Korn/Ferry International (NYSE:KFY) Q2 2015 Earnings Conference Call December 9, 2014 5:00 PM ET.

Gregg Kvochak - Senior Vice President, Investor Relations Gary D. Burnison - Chief Executive Officer Robert P. Rozek - Executive Vice President and Chief Financial Officer Linda Hyman - Executive Vice President and Global Human Resources.

Kevin D. McVeigh - Macquarie Group Limited Tobey O'Brien Sommer - SunTrust Robinson Humphrey, Inc. Timothy McHugh - William Blair & Company Mark S. Marcon - Robert W. Baird & Co., Inc. Ken Ruskin - Acclivity Capital Management.

Ladies and gentlemen, thank you for standing by. And welcome to the Korn/Ferry Second Quarter Fiscal Year 2015 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 call is being recorded for replay purposes.

We have also made available on 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 related to this presentation and the Company's Annual Report for fiscal 2014 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 release relating 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 Rochelle and good afternoon seasons greeting. Thank you for joining us. Here today we have Bob Rozek our CFO; Linda Hyman, our CHRO and Gregg Kvochak.

Let me just start off by saying how proud I am what we’ve accomplished this calendar year and really not only the calendar year, but more specifically our fiscal second quarter, which ended in October.

In that quarter we’ve achieved strongest topline results in our 45-year history generating $256 million in revenue which on a constant currency basis is up about 8% over last year. Profitability was also strong with EPS of $0.51 and that was up about 24%.

We continue to see strong growth, steady growth across the industries and solutions with most of our global practice areas up year-over-year. Futurestep rang the bell, they led the way growing 27% year-over-year and that was really spread from growth in North America and Europe and from all of our service lines.

Our flagship search business was up 7%, little over 7% on a constant currency basis with continued strength in North America that was up about almost 11% and the search business continues to maintain its industry leading market share and leadership position and it grants us brand permission and trust most importantly allowing us to engage in conversations with clients about their talent agenda.

Our leadership offering generated about $66 million in fee revenue and which was essentially flat year-over-year, but that was against a really difficult comp. We posted strong EBITDA margin however in that business a little over 16%.

So overall I am pleased with our results certainly this past calendar year and during the quarter I am even more excited about what the future holds for us. Korn/Ferry is the authority on talent.

We are an organization that based on data and research we can measure and predict who is going to be successful in any given role, organization industry or geography. And for those clients, for those boards, for CEOs, for leadership teams who truly want to use talent as a competitive asset to drive sustained growth.

Korn/Ferry is the authority on talent.

Through IP our focus on innovation and our ability to design a client talent strategy, identified gaps and then help them build and/or attract talent I am confident that in the year ahead we are going to create real impact and drive dramatic change in the organizations we serve continuing to see the opportunity to create the worlds preeminent leadership and talent consulting firm.

So how we are going to do this? We are going to continue to drive relentlessly a proactive go-to-market strategy broadening the conversation with our clients, penetrating those relationships, delivering multi-line diversified solutions.

Secondly, we are going to make our brand more elastic through innovation, executing through IP and the investments that we are making in the Korn/Ferry Institute. Around key themes such as growth, talent analytics, learning agility and enterprise agility.

Third, we are going to continue to develop our workforce, our people to broaden the conversion with our clients. And finally, we are going to execute a systematic approach to M&A as well as capital allocation which Bob is going to speak to. So with that Bob I will turn it over to you..

Great, thanks Gary and good afternoon everybody and thanks for joining our call.

Our strong financial performance continued in the second quarter of fiscal 2015 with our overall results benefiting from our strong demand for our recruitment and leadership consulting services, the continued execution of our go-to-market account management program and our ongoing focus on cost management.

And what is historically a seasonally weaker quarter for us. Our fee revenue reached nearly $256 million Gary said the growth across all three lines of business. At constant currency, our consolidated fee revenue was up $19.3 million or 8.1% year-over-year and it was up $8.1 million or 3.2% sequentially.

