Hudson Global Inc (HSON) 2004 Q2 法說會逐字稿

Good morning, my name is Vanessa and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Hudson Highland Group second quarter 2004 earnings result conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there'll be a question and answer period. [Operator Instructions]

Thank you.

Mr. Chait, you may begin your conference, sir.

Welcome to the HH Group conference call for the second quarter of 2004.

I am Jon Chait, Chairman and Chief Executive Officer.

I'm joined today by Rich Pehlke, Executive Vice President and Chief Financial Officer and David Kirby, Director of investor relations.

I'm going to start by reading the Safe Harbor statement.

Please be advised that except for historical information the statements made during the presentation constitute forward-looking statements under applicable securities laws.

Such forward looking statements involve certain risks and uncertainties including statements made regarding the Company's strategic direction, prospects, and future results.

Certain factors including factors outside of our control may cause actual results to differ materially from those contained in the forward-looking statements including economic and other conditions in the markets in which we operate, risks associated with acquisitions, competition, seasonality and the other risks discussed in our filings made with the Securities and Exchange Commission.

As has been the practice on each of our calls I will limit my comments to highlights within our businesses during the quarter to give you some insight as to the important trends of our business while Rich will review the financial results in more detail.

Periodically I will generally refer to profits at which point I am referring to adjusted EBITDA as defined in the schedule to the press release which we issued earlier today.

Our second quarter operating results were in line with our guidance.

When we completed the spend our guidance was to achieve profitability without a change in the underlying economic environments of our major markets.

While the economy is clearly better than a year ago in North America and somewhat better in the United Kingdom it has been steady in the ANZed (ph), Australia and New Zealand region and still weak in continental Europe.

The improvement in our profit margin therefore has less to do with the economic environment and more to do with the management of our regional leadership and their teams.

Approximately 60 percent in the improvement and profitability in the quarter in constant currency resulted from expense reductions.

This indicates that the improvements are sustainable to a greater degree than if simply related to the strengthening of the economy, no matter how well welcome.

At Q2 measured our constant currency basis year on year, profitability increased 17.6 million compared -- composed of gross margin increases of 7.2 million and an SG&A reduction of 10.5 million.

I would like to point out that we believe we are in the early stages of the recovery cycle for our mix of business.

As you will recall, approximately 60 percent of our gross margin consists of permanent recruitment fees and executive search fees.

Typically these segments of our businesses will be in a very early stage of development at this point in economic cycle and as the economic cycle matures we would hope to see further increases in these segments.

Trends within the quarter were favorable.

The group achieved a positive EBITDA in May, a four-week month, for accounting purposes as well as June, a five-week month.

May's profit was the first in a four-week month since the spin.

Operating leverage was positive in almost all our geographic markets, meaning that the percentage of profitability increase was greater than the percentage of gross margin increase.

This indicates that expenses were well controlled by our operating management.

In fact on a consolidated reported basis, gross margin was up year on year by $14.8 million whereas adjusted EBITDA was up $18.1 million.

Some leaders in terms of operating leverage for Hudson North America on a 25 percent increase in gross margin went from a loss in the prior year to over a $4 million profit.

Hudson Europe, on a 13 percent increase in gross margin, went from a loss in the prior year to over 2.5 million profit with leadership from the UK, Belgium, and The Netherlands.

Hudson Asia Pac on a 13 percent increase in gross margin increased their profit to over $6.6 million an increase of over 250 percent with leadership from Australia, New Zealand, and the Asian region.

Highland Partners continued to benefit from the repositioning completed last year.

Highland Partners reported a 1.4 million in adjusted EBITDA in the second quarter or 8 percent of revenues, compared to a loss in Q2 '03 and break even in Q1.

Highland achieved profitability on essentially flat gross margin and a smaller number of partners.

Highland Asia Pac continued to achieve excellent results with an adjusted EBITDA of 337,000 or 12.5 percent.

The quarter's results reflect the continued benefits from our core strategies including the following.

