Korn Ferry (KFY) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry second-quarter FY16 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. We have also made available on Investor Relations section of our website at KornFerry.com a copy of the financial presentation that we will be reviewing with you today.

Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals, constitute forward-looking statements within meaning of 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 FY15 and in the other periodic reports filed by the Company with the SEC.

Also, some of the comments today may reference non-GAAP financial measures, such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure, is contained in the financial presentation and earnings release related to this call, both of which are posted on the Company's website at www.KornFerry.com.

With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison.

Okay, thank you, Karen, and good morning, everybody, and seasons greetings. Thanks for joining us. It's certainly a special time of year, and particularly when I'm able to announce that the organization achieved the strongest top-line results in our history. And last week, we announced the closing of the Hay Group combination, which is going to be a game-changer for the industry and for us. But first, to the quarterly results.

Revenue was up about 16% on a constant currency basis. EPS came in at $0.51. The run rate EBITDA is almost $200 million. The margin was very strong at almost 16.5%.

All business lines grew. Futurestep was the shining star, another record high. It was up 35% constant currency year over year. North America Futurestep was up 42%, and the UK just knocked it out of the park. The UK was up 68% year over year.

In the quarter, we secured one of our largest RPO engagements ever, a $30 million multi-year engagement with a big brand. The LTC business performed very well; it was up 16% constant currency. That includes the investment we made into a talented group of people called Pivot Leadership. They've integrated and joined the Firm and hit the ground running.

On an organic basis, LTC was up about 6%, and again, 16% overall. It's amazing when I think back eight years ago, our LTC business was $20 million. $20 million. It was rounding to the overall business. And now, with Hay Group, which is our advisory business, that's going to be $800 million, 50% of the Firm. Search performed very well, was up 11% year over year. North America up 13%, Europe up 11%, Asia up 10%, all on constant currency.

With Hay Group now, we're going to have even more expertise and knowledge to give our clients incredible advantage in attracting the best executive talent. I talked about Hay Group. I first reached out to them eight years ago. I think this thing is going to be -- it's perfect for our organization.

We're bringing in 4,000 just incredibly talented people with great insight, a world-class brand. I'm pumped about it. I think this is a historic moment for our Firm. We're going to unify two organizations to create the premier advisor for an organization and its people.

I think it's also a move that affirms the critical role the people and leadership play in driving organizational performance. And we feel that we can help reshape the future of work. Hay has just a rich heritage. It has incredible IP. Combined, when I think about our organizations, 120 years of combined experience.

We have assessment and comp data on more than 20 million professionals. Our pay information is used by 24,000 companies. We have data in 120 countries. We're the pioneer in job design.

We've analyzed thousands and thousands of organizations for all kinds of roles, from the compiler of the Oxford English Dictionary to an astronaut, and the list goes on and on. And we're going to be able to offer clients, starting with purpose and business intent and org design, through work measurement and workforce planning and assessment and development and culture, engagement, rewards and benefits. And then obviously attracting great talent through our recruiting efforts. I mean, this is a -- it's really an incredible set of solutions, offerings and IP that we've put together here.

I've previously talked about this being a multi-hundred million dollar opportunity. I think it's a multi-billion dollar opportunity for us. And as we look at unifying these organizations, yes, there's significant synergies. But listen, make no mistake, this thing's about growth.

We're going to anchor the strategy on several pillars, including our go-to-market proactive strategy for engaging clients. We've already hit the ground running. Account teams have been established. And even though we've only -- it's been a week since we closed, I'm pretty bullish. Our IP and insights and solutions, we're going to unify that, and I think bring some world-class provocative and disruptive offerings to the marketplace.

And finally, just marketing and positioning. And through our world-class marketing team, we're the Firm that knows more about people, leadership and the new landscape of work than anybody else. I would say over the last several weeks, I think there's been a fair amount of spade work that has taken place.

We've certainly communicated with more than 9,000 clients. We've enhanced our brand look and feel. We've conducted more than -- almost 100 road shows around the world. We've reached almost 7,000 of the colleagues. We've held dozens of training seminars. So we've certainly hit the ground, I think, at full speed.

So while I'm really excited about what we've accomplished and the announcement of the Hay Group combination, the closing of that transaction, I'm pretty excited about the future and what it holds for Korn Ferry. We're clearly, without question, the global leader in the business that enables business -- in other words, the people business. And I'm confident that our combination here will help leaders, organizations and society succeed by releasing the full power and potential of people.

So with that, I'm joined here by Mr. Bob Rozek and Mr. Gregg Kvochak. And so, Bob, I'll turn it over to you.

