Korn Ferry (KFY) 2004 Q4 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.

As a reminder, this conference is being recorded.

Before I turn the conference over to our host, Mr. Paul C. Reilly, Chairman and CEO, let me first read the 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.

Listeners 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 conference over to Mr. Reilly.

Please go ahead, Mr. Reilly.

Great.

Thank you, Dave.

Good morning and thank you all for joining us.

This morning we are pleased to report another quarter of profitability as well as our first full year of profitability since the FY 2001.

It is evident that the cost reduction measures we have implemented paved the way for an 80% surge in EBITDA and helped us to re-establish positive EPS.

Nearly all of our sectors and functional practices were up this quarter led by exceedingly strong results from consumer and financial services and technology.

In addition to the continued expansion of new jobs in North America, the beginning of some global recovery helped to drive our quarter results.

As we said on prior calls, the recruitment of new consultants into the firm has been an ongoing strategic initiative for the business.

During FY 2004 we successfully recruited 46 new senior client partners globally.

This includes the former CEO and the former Vice Chair of U.S. from Spencer Stuart, Joe [Grefedeck] and Bob Damon.

Bob who has joined us to run North America.

These new partners come from a wide variety of backgrounds and areas of expertise, and will play a major role in helping us grow the business.

We believe the economic recovery - as the economic recovery continues to unfold, the clients will move forward in expanding their organization.

This movement will fuel the demand for new employees at both the senior and middle management levels, and will also unlock additional training and development needs.

To this end, Korn/Ferry has the right strategy to offer clients services of mobile offerings they need to ensure success in the human capital area.

I'd like to spend a moment to talk about the progress we've made in Futurestep during 2004.

This is the first profitable year ever for Futurestep since opening its doors in 1997.

Revenue for the year hit 34 million, but more importantly, it achieved operating earnings of 1.4 million for the year.

Perhaps even more impressive is Futurestep's fourth quarter operating margin of 8%.

After significant retooling, the Futurestep model is physically sound, and we've only just begun to tap this highly-scalable potential.

At the same time of this growth and profitability, Futurestep has had very high client satisfaction scores.

Based on our product strategy, which now offers project-based recruiting and interim solutions, in addition to single-search decision, Futurestep has made tremendous progress in the middle market.

This progress is being made on a global basis and across multiple sectors.

In an effort to further align the business with Korn/Ferry, we will establish industry-based practices for Futurestep in the year 2005.

Futurestep remains a vital component to our overall growth and a key differentiator for our business.

During this time, we have also continued to grow and develop our leadership development services, which include our as assessment and coaching offerings.

They continue to be fully integrated into our core business.

This morning, I am pleased to announce that we have posted a solid operating profit in the fourth quarter of the FY.

I'm also pleased to announce that we are forecasting positive EPS in Q1 as well.

Revenue growth continues to be driven largely by North America.

When we include our Mexico operation, Q4 revenue totaled $100.5 million.

We expect operating margins to be flat in Q1.

We are, of course, planning a full tax rate for the first quarter which will also have some impact to EPS.

Looking forward into fiscal '05, our focus remains on growing revenue, taking share, and offering clients a diversified suite of solutions.

We will continue to aggressively hire new consultants to the team, and make a few other strategic investments to the business.

Korn/Ferry has always been a pioneer in leveraging technology.

And this year we aimed to significantly improve our competitive advantage through the enhancement of our proprietary technology tool.

In addition, we will also put additional resources towards the professional development of our employees at all levels of the organization.

Further, we will invest strategically in promoting the brand and exploring new service offerings.

I'd liked add I just returned from Hong Kong where I attended the meeting with our market and country leaders in the Asia-Pacific region.

This is an area of high growth, we're extremely well-positioned.

We are strong in a number of key markets like China, India, and Singapore, which are experiencing GDP growth in the 6 to 9% range, and we have significant competitive advantage due to our long tenure in the region.

In fact, I attended our 25-year anniversary in Hong Kong on this trip.

