Korn Ferry (KFY) 2009 Q4 法說會逐字稿

Ladies and gentlemen.

Thank you for standing by.

Welcome to the Korn Ferry International conference call.

(Operator Instructions) As a reminder this conference is being recorded.

Before I turn the call over to your host, Mr.

Gary D.

Burnison, let me first read a cautionary statement to investors.

Certain statements made in the presentation today 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, investors are cautioned not to place undue reliance on such statements.

Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties which are beyond the Company's control.

Additional information concerning such risks and uncertainties can be found in the release relating to this presentation in the Company's annual report for fiscal 2008 and in the other periodic reports filed by the Company with the SEC.

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

Burnison.

Please go ahead, sir.

Well, good afternoon, and thank you all for joining us.

There is a saying that there can't be spring without winter and I think that's probably the best way to summarize the climate facing most global businesses over the last several months.

It's certainly not news to those that are listening on this call that our industry, the global capital markets and most businesses have been under siege since the fall of 2008.

In the first quarter, the AESC, our trade organization, reported that the executive recruiting industry is down over 40% from the prior year.

Unfortunately, that environment is at a significant impact on our top line.

Yet despite the drop in demand, Korn Ferry is successfully maneuvering through this historic global recession.

We moved immediately and decisively to align our business against this unprecedented industry falloff, reducing our annualized cost base by over $300 million in five months, while preserving our top line capacity.

Although we experienced about a 14.5% decline in revenues in the fourth quarter on a constant currency basis, the impact of our efforts allowed us to generate $36 million in additional cash.

Further, the Company's balance sheet is well fortified.

We finished the quarter ahead of forecast, with $326 million in cash.

In March, Kennedy Information, a leading industry analyst, reported that Korn Ferry once again maintained its top spot for 2008.

In addition to being the global leader in executive recruitment, our non-search solutions are increasingly being utilized by clients.

In fact, our leadership business continued to outperform the other business segments in the quarter.

This last quarter, that business reached almost $18 million in fee revenue and we finished the year on a run rate of about $71 million.

Lominger in particular continues to show the untapped possibilities of extending our brand.

Although revenues were about flat for the year, which reflects the overall economy, we did amass $6.4 million in operating profits from this business, which is an operating margin of about 30%.

Overall, our business has stabilized over the past three months and May new business was slightly better than April.

However, with summer upon us, we expect there to be slowness across all businesses, not just Korn Ferry, over the next several months.

There's no doubt that the past 12 months have been an extremely trying time for all businesses, but they are just that, in the past.

Great companies make their best moves in these kinds of markets.

We are moving forward.

Our focus continues to be preserving the franchise, positioning the Company for growth and accelerating through the economic turn.

Our strategy can be summarized in five broad areas.

First, we have to continue to institutionalize how we go to market.

We've worked hard to enhance our processes, and to embed our intellectual property into our search process.

We've done a good job of integrating our non-search offerings and providing our colleagues with ongoing training and development on our broader suite of solutions.

This year we're going to continue to take share and develop deeper, more meaningful relations with our clients.

We're going to continue to extend and elevate the Korn Ferry brand.

Over the next 12 months, we're going to continue to target growth from our largest global and regional accounts.

Proactively identifying the top shelf global clients that we want to pursue and allowing the resources in the organization to go after those opportunities.

We're going to continue to accelerate the growth and future step in our leadership businesses.

We believe that there's a significant opportunity awaiting Futurestep.

If you look over this past year, it's interesting our largest client was Futurestep.

If you look at our top eleven clients, four of them came from our Futurestep business.

With the last round of downsizing in many organizations throughout the world, we've seen companies trim and do more than trim their internal HR, administration and recruiting functions and they are just not rebuilding them.

This provides a great avenue for Futurestep to provide outsource solutions to those organizations.

We're going to continue with that pursuit.

And in the leadership business, we're going to continue to integrate those offerings with our search clients, as well as drive growth within that business.

In addition to pursuing the consultative services within our leadership offering, we're also going to develop more scalable and leverageable product and license offerings.

It's been proven through the acquisitions that we have done, particularly in the Lominger business, that those are more scalable businesses and we can grow them in any kind of economic climate.

