Ladies and gentlemen, thank you for standing by, and welcome to the Korn/Ferry International Second Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made on 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, in the company's annual report for fiscal 2012 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. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measure is contained in the release relating to this call, which is posted on the company's website at www.kornferry.com. With that, I'll turn the call now to Mr. Burnison. Please go ahead, sir.

Okay. Well, good morning, everyone, and thanks for joining us. I've got Gregg Kvochak here with Bob Rozek. And I would -- first, I'm going to comment on our results for the quarter. I'm very pleased with our quarterly results. More importantly, I'm proud of this company, and I'm proud of our strategic progress that we're making. Revenue for the quarter was about $196 million. It was up slightly sequentially. The adjusted operating margin was slightly over 9%. As we celebrate the holiday season here and wind down 2012, I don't need to tell you that the narrative on the economic climate hasn't changed drastically over the course of this year, but I actually believe that's opportunity that great companies make their best moves in times like this, and we have been a company that has saved during summer so that we could invest in winter. That's what Korn/Ferry is all about. Korn/Ferry has an insatiable appetite to grow, to learn, to expand. As I talk to CEOs across the world and in every geography, every industry, there's a real fight to that. There's a real fight for growth. There's a real fight for relevancy. And quite frankly, I think that's going to continue for the balance of this decade. So if you consider that as the truth, CEOs are going to need a workforce that is incredibly innovative and is highly learning-agile. Having the ability to tap borderless consumers on every continent, not to mention a leadership team that can drive smart growth, because I think the days, the couple of decades we've had of relatively easier growth are gone forever. Today, the workforce is it's global, it's mobile, it's virtual, it's dynamic. A company that not long ago did one thing has now found itself thrust into a…

Thanks, Gary. Good morning, everybody. Over the past 2 quarters, we have fully and strategically deployed capital to improve our existing operations and strengthen our market position with the acquisition of Global Novations and now the pending acquisition of PDI Ninth House. We're very excited about both of these transactions, and we looking forward to welcoming PDI Ninth House to Korn/Ferry. These investments represent major steps towards fulfilling our objective of building the industry's leading talent management solutions company and will really be important catalyst for driving future growth and profitability. Currently, in a difficult economic environment, one of the things we continue to focus on is building market share around the world. In our fiscal '13 second quarter, despite the seasonality impacts from summer vacations and so on, our consolidated fee revenue grew $4.3 million or 2.3% sequentially on an organic basis. If you include the 2 months of Global Novations' revenue of $5.2 million, our consolidated fee revenue grew $9.5 million or 5% compared to the first quarter, reaching approximately $196 million, and 35% of that revenue came from LTC and Futurestep. On a constant-currency basis, fee revenue in the second quarter was down organically $4.4 million or 2.2% year-over-year. And including Global Novations, it was up $700,000 or 30 basis points, with the growth in both LTC and Futurestep being offset by the -- substantially offset by the decline in executive search. On our first quarter earnings call, you may remember we indicated that we'd be taking steps to better align our cost structure and improve our near-term profitability. We talked about getting our margins up into the double digits. The actions that were contemplated as part of that were completed in the second quarter, and we estimate them to result in approximately $20 million to $23…

Thanks, Bob. We'll start with our Executive Recruitment segment. Despite summer seasonality, globalized sequential demand for our executive recruitment services remained stable in the second quarter. Consolidated executive recruitment fee revenue in the second quarter was $127.7 million, which was up $300,000 or 24 basis points sequentially and down $14.7 million or 10% year-over-year. Excluding the effect of foreign currency exchange rates, consolidated executive recruitment fee revenue was down 30 basis points sequentially and 8% year-over-year. Regionally, at constant currency, North America was off 4% and South America was down 15%, while both Europe and Asia Pacific grew 10% and 4%, respectively, on a sequential basis. Year-over-year, also on a constant-currency basis, all of our executive search regions were down, with North America down 10%; South America down 1%; Europe down only 30 basis points; and Asia Pacific, off 14%. Several of our Executive Recruitment specialty practices grew in the second quarter compared to the first quarter. At actual rates, both the consumer goods and financial services practices grew 9% sequentially, while the industrial practice was up 3%. This growth was offset by weakness in the life sciences/healthcare and technology practices, which were off 6% and 5%, respectively. Year-over-year, also at actual rates, all of our specialty practices were down, with financial services down 10%, consumer goods down 5% and the industrial and life sciences/healthcare practices down 14% each. The total number of dedicated executive recruiting consultants worldwide at the end of the second quarter was 402, down 15 year-over-year and 11 sequentially. Annualized fee revenue production per consultant in the second quarter was approximately $1.25 million compared to approximately $1.23 million in the first quarter of fiscal '13 and $1.30 million in the second quarter of fiscal '12. The number of new search assignments opened worldwide in the second…