As our integrated selling activities and account management efforts continue to advance, it definitely impacts our fee revenue mix which continues to evolve with now 42% of our second quarter fee revenue being generated from services other than Executive Search.

In Executive Search second quarter new business was up 2.8% compared to the second quarter of fiscal 2014 and down marginally sequentially due primarily to summer vacation seasonality. After a seasonally slow start in August, monthly new orders improved each month within the quarter.

In LTC new business awards in the second quarter grew 10.5% year-over-year and were up 3.5% compared to the first quarter of fiscal 2015. And Futurestep continues to really hit it stride, it achieved its second best quarter of new business ever with total awards up nearly 40% compared to the first quarter.

Leveraging our cost saving actions that we initiated in the first quarter, our firm achieved both record earnings and profitability in Q2. Excluding all management separation charges in the second quarter of fiscal 2014 adjusted EBITDA improved $7.4 million or 20.1% year-over-year to $44 million.

When compared to the first quarter of fiscal 2015, adjusted EBITDA in the second quarter improved $6.1 million or 16.1%. EBITDA margin was 17.2% in the second quarter of fiscal 2015 compared to 15.4% in the second quarter fiscal 2014 and 15.1% in the first quarter of fiscal 2015.

Now in the second quarter, I would like to highlight a couple of non-recurring items that resulted in a net benefit to earnings. Especially we received an insurance settlement which reimbursed the firm for legal fees incurred in prior years.

This was partially offset by higher other professional fees relating to the ongoing evolution of our strategy and additional performance related bonus expense resulting from the continued adoption of our strategy, including referrals between lines of business.

The net benefit to EBITDA in operating earning in the quarter associated with these items was approximately $2.4 million within an approximate 90 basis point favorable impact to our EBITDA margin.

On a GAAP basis, operating earnings in the second quarter were $34.4 million with a 13.5% margin as compared to $23.2 million and a 9.7% margin in the second quarter of fiscal 2014 and $18.6 million and a 7.4% margin in the first quarter of fiscal 2015.

Excluding management separation charges in the second quarter of fiscal 2014 and restructuring charges in the first quarter of fiscal 2015, adjusted operating earnings in the second quarter were up $9.2 million or 36.5%, with a 290 basis points improvement in margin year-over-year and up $5.9 million or 20.7% sequentially with a margin improvement of 210 basis points.

Our financial position remains strong in the second quarter with total cash and marketable securities of $400 million, up $85 million compared to the second quarter of fiscal 2014 and up $28 million compared to first quarter of fiscal 2015.

Excluding cash and marketable securities reserve for deferred compensation arrangements or occurred bonuses, the current investible cash balance is approximately $180 million and that’s up $53 million year-over-year, but down $31 million on a quarter sequential basis, primarily due to the funding within the quarter of our long incentive payments that related to fiscal 2014.

Approximately 32% or roughly $57 million to $58 million of our investable cash current resides in the U.S. and after considering working capital needs a worldwide net investable cash is now approximately $105 million with roughly 30% of that residing in the U.S. net saw $31 million to $32 million.

I am pleased to announce that our Board of Directors has endorsed our plan for a balanced approach to capital allocation going forward. This approach first includes investing in growth initiatives such as the hiring of consultants.

The continued development of our intellectual property and derivative products and services as well as the investment in synergistic accretive M&A transactions that earn a return that is superior to our company’s cost of capital.

Our recent acquisitions have yielded such returns and it’s helped create a stronger, broader solution-rich firm that is less economically cyclical and more strategically relevant for the company’s client. Second this approach includes the planned return of a portion of excess capital to our shareholders in the form of regular dividend.

The Board has endorsed management’s recommendation to establish the payment of a quarterly dividend in the amount of $0.10 per share commencing as the conclusion of the third quarter of fiscal 2015.

Additionally, the Board has approved an increase in funds authorize for share repurchases by approximately $125 million to a level that is a $150 million, which was the company can utilize on an opportunistic basis going forward.

