Gary Burnison - CEO Bob Rozek - CFO Gregg Kvochak - IR

Tobey Sommer - SunTrust Stephen Sheldon - William Blair Greg Mendez - Baird Marc Riddick - Sidoti

Ladies and gentlemen thank you for standing by and welcome to the Korn/Ferry Second Quarter Fiscal Year 2018 Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. We have also made available in the 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 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 and in the periodic reports filed by the company with the SEC, including the company’s annual report for fiscal 2017. And the company soon to be fled quarterly report for the quarter ending October 31st. Also some of the comments today may reference non-GAAP financial measures such as adjusted fee revenue, 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 relating to this call. Both of which are posted in the Investor Relations section of the company’s website at www.kornferry.com. With that, I’ll turn the conference over to our host Mr. Burnison. Please go ahead, sir.

Okay, thank you everybody. But first, I just want to say thank you to our colleagues at Korn/Ferry and I will tell you why. Because this quarter was the best top-line results in the company’s history. To say that I’m proud is an absolutely -- that’s just in understatement. The firm is on a roll, we generated 443 million in fee revenue in the quarter, which is up about 10%, profits were solid, adjusted EPS was $0.67, adjusted EBITDA was about $70 million. Asia not to cover up the ball, Asia was up 17%, Europe was up 10% and North America was up about 6%. And from an industry perspective, financial service was absolutely spectacular, that business grew about 36% or so in the quarter. It’s been two years to a day almost actually, it’s two years and three days. Since we completed the acquisition of Hay Group and although we still got a lot of work to do, there is no doubt about it. I will tell you that this has been again changing. Korn/Ferry has involved into an organizational consulting firm. So, what does that mean? Well most clients can develop a sound strategy, but they often struggle to make it stick. And that’s where Korn/Ferry comes in. Combining a client strategy with their talent to drive superior performance and strategy without talent, it’s helpless and talent without strategy is hopeless. And that’s what we did, we combined is essential elements for our client success and that’s what makes our firm unique. And so, there are really two aspects to our business. First, we help companies design their organization, the structure, roles, responsibilities as well as how they compensate, develop and motivate their people. And secondly, we help organizations select and hire the talent that they need to execute the strategy. The acquisitions that we've made over the year the talent that we're developing internally and bringing onboard as well as our relentless focus on solutions aligned towards our client business outcomes making I think a notable impact. The investments we've made I think have not only enhanced our performance but they have strategically repositioned the company forever providing a platform to both shape and accelerate our growth in the years ahead. So, I'll leave my comments right there. I'd only say as we enter this calendar 2018 we're going to continue our strategic commitment to building the preeminent organizational consultancy firm that changes peoples' lives and that enables organizations and people to exceed their potential. So, with that, I'm joined here with Bob Rozek and Greg Kvochak. So, I'll turn it over to you Bob.