Thanks, Gregg. As you can see, our second quarter was very busy as we were deploying our capital through actual and pending acquisitions and realigning our cost structure. In the second quarter, as we expected, our monthly new business awards started seasonally weak in August but improved sequentially September to October. Similar to the second quarter, the third quarter is historically seasonally slower, due to primarily to new orders during the year-end holidays. So far, early in the third quarter of fiscal '13, consolidated new business awards have trended at a pace that are essentially in line with what we would expect. Assuming the worldwide economic conditions, financial markets and foreign exchange rates remain steady and excluding the impact of the pending acquisition of PDI Ninth House, our fiscal '13 third quarter adjusted standalone consolidated fee revenue is likely to range from $188 million to $201 million and adjusted standalone diluted earnings per share is likely to range from $0.26 to $0.34. Now assuming a December 31 close, we expected to begin the integration of PDI Ninth House into our global Leadership & Talent Consulting segment in January of 2013. Operationally for the month of January 2013, which is a seasonally low month, PDI Ninth House is expected to contribute between $6 million and $7 million of fee revenue and prior to the effects of any purchase accounting amortization, break-even operating earnings. The integration of PDI Ninth House will involve workforce alignment, consolidation of office space and elimination of redundant G&A spending. In order to achieve these synergies, we estimate that in the third quarter, we will incur charges relating to the integration of PDI of between $2.5 million and $3.5 million. In the current environment, PDI Ninth House is expected to generate annual fee revenue of approximately $90 million to $100 million, with an 8% to 10% EBITDA margin before integration and cost synergies and an EBITDA margin of approximately 16% to 18% thereafter. Also associated with the merger, we expect to incur incremental legal and professional fees in the third quarter of approximately $2.5 million. On a consolidated basis, assuming the pending acquisition of PDI Ninth House, our fiscal third quarter fee revenue is likely to range from $194 million to $208 million. And excluding $0.06 to $0.08 per share of estimated incremental charges relating to the integration, as well as the incremental legal and professional fees, adjusted consolidated diluted earnings per share is likely to range from $0.26 to $0.34, with diluted earnings per share as measured by GAAP, U.S. GAAP, likely to be in the range of $0.18 to $0.28. That concludes my prepared remarks. And I would like to wish everyone a wonderful holiday season. Now I'll turn it back over to Gary.

Well, thank you, Bob. Okay, operator, you want to take questions?

[Operator Instructions] And our first question is from the line of Tim McHugh with William Blair & Company.

First, I wanted to ask about PDI. Can you just give us a little more color on kind of -- I guess, looking at the website, there's a variety of services they offer, and it looks like some of it's more kind of solutions and some of it's more traditional time and materials. Can you just give us a flavor for is there any particular area that accounts for a larger-than-normal percentage of the revenue? And is it kind of more -- is it more consulting type of time and materials revenue or more of a solutions sale?

