we're in now, our first quarter.

There will be a little bit of slippage into our second quarter, but primarily it will be paid in our first quarter.

Okay.

Thanks.

And you mentioned amongst trends, I realize we're going to be half bay halfway through June but can you add on what's happened to that, on what's happened in June so far?

It's too early to tell, Andrew.

Yeah, you really can't, you know, based on 18 days in June.

It's very, very -- it's very difficult to make that kind of comment at this point, but, you know, our partners around the world are very optimistic, and as Paul said, we have seen that before, which is good news.

There's more activity.

But, you know, we're still going to be very cautious in how we run this business and we're going to run a cash flow positive business.

Thanks.

Regarding Asia Pacific and kind of the se sequential decline there and future step and the sequential improvement, should we kind of think of those, too, as being kind of related and perhaps due to the SARS effect a little bit?

I don't think so.

I think the decline in Asia Pacific clearly was SARS related.

In fact, I'm kind of impressed how they came through.

But you have to remember in say shah there's almost no traveling between countries for a good six weeks there, and yet people were still able to sign business and complete searches, so that clearly, SARS had an impact which I think for the most part has cleared away now, you know, for the summer, anyway.

And the future step business, especially in Asia, in the U.S. continued to improve, you know, so our people are working away at it.

Tough market, about they keep chipping away at it.

Okay.

So would you -- are you seeing kind of a bit stronger sequential improvement in business in Asia Pacific this quarter, would you say, as kind of the SARS effect goes away?

I would say, you know, we generally -- it's hard to give -- you know, our view of most of the world is flat, flat in revenue and flat in terms of expectations.

Our biggest concern, honestly, right now is Europe.

I think the economy there is just more uncertain.

But I would say, you know, we're operating pretty good baseline both in the Americas and in Asia right now.

Great.

And then if I could just perhaps try one more kind of based on your current head count, could you perhaps try and estimate what revenue you could do on that head count as being like a target?

And then also what would operating margins look like at that kind of revenue level?

Well, I mean, I think as we've always -- not as we've always, but the last two quarters, it's still true today, but we have about, you know, still about a third capacity in the system.

If you look at our average fee per consultant, and we decline consultant a little bit differently; we include more people than some other firms that you cover, but -- so it's artificially a little bit less when you look at it, but, you know, in this quarter we're running annualized now about $688,000 in our target.

Where we were before the go-go days was north of a million dollars per consultant.

And so there's a third capacity, and I would tell you that in terms of the incremental effect on the bottom line, the brick and mortar is in place.

We have the people to execute on the business.

And really the only variable expense would be the bonus payments on that incremental business.

So it's -- it is going to be quite healthy when that happens.

And would you categorize that incremental expense, would you say it's kind of linear with revenue, the bonus payment?

So --

You wouldn't necessarily be the linear because there's -- you know, that wouldn't be the case.

But I would just leave it at that.

A substantial amount of that revenue will fall.

We have the advantage of, over most firms in our industry, we have a leveraging model, and even though it was chalking given the downturn, it really helps us in upturns, we'll really well positioned for it.

So what you have is incremental revenue is a bonus payment.

At some point you've got some incremental delivery support expense but it's not a lot so there is an awful lot of positive leveraging, and that's the story we've been telling you for two years.

We're waiting for the market to turn up so we can prove it to you.

But there is a lot of capacity in the system, and, again, this is a very profitable, good margin business in any kind of real, I kind of economy, positive economy, so.

Right.

So you'd say kind of the double digit operating margins that you reached kind of in 2000, 2001?

Absolutely.

This is a team kind of business and an operating margin, in a reasonable environment.

There is nothing to say that that won't come back at all if the business comes back.

That's great.

Thank you.

Thank you and our next question comes from the line of Dan Dittler from Lehman Brothers.

Please go ahead.

Thank you.

In your first quarter guidance are you assuming receiving no benefit of your $9 million to $12 million in annualized cost savings you expect to achieve from your upcoming charge?

Yes.

There is very little benefit in there for that.

It will primarily happen in our second quarter which starts August 1st.

Okay.

Great.

Thank you.

Thanks, Dan.

Our next question comes from the line of Stephan Mikitiak (ph) Pipe (inaudible) Capital.

Two questions.

I guess first off just picking up on the last question here, what is the bulk of this additional cost savings?

Are you just trimming down, you know, other offices or head count or can you just kind break out what the components of the cost savings are?

Well, again, the components would be it's going to fall on our expense base.

It's going to be people and brick and mortar.

I'm just wondering if you had kind of the breakout between how much of that is coming from, you know, from those two categories.

I'm unprepared to give that to you at this time.

It would be premature.

I would tell you that we're continuing to look at collocating businesses where today we run maybe our future step and search business of two different locating in the same city or same geographic area.

We're obviously going to be focused very much on that as well as the back office functions as well.

Okay.

And how about in terms of your revenue guide an for the per quarter, the you're owes had a pretty good move since then.

Is that built into the revenue guidance and the current level of exchange rates or is it based on the, you know, the rates at the end of the quarter?

No.

It's based on the, you know, on the exchange rates that probably a couple weeks after quarter end, something like that, so I really don't foresee, you know, with the dollar weak, I don't see a lot of impact going to the bottom line in terms of the first quarter, honestly.

Okay.

Well, right.

I can't imagine it has, since so much of our costs are still, you know, are based in the local currency, but it would have a revenue impact.

It would, but, again, I just don't they it's going to be that dramatic.

Yes.