We expect a solid top-line and bottom-line growth from Asia Pacific in the coming year.

We have accomplished so much this year.

Our global account program, our multiple product strategy, and our compensation system that reinforces our values and our quality, have clearly created a stronger client-focused organization.

We have continued to build on the momentum which started last summer.

I am very proud of our partners and what we - as an organization have accomplished.

While all indications point to continuing expansion for the overall global economy, we are cautiously optimistic for our business in fiscal - 2005.

We are encouraged by the increasing demand for senior level positions we have experienced this past FY, and look forward to building upon this momentum in the months ahead.

I'd like now turn the call over to Gary Burnison, our Chief Operating Officer and Chief Financial Officer.

Gary?

Thanks, Paul.

And good morning, everyone.

I'm pleased to report that in fiscal 2004 Korn/Ferry achieved revenue growth and positive EPS for the first time since fiscal 2001.

In addition, we recruited new talent into the firm, further developed our multi-product strategy, and substantially strengthened our balance sheet.

After a relatively slow start, we finished the year exceptionally strong.

Fee revenue in the second half of the year increased 20 percent, or $30 million over the first half.

In fact, in our recently completed fourth quarter, fee revenue surged 16.4 million, or 20% sequentially, to almost $98 million.

And as Paul pointed out, with our fine partners in Mexico including their operation in the top-line that number would have been almost $101 million.

This marks the largest sequential improvement in fee revenue in almost four years.

Fourth quarter fee revenue was driven by strong confirmations worldwide, and strong year-end uptick activity.

Fee revenue in all regions and businesses improved in the fourth quarter over the third quarter.

Net income grew almost $5 million sequentially, or 125%, to - $8.7 million.

And EPS was 21 cents per share versus 11 cents in the third quarter.

The fourth quarter operating margin was 11.6%, or $11.3 million.

For the year, fee revenue was 328 million, and EPS, excluding the impact of the first quarter restructuring charge, was 35 cents.

For the year, excluding all restructuring charges, EBITDA, or cash-flow, improved 15.2 million, or 80%, and operating earnings improved $21.3 million.

All profit improvements are results of a combination of higher revenues and efficiencies accomplished over the past two years.

As of April 30, our worldwide cash balance was over $108 million, or 31 million higher than at the end of the third quarter, and we have no bank debt.

Now let me review the business segments in detail.

Fourth quarter executive recruiting fee revenue grew 14.8 million, or 20% sequentially with all regions worldwide contributing to the improvement.

Results rose the greatest in North America with fee revenue increasing 9.5 million, or 23% sequentially, which is the highest quarterly revenue in ten quarters.

For the year, North America's fee revenue grew 5.2% to almost $171 million.

In Europe, fee revenue improved 2.5 million sequentially, or 1.9 million without the impact of favorable FX.

Asia Pacific--fee revenue was up a very strong 30% sequentially to 11.6 million in the fourth quarter, while Latin American fourth quarter fee revenue grew 6% sequentially to 2.1 million.

Fourth quarter executive recruiting operating earnings were 16.2 million, and improved almost $5 million, or 43% versus the third quarter.

All executive recruiting regions showed sequential profit improvement in the fourth quarter, except Latin America which was very close to break even.

Excluding corporate allocations, the Executive Search operating margin improved to 18.5%, and is at the highest level in three years.

For the year, excluding restructuring charges the executive recruiting operating margin was almost 15%, versus 11% in FY '03.

The number of executive recruiting consultants at the end of the fourth quarter is 379, and is consistent with the beginning of the FY.

Consultant productivity, however, is up 36% from the first quarter to an annualized revenue run-rate of 915,000 per consultant.

Now, turning to Futurestep where fee revenue continued to improve.

Fourth quarter fee revenue was 10.1 million, or 18.3% higher than the third quarter.

All Futurestep regions contributed to the improved revenue in the quarter, with Europe growing 18% sequentially and Asia Pacific growing 33% sequentially.

Futurestep North America fee revenue continued to trend upward.