Well, let me -- Tim, let me try to answer that for you and first step back. I mean, we believe, we want Korn/Ferry to be synonymous with the premier talent solutions company in the world. We see a significant opportunity ahead of us and so we are continuing to build solutions and services that differentiate this great company and make this brand more elastic. In that, we -- our goal is to create the most globally relevant leadership business in the world, which we will do. Today, we have a leadership business that is on a run rate right now of about $160 million in the current economic environment, in the current quarter annualized. With PDI, you would have a company that is essentially $100 million, again, in this current economic quarter, annualized. So you'd have a $0.25 billion leadership organization that is committed to making better leaders for a better world, that is committed to changing the lives of people and accelerating our clients' destination. So we see a multi-hundred million dollar opportunity for us. And I would remind you that that leadership business was a practice. Just a few short years ago, we're $6 million or $7 million. When we look at PDI, what does that give us? That gives us fabulous people with tremendous intellectual property that is all research-based. They share our passion, but everything that we do needs to be research-based. They're approximately in 20 countries around the world, and when you look at their business, it fits very, very nicely into ours to create the most globally relevant leadership business in the world. When you look at the business that they're doing and in this current economic environment, current quarter, kind of annualized, if you will, I'm rounding kind of $100 million. You would say that 25% of that would be product-based, so things like performance management doing 360s, licenses around intellectual property, books, all of those kind of things, just call it, again, approximately 25%. Then when you look at the balance of the organization, it would be around assessment, making better leaders for a better world, development and coaching. And so you look at this great company of PDI that I'm very, very excited about. And what it brings Korn/Ferry is additional developmental capabilities to give to CEOs, to boards, to teams. It gives much greater depth around assessment capabilities. It has technology-enabled learning capability that we really believe that we can scale. It's got great technology. And so I'm extremely optimistic about this, and I would also say that this is a company that I have personally known for 8 years.

Okay, great. That's helpful. On the assessment part, can you contrast -- I think a lot of investors probably saw Corporate Executive Board bought SHL earlier this year, and people have been hearing that term kind of talent assessment more from them. This is much higher end from what I'm understanding, but to the best you can, can you kind of contrast that?

Yes, it is very high -- this is absolutely very high-end. I mean, we're committed to making better leaders for a better world. Now having said that, when you look at the world's population of 7 billion and you think about the outliers of achievement, it's not only in the C-suite, and so we do believe that we've got more insight than anybody else about who somebody is. And not just in the corner office but throughout an organization. So as we think about the strategy of the company in scaling this, we think there's enormous potential, for example, around our Futurestep offering and what we can do there with knowledge workers. Between Korn/Ferry and PDI, assuming the pending acquisition closes, you've got a company that has assessed millions, millions of executives. So this is -- you're oriented more towards the high end, but we see the significant opportunity to scale that.

Okay. And then on the margins, I think, Bob, did you say 6% to 8% before, the synergies, in EBITDA margins that was?

8% to 10% on the EBITDA margins before synergy and 16% to 18% post synergies.

Okay. All right. So I mean, I can back into then it's something like $7 million to $8 million of cost synergies of what you guys are identifying?

Yes, yes. And that again, this is -- I would say, Tim, that this is obviously -- this is a revenue story. I mean, Korn/Ferry is absolutely obsessed with making the brand more elastic, differentiating our wonderful search business. This is a growth story, so what we're talking about here is just in the current operating environment look, bringing these organizations together and really focus in on the expense side.

Do you have everything you need? Or I guess, you never have everything you need. But I guess after Global Novations and PDI, how do you think about as -- with incremental capital? And now at this point, have you built out leadership enough that you'd focus at repurchases or Futurestep or something else instead? Or are there more pieces that are immediately kind of identifiable that you would like to continue to look for?

Well, I -- look, we've got some pretty bold and audacious ambitions here. I think we -- this is all about execution, and execution is all about people and motivating people. We get up at 4:30 without the alarm clock and getting people to work together, that's what a CEO does. So I think what we've got to focus on here is how do we grow what we have. We're always -- we've been very systematic in looking for high-quality solutions, intellectual property that differentiate this brand and this wonderful flagship search business that we have. That's my passion is to differentiate that business. So we're going to continue to look. We've been very, very, I think, consistent that our first priority with capital is to invest it in the business. Now that would be number one. But we're also mindful of making sure that we're earning the kinds of returns on that capital that shareholders would be satisfied with. So we're going to continue on with our playbook here. I don't think anything is going to really change.

Our next question is from Tobey Sommer with SunTrust.

This is Frank in for Tobey. I wanted to ask a little bit about North America. What is your view in terms of seasonality expectations there? And what's going on in the financial sector? Is there any impact of pricing or recent trends?