Finally, fully diluted earnings per share were $0.51 in the second quarter and that was benefited by roughly $0.03 to $0.04 from the non-recurring items that I discussed earlier. Adjusting for management’s separation charges in the second quarter of fiscal 2014 this represents a $0.10 or 24% improvement year-over-year.

Sequentially adjusting for restructuring charges included in the first quarter of fiscal 2015 fully diluted earnings per share improved $0.08 or 19%. On a GAAP basis fully diluted earnings per share in the second quarter of fiscal 2015 were up $0.13 or 34% year-over-year and up $0.22 or 76% sequentially.

I will now turn the call over to Gregg who will review our operating segments in more detail..

Thanks Bob. I’ll start with our Executive Recruitment segment. Globally, revenue growth for our Executive Recruitment segment in the second quarter was affected by summer vacation seasonality.

On a consolidated basis, fee revenue in Executive Recruitment for the second quarter was $148.9 million up $10.1 million or 7.2% year-over-year and up $2.7 million or 1.8% sequentially when measured at constant currency.

Year-over-year on a regional basis at constant currency North America was up 10.6%, Europe was up 7.5% while Asia-Pacific was down 2.2% and South America was flat. On a quarter sequential basis also at constant currency North America grew approximately 1%, Europe was down 5.3% while Asia-Pacific and South America were up 9.6% and 38.4% respectively.

Compared to the second quarter of fiscal 2014 growth in our major specialty practices was mixed with a consumer goods practice up 25%, the industrial practice up 11%, the financial services practice up 10%, our life sciences and healthcare and technology practice were down 1% and 13% respectively.

Quarter sequential growth was also mixed with consumer good up 8%, life sciences and healthcare up 3%, flat result in technology by financial services and industrial were down 5% and 3% respectively.

Financial services accounted for approximately 17.2% of all executive recruitment fee revenue in the second quarter, which was up 70 basis points year-over-year and down 80 basis points on a sequential basis.

The total number of dedicated executive recruiting consultants worldwide at the end of the second quarter was 440, up 28 year-over-year and down to sequentially.

Annualized fee revenue production per consultant in the second quarter was $1.35 million and essentially flat with both the second quarter of fiscal 2014 and the first quarter of fiscal 2015. The number of new search assignments opened worldwide in the second quarter was 1,310 which was up 77 basis points to year-over-year and was flat sequentially.

Consolidated Executive Search EBITDA in the second quarter was $32 million with a 21.5% margin compared to $30.7 million with a 21.9% margin in the second quarter of fiscal 2014.

A slightly lower year-over-year EBITDA margin for the second quarter of fiscal 2015 was primarily a result of higher variable incentive compensation expenses linked to the execution of our strategy including referrals between lines of businesses as well as the timing of recent investment hiring of additional consultants.

When compared to the first quarter of fiscal 2015, EBITDA and EBITDA margin in the second quarter were flat on essentially flat fee revenues. Turning now to our leadership and talent consulting segment which generated $66.3 million of global fee revenues in the second quarter.

On a constant currency basis L&TC’s fee revenue in the second quarter grew 620,000 or nearly 1% year-over-year with growth in Europe and Latin America offsetting slightly weaker results in the North American and Asia Pacific region.

Compared to the first quarter of fiscal 2015 also on a constant currency basis L&TC’s fee revenue was up $3.4 million or 5.4%. Regionally, North America accounted for approximately 69% of total L&TC’s worldwide fee revenue in the second quarter compared to 70% in the first quarter of fiscal 2015.

At the end of the second quarter there were 131 dedicated L&TC consultants, which was up 3 compared to the second quarter of fiscal 2014 and up 4 compared to the first quarter of fiscal 2015. Professional staff utilization in the second quarter was up 100 basis points both year-over-year and sequentially to 71%.

In the second quarter L&TC continue to realize cost savings driven mostly by back office and operational efficiencies resulting from recent restructuring activity. L&TC’s EBITDA margin in the second quarter grew to 16.4% which was up 90 basis points year-over-year and up 120 basis points sequentially.