In fact, the fourth quarter is the sixth consecutive quarter of improved revenue in North America.

Futurestep operating earnings--which continue to expand--were 900,000 in the fourth quarter, or a margin of almost 8.5%.

For the year, Futurestep's profitability improved dramatically.

Excluding restructuring charges, Futurestep's operating earnings went from a loss of 4.5 million in FY '03 to a profit of 1.4 million in this last FY.

Congratulations to our Futurestep team.

Now let me comment on our outlook.

We estimate that FY '05 first quarter fee revenue will be in the range of 90 to 96 million.

I'd point out that our fourth quarter was benefited to a small extent by year-end activity.

Additionally, although we are projecting the first quarter operating margins will be about the same as fourth quarter margins, we will be a full taxpayer--and our effective tax rate will double to almost 42%.

As a result, we are projecting an EPS range of 12 to 17 cents per share in the first quarter.

That concludes management's remarks.

I will now turn it over to Dave so we can begin taking your questions.

Thank you.

[OPERATOR INSTRUCTIONS] And one moment please for our first question.

Thank you, and that will come from the line of Kelly Flynn with UBS.

Please go ahead.

Thanks.

Hi, Gary and Paul.

I can honestly say thank you for putting up such good numbers.

Okay.

So, I have a couple of questions about, well first of all the incremental margins.

Just highlighting what you said, Gary, about the Q1 guidance, but as we move forward and look further out into the future, perhaps into '05, can you just revisit some of the comments you've made about incremental margin in the past, and revenue capacity, and just specifically, if we could go a little bit deeper--if you think about the revenue capacity.

Is it really realistic to think that by the time you get to your capacity based on the consultant count that you have, that you will be at the margins that your incremental margin would imply, or by then do you think you'd have to be, you know, hiring more?

Do you understand what I'm saying?

Thanks.

I do - I do.

Thanks.

Thanks for your kind remarks.

There's a few questions there imbedded in your question.

I will - we don't project out more than a quarter at a time as you know, Kelly.

We believe that in a normalized state, that this business--like any good service business--should produce operating margins all in of about 18% or so.

Our target productivity per consultant is about 1.1 million or so.

And this last quarter we were running at about 900,000.

And so, as we look forward in terms of incremental margins, if you set aside the fact that we're going to continue to aggressively bring in talented people in all lines of our business, not just executive recruiting, we do believe that the flow-through to the bottom-line should be 50% or so.

We still continue to believe that, and that's the - probably the best way that I could answer your - question.

Okay.

That's great.

Now what about a totally different question--on Europe, obviously you guys outperformed there as well, and you saw some improvements in trends as well.

Could you get into more detail, Paul, about, you know, what's going on in specific countries and maybe just touch particularly on France--that's the economy that seems to be on its track the most from a labor perspective--thanks.

Kelly, I would say we've shown in almost all major markets, improvement--with the exception of two, I'll talk about them.

UK is the biggest part of our business in Europe, and clearly showing improvement in the growing environment.

The challenging markets from an economy standpoint are Germany and France.

Germany--we've brought in actually six new terrific senior client partners and are gaining shares.

Our numbers are probably better than the market.

France--where we do have a number one or tied number one position is just a flat market.

It is just a tough market.

And the internal economy is tough, and I think that's going to be the most challenging of our major global markets this year because of the economy, not because of our people or market positions.

Okay.

Great.

Thanks a lot.

Thank you, next we'll have a line - pardon me, a question from [Dave Koenig] from Robert W. Baird.

Please go ahead.

Hey good morning, Paul and Gary, and congratulations on a very strong quarter.

Thank you Dave.

Yeah, first of all, I was wondering if you could go through trends by month within the North America and Europe--maybe kind of through the quarter and then what you saw in May?

In terms of trends, it was - you know - if you go back to the fall of last calendar year, we started to see an increase in activity.

November and December were slower, obviously, because they are holiday months.

And I would say that when you look at January through May, it was fairly consistent.

You know, there may have been a month where it was a little bit stronger than the previous month.