We have continued to reduce infrastructure costs in order to achieve operational excellence.

Rich is going to comment in more detail with respect to the impact in future periods, the change in the lease in our Toronto office.

Secondly, we continue to build our professional staffing, permanent recruitment solutions and executive search segments which offer higher margins to our investors.

This is demonstrated by the adjusted EBITDA margins achieved in this early recovery stage in a number of key markets including Hudson North America where we reached 5 percent, Hudson A Pac where we reached 7 percent and Highland Partners as I mentioned where we reached 8 percent.

All of our major countries and many others contributed to the strong adjusted EBITDA margins.

Including as I mentioned before the U.S., UK, Australia, New Zealand, The Netherlands, Belgium, and the Asian region but particularly Singapore and Japan.

We continue to expand our tent business and to reduce the volatility of our earnings which are currently dependent on permanent recruitment and executive search.

We are continuing to invest in HCS to differentiate our Company from competition and to approach our clients with different perspectives.

In the quarter, HCS was our fastest-growing segment of gross margin dollars measured in constant currencies.

With that, I'm going to turn it over to Rich to talk about our financial statements in more detail.

Rich.

Thank you, John.

I will make a couple of brief comments about areas of the financial statements and then we will get to the Q&A.

Just one -- the first comment I will make is about the impact of currency in the quarter year over year, it impacted revenue by 7.7 percent to increase revenue 7.3 percent increase impact on the gross margin, 6.6 percent impact on expenses resulting in an increase in adjusted EBITDA of about $400,000.

So again as we have seen traditionally the net impact of the currency movements on our financials pretty much mitigated as almost a natural hedge.

As if it's been the trend all along.

Let me talk about the revenue line a little bit.

As John indicated in the release as well, revenue was up 14.2 percent, reported numbers 6.5 percent and constant currency.

We did not see any major shifts in the geographic mix of the revenue.

Our largest region and revenue was Europe as there is about 36 percent of the total with North America in about 30 percent of the total which leaves about 34 percent for A Pac.

69 percent of our revenue came from the temporary business across the globe; about 19 percent from our perm business in Hudson; and 6 percent from the HCS business that John referred to; and about 5.5 percent from the executive search business.

In our gross margin, which was up 14.2 percent on a reported basis and again 7 percent in constant currencies we saw relative balances as well as geographically.

North America accounted for about 27 percent, Europe was 40 percent and APAC was about 32 percent of the dollars -- reported (indiscernible) dollars.

Temporary contributed 32 percent of the total of gross margin; our firm business was about 44 percent and again these percentages are in line with what we traditionally have seen throughout our business.

ATS was about 11 percent and Highland Partners was just over 13 percent.

Again, I think these numbers do reflect the slight increase in the overall perm related businesses which has been the strength of the economic improvement to date that we have seen.

Our gross margin, overall, for Highland as a percentage was 38.5 percent for the quarter which in our gross margin percentage for the tent business was 17.6 percent.

So, again, we continue to see improvements in the first quarter and we think that is a very healthy sign in terms of the overall growth in the gross margin.

Again our percentage reflects the fact that we have such a high concentration perm globally across all our businesses and perm-related businesses as well.

In constant currency for Quarter 2 as John indicated there were very strong increases in both North America and Asia or both the Hudson business and Highland Partners in Asia in both revenue and gross margin and I think that was driven, really, those were the strongest levels that increased in the constant currencies that were driven by the strength of perm contribution in the quarter.

We had solid increases in the Hudson Europe business as well as Highland Partners in North America and in ANZ, Australia New Zealand -- several quarter over quarter in constant currencies were relatively flat in the revenue in gross margin and for those of you who have followed the Company you know that this has probably been our strongest business from a profit standpoint and in an economic health standpoint as well.

And this is important to note because when we talk about the overall results you'll see that this region has done an outstanding job in maintaining very strong revenue and gross margin trends.

And at the same time bringing improvement and productivity in in their bottom line.