Finally, turning to our fastest growing segment Futurestep which grew for the eighth consecutive quarter and generated $40.3 million of fee revenue in the second quarter. On a constant currency basis Futurestep’s fee revenue in the second quarter was up $8.7 million or 27.2% year-over-year and up $1.98 million or 5% sequentially.

On a regional basis, measured year-over-year at constant currency, North America was up 37%, Europe was up 43%, South America was up 41% and Asia Pacific was flat. Sequentially on the same basis, all regions grew in the second quarter led up by the North America and Europe which were up 3.7% and 7.8% respectively.

Leveraging their fixed costs, Futurestep’s profitability has continued to improve with revenue growth.

Futurestep generated $5.6 million of EBITDA with a 14% margin in the second quarter which was up $2.7 million or 90% with a 470 basis point margin improvement year-over-year and up $310,000 or nearly 6% with a 40 basis point improvement in margins sequentially.

I'll now turn the call back over to Bob to discuss our outlook for the third quarter fiscal 2015..

Great. Thanks Gregg. Historically we've talked about our second and third quarters being our seasonally weaker quarters primarily due to the summer vacation season and the year-end holidays.

And now that we have two years of history with our most recent acquisition, it’s clear that the third quarter is our seasonally low quarter due to the impact of the year-end holidays on the number of business days that are worked within that quarter.

Globally, as expected August was our weakest month of new business in this fiscal year, with new business improving consecutively in both September and October, it provides us with a pretty good backlog.

Our November new business was seasonally low and we anticipate December will be soft due to the year-end holidays, both new order releases and delivery slows. January has historically been a strong month of new business across all of our service line.

In general, the total number of working days in the third quarter will affect fee revenue in each of our business lines is roughly depending on what part of the world you are in say seven months to nine months working days in the third quarter compared to the second quarter and actually too less working days this year than in the third quarter of last year.

Our topline growth is also being adversely impacted by currency movement, particularly with respect to the pound, the euro and the Australian dollar.

Additionally, our forward visibility remains limited and it is difficult to decide for us the deceleration of simply seasonality or a certain economic geopolitical factors are negatively affecting our new business.

Assuming worldwide economic conditions, financial markets and Foreign Exchange rates remain where they are, fee revenue in the third quarter of fiscal 2015 is likely to range from $241 million to $251 million and diluted earnings per share are likely to range from $0.43 to $0.49.

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

Certainly [Operator Instructions] Our first question comes from Kevin McVeigh of Macquarie. Please go ahead..

Great thanks. Hey great job in terms of results. I wanted to just get a sense overall as we think about the margin profile, particularly in the Futurestep business I mean you really saw tremendous sequential and year-on-year margin expansion in that business. Should we think about that going forward.

And to me the hiring that you talked about did that dampen any of the margins in the quarter? Or was that all kind of things we should think about going forward and if you could give us a sense of where those hires will be split?.

Yes, I think let me take the Futurestep question first. Kevin this is Bob..

Hey, Bob..

Hey, how are you doing?.

Good..

In the Futurestep yes, I think as we talked the folks that we think long-term margin range for that business was in the 13% to 15%.

I think we see them now as they continue to ramp up with new contract if you go back to last year in the second quarter, they had just a real spike in new business awards and that negatively impacted their margin in that quarter. But now we kind of have our pipeline in backlog filling in.

So as they continue to gather new contracts but not seeing the downward pressure in the margin anymore. So I would say probably in the kind of 13% to 15% range right now there smack dab in the middle of it.

And then in terms of the new hires, if you look across you know where we’re on a year-over-year basis to predominant hiring came in the Executive Search segment. I think we are up 28 search consultants. Some of the folks have their - are starting to get their legs underneath them now.

So the ramp up time as we bring in people with experiments is a little bit less than those that don’t have it. So I wouldn’t anticipate any real downward pressure from those hires going forward..