I think your comment's right on, that we're very hedged because even if the business everywhere was operating in a double digit margin, that's your exposure but it does have a con consolidation impact.

But I can't tell you what the Euro is and I can't tell you what how the quarter is going to end on a revenue basis so that's our best estimate today.

Okay.

Thanks.

Fair enough.

We ever a follow-up question from the line of Mark Marcon.

One just housekeeping item, can you go over the difference in terms of the reimbursable fees versus the expenses that are reflected?

There seems to be a bit more of a Delta this time than usual.

In terms of -- in terms of what, Mark?

In term of the --

The reimbursed out of packet engagement expenses as opposed to what you're showing on the revenue line as opposed to the expense line.

Let's see.

I mean, I think in the quarter the out-of-pocket engagement expenses that we list below the line were about $6 million bucks, and the reimbursed or about $6.3 million.

That's what you're referring to?

Exactly.

You know, it's really hard to say.

The timing plays into that in terms of when we incur the expense versus when we're billing the clients, and then we're obviously trying to do this on accrual basis, but, you know, for me that would be very difficult to get into on this call.

Okay.

We don't see necessity structural change, if that's your question, at all.

There is no -- I mean, there is no offset or there is no other item that -- where some of those reimbursed out of pocket expenses could go into, is there?

No.

No.

So it's all in that.

All right.

It's really tough.

It's really a lot of it, I think, marsh, is timing.

And then CAPEX for this coming here?

CAPEX for this year probably be around $3 million or so.

That's what it was for this past fiscal year, and that's what we're budgeting for.

And you said D&A was going to be what for this coming year?

Should be around $12 million to $13 million.

That's one of the big burdens we've had, is when you look at our GAAP loss on an APS basis, we have had $16 million for the this past year, we had $4 million in the quarter, and that is going to taper off, obviously.

We only spent $3 million in CAPEX this last year, and we're

going to, like I said, budgeting for ‘03.

So we think that will be $12 million to $13 million forward.

That actually sounds pretty encouraging.

And then tax rate, what should we use?

I would just continue to, you know, to plug in what we've had.

I mean, we've got, due to some tax planning strategies and some losses in the past, the good news is we've got on U.S. taxable income, we're going to be able to shelter quite a bit of U.S. taxable income because of that.

For this quarter I think we provided about $500,000, if I'm not mistaken, in tax expense for the quarter, and, you know, a lot of that is due to some of our international operators and which are profitable, so I would probably use that number number for the next quarter.

Okay.

And then with the change in control in terms of future step, does the non-controlling shareholder an in equity and earnings change?

No.

That will be so insignificant, you won't even see any difference there.

It will make a huge business in how we run and manage our businesses.

Did you just buy those people out or what did you do?

Yes.

Can you say for how much?

$500,000.

And what sort of interest did they have in it?

I'm not going to disclose that, Mark.

They did have a minority interest in the business, and we think that this is a fantastic move for the shared holders and for our partners, and we'll will really enable us to fully exploit the synergies of the businesses.

For us the burden of separate entities and allocations which we have tremendous freedom on now will more than offset the cost very, very quickly, so it was an easy decision for us.

It sound like you've already made some progress and we should see even some greater progress going forward.

It just burdened us a little bit and our shared resources and our allocations and the documentation because we had two groups of shareholders.

Now we'll be very free just to implement what's right for the overall business.

Great.

What can you say about pricing?

What's the pricing environment look like?

Pricing is tough, you know.

It's held.

It's clearly competitive, and it's in a mark like this on the high end searches there is no price pressure.

The lower you go, the more price pressure there is.

And, you know, it's just a reflection of the market.

Is it changing at all or is it pretty steady relative to the previous quarter?

It's been pretty steady quarter on quarter.

I think the good news is, is we get -- when you come into an upturn almost all of that goes away, but in a downturn clearly it's been more of a buyer's market.

So there is no, more pressure, but we've worked very hard, and we lose some jobs to pricing, hold than our pricing levels, as you've seen, put from what I've been told by everybody that has been around the industry that's a normal cycle type of approach, and I expect the pricing will continue to improve as it had during the up-cycle once it picks back up.

Mark, our average fee in the fourth quarter was about 57 grand.

Between the third quarter it was about $61,000.

So very little movement.

If you go year over year for FY ‘02 it was about $63,800 and for FY ‘03 for the full year it was about $60,000, so, again, in terms of the numbers, not a lot of movement.

And with regards to, you know, let's say you get to $78 million in revenues and you're break even at that level, and you mentioned that you're not going to have any benefit from these cost savings, would you -- you know, if we were to use $10 million in terms of cost savings from the restructuring effort, do you think you would realize like $2.5 million in cost savings in the second quarter or how should we think about that?

You know, I think that's probably a little aggressive.

You know, I would probably think of it more like a couple million bucks in our second quarter.

Then kind of gradually increasing.

But that's -- I mean, that's my best guess today.

Great.

Thank you.

Thanks for your questions.

There are no further questions.

Please continue.

Well, great.

That's the end of the questions.

We appreciate everyone on the call, and hopefully the as the economy improves, hopefully it will have a positive impact on our business but we'll continue to manage tough until that's evident and appreciate you attending the call this morning.

Thank you.

Ladies and gentlemen, this conference call will be available for replay for one week starting today at 1. 30 p.m. eastern daylight time and running through June 25th at midnight.

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Additionally, the replay will be available for play back at the company's web site www.cornkerry.com in the investor relations section that much does conclude our conference today.

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You may now disconnect.

Thank you, Robert.