Great thanks Gary and good afternoon everyone. As usual, I'm going to start with a few key highlights. First as Gary mentioned, fee revenue in the second quarter reached an all-time high with all three lines of our major business segments achieving strong year-over-year growth. Globally the fee revenue in the second quarter is approximately $443 million that's growth of over 10% year-over-year at actual foreign currency rates and nearly 9% at constant currency. Growth was strongest in the talent acquisition businesses, execute search and future step which grew year-over-year by approximately 13% and 17% respectively. For executive search, fee revenue growth in the second quarter was broad based with growth in North America, Europe and Asia-Pac regions of 9%, 19% and 33% respectively. We're also pleased with the 6% year-over-year growth that we saw in the Hay Group, which reflects not only the addition of new talent but our focus on larger solutions and our go-to-market activities as well. Second, in the quarter we continue to invest for growth. On a quarter sequential basis, we hired an additional 17 net new fee earners 6 of those in executive search and another 11 at the Hay Group. Many of the new consultants we have onboarded over the last several quarters are currently making a real positive impact. We have record quarter of new business in all three lines of business which not only contributed to our record overall revenue in the quarter but positions us very well for the second half of fiscal '18. We expect these new hires to further contribute to growth over the next few quarters as their productivity ramps. A third our adjusted EBITDA as Gary mentioned, in the second quarter reached $69.6 million an improvement of 10% compared to last year's second quarter. And then finally, we continue to return capital to shareholders with the payment of our quarterly dividend and the repurchase of our stock. Over the last five quarters we have now repurchased approximately 2 million shares, that’s about 3.5% of our outstanding fully diluted share base and we've use about $58 million of our $150 million authorization. Now, turning to new business trends, first for executive search segment globally new business wins in the second quarter continue to improve and reached a record high. In the second quarter consolidated executive search new business was approximately $180 million, and that was up about 15% year-over-year. Again, driven by strength in North America, Europe and Asia. Similarly, new business growth in the second quarter for Hay Group was strong coming in a record $260 million and that’s up double-digit some measured year-over-year. And finally, in the second quarter Futurestep achieved in all-time high in new business with total awards of approximately 149 million. This includes 28 million in single search and then on the RPO side is about $121 million, 5.5 for that is an extension of an exciting client relationship about 52.5 is an expansion of an existing client relationship and then about $63 million relates to new customer wins. And majority of that RPO revenue will be realized over four to five years. At the end of the second quarter, total cash and marketable securities were 414 million, that’s up about 24 million compared to the second quarter of fiscal ‘17. And then when you excluding amounts reserved for deferred comp arrangements and accrued bonuses, our investable cash balance is about $185 million and that’s up about $30 million year-over-year. As of the end of second quarter, we had about $246 million of debt outstanding. And then finally, our adjusted diluted earnings per share was $0.67 in the quarter coupled off 13.5% year-over-year. And on a GAAP basis fully diluted earnings per share were $0.64. Now with that, I’m going to turn it over to Greg, who will review the operating segments in a little more detail.

Okay, thanks Bob. Our executive search segment continued a strong pace of growth in the second quarter of fiscal ‘18 achieving a record [$177.8] million of global fee revenue, which was up $20.5 million or 13% year-over-year measured at actual exchange rates and 12% measured at constant currency. Regionally growth in the second quarter was broad-based and driven by strength in North America, which is up 9% and double-digit growth in both Europe and Asia-Pacific, which were up 19% and 33% respectively. By specialty practice, executive search fee revenue growth was mixed in the second quarter. Compared to the second quarter a year ago, growth in our financial service practice up 41%, industrial practice up 20%, consumer goods practice up 13% and our technology practice up 4% was offset by flat year-over-year results in the life science and healthcare practice. The total number of dedicated executive recruitment consultants worldwide at the end of the second quarter was 538, up 37 year-over-year and up 6 sequentially. Annualized fee revenue production per consultant in the second quarter was 1.32 million and the number of new search assignments opened worldwide in the second quarter was 1,578, which was up approximately 5% year-over-year. Consolidated adjusted EBITDA for executive search in the second quarter was $37.9 million, which was down marginally when compared to the second quarter of fiscal ’17. This was due in part to higher compensation expense resulting from a recent hiring of new consultants and in part due to the year-over-year change in the value of the assets back in the firm’s deferred compensation plan. As in the past quarterly market driven gains or losses in these assets are recorded as increases or decreases in compensation expense and primarily affect North America executive search. The consolidated adjusted EBITDA margin for executive search in the second quarter of fiscal ‘18 was 21.5% compared to 25% in the second quarter of fiscal ‘17. Now turning to the Hay Group, where improving new business activity drove fee revenue growth in a seasonally strong quarter. In the second quarter Hay Group achieved fee -- record fee revenue of $200 million which is up 6% year-over-year and 5% measures at constant currency. Improvement was broad-based and driven primarily by double-digit growth in Europe, Asia Pacific and Latin America. As previously mentioned, new business awards for the Hay Group in the second quarter were strong and improved approximately 12% measured year-over-year. Further we saw new business awards improve sequentially each month in the quarter. Despite the sharp increase in consultant staff hiring over the last several quarters, earnings and profitability for the Hay Group have remained solid. In the second quarter adjusted EBITDA for the Hay Group was $36.4 million an improvement of 3% year-over-year with an adjusted EBITDA margin of 18.2%. Finally, turning to Futurestep which achieved another quarter of double-digit growth. In the second quarter Futurestep generated $66.3 million of fee revenue which was up nearly 17% year-over-year, continues to balance investments to support future delivery capacity, Futurestep also achieved strong earnings in the second quarter with EBITDA of $10.2 million, and EBITDA margin of 15.4% which were both up year-over-year. Now, I will turn the call back over to Bob to discuss our outlook for the third quarter fiscal ‘18.

