Korn Ferry (KFY) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Korn/Ferry International conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session, and as a reminder this conference is being recorded.

Before I turn the call over to your host, Mr. Paul C. Reilly, Chairman and CEO, let me first read a 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, the company can give 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.

Thank you, and good morning.

Thanks for joining us.

This morning I'm going to share with you some highlights of our first quarter of our fiscal year which ended July 31, 2003.

I'm also going to provide input on some of the operating highlights occurring in our business and then I'll turn it over to Gary Burnison, our Chief Financial Officer who will provide more of the details.

Results for the first quarter were in line with expectations.

We achieved revenues of $73 million, which were driven by a relatively low backlog coming into the quarter, as a result of the conflict in Iraq.

Corporations remained skittish to move forward in new hiring new talent as the war effort tapered down.

Confirmations however, did rise over the quarter, and at this point, appear to have been stabilized.

We had a very successful quarter in terms of recruiting.

Since May 1, we have recruited 18 new partners.

We believe that we have the right consultants in place to secure new business and service our clients which is critical for our human capital firms to increase their market share.

Thus, we have been and will remain aggressive in recruiting the new consultants.

Korn/Ferry recruits for itself with the same standard of excellence we provide for our clients.

We are focusing on attracting A-level players with the right skills and who fit the strategy and values for our organization going forward.

For Korn/Ferry that's people who not only know how to bring in business, but have a proven track record of world class execution and client delivery.

While the marketplace remains challenging, I am pleased however to announce that we have completed our restructuring efforts around the globe.

This quarter we have taken out, we've taken an $8.5 million charge which we expect will yield about $16 million in annualized savings.

Furthermore, based on current revenue levels, and our newly reduced cost structure, we expect to report a breakeven deposit of EPS as early as the end of this current quarter.

This will be our first positive quarter in nine quarters, and marks a significant milestone in this extended industry slump.

This has been an enormously difficult and extended task, but our primary focus has been to return this organization to acceptable levels of profitability.

And we're nearly there.

From here, we're going to redouble our efforts to focus on growing our revenue and serving our clients.

While true economic recovery continues to elude the search industry, it does appear the markets are stabilizing and in some sectors even advancing.

Our Life Science practice has continued to grow in this quarter, the Global practice grew to 11% from the prior quarter.

And after an extended period of decline, our Financial Services practice posted an up quarter.

Perhaps most notable is the 10% advance in our Commercial and Investment Banking subsector.

We are hopeful it is the start of a long-term trend for the financial industry.

Another bright spot for the firm comes from the significant progress being made at Futurestep.

Over the quarter, we completed our country-by-country assessment of Futurestep operations.

Based on our assessment, we closed or integrated several European offices.

This will provide Futurestep with further efficiencies and significant cost savings in the back office.

Futurestep will now be able to concentrate in its growth activities in the key European markets.

Futurestep continues to operate at a cash flow breakeven in North America and is solidly profitable in Asia Pacific.

Since our last earnings call, Futurestep closed offices in Malaysia, Singapore and Tokyo and concentrated on the major markets where activity is occurring.

These efforts will continue to further contribute to Futurestep Asia's profitability.

The business is doing a terrific job in transforming the Futurestep model from a single transaction to a large product and managed services engagement.

These larger, more profitable deals will provide the final ingredient that Futurestep requires for long-term growth, profitability and scalability.

I am more confident than ever that our ongoing strategy of providing a broad range of executive human capital solutions and investing in the tools and right methodologies will continue to differentiate us from our competitors.

Since the launch of Search Assessment products which statistically validates the overall fit of individual candidates to secure a position in our executive search business, we have utilized it in over 320 searches.

Feedback from clients has been extremely encouraging, stating that Futurestep, that Search Assessment is remarkable in bringing data and science into the identification and selection process of candidates, a process that historically has been very subjective.

This tool was an offshoot of our Assessment business.

Our Assessment and Coaching business continue to promote excellent service to our clients.