Fourth, we're going to pursue transformational opportunities along the broad HR spectrum.

I'm quite pleased by the growth in contribution of the four acquisitions we've made over the last three years.

And finally, we're going to invest in our most precious natural resource, which is our people, continuing to train colleagues on consultative selling, performance management, and employee engagement.

As I said, there's no doubt that this has been a trying time for all businesses.

But, despite the economic climate and ironically because of it, I've never been prouder of our organization.

I'm confident that the combination of our entrepreneurial attitude, our fortified balance heat, along with the seeds that we've planted for further transformation, are going to yield great things for Korn Ferry.

We're going to extend our reach in the value we provide for clients and we'll continue to achieve above average industry growth rates and returns for our shareholders.

Before I turn the call over to Mark Neal and Gregg Kvochak, our VPs of Finance, I would like to introduce our new CFO, Mike DiGregorio.

Over his career, Mike has worked for both public and private companies, both in the roles of CFO and COO, started his career at Deloitte and Touche and spent many years with Gillette, now P&G.

Mike started just literally just about a week or so ago, so his comments will be brief, but, Mike, could you say a few words for us.

Sure.

Thanks, Gary.

It's a pleasure to be speaking with all of you today.

I'm truly delighted to have joined such a world class organization.

Having spent the majority of my career at industry-leading companies, I'm familiar with the strengths and advantages that a company of strong brand.

Korn Ferry is the recognized leader in global executive recruitment and a fast up and comer in the broader talent management arena.

I look forward to personally contributing, as we continue this exciting transformation.

As Gary mentioned, I just started a week ago, so at this point, I will not be presenting the fourth quarter and year end results, but I will be talking with you plenty in the future.

Meanwhile, as you know, we have a strong experienced financial team with Gregg Kvochak and Mark Neal and they will be delivering today's financial remarks.

So at this point, I look forward to turning it over to Mark.

Mark?

Thanks, Mike, and good afternoon, everybody.

As Gary said, current market conditions around the world remain challenging.

On a constant currency basis, Korn Ferry's fiscal '09 fourth quarter fee revenue fell 43.5%, or nearly $91 million versus the fourth quarter of fiscal '08 and 14.5%, or $19.9 million sequentially to $107 million.

On the same basis for all of fiscal '09, fee revenue contracted over 16.5%, or $131 million to approximately $638 million.

The good news is that within the quarter, the pace of sequential fee revenue decline has slowed substantially.

Additionally, despite the decline in the top line, the firm has continued to generate positive cash flow.

At the end of the fourth quarter, the firm's worldwide cash and marketable securities balance was over $326 million, up over $36 million from the end of the third quarter.

Our firm continues to be the most liquid and well capitalized in the industry, with substantial financial resources to weather a prolonged recession.

As previously announced, we have taken aggressive actions to rationalize the firm's cost base for the projected near-term volume of revenue while maintaining critical consultant and execution talent necessary to take advantage of the longer term surge and the demand for our services that typically follows a recession.

These cost savings actions have resulted in an approximate 30% reduction in our global employee base, the consolidation of office space in select locations and the reduction of various other G&A expenditures.

Combined, these actions are projected to result in annualized prebonus cost savings of nearly $185 million when compared to the annual run rate in the first quarter of fiscal '09.

The full effect of these cost savings are expected to be realized in the first quarter of fiscal '10.

Restructuring charges to achieve these savings were approximately $42 million, of which $25.1 million, or $0.34 per share was incurred in the fourth quarter.

This charge is comprised of $13.4 million of severance pay and $11.7 million of facility consolidation related expenses.

The cash flow impact in the fourth quarter of all restructuring actions completed in the third and fourth quarter was approximately $12 million.

Excluding the impact of all restructuring charges, pro forma fourth quarter operating loss was $8.9 million, down $29 million year-over-year, and down $14.4 million sequentially.

Given the difficult market conditions, management believes that the most relevant current operating measure is the firm's ability to maintain and generate cash.

Internally, we are managing the firm to positive EBITDA plus the amortization of stock compensation and other long-term deferred compensation costs.