Good. Thanks, Gregg. As previously discussed, monthly new business activity in the second quarter ramped for all of our operating segments, just ahead of our seasonally slower third quarter. Globally for executive search new business awards in the month of September and October were up year-over-year by 13% and 22% respectively and we strength in the month of November which was also up year-over-year. As monthly new business patterns remain consistent with prior years, we expect executive search new business awards to trough sequentially through a seasonally low in December then rebound to a quarter peak in January. For the Hay Group, the third quarter is also typically a seasonally weaker quarter for both new business and revenue as time off during the year-end holidays results in less time with clients to execute backlog as well as win new assignments. However, we do expect the Hay Group to benefit in the third quarter from both the search and new business awards secured in the second quarter as well as the continued ramp up in productivity of many of our recent consultant hires. Also, as previously mentioned, Hay Group new business awards improved each month during the second quarter and the month of November was strong up over 14% year-over-year. With regards to Futurestep, both business under contract and the pipeline of potential new business opportunities remain strong and should drive continued growth in the third quarter. As we previously mentioned, in the second quarter we continued to hire fee earners and select support staff in all of our operating segments. At the end of the second quarter our net consultant counts are up 21 in executive search and 37 at the -- Group on a year-to-date basis. As is usually the case, in the short term many of these new hire consultants will not immediately bill at full capacity and therefore will create near term downward pressure on earnings and margins especially in our seasonally slower third quarter. Now considering these factors assuming worldwide economic conditions financial markets and foreign exchange rates remain steady and under the existing U.S. tax law, we expect our consolidated fee revenue in the third quarter to range from $406 million to $426 million with growth in all of our lines of business and we expect our consolidated adjusted diluted earnings per share to range from $0.54 to $0.62. And then finally, consistent with prior quarters, our financial results in the third quarter include the amortization of integration and acquisition costs of approximately $2.3 million for retention bonus as related to the Hay Group acquisition. When you include these costs, we estimate that the fiscal '18 third quarter fully diluted earnings per share as measured by U.S. GAAP will likely be in the range of $0.51 to $0.59. And with that, we'll conclude our prepared remarks and we'll be glad to answer any questions that you have.

Alright, thank you. [Operator Instructions]. And we go to line of Tobey Sommer from SunTrust. Please go ahead, sir.

Thank you. wanted to start off with kind of the longer-term question in light of the improved results and -- kind of finding a nice growth trajectory. Gary, do you have goals for returns on ROIC that you can share with us. You are buying back stock you don't have a bunch of quarters and just curious how we should view or what your view is on improving those returns?

Well we do have goals for ROIC. And we would clearly expect to be at least 11%, 14% maybe 15%. I mean, that obviously depends on where you are in the cycle. But that's kind of the gate that we put around it.

Okay. And could you give us a color on how the product in licensing product how that grew in the quarter and maybe update us on what you think that business can be overtime?

It didn't grow at all. And I think that the reality is as we've really started to look at the opportunity there, there is been a couple of things that have really struck us. Number one the opportunity to create a platform that companies could use to hire people, to assess people, to develop people and pay people is absolutely there. And we have the IP to be able to deliver on that promise. That's number one. But the second is quite frankly, we've got some work to do in terms of making that dream a reality. I still believe very, very strongly that the business has the opportunity to double or triple actually overtime. And it is certainly other scalable business. But we’re going in and really taking a hard work. The customer interface, how they experience it. And we’re making some pretty substantial changes to what that offering will really be. We’re looking at the pricing of the business, some of that pricing they are locked in for more than a year. But the opportunity is absolutely there, but we saw that some work to do. And we also have to continue to develop talent in that business as well as augment talent from the outside.

Okay. Your hiring plans, you have been pretty aggressive in this calendar year [into the fiscal]. As you look out over the next several quarters. Do you see the growth rate of your internal kind of fee generating staff moderating a bit?