From an expense standpoint, overall, we have very good control in our expense line.

I am really proud to say that once again I can stand here and congratulate our team worldwide -- both the finance team and the operating teams -- in their control with expenses globally.

I've reported numbers were down 2.8 percent on a constant currency basis they were down 9 percent in overall expenses, again, a very healthy improvement.

It's across all categories.

We are basically flat to quarter 1 in constant currency which means we really have positive operating leverages and we have seen a big volume increase quarter 2 over quarter 1 which is our seasonal strength.

Our salary and related expenses overall were basically flat, higher revenue in gross margin and, again, that's a good sign because it means our operating leverage is coming through.

The benefit we enjoyed in the quarter as well of accounts receivable recoveries was worth noticing because it really pays tribute to the fact that our team didn't give up.

The investors did take some pain last year as you may recall in terms of cleaning up our bad debts and our receivables.

We have recovered over 60 percent of the accounts that we wrote off last year which I think is a tribute to the efforts of the team globally and as a result of that effort some of that cash came through in the second quarter and the balance is the ability for us to take reserves off the balance sheet because of the implementation and the systemic and consistent performance of our people and working capital that have allowed us to bring overall corporate reserves down.

Because we couldn't justify them anymore because we implemented the new policies.

So again that's a tribute to our efforts globally.

We've had a significant improvement in bad debt expense across the whole company.

I think it's really noteworthy when you look at the expenses on our constant currency basis that if you break it out in two categories 1 being salary and related which really is the majority of our expense dollars which relate to people which is their salary, their health benefits, their bonuses and commissions.

That inconstant currency year-over-year basically stayed relatively flat.

And on a big uplifting revenue in gross margin and so that is a tribute to the fact that our people we've done the right things in terms of changing out our workforce and making our workforce more productive.

What I'm exceptionally proud of is that on a year-over-year basis of our G&A expenses which don't include people there's been a 27 percent overall improvement quarter 2 in the second quarter year over year and that's just phenomenal because that really speaks to the fact that we have reengineered -- to John's point earlier the cost space of this Company we continue to work at it but when I looked at it last night regionally across our Company the lowest level of improvement of any of our geographic regions was 8 percent improvement.

And we had some regions that were up in the 20, 40, 60 percent range and constant currencies.

So what that means to John's point earlier is that we believe we are much closer to a sustainably manageable cost structure that without the help of the economy we can manage this business in a long-term fashion that will create sustainability and profitability over time.

So we are encouraged by the efforts of our people.

They have done an outstanding job.

I will comment briefly about the balance sheet.

And cash.

Our DSO is at 48.4 for the quarter.

It did go up slightly from the first quarter.

We did flip a bit in Europe in the second quarter; we are addressing that issue.

It did impact us a little bit in the growth mode -- I don't think it's anything serious.

Our people are addressing it and I still feel comfortable that our overall working capital management across the globe is in good shape.

We did have a higher cash outpour over the course of the quarter.

We did expect that as you may recall that we do have cash payments related to some of the moves we have made to make ourselves a more profitable company that pay out over this year and the next.

We paid out an excess of $8 million from the first six months of this year in restructured payments.

We still have some to go, for '04 as well as for '05.

They are very manageable and they are in cash forecast I still believe that we will end the year and continue to say at reasonably close to the level of cash balances that we enjoy today.

We are extremely stable on the balance sheet.

And I feel good about where we are and the ability of our people that as we continue to generate profit that we will be able to build our cash reserves over time.

Because we will eventually get into situation where we will be able to release the net loss carryforwards.

I am also pleased to announce today that we have reached a final agreement with our credit facility in Foothill and we have they have syndicated our credit facility which has now been expanded to the full $50 million.

We so we are announcing that today and our filings will reflect that in the future as well.

This has been an issue that we kind of knew was coming over time and that agreement has been reached and the agreement has been amended to reflect that.

And so we are in a very strong position right now from both our credit facility as well as our balance sheet to sustain our business going forward and I have no real worries about that going forward.