This is a further validation and a strong testimonial to our long-term strategy.

We are optimistic about fiscal year '04 and I believe Korn/Ferry is well poised for growth.

Our cost structure is aligned and I believe we will generate a modest profit in the current quarter.

From here, even the slightest upturn in revenues fall directly to the bottom line.

With a solid balance sheet, a world leading brand and a team committed of A-player consultants, I believe we're on the right path.

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

Gary?

Thanks, Paul, good morning everybody.

First, let me go over a few highlights for the quarter.

EPS adjusted for nonrecurring charges was negative 2 cents and was at the high end of our guidance.

This represents a 3 cent sequential improvement over the fourth quarter of FY '03.

Adjusted operating earnings improved $500,000 sequentially, while adjusted EBITDA cash flow remained relatively flat at $4.4 million versus our fourth quarter.

As Paul said, consolidated first quarter fee revenue was $72.6 million.

We had previously announced plans for further streamlining initiatives in the first quarter.

As Paul indicated, we executed on this plan in the first quarter and as a result incurred a restructuring charge of $8.5 million or 23 cents per share in the quarter.

These restructuring initiatives included consolidating Futurestep's back office functions, reducing headcount in a further reduction of corporate and administrative overhead.

The charge is comprised of approximately $6.7 million of cash severance related to approximately 160 colleagues, $900,000 of facility related cash charges, most of which will be disbursed over the next two years, $400,000 of other facility related noncash fixed asset write-offs, and approximately $500,000 of cash for other restructuring related expenses.

More importantly, the forecasted annualized savings related to these charges are approximately $16 million.

As of July 31, the balance sheet liability for all phases of restructurings is about $19 million of which 9.7 is classified as current.

As of July 31, our worldwide cash balance stands at approximately $54 million, and we have no outstanding borrowings on our line of credit.

Additionally, our accounts receivable was $48.5 million, and the total worldwide employee headcount was 1400.

Let me now take a moment to review the business segments in detail starting with Executive Recruiting.

Quarter one Executive Recruiting fee revenue was $64.5 million, down $3.5 million versus the fourth quarter of FY '03.

And again, as Paul indicated, fee revenue in quarter one was affected by relatively lower beginning backlog as a result of soft confirmations in the months of March and April, particularly March, during the outbreak of the Iraq conflict.

The backlog situation was most dramatic in North America and Europe, as one would expect.

North America quarter one revenue was $36.4 million, compared to $38.7 million in the fourth quarter, while Europe was $18.2 million, compared to $19 million in the fourth quarter.

Both Asia Pacific and South America regional fee revenue remained relatively flat in quarter one at $8 million and $1.9 million respectively.

Despite the modest decline in revenue, post adjusted operating profit and EBITDA improved sequentially excluding the current quarter restructuring charge.

Executive recruiting adjusted operating earnings was up $1.2 million sequentially, to $6.9 million, or a 10.7% margin in the first quarter.

EBITDA or cash flow was also up sequentially in quarter one to $9.1 million, or a 14.1% margin.

Both improvements were due in part to our past and current cost savings initiatives.

The number of search assignments and average fee per engagement remained relatively flat versus quarter four at 1,150 and 56,000 respectively.

Now, turning to Futurestep, our overall quarter one fee revenue was $8.1 million and was flat with the fourth quarter of FY '03.

On a geographic basis, all Futurestep regions reported flat revenue in the quarter, and as Paul indicated the business was essentially cash flow neutral in the quarter excluding the restructuring charge with adjusted EBITDA of negative $100,000.

Let me now comment on our outlook for quarter two.

Although the activity is improved in the U.S. over the last couple of months, in the quarter one ending backlog situation is better, vacation seasonality will affect quarter two revenue.

However, we are expecting continued enhanced profitability in quarter two as more cost savings from our quarter one streamlining efforts are realized.

That said, we are projecting quarter two revenue to be in the range of 70 to $76 million, and EPS to be breakeven to positive 5 cents per share.

That concludes management's remarks.