Great. Thanks, Gary, and good morning, everybody. My commentary today is going to be a little bit different. I'll talk about the Q2 results and Q3 guidance, but I'll also provide some additional commentary on the recently closed Hay Group transaction.

In case you couldn't tell from Gary's comments, we are very excited to welcome Hay Group to the Korn Ferry family. And we really look forward to beginning the integration of our operations and improving the growth and earnings power of our combined business.

In the second quarter, for the Korn Ferry legacy operations, demand remained strong. Our consolidated fee revenue in the second quarter improved to $280.6 million, which at constant currency, was up $41 million or 16% compared to the second quarter of last year. Sequentially, also at constant currency, our second-quarter fee revenue was up almost $17 million or 6%. Our growth was broad-based, with all of our operating segments growing in the second quarter on both a year-over-year and quarter-sequential basis at constant currency.

Now, turning to new business for executive search, new business trends improved each month within the quarter, and actually peaked at a record high in October. Actual foreign exchange rates, our worldwide executive search new business was up 6% compared to the second quarter of FY15. And the number of new assignments -- that's on a unit basis -- was up nearly 7%.

In L&TC, new business awards in the second quarter at actual FX rates were down approximately 5% year over year. But on a constant currency basis, they were essentially flat. And finally, Futurestep achieved another record high for new business in the second quarter, with the total dollar amount of confirmed assignments up 67% year over year, up 2% sequentially. In the last two quarters combined, Futurestep has won approximately $148 million of new assignments, which includes approximately $111 million of long-term RPO and related services work, which we expect to recognize revenue on over the next three to four years.

Driven primarily by higher fee revenue, our profitability also improved in the second quarter. Excluding acquisition and integration costs of approximately $12 million, our adjusted EBITDA in the second quarter improved $2 million or nearly 5% year over year, to $46 million.

If you recall, when we talked about our Q2 FY15 results last year, we mentioned that, that quarter was benefited by the net impact of several items, which amounted to approximately $2.4 million. If you eliminate the positive impact of this from our second-quarter earnings, our adjusted EBITDA actually improved $4.4 million or almost 11% year over year. And when compared to the first quarter of FY15, the adjusted EBITDA also improved by almost $4.4 million, or again, 11%. And that was really driven by the higher fee revenue, our lower G&A expenses, which was partially offset by some higher compensation costs related with our new hires.

The adjusted EBITDA margin improved to 16.4% in the second quarter from 15.6% in the first quarter of FY16. Our financial position continues to be strong. At the end of the second quarter, total cash and marketable securities were $418 million, which is up $18 million compared to the second quarter of FY15.

Excluding cash and marketable securities that we reserve for our deferred comp arrangements and for our accrued bonuses, our investable cash balance at the end of the second quarter was approximately $186 million. And that's up $6 million or 3% compared to the second quarter of FY15. And that includes the paying of $10 million in dividends this year, which we didn't have last year, as well as a purchase price for Pivot. So I think we continue to perform very well in our cash-generating activities.

Finally, excluding all transaction and integration charges, our adjusted fully diluted earnings per share were $0.51 in the quarter. Which was in line with what we guided to: flat compared to the second quarter. Which, as I previously discussed, benefited from those nonrecurring items, which totaled approximately $0.03. Sequentially, our adjusted fully diluted earnings per share were up $0.04, or a little bit over 8%.

Let me turn it over to Gregg now, who will review the operating segments in a little more detail.

Okay, thanks, Bob. Going to start with our Executive Recruitment segment. As Gary and Bob stated, global demand for our Executive Recruitment services remained strong in the second quarter. At actual foreign exchange rates, consolidated Executive Recruitment fee revenue in the second quarter was $156.5 million. That's up $7.6 million or 5.1% year over year, and up $4.4 million or 2.9% sequentially.

Adjusting to constant currency, our consolidated Executive Recruitment fee revenue in the second quarter was up $16.7 million or 11.1% year over year, and up $6.3 million or 4.1% sequentially. On a regional basis, compared year over year at constant currency, strong growth in North America, which is up 13.3%; Europe, which was up 11.2%; and Asia-Pacific, which was up 9.9%; was offset by weakness in South America, which was down 7.2%. On a quarter-sequential basis, also at constant currency, North America grew 3%, Europe was up 2.1%, Asia-Pacific was up 13.4% and South America was up 3.5% in the second quarter.

Compared to the second quarter a year ago, growth in our Executive Recruitment specialty practices was mixed. Positive results in our financial services practice, which was up 27%; our life sciences healthcare practice, which was up 14%; and our technology practice, which was up 15%; while our consumer goods and industrial practices were down 4% and 11%, respectively. Financial services accounted for approximately 21% of all of our Executive Recruitment fee revenue in the second quarter, which was up 300 basis points year over year, and flat sequentially.