The financial sector, you mean financial services?

Yes.

Oh, it's extremely difficult, and it's going to continue to be difficult for a long time. There's no question about that. And so I -- we've got an absolute -- look, we've got a fantastic team in financial services. I would say it's the best -- absolutely the best in the industry. But I think that you have to be quite -- you've got to assess reality. As a leader, you have to assess reality. And I think that for some time here, it's going to continue to be challenging, and there's going to be headwinds, but that actually presents opportunity for us and for Korn/Ferry and that's how we have to look at it. But I think the industry is being reregulated. You don't know what the capital requirements are actually going to be. There's a lot of uncertainty there, and I think that's going to continue.

Okay, great. And could I get a quick update on the SuccessFactors partnership? I know it's early stages, but how are things going there?

Yes, well, we -- so far, it's still early days. We believe that we've got tremendous intellectual property that we can deliver to clients to accelerate their destination. And in terms of channels to distribute that, one of those challenge -- one of those channels would be through SAP SuccessFactors. And so we are -- we have a big initiative around product-izing, digitizing and distributing our intellectual property. I think it's really still early days but so far, so good in terms of how we're approaching that.

Okay. And then finally, in your prepared remarks, you talked about the global nature of PDI. Could you give us any insight into kind of where the revenue by geography is and kind of where that's expected to go and have that kind of the complements your current?

Right. It pretty much -- again, I'm going to speak right upfront here. It kind of mirrors our footprint pretty nicely when you look at our firm overall. So when you look at -- they may have a little bit more in the U.S. than we do. Korn/Ferry today is probably, I don't know, 47%, 50% U.S. PDI, we would have a little bit more in the U.S. but it's pretty close to how we ...

And I think it allows us to do as well is start to get really get the scope and scale that we need in EMEA and in Asia Pac.

[Operator Instructions] We'll go to the line of Mark Marcon with Robert W. Baird.

Congratulations on the acquisition. Looks like it's a really nice strategic fit. Can you talk a little bit more about how much of the business is somewhat recurring in nature versus how much is discretionary that's re-upped every year? Compare and contrast it to some of your other leadership and talent development businesses.

Again, it's hard to generalize, Mark, but I would say that the nature of the work for PDI is more recurrent than some of the work that we have at Korn/Ferry. And so you will see very, very high level of consistency in their top clients year after year after year. So I would characterize it as less episodic than some parts of our leadership business.

What would be those recurring type of solutions that you would provide?

Those would be anchored around assessment, Mark. And so those could be in the C-suite, it could be in terms of pivotal leaders, knowledge workers, professionals, and it could be in the category of the vital manning. So -- but I think you would find it much more recurring around the assessment, as well as the performance management piece around 360s.

And Mark, this is Bob. A number of their relationships have contracts that will provide for assessments over a period of time. There's no individual annual guarantees, but they are provided over a longer period of time, so that creates more of the recurring revenue streams that Gary's referring to.

Great. And who would you typically end up selling to in terms of the key contact with the clients? And can you talk a little bit about the types of clients that they would typically have?

Well, we're not going to mention client names.

Not the specific names, but large, global.

Yes, yes, Mark, absolutely. Again, it's much like our client base when you line them up. It's just incredible, fits very, very nicely together. And in terms of the buyer, it's not going to be that much different than, per se, at Korn/Ferry. And when you look at our constituencies, you would find that the boardroom is a constituency, the C-suite is a constituency and then the broad HR organization is a constituency, and so it's really those 3.

Okay, great. And then, with regards to the improvement in the margins that you spoke of, can you talk about specifically where or how you would improve the margins? I mean, that seems like a pretty dramatic increase.

Well, Bob has certainly laid a high benchmark, haven't you?

We have.

Yes, you said high expectation.

Yes, and we will deliver on those expectations. I think right now, as we look at the synergies that we're attempting to drive into the organization, Mark, I would say probably 60% to 65% will come from reduced salaries and benefits on a combined basis. There's probably another 25% or so that's going to come from synergies that we're going to realize out of combining our real estate platforms. And then the remaining amount will just come more naturally, I would say, from the G&A savings, where you don't have 2 sets of auditors, you don't have 2 sets of outside accountants any longer and so on. And so we'll get some natural synergies out of that, too. But we're...