During the fourth quarter, the firm generated approximately $100,000 of EBITDA plus long-term incentive compensation amortization.

Excluding restructuring charges, fiscal '09 fourth quarter loss per share was $0.11, down $0.47 versus the fourth quarter of fiscal '08 and down $0.19 sequentially.

For the full year on the same basis and excluding the nonoperating investment losses incurred in the third quarter associated with the firm's deferred compensation program, earnings per share were $0.63, down $0.83 year-over-year.

On a GAAP basis, fiscal '09 fourth quarter and full year losses per share were $0.45 and $0.28 respectively.

At this point, I'm going to turn it over to Gregg and he'll go through some of the segment information.

Okay.

Thanks, Mark.

Starting with the executive recruiting segment.

On a constant currency basis, fiscal '09 fourth quarter fee revenue fell $77.6 million, or 43.7% year-over-year and $17.6 million, or 15.2% sequentially.

All executive search operating regions and specialty practices were down both year-over-year and sequentially.

As previously stated, despite the ongoing economic headwinds the overall pace of sequential fee revenue decline has decelerated significantly.

Executive search fee revenue and new business confirmations were essentially flat over the three months of the quarter February through April.

For all of fiscal '09 on a constant currency basis, executive search fee revenue was off $120 million, or 17.7%.

In North America, fourth quarter fee revenue was $56.9 million, down 42%, or $41 million year-over-year and down $10.1 million, or 15% sequentially.

All major specialty practices were down year-over-year and sequentially.

The major -- the most difficult specialty markets continue to be financial services followed by the technology and industrial markets.

The North American consumer goods and education practice were essentially flat versus the third quarter.

For the full year, North America executive search fee revenue fell $65.4 million, or 17.4% to $309.5 million.

Underlying market conditions in Europe remained depressed in the fourth quarter.

On a constant currency basis, Europe fourth quarter fee revenue declined 51%, or $25.5 million year-over-year.

Sequentially on the same basis, Europe fee revenue fell 21.4%, or $6.5 million in the fourth quarter.

All individual country markets and all specialty practices contracted in the fourth quarter both year-over-year and sequentially.

In the larger markets, both the UK and Germany were off 34% and 32% respectively, while France was off 15%.

For the full year on a constant currency basis, Europe fee revenue fell approximately 17.6%, or $32 million.

In the Asia Pacific region, constant currency fiscal '09 fourth quarter fee revenue was off 49%, or $11.5 million year-over-year, and 14.8%, or $2 million sequentially falling to $10.1 million.

All Asia Pacific country markets fell year-over-year and sequentially in the fourth quarter.

Sequentially, Australia and China performed best and were off only 5% and 3% respectively.

Financial services remains the toughest market in Asia Pacific, off 70% year-over-year, and off 35% sequentially.

For all of fiscal '10 -- for all of fiscal '09 on a constant currency basis, Asia Pacific's fee revenue was off 27.4%, or $26.3 million.

In Latin America, fourth quarter fee revenue measured in constant currency was off 15.8%, or $1 million, and 8%, or $450,000 sequentially.

For all of fiscal '09 on the same basis, Latin America fee revenue was up 1%.

The total number of executive search consultants at the end of the fourth quarter was had 460, down 37 sequentially and 54 year-over-year.

The average fee per search was approximately $75,000 in the fourth quarter and was down 17% sequentially and 22% year-over-year.

Annualized fee revenue production per consultant fell 17% sequentially and 47% year-over-year to approximately 708,000.

Excluding restructuring charges of $19.4 million, consolidated executive search pro forma operating earnings were $3.3 million, down $24 million year-over-year, and $12.9 million sequentially.

Consolidated executive search operating margin was 3.6% compared to 15.4% in the fourth quarter of fiscal '08 and 14% in the third quarter of fiscal '09.

For all of fiscal '09, pro forma consolidated executive search operating margin was 14.3% versus 18% for all of fiscal '08.

In the fourth quarter and excluding restructuring charges, consolidated executive search operations generated approximately $1.3 million of EBITDA plus long-term incentive compensation amortization.

Now turning to Futurestep, measured on a constant currency basis, fourth quarter fee revenue fell 42%, or $12.9 million year-over-year and 11%, or $2.2 million sequentially to $15 million.