Sequentially, technology and consumer goods were each up 11%. Financial services was up 2%. Life sciences and healthcare was flat. And the industrial practice was down 2%.

Consultant hiring continued in the second quarter. The total number of dedicated Executive Recruitment consultants worldwide at the end of the second quarter was 494, up 54 year over year, and up 8 sequentially. Annualized fee revenue production per consultant in the second quarter was $1.28 million, and was impacted by the lower production of new-hire consultants, whose productivity is expected to ramp over the next few quarters. The number of new search assignments opened worldwide in the second quarter was 1,380, which was up 9.4% year over year, and up 1% sequentially. Consolidated executive search EBITDA in the second quarter was $40.6 million, with a 26% margin, an improvement of $8.6 million or 26.9% year over year, and $3.7 million or 10% sequentially.

We'll now turn to our Leadership & Talent Consulting segment, which generated $73.6 million of fee revenue in the second quarter. Measured on a constant currency basis, L&TC's fee revenue in the second quarter grew $10.3 million or 15.5%, with year-over-year growth in every region. Compared to the first quarter of FY16, also on a constant currency basis, L&TC's fee revenue was seasonally strong and grew $5.1 million or 7.2%.

Excluding the impact of the Pivot acquisition on L&TC's second-quarter fee revenue, growth at constant currency was 5.7% year over year, and 6% sequentially. At the end of the second quarter, there were 184 dedicated L&TC consultants, compared to 181 in the first quarter of FY16 and 131 in the second quarter of FY15. Professional staff utilization grew to 71% in the second quarter from 68% in the first quarter FY16, and was flat compared to the second quarter of FY15.

Compared to the second quarter of FY15, L&TC's EBITDA in the second-quarter FY16 was up approximately $3.8 million or 35% to $14.6 million, with a 350-basis point improvement in margin. Sequentially, L&TC's EBITDA grew $3.9 million or 37%, with earnings growth being positively impacted by seasonally strong fee revenue and flat G&A expenses.

Finally, turning to the Firm's fastest growing segment, Futurestep, which grew for the 12th consecutive quarter and generated $50.5 million of fee revenue in the second quarter. Measured on a constant currency basis, Futurestep's second-quarter fee revenue was up $14.3 million or nearly 36% year over year, and up $5.3 million or 11.7% sequentially. On a regional basis, measured year over year at constant currency, North America was up nearly 42%, Europe was up 30% and Asia-Pacific was up 27%.

Sequentially, constant currency growth in North America was 10.5%, while Europe and Asia were up 11.6% and 14.4%, respectively. Futurestep's profits continued to grow with fee revenue. EBITDA in the second quarter grew $1.8 million or 33% year over year, reaching $7.4 million, with an 80-basis point improvement in margin. Sequentially, Futurestep's EBITDA grew 10.9%, with a 10-basis point improvement in margin.

Now I'll turn the call back over to Bob to discuss our outlook for the fiscal third quarter.

Great. Thanks, Gregg. Before I go through the outlook though, I really want to touch upon a few highlights relating to our recently closed acquisition of the Hay Group.

To refresh everyone's memory, the Hay Group is a business generating about $500 million in revenue, with an EBITDA margin on a run-rate basis of about 8%. With respect to the acquisition consideration, the total purchase price net of acquired cash was approximately $475 million. And remember, that's comprised of about $200 million of Korn Ferry stock, which equates to about 5.9 million shares, and approximately $275 million in cash.

Now, for the cash consideration, we used approximately $71 million of our domestic cash, and we were actually able to deploy about $54 million of our foreign cash balances. And the remaining $150 million was funded with term debt under our credit facility.

Now, with respect to the stock portion of the purchase price, a couple of points worth noting. The shares will be registered within one year of the closing of the transaction. There's a three-year lockup, with one-third of the shares issued becoming tradable on the first, second and third anniversary of the closing.

And finally, Korn Ferry will have a right of first refusal on block sales of shares over 50,000 in a month, and that's approximately one-sixth of our average daily trading volume. Also, as we previously discussed, we established a retention bonus pool in the amount of $40 million in connection with the acquisition. Of that amount, Korn Ferry funded approximately $12.5 million of the pool, and the Hay Group funded the remaining $27.5 million through a reduction in purchase price. Now, the pool participants includes about 170 individuals, and the retention period is three years.

Turning back to the credit facility, the $150 million of borrowings, a few important details to highlight. The term of the loan is five years, and it has straight-line amortization, with principal and interest payments being made quarterly. The interest rate is variable, and is currently approximately 135 basis points -- and that's on a pretax basis.