I guess I will close by reiterating our feeling about our guidance going forward.

We really haven't changed our view about '04.

As the year overall we do expect that the last half of the year will be EBITDA -- adjusted EBITDA positive and I guess before I get to that I did forget to mention Toronto because John did say I would talk about that in detail and I apologize.

We are taking a restructuring charge in Quarter 3 for the Toronto lease.

We have talked about this before at many of our investor presentations that we still had problem areas in real estate portfolio.

The Highland Partners office in Toronto was a very large space that had a lease that went through 2010.

It was probably well over twice the amount of space that we needed as a business and it was extremely costly space.

We have now struck a deal to sublet that space and we're moving into space that we are subletting from someone else in Toronto.

We have downsized considerably.

It is more than adequate space for our business needs.

We will on an operating basis save more than $1 million a year in operating cost.

My payback on this charge will be in just over two years and so it was the right thing to do for the business.

Our people did a great job in getting it executed.

As John and I have indicated to the investment community many times, there are still a couple of properties that we would like to deal with in similar fashions.

And our expectations for further restructuring charges really only point to the fact that we still think there are some problem leases out there that, as the economy continues to improve and the commercial real estate markets continue to improve worldwide, we will take action to improve our infrastructure costs and get our occupancy cost down.

We did have a real decrease in occupancy cost Quarter 2 vs.

Quarter 1 and we will continue to chip away at that because that is our biggest cost non salary related.

So getting back to the guidance.

That is why we always talk about adjusted EBITDA, because it excludes the restructuring costs.

We do believe that the last half of the year, overall, we expect the adjusted EBITDA to be positive.

Our key issue looking forward into the rest of '04 is really the balance of the third quarter.

We have a very high concentration of perm business throughout our business as well as a large presence in Europe, which is our largest geographic segment.

And, seasonally, it is a tougher third quarter for those two reasons.

And so as the third quarter goes really goes our balance of the year and whether or not we can overtake or overcome the effect of the large loss in operations in the first quarter.

So our outlook pretty much remains the same.

We are encouraged by the trends in the business and we have seen no material movements off that as we enter the third quarter.

And I think with that we will go to the questions.

(OPERATOR INSTRUCTIONS) Matt Litfin with William Blair & Co.

Good morning.

Congratulations.

Question on SG&A.

You worked that down about $5 million sequentially.

Do you have any more to do there or should we expect absolutely SG&A charges moving up from here?

Matt I don't think it's going to move down considerably but I'm really pushing hard to hold the line where it is and again, when we look at SG&A I think it's really important to look at from both the G&A's perspective and the salaried and related cost.

The G&A cost going forward, I don't expect a lot of movement because when we start to get the benefit of the Toronto lease savings we should be able to hold the line pretty well on the run rate of G&A.

I'm hoping the salaried cost go up, because that means our business is growing and the good news is that the incremental margin from that growth in the business should be more than enough to offset those expenses.

I think, Matt, we continue to believe that we will gain operating leverage in subsequent periods.

And we're not -- the third quarter is a little difficult for us to forecast because of seasonal weakness but certainly as we go through the fourth quarter and next year, we continue to expect to gain an operating leverage.

So the increase in SG&A would be in our minds less than an increase in gross margin improvement.

Your third quarter comment there, John.

Is that coming from your industry experience or have you seen something in the first three or four weeks here in July that indicate things may be a little tougher and also Rich on that same order.

Do you expect the currency effect to be something similar to what you saw here in Q2 or is there some kind of an anniversary effect that will change that?

I will answer the trends and turn over to Rich for the currency.

On the trends we're not seeing any change in trends.

We are seeing a continuation of the same trends we saw at the end of the June quarter.

So what I'm commenting on is just from my experience in a business that's very dependent on permanent recruitment, simplemindedly people aren't making hiring decisions because they are on holiday.

Particularly in July and August and all over the Northern Hemisphere and particularly in Europe.