Well, we certainly we have been very aggressive and it’s not -- it’s been broad based. We brought in people that have professional account management experience. We brought in people that are what we would call solution architects. So, it has been aggressive. I would not anticipate that same level of aggressiveness for the next one to two quarters. I think the reality is that our expense base is grown substantially. I believe we still have a capacity, so a lot of capacity. And quite frankly, we’ve got to kind of re-collaborate this product business. We’ve got work to do there. So, I think for those reasons, it’s not going to be as of growth as it was say going back in nine months.

Two other questions and then I’ll get back in the queue. As we look into next quarter, the one you just guided for, would Hay revenue will be down a little bit sequentially after kind of a strong seasonal period in September, October? Or were you kind of recent headcount or mission perhaps offset that traditional seasonal change?

Yes. I think it's impossible to without a lift in the product business now. It’s almost impossible, because of the substantial reduction in billable hours in time. I don’t know, what you lose in this quarter, if it’s 7, 8, 9 days, I mean it’s a pretty big number. So, there is just no way to really make-up for that sequentially.

And I would say, this is Bob. Even when all of our folks are fully ramped up, you’re still going to see a sequential drop Q2 to Q3. For the reason Gary just articulated as well effect that Q2 is a seasonally high quarter for products of revenue, because there is a lot of renewal activity that happens during that quarter.

Okay. Last question for me. Bob do have any preliminary thoughts on what the tax law changes could mean for your working cash taxes?

Yes. I think, Tobey, we’ve done some internal analysis, but I would prefer to wait until we see where everything settles down and at that point, we will come out with a more formalized point of view.

Thank you. And now to line of Tim McHugh from William Blair. Please go ahead.

Yes. Hi, it’s Stephen Sheldon on for Tim. Thanks for taking my questions, and great results. I guess, first, the acceleration you saw on Hay Group, I guess, how should we think about the underlying factors driving that? Would you attribute it mostly to hiring or are you generally seeing clients more rolling the spend towards improving the talent strategy and generally getting more comfortable with the value you provide there?

Look, I don’t -- we have -- look, we have a new leader in the business that has had an impact for sure, no doubt about it. But, the team that we have is really, really good. And so, we have tried to push over the last several quarters to orient ourselves towards more impactful, larger assignments. Secondly, we try to push the organization towards a solution mentality. So, I would actually -- I would attribute it to those things. Obviously, to the extent that you can develop talent from within or augment from the outside, that’s a big plus. But, I don’t think there’s been enough time to really put points on the board. So, I would attribute to those other three things than kind of the new talent per se.

And then, the sequential jump in absolute revenue in Futurestep. As we think about 3Q and kind of going forward, would you view the absolute revenue contribution this quarter as kind of being sustainable? And then, also, I guess, during the quarter itself, what was the breakdown between kind of trends in RPO versus professional search?

Yes. So, I would say, if you go back and you look at the historical patterns in Futurestep, the third quarter is generally flatter, even down a little from second quarter, again because of the year-end holidays, and we would expect that same pattern to exist this year. If you go and look at the business, the business is roughly 45% single search, 55% RPO.

Thank you. And now to line of Greg Mendez from Baird. Please go ahead.

Hi. This is Greg on for Mark Marcon. Thanks for taking my question. Nice results. I guess, first, if we look at executive search, performed really well, nice pickup in productivity, even with consultant additions, you are still adding and they are still ramping. So, just thinking -- I mean, how are you thinking about productivity ramping over here in next couple of quarters, get back to like 1.4 million, 1.5 million, just any thoughts around how that’s -- where you think that goes?

Well, I think, look, if things play out the way it appears right now, you are at a point where wages will be rising. Wages rising is a good thing for everybody. But, I would say that -- I would hope that we could look at that at more like 1.4 million, maybe Maybe even $1.5 million, I mean, why not. So, yes, I would tend to think this quarter we were like $1.3 million something like that. Yes, $1.3 million. So, I would -- I think, you could see yourself too for sure, like $1.4 million. And possibly I think that to the more -- that we integrate ourselves as one rather than being 3 or 6 or 9, I think if we integrate ourselves as one firm, those are not just possibilities, it becomes a reality.