Geographically, business was weakest in North America, where fourth quarter fee revenue was off 54% year-over-year and 27.5%, or $2.1 million sequentially.

Sequentially on a constant currency basis, Futurestep Asia Pacific was up 7.7%, or $400,000, while Europe was down 13%, or $800,000.

For the full year, Futurestep consolidated fee revenue dropped only 9.8%, or $11 million on a constant currency basis.

Excluding restructuring charges, Futurestep's operating loss in the fourth quarter was $2.1 million versus a loss of $2.5 million in the third quarter.

Futurestep absorbed $5.6 million of restructuring charges in the fourth quarter and is continuing to lower head count and G&A expense with the goal of achieving near-term cash flow breakeven.

In the fourth quarter, Futurestep incurred an EBITDA plus long-term incentive amortization loss of $1.2 million.

Let me now comment on our outlook for the first quarter of fiscal '10.

The global economic crisis has had a significant impact on many of our clients human capital initiatives.

Demand for executive searches, leadership and talent consulting and project-based professional recruiting has declined sharply since October of 2008.

Although the demand for our service is beginning to stabilize, the macroeconomic environment and labor markets remain uncertain and therefore our revenue visibility remains challenged.

However, based on new business trends since the end of the fourth quarter and considering the anticipated decline in new business in the summer due to seasonality, fiscal '10 first quarter fee revenue will likely range from 90 million to $100 million.

Furthermore, the firm's operating goal in the short run is to maintain positive cash flow as defined by the measure EBITDA plus long-term incentive compensation amortization.

Finally, given the continued uncertain economic environment, the firm will be taking additional less significant actions to rationalize the cost base to maintain positive cash flow.

That concludes our prepared remarks.

We're glad to take your questions.

Thank you.

(Operator Instructions) Our first question is from the line of Andrew Fones from UBS.

Please go ahead.

Yes, thank you.

Obviously I understand that the revenue flows in a little bit behind the confirmation.

You said confirmations were flat month over month through the fourth quarter, but you are guiding to a little bit lower revenue for the first quarter.

Did you see a dropoff in confirmations in May, or is this just that lagging effect of the revenue behind confirmations?

Thanks.

Thanks, Andrew.

Well, it's a little bit of a lagging effect.

May was actually better on balance than April, but one month doesn't make a trend and our belief is that many businesses this summer are certainly going to take some time and pause.

And so we are anticipating in the summer months sluggishness.

And so that's what's going into the forecast.

Okay, and then in terms of the further cost cutting initiatives, you said it's going to be less than we saw over the last two quarters.

Would you still be anticipating shutting offices, or is this just going to be a small number in terms of head count and will that be front and back office or just how should we look at that?

Well, we've, now for several months, we've said that the operating boundary of the business needs to be cash flow as measured by EBITDA and the amortization of long-term incentives.

The falloff that we saw in late October, early November was clearly unprecedented.

I think we reacted immediately and decisively.

In terms of our operating plan right now, we do not foresee any kind of mass reductions in either our real estate or workforce like we've done over the last several months, and it's more continuing to refine the cost base.

But, look, our focus needs to be on the top line.

I absolutely believe that great companies make their best moves in times like this.

This is why we've been so careful with the cash and the balance sheet.

That's what we're intending to do.

Okay.

Just actually regarding the cash on the balance sheet, how much do you expect to pay out in bonuses here and can I ask what the bonus accrual was in the fourth quarter?

Sure.

The bonus accrual in the fourth quarter was $4.5 million and you should be thinking in terms of roughly $90 million of bonus payout in fiscal '09.

Okay, thanks.

And then just following up to your answer to the first question, in terms of a little bit of a pickup in May, obviously we don't want to get too carried away here, but in terms of areas of improvement, what did you see?

Was there anything notable in terms of practices or geography?

Thanks.

Well, I would just caution you to, again, one month doesn't make a trend.

So I certainly wouldn't draw any conclusions.

We have not drawn any conclusions from that performance.

Generally speaking, May was better in Europe than April.

Some of that could be holidays and Asia and North America were only slightly better than April.

Okay thanks.