I'll now turn it over to Shelley so we can answer any questions you have.

Thank you.

Thank you.

Ladies and gentlemen if you wish to ask question, please press star then one on your phone.

If you press star 1 prior to this announcement you will need to press it again.

To remove yourself from the queue, press the pound key.

If you are using a speaker phone please pick up your handset before pressing the numbers.

Once again if you do have a question or comment press star 1 at this time.

Our first question will come from the line of Paul Cader with Wachovia Securities.

Please go ahead.

Paul Carder, CFA: Hi, this is Paul for Mark Marcon.

Can you guys hear me?

Yeah.

Paul Carder, CFA: Thanks.

Real quickly, in reference to the, I guess margins outlook going forward, given the changes that you guys have made or the charges you've taken in Europe and the elimination of the people in the back office what have you, can you give us a sense I guess, the two largest markets, Europe, America, or North America, you know what your margin expectations are for those two segments for the rest of the year?

Well, we're only going to give guidance out a quarter, that's what we've done, Paul.

If you look at the charge that we took, most of it I would say that 60% of it related to Europe and the balance related to North America.

And so the savings which we anticipate to be $16 million will accrue to the benefit of those two regions primarily.

Paul Carder, CFA: And proportion?

I would say it should be about the same proportion, yeah.

Paul Carder, CFA: Same proportion relative to the charge?

Yeah.

Paul Carder, CFA: In terms of the new hires that you guys have made, are you guys strategically targeting any particular areas?

I mean, you talked about Life Sciences a minute ago and you talked about maybe a potential uptick in Financial Services.

I was just curious if you guys are kind of stacking the deck in a particular area or not in terms of specialties, practices, what have you?

I'd say, you know, there are clearly areas where we've been kind of beefing up but the hires have been in multiple industries.

We probably have focused a little bit more in Financial Services.

But you know, the industries are probably fairly broad and our key is really finding top A players.

And they've come from probably mostly from the industry from our industry, but we have been taking some out of industry who are key players that we think can drive the business forward.

So we do have a strategic plan, we have a recruiting plan by region, by market in every region of the world and we're executing against it and it's been very, very successful.

The thing I like about the people that we're recruiting, they're people that have a real hard time moving.

So they're joining us really for spiritual and strategic reasons, not for money or not that they're going to the bidders.

I mean all these deals have been, hey, come on over and get in our comp plan and they believe in what we're doing.

So I've been very, very happy at the recruiting effort and we're going to continue it.

Paul Carder, CFA: Tell us about I guess what your target is in terms of the number of consultants you'd like to have by year-end?

Well, it's funny, I had put a, you know, the numbers we've given you included all of our businesses.

For example, in the Executive Search business I committed to get kind of 20, what we called A-players in areas we needed.

We recruited 10 in the first quarter and we have a backlog at the same pace.

So we will continue to take world class people that believe in our strategy and direction and I think in the industry right now we offer really a unique direction.

We are still focused and haven't waived on our total human capital solutions and a lot of people in the industry who probably questioned it a little bit when I was here in the downturn now believe in what we're doing.

And we'll continue to bring A players who service clients that make sense and I'm sure we'll pass the 20 number but I don't know what it will be.

Paul Carder, CFA: Thank you, I'll come back on.

I'll let someone else hop on.

We have a question from the line of Mark Allen with SunTrust Robinson, please go ahead.

Mark Allen, CFA: Good morning guys, and nice to see you, it looks like you're going to get back to profitability this quarter.

Question relative to the production, I guess, revenue per producer.

Where are you running right now in terms of annualized, you know, revenue per producer and how does that compare back to the peak of the last cycle?

Well, it's about $675,000 per consultant as we count a consultant.

Some other firms count consultants a little bit differently and would use a smaller number.

We include more people in the definition but it's about $675,000 for the quarter annualized, Mark.

And if you look back, if you exclude the go-go days, we've gone back and looked throughout the firm's history, that number was $1 million and in some regions north of that.