But, you know, overall fairly consistent with a slight bias toward the trend up.

So somewhat of a bias toward a bit of acceleration by month?

Yeah.

And you know, the thing that's hard is that our, you know, our year obviously ended, our year end - ended in April--and so, as with any company you'll see some - if it's a search company, some uptick activity at the end of the year.

Europe was--I would characterize it as fairly flat.

Asia-Pacific had a, you know, one or two good months in that stretch from January through May.

If you look really for overall market trends, there's no doubt since the fall--especially in North America.

The market's been trending up, both in - not just on what we're booking, and you can see by our quarterly results, but by consultant activity, by market, I mean, it's been trending up.

I think we're always concerned in April, because year-end people get really active what May would look like, and May's looked really good so far.

So, but you know, again, you know, we're very optimistic about the future, but if you look at the economy, will, what will happen with oil, what will happen with interest rates, what will - I think there's still a few questions out there.

But everything we say - everything we see in Asia, North America and most places in Europe except France, particularly, are all positive signs.

But everything we say - everything we see in Asia, North America, and most places in Europe except France, particularly, are all positive signs.

Alright, well thank you.

Thank you.

And next we have a question from the line of Ty Govatos - with CL King.

Please go ahead.

How are you fellows and let me add my congratulations.

Spectacular quarter.

Thank you, Ty.

May you have many, many more strung together.

Absolutely.

Nitpickey question--bonus accruals for the quarter, and do you have any plans for investment spending this year versus last?

The bonus accrual was a little bit over 16 million -

How much?

16 in the quarter.

And in terms of investment spending as Paul indicated, we are going to continue a focus on recruiting talent into the firm.

Retaining the fabulous talent that we have.

In addition, you will see us, as Paul indicated, make some investment in the information and technology area.

And also in terms of organizational development.

Could you quantify that at all?

Or bracket, you know, a possible range?

I would say that if you look at Capex--to highlight that, Ty-- for the forward 12 months, that would be about 6.5 million or so.

Right.

Oh, so most of the investment spending is going to be there.

Do you have any additional programs, like training, et cetera, that would show up in SG&A or anything like that?

Well, we do.

The organizational development program would show up.

They would be expensed through SG&A.

And in terms of the number, I'd rather not comment publicly on what that's going to be.

But I think it's very reasonable, and will certainly not throw off the margins.

Fair enough.

Thanks an awful lot.

And congratulations again.

Great quarter.

Thank you, Ty.

Thank you, and Ladies and gentlemen, if there are any further questions, simply press star 1 at this time.

Next we'll hear from the line of Mark Marcon with Wachovia Securities.

Please go ahead.

Hi, Paul and Gary, what a difference a year makes.

Terrific.

Thanks Mark.

Wondering if you can talk a little bit about what you're seeing in terms of pricing out there?

Well, it's a - you know - I've actually - as a newcomer to the industry, was fearful on pricing coming in.

Our pricing has held amazingly well, you know, through the downturn, and now that it's ticking up, my view is I think pricing is, you know, we're not going to - I'm not - it's early to predict, but I think pricing actually in a, you know, in a sellers market, you know, is going to actually firm up and start to increase again.

And I think we're seeing early signs of that.

We're seeing a lot less questioning on pricing on our proposals.

We are getting busy.

Our competitors are getting busier.

And I think it's going to be a very, I think it's going to be a positive trend.

Are you, in terms of fees per engagement, are those - are those potentially coming down on average due to the fact that the activity levels have broadened out beyond the C-level suite, and are going down to closer to middle markets or middle-management ranks?

I don't think, you know, I think we've experienced, you know, fees have held pretty steady through this quarter, and clearly as you go through the next level there's, you know, the average fee isn't as high, but, you know, I also think that you're going to get more full fee, you know, less concession.

Right.

So, I don't - - see a negative fee pressure at all right now.

I think we see - all the market trends as a continuous positive.

I couldn't - we couldn't say that a year ago.

I can say that now, though.

Great.

And were there any big projects in the quarter?