Thank you.

Our next question comes from the line of Kevin McVeigh from Credit Suisse.

Please go ahead.

Great, thank you.

Nice job in obviously a very, very difficult environment.

I appreciate you framing out some range of guidance.

And not to try to get too precise on the operating line, but the 90 million to $100 million, trying to assess what the incremental cost savings will be in the first quarter, so I'm going to ask my question this way.

If you had $107 million translated into a loss of about $11 in the fourth quarter excluding the charges, is 90 million to $100 million, what should that range be on the EBIT line, given the incremental cost savings as a result of the actions you've taken?

Sure.

I mean broadly speaking, we're not giving earnings guidance.

However, I think it's a fair question.

There clearly is going to be in the first quarter some operating savings, reduction in expense that is lagged, that's staged, that's happening from the prior actions that will roll through in the first quarter that will help to offset that deterioration in the top line, assuming that the summer months turn out to be quite cyclical.

At the same time, you'll probably see a slightly higher bonus provision in the first quarter than you did in the fourth quarter.

Got it.

And, Gary, while I have you, if we could just, or if Gregg's the right person for the question, the components of the cash of the 326, how does it break down in terms of what you could use versus what is more longer term in nature?

Sure.

If you take the $326 million and you roughly deduct $90 million for the bonus expense, you'll come to about $237 million of net cash.

And from that, about $62 million is in reserve in our E-Cap program.

So the balance, which would be about $175.5 million or so would be what we would consider usable or investable cash.

Does that make sense to you?

That makes a lot of sense.

And then obviously, Mike, I know you haven't been there all that long, but I wonder if you could give us your initial thoughts on Korn Ferry and what you intend to focus on, with the caveat you've been there less than two weeks?

I think it's -- as everybody said, a very unique time in any business environment and I think fundamentally the general focus is on generating positive cash flow.

And so as we said, we know we're starting to take some other cost saving actions and we're going to be very vigilant to continue to look at this and control the cost base and we're confident in time that the top line will start moving up, but the short-term focus is going to be on maintaining strong cash balances, liquidity, and keeping in the black on cash.

Great, thank you.

Thank you.

Our next question is from the line of Tobey Sommer from SunTrust Robinson Humphrey.

Please go ahead.

Hi, this is Frank in for Tobey.

Good afternoon.

Hi, Frank.

I wanted to ask a little bit about the pricing environment.

We saw a little bit of a decline in the average fee.

Can you talk about kind of what's going on there and maybe by either segment or, or sector?

Yes, I think to get that granular would be difficult.

I'll give you some broad parameters.

Overall -- first of all, there's no wage deflation at the top of the house.

If you look at the Fortune 500, for example, there's only been isolated examples of salary reductions.

If you look at the Fortune 500 and talk about long-term incentives, we have seen that packages could be, 10, 20, 30% long-term incentives, could be less than, say, the prior year.

So there is a little bit of that.

But generally speaking, we're not really seeing wage deflation.

The decline in the average fee is really coming about because of the environment, the competitive environment that we're operating in, whereby literally in the last part of October, early part of November, this industry fell off dramatically.

And so certainly there has been pressure on expenses and the like, but I would not take this trend, I wouldn't extrapolate out on that long-term in terms of this industry because we just don't see wage deflation.

We continue to see that there will be a shortage of skilled executives globally over the next decade.

Okay, great.

That's helpful.

And you mentioned sectors that were experiencing weakness being financial services and technology.

Can you go into -- is the rate a weakness stabilizing at all or is there some areas that you're seeing changes in there?

Well, if you look sequentially, it's very difficult because the business, it's -- you're recognizing revenue over a several-month period.

And so what you're seeing in the quarter is the lag effects of just this draconian, this incredible dropoff that this industry experienced in late 2008.

Broadly speaking, you look at the numbers that we just reported and sequentially quarter four compared to quarter three, so the April quarter for us compared to our January quarter, you look and it's fairly consistent in terms of the -- in terms of the declines.

I would say that some of that, too, is driven by FX.

I mean that had a significant impact on this Company over the last, over the last four or five months.

Ware seeing green spouts.

Again, I don't know if a few weeks or a month makes a trend.