Mark Allen, CFA: Okay.

We have capacity.

Mark Allen, CFA: So you're running sort of two-thirds of normal revenue per senior person.

The second question I have is relative to discussions you have with clients, what's your sense of what I would call pent up demand?

Are clients, do they have hiring needs they're kind of sitting on and they're looking for sort of more improved confidence in the economy?

What's your sense of the pent up demand?

I think you've gotten it.

I think clearly if you look at most corporations around the world, you know, a lot of the bottom line improvement has come from cutting headcount.

And there is, you know, if you look at productivity numbers you talk to people, people are working day and night.

So, I see two differences.

As I tell people, that six months ago, I think CEOs would say we're not sure if things are going to get worse.

Today, I think most COs are convinced it's bottomed and there is much more discussion on hiring, if people are putting together their budgets and starting to look forward next year, there's hiring budgets.

And I do think the one thing that people are waiting for is to see when is revenue, when do we get a sustained movement in revenue.

And when that happens, I'm convinced we'll be a floodgates.

Because people are down to the bone but I do think people are being cautious because the layoffs weren't that long ago.

Some still are and they're reticent on hiring until we move.

At the senior level, people have been making the adjustments at the very, very highest, the CEO level, the board level and those have been robust businesses for us.

But that volume piece is, I think people are waiting to pull the strings to see an upward revenue trend.

Mark Allen, CFA: Final question would be regarding geographic, I guess what I call geographic cross-selling opportunities, are there major companies out there where you would say service them in Europe but not in the U.S. and vice versa?

I mean, how much room is there to run in terms of serving multinational companies?

You must have been attending my management meetings in the last few weeks.

As a firm we have clearly the best global footprint of any organization.

I think that what we really stepped up is our global account program to service those companies on a global basis.

It's been very, very successful for us.

We've rolled it out to about a dozen accounts, we're adding four more.

The opportunity is absolutely huge.

Now, every client is different.

Some centralized hiring, some centralize the process and decentralize hiring to their division managers and regions.

And the only way to really service those businesses on a global basis is to have a process-oriented mechanism that you have consultants around the world who are tied to the same recruiting plan.

And we're making great progress both on our global accounts and rolling it out to regional accounts across regions where they need the same service level.

I believe it will be the biggest transformation in the industry over the next 10 years as people have outsourced finance, they've outsourced technology, I believe they're going to outsource pieces of the recruiting to companies that can deliver on a global basis and know them.

So we continue to move on the trend.

I think it's the biggest macro economic trend that's going to happen in the industry over the next 10 years.

Mark Allen, CFA: Thanks and best wishes this year.

Thank you.

If there are any additional questions please press star 1 at this time.

And we have a question from Kelly Flynn with UBS.

Please go ahead.

Kelly Flynn, CFA: Thanks, I have a couple of questions here.

First of all, I was looking for some kind of qualitative color on Europe versus North America.

Could you share any theories on how you think the recovery in Europe would trend relative to what's going on in North America in your industry?

And then any color you could shed on France, U.K. and Germany specifically would be helpful.

Then I have a couple more, thanks.

If I knew those answers I'd be the macro economist that everyone talks to.

I tell you something clearly, I think there isn't anyone in the U.S. that says the downturn is over, that the question is when does it rise.

I think that's the debate.

I see it in clients and I see it in our activity.

The issue of continental Europe isn't really France, and it isn't the U.K., it's Germany.

I think the German economy, labor law, financial issues, political issues, make it very, very uncertain to call.

And the German economy is so important to the rest of the continental European economy.

So that is the big question mark.

Although the economy is tough in France and the U.K., I think both their economies internally and our business is doing okay there.

Germany is the big question.

When it recovers, which way it goes, does it get worse, does it get better, and it's just very, very difficult to tell.

I think if anything that's going to slow down the whole EU recovery.

That is the question mark.

Asia remains, I think stable and poised for growth.