Yes. I mean, look, I was joking with Bob, "This has got to be a growth story, right?" So that's how we're going to be oriented. That's how we're approaching it. How can we grow, how can we differentiate? That's what our focus is going to be. But naturally, when you look at things like -- real estate, there's going to be some overlap. We can do some creative things that are cool with real estate. There's opportunity there.

Okay. And what was the growth rate -- what's the growth rate been for the last couple of years?

Growth rate of their business would be single-digit kind of growth rate, Mark, high-single digit last few years, a couple of years.

So in a tough environment, it's been...

Yes. I mean, that's right.

Okay. And you're anticipating -- I mean in terms of getting to the margin profile that you were referring to, what sort of growth rate would you need to accelerate that to? Or would you just assume that that's going to continue?

I'm going to assume that, that's -- for now, right, for now, we only guide out quarterly, right? So I'm Just going to assume that...

Sure. I'm just trying to look at the potential return on invested capital in terms of what you paid relative to what you think the profit is going to be and how quickly you can achieve that.

Yes, yes, yes. I think if you look at our -- the organic growth rate of the -- of our leadership business, it's pretty impressive. And so I think if you -- if one would kind of say that if PDI has been single digit and Korn/Ferry's leadership business has been significantly beyond, you better -- you should probably split the difference, right? We do see a lot of client pull here in terms of significantly differentiating our search business, our brand, our Futurestep business. But this is a challenging economic time as well.

Okay. And is there any overlap between your current leadership business and what they offer?

Well, we think that it's quite complementary in terms of the solutions and intellectual property. And to be quite candid, we just -- we don't have enough depth and scale in our leadership business today. Quite simply, we need more intellectual property, we need more research, we need more science, and we need more people and more global coverage. And this does it pretty significantly.

Great. And then in terms of just going to the core executive search business, can you talk a little bit about any sort of potential changes that you're seeing in terms of competitive set or alternatives or behavioral changes at your clients?

Yes, Mark, it's pretty much the same. We've tried to hold the line on pricing. One of the strategies of the company was to make sure we elevate the brand, the level at which we're operating within an organization. I think, objectively, we have clearly, clearly done that. It continues to be, for any business, a real fight for growth and relevancy, and that's why something like this investment, the things we're doing with SuccessFactors, with Futurestep, with intellectual property, it makes us more relevant. And I think it's going to result in greater share in that core flagship search business.

Great. And then in terms of the -- you mentioned a little bit about the monthly trends. And that seems to be more a function of seasonality. Can you talk a little bit about the year-over-year trends by month in North America?

Yes. I think if you go in, Mark, and you look at the year-over-year trend, it continues to be pretty choppy. But it's staying within a relatively, what I'll call, narrow band as we -- we can go back over the past 2 years and one month you have a pretty good month and then you have another month or 2 where it drops down again and it pops back up for a couple of months. But it's generally in the $20 million-plus range plus or minus and you just add a couple of million on a month-by-month basis, and it's been like that for probably the past 12 to 18 months.

Great. And so kind of basing out at that level, so that 10% year-over-year decline should start basing out and basically, the year-over-year decline should decline?

If I would also -- but again, I caution everybody, with everything we've talked about, we've got this fiscal cliff here that if something happens there in the next 2 or 3 weeks, all bets are off.

Well, something's going to happen. It could be bad, could be good. Asia Pac, how -- what are you seeing there geographically in terms of -- what are the areas that are doing better on a relative basis and what are the areas that seem to be getting a little bit worse?

I would like to think that we're going to see pickup in industrial, again, here over the next few months. I think that's going to happen with the monetary policy in China. I believe that's going to happen in the change of leadership. Financial services, still very, very tough in Asia. That's going to continue, and hopefully, we will see some traction increase -- increased traction in industrial.

Yes, I think from talking to our folks over there, there's some bullishness in terms of China with the change in the government political structure over there. I think there's some budding optimism that I see in China.