In financial services, we're seeing -- we are seeing more activity.

We are seeing clients not be blase about resignations.

We're seeing them trying to keep people.

We're also seeing activity from foreign-based institutions that are aggressively trying to establish their beachhead in the United States.

So those two trends in financial services are interesting, but again, I don't think I would extrapolate that out.

All right, great.

Thank you very much.

Thank you.

Our next question is from the line of Jeff Meuler from R.W.

Baird.

Please go ahead.

Good afternoon.

It's Jeff Meuler from Baird in for Mark Marcon.

As a follow-up on the prior question, in terms of the average fee for search decline, are you seeing more pay caps, are you doing more lower level searches, and how do the dynamics compare to the prior downturns?

The prior downturns, it's interesting.

You kind of had -- when you look at it, I'm going off the top.

Probably 4 or 5, 6% kinds of declines in average fees.

This one is certainly more significant.

You can talk about caps and you can talk about expenses.

I'll tell you, most -- almost every CEO for the last six months, cash is not just king.

It's God.

And so there has been such a heavy focus on businesses around the world to maintain their cash position that they have been fairly cautious and when they do have mandates, been conservative in how they want to approach that.

Okay, and then you obviously have a lot of cash available even after you ex out the bonuses and the E-Cap.

There's been some well publicized rumors of a potential acquisition.

Could you talk about your appetite for acquisitions at this point of the cycle and whether they would be in the traditional core executive search business, more along the lines of Futurestep, or in the leadership consulting?

Well, broadly speaking, we want to continue to give our consultants and partners and colleagues reasons to talk to clients throughout the whole year.

Solutions and services that differentiate our flagship business, that's the strategy of this Company.

We have been very pragmatic and disciplined in terms of looking at opportunities that not only move the brand upstream, but make it more elastic.

We do not comment publicly on rumors or acquisition activity or stock buybacks.

That's not something that we do publicly.

I will tell you, however, that I, again, believe that the time that you plant seeds for change is in this kind of environment.

Whether that deals with the strategy of a company, whether it deals with cultural transformation you're trying to pull off, whether it comes to upgrading talent, if your balance sheet is fortified, this is a very interesting time.

And on the apples for apples basis with that $175 million, is there a level of cash that you would not want to drop below?

Well, back seven years ago, you'll have to appreciate that we, and we wouldn't want to do this again, but I think the cash balance got to as low as, Gregg can correct me with the numbers, but $20 million or some number.

And the Company had, I don't know, $50 million of bank debt.

So, we have in the past operated at that level.

That's not the way that we're playing the game here.

And so, we have conservatively looked at wanting to keep working capital around the world of 40 million, $50 million.

Okay, and then what do you expect for noncash comp expense in fiscal '10?

Yes, that would be about $15.5 million of stock compensation and then maybe another 7 million to $7.5 million in other long-term incentives as it relates to our deferred compensation program, the E-Cap program.

Okay, thank you.

Thank you.

It appears there are no further questions, Mr.

Burnison.

Well, thank you.

Look, this is -- the word "unprecedented" has been used.

It's almost become a cliche.

We're not proud of the top line of this Company or the EPS, but the reality is we were dealt a deck of cards and so was the industry.

We believe that we reacted immediately and decisively and although we're not necessarily proud of the top line, I am incredibly proud of our organization in how we're dealing with this.

So our view, our eye is not on the rear view mirror, but it's out the windshield.

And so we are continuing to maneuver this unprecedented storm and we look forward to continuing to expand our suite of services and extending the brand, moving the brand upstream, and continuing to transform Korn Ferry.

So with that, thank you very much for your time this afternoon.

Thank you.

Ladies and gentlemen, this conference will be available for replay one week starting -- I'm sorry, available for one week starting today at 4:00 p.m.

Eastern daylight time and running through the day June 23, at midnight.

You may access the AT&T Executive Playback service by dialing 1-800-475-6701 and entering the access code 103502.

International participants may dial 320-365-3844 and use the same access code 103502.

Additionally, the replay will be available for playback at the Company's website, www.KornFerry.com in the Investor Relations section.

That does conclude our conference.

You may now disconnect.