We've had great positioning there and I actually think Latin America is poised to become much better like Brazil which is the most important economy there is taking off and our Mexican operation is just through the ceiling, those guys are amazing in that economy, so I think the question is really Germany for Europe.

Kelly Flynn, CFA: Okay.

So would you say the U.K. and France are pretty much stable?

Yeah, tough markets but stable and you know, obviously I would put the whole European theater in the uncertain area economically, but you know, they seem to be relatively stable markets.

Kelly Flynn, CFA: Okay.

Thanks.

Second question here for Gary, I know you guys don't really want to give longer term specific guidance but maybe you could touch on a longer term margin target in general and roughly what revenue levels you think that would be associated with?

And a rough time frame maybe on that?

So in other words.

Kelly Flynn, CFA: So give us guidance, right.

I like the way you ask the question.

You know, with -- we really do only give guidance out a quarter, that's what we're going to stick to.

You know, I will just -- I'll tell you that I really believe that we've right-sized the business on the expense side, I think that our recruiting strategy that we have, our colleagues and partners are world class.

Our consultants, if you look on a macro basis, are, you know, generally running at two-thirds or 70% of capacity.

The business is quite scalable.

And if you look in this last quarter, you know, with that as a backdrop, the overall operating margin in the executive recruiting business was almost 11%, North America was 17%, I'm confident that Europe we will rally there, and Futurestep has turned around from a $20 million loss-making business not more than, say, five quarters ago, to one that's now cash flow neutral.

So I do believe there's a lot of leverage and scalability in the business as we have today.

And I think that will be reflected in the margins.

Kelly, I'm not going to give obviously outlook, but I will say that nothing fundamentally has changed in this business outside of the downturn in terms of profitability and margins that can be achieved on an historic basis.

Kelly Flynn, CFA: Okay.

That's helpful.

I have a couple more, more modeling related questions.

On the restructuring related savings, the $16 million, could you just confirm when that's going to roll in?

Is that all going to incremental this quarter?

Did you see a little bit in Q1 and just any color there.

And then finally, just any kind of cash targets for the end of the year.

Thanks.

I think if you look at the $16 million annualized savings that we're talking about, the full effect will be in place by the beginning of our third quarter.

There was a small amount that we realized here in the first quarter.

And I would say that 60% of it or so should happen in the current quarter we're in now.

But the full effects will be in place beginning of the third quarter.

Kelly Flynn, CFA: Okay.

And the cash, then I'll hop off.

Well, the cash at the end of this quarter, at the end of our second quarter, we would expect to be in the mid-50s, somewhere around there in terms of cash.

Kelly Flynn, CFA: Okay.

Great.

Thank you.

We have a question from the line of Dan Dittler with Lehman Brothers.

Please go ahead.

What was your bonus accrual in the quarter and how did that compare with the prior year quarter?

The bonus accrual, Dan, was around $8 million or so.

If you look back, if you're going back a year ago, I think the bonus accrual was around $10.5 million or so but of course you know, the bonus accrual flexes with revenue.

And revenue, if you go year-over-year was obviously down.

Great.

Thank you very much.

If there are any additional questions, please press star 1 at this time.

And Mr. Reilly, we have no further questions.

Great, now just a quick closing statement.

In terms of the team here, I think we've done an excellent job of cost sizing the business.

And I really think that activity is over.

This is a revenue driven business, I think we're poised, we've got great consultants in the field that have capacity, our costs are in line and this is a revenue gain.

And obviously we're affected by the worldwide economy but we're in a strong position if it's flat, to hold through it, if it picks up, I think to become a very profitable operation.

I'm really proud of the people here and the partners and I look forward to a little pickup in the world economy and I think it will be reflected very quickly in our business.

Thank you for joining us today.

Ladies and gentlemen this, conference will be made available for replay one week starting today at 1:30 p.m. eastern time and running through September 17th at midnight.

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Additional replay will be available for play back at the company's Web site at www.kornferry.com in the Investor Relations section.

That does conclude your conference for today.

Thank you for your participation.

You may now disconnect.