The covenants are consistent with our previous credit facility, including a maximum leverage ratio -- and that's set at 2.25 times -- and a minimum level of adjusted EBITDA, which is $100 million. We have $100 million of remaining borrowing capacity under the revolver portion of the credit facility, and the entire credit agreement is unsecured. Also, as previously discussed, the acquisition was affected through our international holding Company structure, which has several advantages, one of which will allow for future tax-efficient cash repatriation to the US, up to $200 million.

Now turning to the outlook, I'm going to start with some general, kind of new business commentary, and then provide guidance on Korn Ferry standalone, the Hay Group standalone, and then I'll talk about the combined guidance. After this quarter, our guidance on the Hay Group LTC legacy businesses will only be presented on a combined basis.

Despite being an historically seasonally weaker quarter due to summer vacations, as I indicated earlier, our new business trends remained strong in the second quarter. Given this, we're bringing a strong book of new business into our fiscal third quarter. Similar to the second quarter, the fiscal third quarter is typically a seasonally slower quarter for both revenue and new business, due to time off for the year-end holidays.

So in essence, less assignments are open, and those in process are a little slower to conclude. So far from what we have seen in the early days of our third quarter, the new order volume is in line with typical patterns. And it's also in line with our expectations, based on our recent experience.

Now, assuming worldwide economic conditions, financial markets, foreign exchange rates remain steady, and excluding the impact of the Hay Group acquisition on Korn Ferry, our FY16 Q3 Korn Ferry standalone fee revenue is likely to range from $268 million to $278 million. And Korn Ferry's standalone adjusted diluted earnings per share are likely to range from $0.50 to $0.56 per share.

Now, with the December 1 acquisition close, we'll begin the integration of Hay Group with our global Leadership & Talent Consulting segment. And for the months of December and January, which are generally seasonal low points for legacy Hay Group, and prior to the impact of certain purchase accounting adjustments and other transaction-related items, the Hay Group is expected to contribute adjusted fee revenue of between $75 million and $81 million and adjusted EBITDA of between $6 million and $8 million.

Now, considering the negative impact of the deferred revenue purchase accounting adjustment, the Hay Group revenue will likely range from $68 million to $74 million. Additionally, considering the negative impact of all the purchase accounting adjustments, our integration and acquisition costs, restructuring charges and retention bonuses, the Hay Group EBITDA will likely range from negative $38 million to negative $49 million.

On an adjusted combined basis, also prior to the impact of purchase accounting adjustments and other transaction-related items, our combined FY16 Q3 adjusted fee revenue is likely to range from $343 million to $359 million and our FY16 Q3 adjusted combined diluted earnings per share will likely range from $0.48 to $0.56. This includes the dilutive impact of an additional 3.6 million shares of the 5.9 million shares that were issued and outstanding for two of the three months in the quarter.

We believe that the Hay Group acquisition will be accretive to earnings on a US GAAP basis within one year of closing, and prior to that time, on an adjusted basis. On a combined basis, measured by US GAAP, FY16 Q3 consolidated fee revenue is likely to be in the range of $336 million to $352 million and fully diluted earnings per share are likely to be in the range of a loss of $0.16 to breakeven.

Now let me provide a little more color and clarity on the purchase accounting and other transaction-related items that relate to the Hay Group acquisition and that are impacting our guidance. Let me start with the purchase accounting adjustments to revenue for the deferred revenue write-offs. They're expected to be approximately $7 million in our FY16 third quarter and then beyond that quarter, additional deferred revenue write-offs are estimated to be another $7 million in our FY16 fourth quarter, approximately $5 million in Q1 of FY17, $3 million in Q2 of FY17, and then nothing thereafter.

Also in FY16 Q3, we expect to incur additional integration and acquisition costs. These costs primarily relate to contractual items that are called for in the stock purchase agreement, as well as additional legal and professional fees associated with the close of the transaction and the integration of those operations. Those costs in FY16 Q3 are estimated to range in total from $17 million to $21 million. And although we will continue to have ongoing integration activities, these costs will decrease substantially and will go away over the next two to three quarters.

As previously discussed, a retention bonus pool of $40 million was established. This bonus pool, as I said, will vest over the next three years, and the FY16 Q3 expense associated with that was about $2.6 million and the future quarters will hold about $3 million to $4 million of amortization expense through the conclusion of the retention period.

On the tax side, certain of our transaction-related costs that we will incur in the third quarter will not be deductible for tax purposes. We're required to put those into the basis of the stock, and that will result in an increase to the Company's full-year estimated tax rate, which is now expected to be approximately 33% to 34% and in the discrete FY16 third quarter, that will result in a rate of about 40%.