So we expect that the quarter will be a difficult quarter but on the other hand we do expect that the second half will be profitable.

And, Matt, from the currency perspective, I wish I had the crystal ball in terms of what's going to happen with the dollar.

We have seen the impact come down slightly in terms of just less volatility in the currency globally.

And so, again, just because of the nature of our business it tends to almost serve as a natural hedge just in the way things have worked out to date and so we don't expect a huge impact to materially drive our results one way or the other in the third quarter.

A final quick clarification, if I might, on the guidance?

Wasn't sure exactly what you guys were saying there on the -- are you talking about making up from the first half?

You said you're not sure if you could make up from the first half.

Are you talking about the EBITDA operating profit or EPS there?

We're talking about adjusted EBITDA.

All our guidance has always been around that line which we kind of consider the true operating earnings right now, just because of the nature of things like Toronto which would be in the restructuring line.

So we're talking about the adjusted EBITDA number.

Dave Koenig with Robert W. Baird.

Good morning Jon, Rich, and David and congratulations on a very good quarter.

Getting back to guidance a little bit in Q3.

I know in the last couple of years Asia-Pacific has been seasonally strong in Q3 and I think we're benefiting from good trends in America.

I can understand how Hudson Europe is a bit seasonally weak but last year it actually was up sequentially on a constant currency basis.

I'm just wondering what might be different this year compared to last year when it was up a bit?

Well again I'm going to go back to the comment that says really that we have such limited history with this Company and given the fact that we have seen so much improvement come in the perm sector of our business as well as the fact that just the signs we see, we have never bet on economic improvement to drive the results of the Company.

We are not confident that we are totally where we need to be from a profitability standpoint particularly in Europe, because it just hasn't been for the size of business it is, we haven't got quite the results out of it that we would probably expect over time.

So I think we're just cautious from the standpoint of making sure that the changes we've made and the momentum that we're starting to see in the business, albeit moderate, continues through the quarter and because we don't have a lot of visibility and certainly not a lot of past history with this Company, it's really a new company, we are taking a slightly more cautious approach.

It is a seasonally tougher quarter.

As Jon said, we have portions of our business that basically from mid-July through early September almost shut down.

And we have offices in the Nordics that put it on voice answering machines for three weeks.

So you just never know the impact of that, overall.

I mean what we have been trying to do and I think Jon touched on it on his commentary is we continue to invest in areas of the business that will bring us out of some of these seasonal variances and into a more steady operating environment in terms of both contract business as well as HCS that are less dependent upon some of the seasonal variations.

And I think that's about the best color we can give you.

Okay and just one follow-up in the Americas, very good traction improvement there.

I'm wondering what segments were particularly strong for example FNA and IT, seems like we've seemed pretty strong in other companies.

I would say accounting and finance IT and legal were all strong in North America and accounting and finance and IT were much stronger in all of our regions.

Mike Carney with Stephens.

Good morning.

Congratulations.

I think all my questions have been answered except, Rich, if you could tell us of the $2.8 million restructuring charge, I assume that was before tax?

That's right.

It's a discounted value of the difference in the lease, the cash expense vs. the sublet revenue and is discounted at a very modest rate and per the accounting rules and so, yes, it's pretax.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

I would like to turn the call back over to management for closing remarks.

Thank you, operator.

Well, thank you very much for attending this conference call.

Rich will be available and David will be available afterwards to answer questions and Rich do you have a specific.

(MULTIPLE SPEAKERS)

Yes and just to call everyone's attention that the call has been recorded and will be available after 1 o'clock Eastern time today.

You can call 1-800-642-1687 and there's a passcode which is 8648410.

And it will remain available through Wednesday, August 4th.

And for those of you who are outside the U.S., you can dial 1-706-645-9291 with a pass code of 8648410 and you can also look at our investor relations web site on our hhgroup.com to review the Web cast.

With that we thank you for your attention and your interest.

Have a great day.

Thank you.

That does conclude today's conference.

You may now disconnect.