Okay. And then just in the balance sheet, with the accrual that you've made for bonuses, what's the usable cash?

The net investable cash, that was what I commented on, Mark, in my prepared remarks. After -- if you reserve the money for the pending acquisitions, it's about $105 million of investable cash. Now in that balance, we will obviously need to maintain levels of working capital and so on. But that's our -- if you go back to our pure definition of net investable cash, it's about $105 million.

Okay. And are you thinking about -- I mean, obviously a lot of other companies are returning some to shareholders prior to the end of the calendar year. Any thoughts there?

Not before the end of the calendar year, Mark.

And next, we'll go to Josh Vogel with Sidoti & Company.

I'm sorry I jumped on a little late so I'm sorry if you're repeating anything here. But Bob, you were talking about EBITDA margins at PDI. I think you said they were 8% to 10%. Is that the trailing EBITDA margin?

Yes.

Okay. Because I'm just trying to get a sense of the multiple you pay on PDI versus prior deals. Was it higher, lower, in line?

We generally don't comment on that level of specificity.

Okay. And what about just the pipeline for additional opportunities on the LTC front?

When you say -- pipeline of what?

Acquisition opportunities, sorry.

Again, we're always looking. We've always been looking. This is my -- I've been here 10.5 years. We've been very, very consistent, and we're going to continue to run that playbook as a company.

Okay. And what percent of your executive recruiting clients today are using your LTC services as well?

Well, when you look at our -- for example, you take a look at our top 50 clients, 82% of those are using 2 out of our 3 service lines. When you look at our strategic accounts, a significant portion of those are using our LTC service offerings. So we think, given what CEOs are fighting and what they're going to continue to fight over the next several years, we think there's going to be quite natural pull to how do you align a workforce, how do you take common purpose, how do you take vision and how do you align that to your workforce strategy when you're asking more out of people, there's less people, you need to be innovative, you need to have cultural dexterity, Korn/Ferry is that bridge between a CEO's common purpose and vision and their workforce. And so we think that there's pull, natural pull, and we're trying to accelerate that.

Okay. And just one more. I was reading some literature recently about trends within Fortune 500 firms where they're bringing their executive recruiting spend in in-house. And I was wondering what you were seeing within your client base.

Sure. I mean, that comes and goes. I've been here 10.5 years. It goes through fabs and cycles. The thing that I will tell you as a CEO, you're always going to want somebody that's going to give you that independent view of who somebody is and it's not going to be tarnished by a lens -- by an internal lens. I will tell you that as a CEO. I believe it. You're going to want that firm that is your talent adviser. So you see this come and go. You see it with internal audit. You see outsourcing, in-sourcing. It just kind of goes with the cycles. And so there's obviously right now a big focus on cost and the likes. So you're going to see that.

And with no further questions, I'll turn it back to you, Mr. Burnison.

Okay. Well, listen, I want to thank everybody for their time. Our -- I'm proud of this company. Our search business is the ultimate differentiator for our company. It gives us tremendous brand permission. It grants us trust. It serves as the edge. And even though the economic climate continues to be unsettled, I think that history has definitely shown that challenges present opportunity, but only for the nimble, only for the determined, only those that have saved money during summer. We are a company that continues to view the world both outside in and inside out, and we've got a relentless focus on how we can link a CEO's business and talent strategy. And so we see this environment, this real fight for growth, doing more with less as an opportunity for Korn/Ferry. So I'm proud of our efforts in 2012. I'm confident about how we're aligned for 2013. I want to thank our shareholders and more importantly -- as importantly, I want to thank our fabulous colleagues around the world. Happy holidays to everybody. Thank you.

Ladies and gentlemen, this conference call will be available for replay for 1 week starting today at 11:00 a.m. Eastern standard time, running through the date December 13 at midnight. You may access through AT&T Executive playback service by dialing (800) 475-6701 and entering the access code 274087. International participants may dial (320)365-3844. Additionally, the replay will be available for playback at the company's website, www.kornferry.com, in the Investor Relations section. That does conclude your conference. Thank you for your participation. You may now disconnect.