Finally, the integration of the Hay Group will involve workforce alignment, consolidation of our office space and the elimination of redundant G&A activities. In order to achieve these cost synergies, we plan to incur restructuring charges in the third quarter of approximately $20 million to $25 million. These charges are expected to result in savings between $25 million to $30 million on a run-rate basis. We believe at the conclusion of the restructuring plan, which is early in our next fiscal year, the combined Hay Group and legacy LTC business EBITDA margins will be in the 14% to 18% range.

With that, I'll conclude our prepared remarks. And we would be glad to answer any questions that you may have.

(Operator Instructions)

Our first question comes from the line of Tobey Sommer. Please go ahead. Your line is open.

Thank you. Bob, I had a question right off the bat about the cost synergies and charges in the next fiscal quarter, and the savings that will result in the next fiscal year. Is that a little bit higher and a little bit faster than had been discussed when the transaction was initially announced?

Yes, that's absolutely correct, Tobey. Now that we've owned them for seven days and we've gone through, prior to closing, a lot of the integration activities and the thinking around it, we think we can get there quicker. And we think the size of the initial prize is a little bit larger than what we talked about.

Okay. And can you remind me what that initial set of parameters were?

Yes, initially what we said, Tobey, was we would expect to get at least $20 million saves, and we thought it would be a dollar-for-dollar cost. But now we think there's more leverage there on the dollars that we invest. And again, we think it's going to be quicker.

Okay. Switching to something longer term, a little bit more strategic, Gary, now that the Hay LTC combination is going to be half of the Business, what are the strategies that you have in place and the tools to try to stimulate the growth rate of that combined Business? And where do you think that can go over a medium- to long-term period of time?

Well, I think -- listen, I think that we need a new conversation on people. And it is the world's most precious commodity, and it's not a commodity. As a CEO in any industry, it will come down to two things: your customers and your people. There is not a globally branded advisory dealing with an organization and its people.

So, our intent is to change the conversation as it relates to people, and bring to the market solutions in IP that can clearly make the difference between 10% growth and 8% growth to a CEO, a board and an organization. So, we will do that by, number one, a cohesive, unified go-to-market strategy. Obviously, search gives us incredible access anywhere in the world. And now, from org design to job design to rewards and benefits, we can cover just about any of the levers that a CEO or board needs to motivate and inspire a workforce.

So, it's one, the go-to-market strategy. It's two, build the Firm on a solid foundation of intellectual property and innovation. Three, it's around continuing to make investments, looking both organically into the Business on the technology side, as well as acquisitions, to continue to grow depth and scale into this Business. And finally, it's about making us a career destination for people who want to change the world. So, that's kind of our path to growth here.

Thank you. And my last question and I'll get back in the queue relates to the hires that you've done internally, whether it's LTC or in executive search. What kind of productivity are you getting out of those new hires, and how much is left to go? Thank you.

Well, I think there is plenty to go, for sure. As you know, several months ago we invested pretty aggressively on both the -- well, really across the entire Business. But in particular what comes to mind is in the search area, as well as the LTC area. I'll tell you that the search -- clearly, the results of the people that we brought in have had a big impact so far. And do I think that they're probably halfway ramped up on the search side? They're probably a little bit more than halfway ramped up -- the new hires we've made.

On the Hay Group business now, we're combining the LTC, former LTC business -- we're going to call it now Hay Group. We're going to report on -- that's how we'll report it, too, Hay Group. Those former LTC people that we brought in, I would say that they're probably only about 30% ramped up. We brought in about 50 or so of those, quote, consultant partner types, earlier this year.

Thank you.

Next question comes from Tim McHugh. Please go ahead. Your line is open.

Just want to follow up on the comment about getting to the synergies faster and a little larger size. Can you elaborate, what you found, and I guess to some extent then, to the speed with which you can get there? I think I thought some of it was going to be about consolidating IT systems and things like that, which I would assume would take some time. But maybe a little bit more color on what's allowing you to get there in a faster and bigger way?

Well, I think -- let me -- before Bob, who is clearly the expert here, I would just say that just keep in mind that Hay Group is a premier brand that's been around for 70-plus years. And in many of those years, it was a private partnership. And so, when you look at something, say financial systems, they were not able to leverage capital and leverage technology.

And the world has put itself out of business through technology, and that's a really big lever that we can deploy. So, just think about a company that was privately held for a long period of time, with really not a lot of access to capital.