Great and then in terms of just any impact you know are you seeing in the business, or you thinking about it differently just and this maybe reach but just given that how much oils has come off has that impacted any of the end markets maybe some stepping up more maybe some coming off the accelerator a little bit or is that still too early to tell..

Its way too early to tell and certainly something that we have our eye on and broad intends and purposes it’s really only been a couple solid weeks. And so I think the jury is out and we will see what that hold in January and February..

Got it. And then just Gary the decision to introduce the dividend, which looks great, and then up to buyback.

Is that a functions of just where we are in the cycle and just how we are thinking about acquisitions going forward or just any thoughts on capital commitment going forward just given the recent news?.

Listen I think it’s really not a change, our first priority is to invest in our business either through intellectual property or hiring other expansion. Secondly, its a continue to look for solutions that make the brand more elastic that allow us to penetrate our clients in a deeper in more meaningful way.

And lastly we have to be cognizant of the cash balance that we are building and we just can’t - we cannot earn less than 1% on that. So we have to be mindful of all three of those and we have to take a balanced approach and our Board has been very instrumental in helping to shape what we announced here today..

Super. Congratulations..

Okay, thank you. And the next question, it comes from the line of Tobey Sommer of SunTrust. Please go ahead..

Thank you. Just a couple of quick follow-ups on that.

Is it - do you have a dividend payout ratio in mind? Or do you have a different way of looking at that particular aspect of your capital allocation?.

Yes, I mean right now Tobey, it’s roughly 20% of our domestic cash flow, I mean it today’s price is about 1.5, obviously we’ll continue to monitor the build-up of cash and like to slow over time we would like to slowly grow there to a little bit higher yield.

But there is nothing targeted, it’s all depends on, the key variable for us is going to be the M&A landscape in what the opportunities are out there and what we are able to capitalize on that could use more or less of our cash depending on the outcome of that..

Speaking to that segway into the next question does the timing of this capital allocation news imply that the pipeline for M&A is little less interesting or robust than it was couple of quarters ago?.

No, not at all. Not at all, it reflects an ongoing dialog with our board again I think it’s been a very, very helpful in shaping this and it reflects the accumulation of cash and we have to be more transparent to our shareholders and that’s the road we are going down here..

Okay..

It’s very consistent Tobey with some of the conversations that we’ve had over time in terms of taking a balanced approach to not A, or B, or C, but it’s looking ahead across all the potential uses of cash and being balanced and thoughtful..

How much of the business is driven by cross-selling now and how is that maybe changed over the last two years, and you can answer that other with numbers or qualitatively if you like..

No, I’ll answer with numbers, let’s say if you look at the new business that’s going into Futurestep and LTC, approximately 40% and when you count the tail and the repeat business that number becomes even more material.

So one of the things that we take great comfort in is the acceptance by clients to invest in what is probably their most underinvested area which is people, which is the most important area.

And in the way that our colleagues have embraced the notion of kind of broadening the conversion and so I think that’s pretty remarkable relatively short amount of time..

Okay, thank you. And the next question is from the line of Tim McHugh of William Blair & Company. Please go ahead..

Yes, thanks.

Bob first I think when you are talking about the legal reimbursement you netted that out against some items, but I think can you review what that was that you are saying the net impact from that in this quarter?.

Yes, we had an insurance recovery in the quarter which was partially offset by - we had some higher professional fees as we continue to go back and revisit our strategy and fine-tune it as we move forward as well as some additional bonus incentive compensation expense in the quarter as our revenue spiked up to the level they were at in a level of cross-selling nature you just talked about grow the higher bonus expense for us in the quarter.

But the net of all those items was about $2.4 million through EBITDA..

Okay, what I mean ideally those referral fees are less of a one time issue though, if you are going to continue to grow right?.

Yes, but we stepped up actually over the last - really over the last what’s been in the second quarter, actually in the last three or four months, we’ve stepped up our incentive compensation scheme for driving a broader talent agenda. So that is actually something that is at a newer level relative to last year, six months ago..

Is that a permanent change or is this a temporary kind of incentive program?.