No.

I mean, I can't think of anything that would be extraordinarily large this quarter.

I mean, obviously, every quarter we have a fair share of marquis assignments.

So, I would say that there was nothing that really stood out.

Yeah, there was nothing.

I mean, we've had a number of big assignments, but they're not more than any other quarter in total.

I mean, so we can't say, if you're looking at graphing of revenue surge because of a couple of big unusual assignments, I don't think more than average.

Great.

And then in terms of - in terms of your cash flows, what - was Capex this quarter?

It was very minimal, Mark.

I mean, I want to say it was less than, you know, less than $1 million, probably 700,000 or so, very minimal.

Great.

And where would you expect the--you said Capex is going to be 6.5 million for next year.

Where would you say D&A would come out?

Depreciation?

Yeah, depreciation and amortization.

You know, I think it'll probably be around $9 million or so.

It's clearly, which is great news, trended down significantly from when we came in the business when it was down over $16 million.

So it's almost half what it was.

And the Capex expenditures, although will be up slightly forward 12, they're way off where they were in the go-go days, obviously.

Yeah.

And then in terms of - in terms of the taxes that you are actually--you're going to reflect a 42% tax rate--but what - would be a more realistic actual cash outflow for taxes?

Well, I mean, I - think that that's - you know - that's pretty close to where it's going to be.

I mean, we're obviously looking at various tax-planning strategies.

We've done an awful lot of that over the past 2 and a half years, and that's reflected in cash refunds and a low rate.

But, we are looking at other things, but unfortunately, you know it's, we have people and we have real estate.

There - not a lot of things that we can do.

So, I'm expecting that the cash outflow is going to be pretty close to what the effective tax rate is.

Okay.

And then in terms of the bonuses that you're going to pay out, can you give us a sense in terms of what's going to happen to the cash balance?

I think that after bonuses are paid we'll probably be in the mid 70s, something like that, after the first quarter.

And all the - bonuses will be paid during the first quarter?

There is a little bit of slippage in - some regions of the world that goes into August, but it's - not significant.

Okay, great.

And then in terms of the areas that you're - how should we think about the consultant count going forward?

Is that going to tick up materially, or it sounds like you still have, you know, significant excess capacity?

I think what you'll find, Mark, is that we'll recruit and continue - which we've done a terrific job it seems this year of bringing high valued people, so, I think you're going to see two pieces of it, three pieces.

You'll see some, you know, some of the lower performers that we continue, that any organization has fallout at the bottom.

Right.

We'll continue to bring in high level people.

But the new recruits--they pretty much hit the ground running, and are productive and you're going to see a continued increase in productivity in the existing people as the market picks up.

So, my guess is the count may be flattish, or up a little bit, but you know, I think you're going to see it more in productivity.

Great.

And then in terms of the other areas that you mentioned, you're going - - to bring some people.

Can you elaborate a little bit on that?

Well, Futurestep continues to grow - -

Sure.

I mean, it's backlog is in really good shape relative to the business.

And we'll continue, you know, we - to bring people in, just as in our leadership development services.

We had some areas that were slow.

We brought some new leadership in in the U.K. and North America, and the business has really picked up and started going.

So, we'll continue to invest in all those areas in high value people.

But, you know, the people that come in have almost instantly started to drive the business.

So, even though it's an investment in some sense, it's been a pretty quick return.

Great.

Super, thanks.

Oh, one last question.

Can you mention - just a point of clarification.

Were the [confirms] up in May relative to April?

Were the - It was, you know, it was fairly--you know--fairly consistent worldwide.

You know, in North America it was up a little bit.

But overall, Mark, it was fairly consistent.

Great.

Thanks a lot, Gary and Paul.

Thank you, Mark.

Thank you, and next we'll hear from the line of [Chris Lord] with Criterion Capital.

Good morning.

Can you just give me - - talk about a target 18% operating margin goal, can you just qualitatively speak a little bit about where, and what part of the team now you think you'll see the most leverage, is - kind of a 40% gross margin the target?