And, Tim, in terms of the activities, as we've gone through and completed all of our planning, one of the things that drives us to get there a little quicker, quite honestly, is the need to comply with Sarbanes-Oxley. As we've gone through all of our planning activities, as Gary indicated, as a private company, obviously didn't have to worry about compliance with SOX, and now we do. And so, as we look forward to the requirements to do that, it puts us on a bit of a quicker path than what we originally anticipated, with respect to migrating the major operations from the Hay Group into our business processes and into our technology platform.

We've got a very detailed plan that we're executing on, as we speak, that's going to migrate the top, somewhere between 14 to 15 Hay Group locations, and that will capture probably 75% of their revenues. And we're going to do that by May 1. We've got a pretty aggressive timetable. I've got to tell you, I've got a great team that's out all over the globe right now working hard to make that happen.

Then the other thing I would just mention is that I think that creating connectivity of people and clients in an environment of collaboration is incredibly important. And although we live in a virtual world, I fundamentally believe that the people need -- to the extent possible, need to be housed in the same location. So, we also are going to push incredibly hard on the real estate side. I think it is paramount to unifying people.

And so, that will also create some cost savings. But obviously there will be a cost, too, to exit some of those locations. But the payback will be dramatic over the next decade.

Yes. I'd say the other point I was going to make, and the last one I would touch on, Tim, is on the SGA side. We've identified a couple of opportunities for early wins that will land quicker than what we had anticipated. I think the combination of those three areas, as we continue to evolve our thinking and understanding of the organization, draws us to the conclusion that we'll -- the prize will be a little bit bigger than what we anticipated, and the time frame is going to be faster.

Okay, great. Some more nitty-gritty numbers ones, Bob: The adjusted EPS, as you're framing it now, is it correct you're not -- it looks like you're not excluding intangibles, it's just the restructuring charges and retention bonuses. Is that correct?

Yes, that's right, Tim. If you go to the press release, we've got a pretty detailed schedule that shows how we go from Korn Ferry standalone to the adjusted numbers, and then to the combined numbers.

And do you have a view, updated view -- has your view of the tax rate, on a combined basis, changed at all?

I think in the short term, as I indicated, we've got some costs that we're not going to be able to deduct. They'll flow through our P&L for GAAP purposes. For tax purposes, we're required to put them into the basis. So, that's going to obviously drive our rate up in the short term.

I also think we've got -- as we get in and better understand the Hay Group entities, we've got some opportunities to do some structuring that will allow us to drive the rate down ultimately to something -- we'll probably pick up a 200- to 300-basis-point improvement. But it's going to take us a little bit of time, because they've got some structuring activities that we need to do over time.

But the important thing is, as I mentioned as well, to think about is -- or the way that we've set ourselves up with the international holding company from a tax perspective -- we still have the ability to repatriate that $200 million in cash as well. So, that's something that we remain pretty excited about.

Okay. And then just last, Futurestep -- obviously great performance. And I get the contract wins, particularly on the RPO side -- it gives it a tailwind. But just the professional search side -- what's the productivity like of this staff now, seeing that level of growth that you've seen now for a while? I mean, are we running towards peak type of productivity levels with that staff? I guess basically, how worried are you about sustaining that level of performance more on the professional search side?

I'm not worried. I'm only worried about the economy. Again, I think that we've demonstrated that we've got incredible quality. We've combined IP with that Futurestep offering. It would be not a question of our capacity; the question would be around the economic cycle.

Yes, I agree with Gary 100%. I think the way Byrne has that business built right now -- he's got service management centers that span the globe. He's actually introduced, over the past year, a very interesting concept in terms of bringing new talent into the Futurestep business. He calls it the Talent Academy. And they actually recruit and bring in classes of new folks into the business on a regular basis -- two or three times during the course of the year.

So, in terms of us building the capacity, again, as Gary indicated, it's really not a concern at this point. Byrne will flex up or flex down as the volumes go up and down.

Okay, great. Thanks.

Next question is from Gary Tong. Please go ahead. Your line is open. Pardon me, the next question is for George Tong. George Tong, go ahead.

And we'll move on to the next question from Mark Marcon. Your line is open. Please go ahead.

Good morning. Was wondering if you could just talk a little bit about some of the early reactions in terms of the thoughts that your core executive search consultants have about potentially cross-selling the Hay Group? How they think it might be different than the platform that previously existed, and any early feedback from clients?

Well, first of all, we gave you early wins. That's the most important. The thing that I've been surprised about is the referrals of business from our combined Hay Group solution into search. So, literally, Mark, I can point to a handful of, not proposals, but actual wins. That's probably where the rubber hits the road.