Well, we are going to see how it plays out, we’re not a 100% sure. We continue to evolve our compensation which we have to continue to do to reward our colleagues or not just what they deliver, but how they do it and so you know quite candidly we're going to continue to see how month play out and whether we should actually revise it again..

And it seems like those resources particularly that was the future step tales or you saw the success this quarter, is that fair?.

Well it goes across the board, it goes any piece of business that one originates outside of their primary home, they will receive subject to the profitability of the company incentive compensation. Certainly given the Futurestep growth, yes there has been a fair amount for Futurestep, but it also goes the other ways too.

Searched LTC, LTC Futurestep to search, albeit the ladder is much, much small than the form..

Yes I think Tim, also if you look at the new business awards for LTC, they are at a pretty significant level, I think it’s the highest level since we've had PDI combined with the business, so Futurestep did have a good quarter, but LTC in this quarter last two months were relatively strong with the new business builder so that’s a little portion of it as well..

Can you reconcile, I was going to ask about that. I mean reconcile kind of that statement with year-over-year revenue was basically flat and it feels like you are kind of implying or guiding us towards a similar number this next quarter, at least not a whole lot of growth.

So I mean I get the seasonality, but if we are looking year-over-year I guess trying to understand that..

I think what you are looking at here is number one, it’s a pretty difficult comparison, you have got difficult comp, in last years second quarter we had a very, very large engagement that happened to hit in one quarter.

The second thing is that when you look at the nature of the projects that we’re now winning and securing, they are actually executed over a multi quarter period. And so whereas in the past it would be we picked up for example in assessment that would be executed pretty quickly.

Now the assignments are really stretching out overtime and that’s what we actually are trying to deliver more value, bigger assignment, bigger impact with our clients. And so I think it’s going to be a little bit lumpy or then what we would have had say two, three, four-years ago..

Okay. And then I guess two numbers question Bob one the tax rate how are you thinking about that for next quarter. And can you - you talked about currency being a bigger head.

Can you quantify I guess in anyway impact that you are expecting?.

Yes, Tim as you look at the both the year-over-year in the quarter sequential impact on what we’re thinking about for Q3 you know its probably couple of million $2 million, $3 million and the biggest impact is coming from the Euro, the Pound and the Australian dollar as we rolled up our thinking on Q3.

From a tax rate perspective I think the last time we chatted I was pushing folks towards 33% to 34% given way our earnings are playing out right now its probably going to be closer in the 32% to 33% range for the full year given the mix that we are experiencing to date..

Okay great thank you..

Yep..

Okay thank you. And you have a question from the line of Tobey Sommer of SunTrust. Please go ahead..

Thank you.

What is the currency impact on your guidance just based on kind of the difference between the exchange rates we know about year ago and what you built in for this years?.

Yes, that’s I would say that’s $2 million to $3 million I was just commenting to Tim on..

Oh, I apologize I was talking to the operator for a second..

$2 million to $3 million bucks..

Okay I’ve got two business line questions.

In Futurestep lot of momentum over the last two quarters strong growth rate how sustainable is that momentum in what is driving what look likes the market share gains, maybe I imagine cross-selling is part of it but is that the single answer?.

No, its not the single answer but you know I think number one is leadership that’s probably first and foremost we got a phenomenal team I think secondly is the ability to broaden the conversation search has had an enormous impact on that business.

Third is the fight for knowledge workers and I would point to those and the growth is in North America and it’s actually in Europe as well..

The other thing I would highlight Tobey as well within the RPO side of burns business, one of the things that they’ve been able to do is to win more engagement, they have got a demonstrated ability to deliver on those engagements since as they get larger and larger engagements and demonstrate that ability, we are getting more swing at that plate, we are getting more opportunities those are translating into more wins.

So their success at the - in the early days and the ability to execute and deliver on that success its beating on itself in that business..

Okay, thanks that’s helpful. And then on for LTC I am curious are you keeping pace with the market and what can you do to grow faster in LTC..