And then, is it on the [inaudible] on the G&A line, it's - - the obvious spot I would look toward.

And then also, if you could, talk about a share count for fiscal '05 what you think that might be on an - - an average basis for the whole year?

Thank you.

Nice quarter.

Thank you, Chris.

If you look at the leverage in the business, you're right, it's really in a couple areas.

The - there's clearly been a tremendous amount of efficiencies that we've implemented over the past two, two and a half years.

The corporate and regional overhead areas around the world are a third of the size that they were a couple years ago.

And although we will make some investment there, clearly there's leverage there.

We have brick and mortar in almost every geographic market around the world where we want to be.

And so there's leverage on the real estate side.

On the final piece, is our existing professionals that we have.

We're running, as we said, about 900,000 or so per consultant.

And we would like to see that go up by a couple hundred thousand.

And as Paul indicated, we will continue to bring talented people into the organization.

Shares outstanding?

In terms of the diluted, fully diluted share count for next year, I would use about 46, 46.5 million shares.

Okay, great.

And this might be a silly question.

On the increased productivity, is that going to be reflected in the gross margin line?

Yes.

Okay, great.

Thank you, Chris.

Thanks again.

Thank you.

Next, we'll hear from the line of Jim Wilson with JMP Securities.

Please go ahead, sir.

Oh, thanks, good morning.

Just a couple quick questions.

As business has improved, can you see or sense, or any feedback as to if there's any new reason you might think you win business against competition, or in turn don't?

I would say that there are a number of factors and I alluded to them in the opening remarks.

I mean, it's great to have the numbers and the increase, and don't get me wrong, I feel good about it.

But, you know, I think what we're seeing the difference, and if you look at it - I truly believe we are gaining share, it's the whole strategy that's been implemented even during the downturn that we've - we're going into market now with multiple products.

We have a global and regional account structure and strategy that's very different, that's supported by infrastructure not just by, hey, you're important, we're going to do work for you.

We have a client first initiative that requires basically our geographies and our market leaders to say collaborate on every single search and, you know, bring the right team to market and agree on the right team.

So there's a lot of infrastructure things that a client wouldn't see but are clearly feeling it, and we're hearing from customers all the time.

We have a - we have a group that does a client satisfaction survey, a telephone call actually,on every single engagement whether it's Executive Search, middle management, or a leadership development services.

And I think there's a whole different focus on the organization about putting the client first, getting the best team there, and having the absolute best quality and client satisfaction, and it's reflecting I think in the marketplace.

Great.

And just one other, any other new strategic directions you might be thinking of moving into?

I think where we are right now is, we've come so far on integrated products we have, in growing them and they are all profitable, and we're going to continue that as our main thrust this year.

We've still got some work to do.

And we'll probably look in some other areas, but I, you know, I wouldn't say we are committed.

We are committed to exploring what other services may enhance, you know, our human capital solutions, that reinforce Executive Search and tie all of our products together.

And, you know, we've got our existing products tied together.

So for example, our assessment methodology that we use in our leadership development services, we have an assessment tool that we use in search now called Search Assessment.

We have that same assessment model that's used in coaching.

You know, so it ties all of our services together in platforms.

And we'll probably explore areas where we think we may be able to enhance the offering.

I can't tell you what those would be today.

You know, but the major focus is still to drive those three businesses we have and take them again to a higher level, more critical mass, more market share.

All right.

Great quarter, thanks.

Thanks, Jim.

Thank you.

And Mr. Reilly, at this point we have no one else queued up for questions.

Well, great.

We'll I'd just like to thank you all.

Obviously, we are proud of our quarter and our accomplishments, but you know, as of today our quarter is behind us.

As of the release officially, and we're looking forward to what do we have to do to continue to take the business to the next level.

So we're excited.

I think the market trends, for the first time since I've been here in three years, are looking positive and we'll continue to drive the business hard.

So, I look forward to talking to you all in another three months.

Thank you, Dave.

You can close it up.

Thank you, certainly.

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