I think that if you think about where Korn Ferry, before Hay, started in 1969, there's two things that we do religiously every day. We assess people and we do compensation. So, if you look at the fundamental strategy, we've grown from strengthening at one point was our core business. So, the reaction from the search partners that we have, almost 500 of them, has been universally positive. And it's positive because if you just think about what they do in their daily lives around assessing people and doing compensation.

Great. And then with regards to the general client discussion, I know you had some wins, but have you heard a broad level of discussion or --?

No, I've gotten universal enthusiasm. I mean, seriously, that's the reaction that we've gotten. I think that clients will be very, very anxious and interested in how we can put this together to help them achieve growth. But, Mark, it's been universally positive.

And so, how quickly do you think that level of enthusiasm turns into like a real acceleration, with regards to their revenue growth trajectory?

Well, listen, assuming that the economic conditions are what they are today, I would certainly hope that that happens in the first few quarters. That's why we're trying to push so hard on this synergy stuff, to get it behind us. I just think -- my view is, it's better to get this and get it done and get it over with. So, we're clearly pushing that hard.

But we're also very much oriented towards growth. We've assigned account teams for our top accounts around the world. We've segmented the client portfolio into three tiers. We've gone into the data and done a lot of analytics on which consultants have done business with which companies. We've connected those consultants. It's amazing. Hopefully, we can do that sooner rather than later, Mark.

That's great. And then can you talk a little bit just on the core executive search side -- the margin performance in North America was terrific. Can you talk about you how sustainable that is, or what factors may have contributed to potentially stronger-than-sustainable margins?

Well, we had the luxury of attracting just some world-class professionals earlier in the year. And that has played a big role, as has financial services.

It's counterintuitive, but we've actually seen some pretty good activity around banking, around insurance and around capital markets. And the other area in the United States is healthcare and professional services. So, those have all been incredibly strong.

Now, we've had to fight energy. Energy has had a -- globally, it's had about a negative $40 million impact on the top line for us, as you would imagine. But those other areas have more than offset that.

And so, do you think this -- are we at a new margin level that's sustainable or --?

Well, listen, this margin was several percentage points higher than what we've done in the past. I would tend to think that this is a little bit higher than what one should assume. But we'll have to see.

Yes, Mark, I would say, as we've talked in the past, we think the long-term margin range for that business is in the 20%, 25% range. I don't see any basis to move off that at this point. Obviously, that's on a blended basis, so you get a little bit more juice in North America. But overall, I think, in the 20%, 25% range is probably a good place to stick at this point.

Okay. And then in Europe, you had nice acceleration. Can you talk a little bit about that?

We did. Germany was very, very strong. UK was kind of single-digit, constant-currency, up. But we also had some nice activity in the Netherlands, in Norway and Spain and Sweden. So, it was -- I think it was pretty steady. When you look at, say, France, that had single-digit gains.

So, it was actually pretty balanced. Then, even -- I'm sure when you talk about Asia -- just continuing to go around the globe -- that looked pretty good on a constant currency, in particular China, which again may be a little counterintuitive, but both China and Australia, we saw very good performances. Then the one that's challenged is South America.

Yes, for obvious reasons.

Yes.

But it sounds like globally, exclusive of energy, that the overall tone -- if this is correct, it sounds like things are getting -- like your clients are feeling better, generally speaking, or not?

I would say that there is a positive bias, Mark.

Okay, great. Thank you.

Next question is from George Tong. Please go ahead. Your line is open.

Hi, this is Adrian Paz on for George Tong.

So, I wanted to talk about Hay Group, and talk about the cross-selling opportunity in North America, with Hay Group having such small exposure in North America.

Yes, George?

Did you complete the -- that's the question?

Well, I guess I wanted to see what your sense is on how quickly that could ramp, what the cross-selling opportunity is and --?

Well, I think that's the question and the answer. I completely agree with you. I think it's going to take longer now.

This is not -- the Hay Group business -- 80% of it is outside the United States. And so, if you just run the math, and you were to assume that it would look like any other professional services firm, what you'd find is that 50% of the business should be in North America. So, you can do the math, and it would suggest that there is an opportunity of $200 million to $300 million.

Now, I don't think it's realistic to say we're going to capture that in the next few -- couple quarters. That's not going to happen. But I guarantee you that opportunity is there, and we will seize it at some point.

Great. And on your compensation expenses, it looks like, as a percentage of revenue, compensation expenses stepped down year over year. Can you talk about what trends you're seeing there, and maybe if this is a sustainable level?

Yes, I think if you go back and you look at our comp expense as a percentage of the revenue, it actually stayed relatively consistent. We're in the 66%, 67%, 68% range. And in any given quarter, depending on revenue levels and so on, you're going to see slight modifications to it.