Well, I think the - it’s an interesting market because if you ask any CEO what their biggest asset is, they say people and yes, there is usually a divide between that statement and what happens in an organization.

And so what you have is a very fragmented industry where it’s unusual to see multi-hundred thousand dollar, multi-million dollar engagement. And so to get a read on “the market is certainly more art than it is science”. In terms of the growth question, I think that we must continue to orient our business along global solution lines.

Solutions that such as art design, or assessment, or succession planning, or on-boarding, or team effectiveness, or development. We have to bring to market more standardized scalable solutions that we can replicate in scale.

And so while we’ve continue to invest in intellectual property and acquire these product and tools I think we’ve got to do a better job into packaging those even replicating success..

Thank you very much. If I could sneak one more in.

How much revenue is being derived from - directly from IP and kind of product related businesses at this point?.

It’s about again on a standard alone basis it would be in a 6%, 7% of the company now, the thing that’s a little bit misleading is that we also use that IP for a good part of our leadership and in fact even our Futurestep work.

And further we are actually using in search to, but on a standalone basis 6%, 7%, but when you look the LTC business there is a fair amount of that business that is actually utilizing the IP in delivery of consulting work..

Thank you very much..

Okay, thank you. And the next question comes from the line of Mark Marcon of Robert W. Baird. Please go ahead..

Good afternoon and first of all congratulations to you and the board in terms of the capital allocation decision really glad to see it..

Thank you, Mark..

With regards to Futurestep you have been experiencing a strong growth. I’m just wondering how should we think about capacity in that division. How are you running into any constrains obviously that you do have a number of the deals come on and so you’ve to scale up for those, but how should we think about that longer over the next couple of years..

Yes, I think Byrne has done, Mark this is Bob. Byrne has done a nice job over time of putting into place the service management centers across the globe and so I mean essentially all what he does is new contracts come on and he will step up with the healthy needs in those service management centers.

But it’s always kind of balancing that with other increases or decreases in existing contracts that come into play. So it’s a bit of a like a logistics exercise for him to do to go into the demand that’s coming out of the contracted base..

No obstacles in terms of adding more capacity as….

No, I think we’re constantly in discussions with Byrne about expanding capacity in the service management centers especially more recently now that we’re seeing has new win rates continue to develop as positively as it has.

And I will add essentially getting a little more real savings from desks and cubicles and so on you know you’ve got to going on and step up the folks..

Great. And then with regards to L&TC, can you talk a little bit about the success that you are having or the challenges that you are having with regards to increasing the number of people who can solve some of those capabilities skillfully and successfully..

Yes, it’s very difficult to find them to be quite candid. So as I talked about....

But I know it’s a good search firm..

Yes..

Yes, we can’t be the cobbler’s kid generally.

It is tough, but you know its more than the people, its also about educating boards and CEOs about putting their money where their mouth is and it is our single greatest assets, so its one of things that we have to do is to demonstrate that the data and the proof points and we have to use data to help generate demand, in addition to having these more global solutions that we can replicate that have real impact, we also need to generate demand.

So we're continuing to look, mark for those people and whether that is done through acquisitions or that is done through hiring or that through continuing to develop our own people. We are going to do all three of those..

In fact Mark one of the things that in spite of my propensity is try to keep costs down, Gary is having us invest back into sort of a more dedicated recruiting function within L&TC. So we've got now three or four folks who are spending full-time and trying to track the folks down and bring them into the organization..

Great.

And then I apologize is this was asked before, but with regards to Asia Pacific, what are you seeing in China?.

Well you know listen, the business has actually this last quarter if you look year-over-year, it was flat, I think that they are going back for the past few quarters. There has been a cautiousness that is in that market.

The long-term trends are still very, very appealing, but the demand for some of our services is quite candidly its brand new, its an immature market around what companies really do, not only just developing people, but even in terms of how they hire and so its young, its immature and there has been cautiousness that has been in that market for a good four to six quarters now.