Great. Thanks. Also, Futurestep, the new awards this quarter were really strong. How does the pipeline look as we look over the next couple of the quarters, is it still robust, still lot of opportunity nationally with that being early stages, how should we think about that?

Yes. I think, the pipeline remains pretty strong, I would say, and we've seen it in the past when Byrne has a new business, Futurestep has new business that it wins, the maturity or the sort of advanced stage of the pipeline changes a little bit. So, the daughter value remains at a high level but maturity or the stage of completion of the proposal is probably a little bit earlier.

Okay, got it. And then, within Hay Group, new business is trending strong, things like that, and that continued into October. How is that, when we think about North American business, are you're seeing improvement in the trends there?

We have. In terms of the new business, we’ve certainly seen. We've got some nice wins, high to six-figure, seven-figure wins, particularly around M&A and talent development. So, that's -- I think that overall as we continue to move the portfolio, hopefully towards bigger assignments, that obviously changes everything, the value proposition, it changes the economics as well.

Great. And then, just a quicker last question. Europe sounds like it was doing really well. Does that strength -- I mean, last quarter you noted the UK was still holding up pretty well despite what was going out with Brexit. Did that continue this quarter too?

It did. The UK is the flagship of the Company. We got 750 people there. The business is outstanding. That business performed again incredibly well in the quarter.

Thank you. And now to line of Marc Riddick from Sidoti. Please go ahead.

Hi. Good evening, everyone. We wanted to touch on the -- and maybe just speaking back a little bit from your comments about the UK. But wanted to touch a little bit on the strength of the financial service. Clearly, there was strength across the board certainly, sequentially pretty much almost all the areas in high single to low double digits. But I wanted to touch a little bit on the financial services and what was driving that. And it seems as though that the UK was part of that, but I was wondering if you could delve a deeper into the growth in the financial services space?

It was. Europe was clearly part of it, not only the UK. I would say that we have seen probably, as you would expect, good activity in commercial banking, consumer banking, wealth management, insurance, those have all been good as well as private equity. So, when you look at the sectors within financial services, you’re going to see pretty strong across the sectors. And from a geographic perspective, you’re also going to find it relatively balanced in terms of growth.

And then, just maybe, if you could touch a little bit on the talent acquisition. Maybe if there are any differences, the sources of talent acquisition that you’re looking at, maybe the pipeline there, does it look any different than maybe six to nine months ago or if you are just continuing to see folks that are gravitating toward you from all phases? Thank you.

It really hasn’t changed since the last call, but it certainly has changed over several quarters, no doubt about that. And so, we are an organizational consulting firm. And as we go to continue to integrate ourselves around one firm, we have seen people from strategy background, the big four, some of the branded HR providers, certainly seeing an uptick in activity from those sources.

And then, one last thing. You touched a little bit on the -- being into early stages of the new account program in maybe the past call or two and sort of touched on some of those things. And I was wondering if you could give bit of an update as to sort of -- certainly the numbers would indicate that things were going well there. But I was wondering if you could give a little bit of detail on that progress? Thank you.

Today, it’s about 20% of the firm, 20% of the portfolio. When you look at world class professional services companies you find, it would be anywhere from 20% to 30%. So we certainly, we would not see it at 30%. But, we would see it in the low-20s in terms of percent of the overall portfolio. I think, we made really good progress in the quarter. I’m not satisfied, but I’ll just -- one of the contributors to that large Futurestep new business -- new business orders in the quarter was from a marquee account. And it’s just amazing for me to kind of contemplate how much impact we can have with some of these clients versus say a decade ago.

Thank you. It appears there are no further questions. Mr. Burnison, please continue.

Okay. Again, I want to say thank you to our colleagues, obviously, thank you to our shareholders as well and to our Board. Special time of the year, and so I pass on season greetings to everybody. And we look forward to speaking to you in the new calendar year. Thanks, everybody.

Thank you. And ladies and gentlemen, this conference will be available for replay for one week, starting today at 6.30 p.m. Eastern Standard Time running through the day of December 13th, ending at midnight. You may access the AT&T Executive Playback service by dialing 1-800-475 -6701 and entering the access code of 438145. International participants may dial 320-365-3844. Additionally, the replay will be available for playback at the Company’s website at www.kornferry.com in the Investor Relations section. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.