We've been pretty consistent. We manage our costs pretty tightly, and I would expect it to stay within that range for the foreseeable future. And even with the Hay Group, if you look at their historical comp-to-revenue ratio, it's pretty much in line with where we are. So I don't see that transaction changing that dynamic on us.

Great. And on pricing trends, with the economy, especially the North American economy, doing quite a bit better, how are you seeing pricing trends evolving? And where do you think they'll -- what's your outlook on that?

When you say pricing trends, you're talking about on our advisory business, or broadly?

Yes, for your executive search business.

We put out a -- we've done an extensive amount of work on -- obviously, we have compensation data on 24,000 companies. So, yesterday, we put out our global forecast. We're expecting about a 2.8% rise in salaries next year. So, that's probably what I would assume. And our fees are -- on the search business -- would be calculated off that.

All right, great. Thank you.

Next question from Kevin McVeigh. Please go ahead.

Great, thanks, and thanks for all the detail. Hey, Bob, I wonder if you could give us just a sense on the cost synergies? What areas were you able to -- came in better than expected, as it relates to Hay -- just a way to bucket them?

I would say we were able to get, on the headcount side, a little bit faster in terms of what we had early on identified.

In terms of the broader buckets, though, I think, to Gary's point on the real estate side, he's pushing us -- and I think it's absolutely the right thing to do -- pushing us hard to go as quickly as we can to bring everybody together. We saw that when we did the PDI transaction. As folks sit next to each other, the synergies that you yield from the transaction happen much quicker. So, we're moving faster on that.

And I think on the SGA side, as I indicated earlier, we identified a couple of quick wins that we're going after relatively aggressively. So, as a result of that, we're seeing some of the savings come in faster than we initially anticipated.

Got it. And then from a competitive perspective -- more on the executive search side is -- there's been some sizable competitors that have gone away. Have you seen any change in terms of just pricing or just demand overall?

No, we haven't. The competitive landscape -- that's similar. And Bob and Gregg talked about the new business trends, which I think are steady, with a positive bias.

Great. Thank you.

Next question from Tobey Sommer. Please go ahead. Your line is open.

Thank you. I just had a longer-term question as a follow-up. When you look at the growth profile and the margin profile of the businesses going forward, particularly given the high level of profitability you've been able to achieve in the quarter and in recent quarters, do you think you have an opportunity to improve what you had previously conveyed as long-term ranges? Thanks.

I think, Tobey, as we grow in scale, obviously there's going to be some leverage from it. Now, when you look at the Hay Group business coming on board, us being able to get that to a 14% to 18% margin, obviously if you have half your business at that, that will change the dynamics of our margin profile and put some downward pressure on it.

But I think, as I look at the Organization and where we were prior to Hay Group, we were -- had a global footprint, and our revenue levels were at a level where perhaps we weren't getting as much leverage as what we would like. But now with the Hay Group coming on board and us going above $1.6 billion, approaching $2 billion in revenue, we'll start to be able to leverage that. So, I would think the combination of those two items offsetting each other would keep our margin -- our overall margin profile pretty consistent with where we are today.

Thanks very much.

Our last question is from Mark Marcon. Please go ahead.

Just a follow-up on that, just to be clear: So, calendar 2016, obviously transition/integration year. But do you think we get to that margin profile by calendar 2017, in terms of the Hay Group?

Yes, without question.

Great. Sounds like even by the end of calendar 2016 we should get there?

Your question was calendar 2017. And for sure, calendar 2017. And we're obviously pushing hard, Mark.

Okay, great. And then what do you think of being the sustained growth rate on the Leadership & Talent Consulting side, assuming this kind of a normal plodding along macro backdrop? And to what extent do you think you have enough people to go out and sell the solution effectively?

Well, all the analytics and everything would tell you that it's around 5%. I've held out 10% as something we should aspire to. And so, I think you're probably in that kind of range in this kind of environment.

Yes, Mark, the only thing I would add to that -- I think Gary's right. And as you migrate up to the 10% level, obviously that would include our continual deployment of capital back into the Business, and the acquisition of other assets that we could bring to market as well.

Great. And then, any turnover at all in terms of the Hay folks?

No. In fact, turnover for our Firm over, just not the quarter, the last several years, we've been blessed. We've been fortunate. And we hope that continues.

Great. Thank you.

Okay. Listen, I want to tell everybody, first, Merry Christmas, and have a wonderful holiday. I'm confident in the year ahead that we're going to drive dramatic change in the organizations, clients that we serve, and seize the opportunity to be the world's preeminent advisor for an organization and its people. So, listen, happy holidays to everybody, and thank you.

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