The good news, when you look at it here, it’s certainly this last quarter it hasn’t gone down. It was essentially flat, but you know the financial services market not only in China but globally has just been totally changed.

This cycle versus the last one, it continued challenges and capital market were just not at doing the levels of business that we did before and that’s true in China as well..

And which regards - in terms of how you plan for that or do you start saying well G it’s not at a level for whatever reason it hasn’t come back.

Do you start just reallocating across different practices?.

Well, we’ve done that, that’s exactly what we have do to I mean listen I am very optimistic on in particular what we have in China and our prospectus. And you can’t be on and off, you can’t have an on and off switch….

Right..

Yet to be there we've been there for two decades. We are excited about the long-term prospects. We have to realize you know the transformation that country is going through and it’s you know it’s a relatively young market for 60% of our business and even the recruiting side is much different than it is in the United States..

Okay great I appreciate the color. Thank you..

Okay thank you. And the next question is from the line of Ken Ruskin of Acclivity Capital. Please go ahead..

Hello guys I just had a quick follow up question I wanted to make sure I understood that the January quarter guidance include the impact of two fewer working days is that correct?.

It’s correct. On a year-over-year basis sequentially it’s in the seven to nine range again depending on where you are in the globe..

Great okay.

I meant year-on-year, so that would really be it is a math that simply work to that being sort of like a 3% type revenue had come year-over-year?.

Ken, the math works easier on the L&TC business you know kind of time of materials as you charge your time and there is two less days you don’t get it, it’s a little bit more challenging to do that on the search side. So I would say it’s probably 3% to 4% range, not be a bad way to look at it..

On the L&TC side..

Yes, yes..

Okay got it. Okay thanks so much..

Okay thank you and the next question is from the line of Tim McHugh of William Blair & Company. Please go ahead..

Hi, thanks just one or two quick follows-ups. The margins I think you guided to in Q3, if I strip out the kind of the legal reimburse, the insurance reimbursement from Q2 it seems like you expect a healthy kind of improvement versus the third quarter.

Is it as simple as not having those referral fees or are you seeing the full benefit from some the actions taken in Q1 from a cost structure.

I guess is there something you’d point to why?.

I think it’s - yes, if you pull out those and non of those items in Q2 the 90 basis points to get down about a 16.2%, 16.3% margin, our margin inherent in Q3 is essentially flat where they’re riding on the same point. I think you hit the nail on the head in terms of getting the full benefit of the Q1 action.

And then again as Gary indicated we always continue to look at our incentive programs in [indiscernible] back in the particular quarter with respect to what we are trying to drive in the organization we’ll have an improvement on that..

Okay, and then just I don’t know if you are going to few said this, but can you elaborate on Europe in terms of the sentiment, in terms of the Executive Search business just relative to the economic and kind of data points we are hearing I guess what’s the commentary from the ground that you are getting back right now?.

Yes, I am happy to do that, so as you talk to Bernard’s and looking to leads the European practice I think we continue to see strength in the UK and UK is roughly 40% of our European business where we’re really seeing the most weakness in Europe today is in the search sides in Germany. That’s probably the one area that there is the most turnover.

The currency is a big obviously between these pound and the euro that’s a big impact I said before, pound, euro, and a strong dollars $2.5 million, $3 million and about two of that relates to the Europe, so we are seeing that have some dollar pressure on our revenues in Europe as well as and what we expect to guide..

Okay, all right thank you..

Okay, thank you. And the next question comes from the line of Tobey Sommer of SunTrust. Please go ahead..

Thank you, just one question.

What is the value of the stepped up incentive comp that you netted against the insurance adjustment?.

Yes, I don’t think we get into that level of detail Tobey. In terms of the - we wouldn’t give out that level of granularity and dialogue for it..

Okay. Thank you..

Okay. Thank you. And it appears there are no further questions. Back to you Mr. Burnison..

Okay, well listen, I want to thank everybody for joining us here, I wish everybody a very safe and happy holiday season and thank you for the interest in Korn Ferry and what we're creating here. Have a great holiday. Thanks..

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