Hudson Global Inc (HSON) 2004 Q3 法說會逐字稿

Good morning.

My name is Patrice and I will be your conference facilitator.

At this time I would like to welcome everyone to the third quarter 2004 earnings results conference call.

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

After the speakers remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two on your telephone keypad.

I would like to turn the call over to David Kirby, director of investor relations for the Hudson Highland Group.

Sir, you may begin your conference.

Thank you, operator.

Good morning and welcome to the Hudson Highland Group conference call for the third quarter of 2004.

I am David Kirby, director of investor relations for Hudson Highland Group.

The call today will be led by Jon Chait, chairman and Chief Executive Officer and Rich Pehlke, Executive Vice President and Chief Financial Officer of Hudson Highland Group.

Before we begin I would like to read the Safe Harbor statements.

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

Such forward-looking statements involve certain risks and uncertainties including statements 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 other risks discussed in our filings made with the SEC.

With that I will turn the call over to Jon Chait and Rich Pehlke.

Thank you, David and thank you all for for joining us today.

For purposes of my remarks I will assume that you've had a chance to read our press release which was released earlier this morning as to our third quarter operating results.

I am going to start off by discussing a few themes and then I'm going to turn over to Rich to talk about the results in detail.

After that both of us will be available for questions.

As you can see from the release, the third quarter was our second consecutive quarter of profitability.

There are a couple of notable themes I think that I would draw your attention to from the release: Operating leverage was utilized successfully within the quarter.

The group has continued to leverage the increase in gross margin down into EBITDA, adjusted EBITDA.

For example, the year on year increase in gross margin and constant currency was approximately 11 percent, or $11 million.

Constant currency SG&A fell by approximately $5 million.

As a result in constant currency adjusted EBITDA increased by $15 million -- approximately $15 million year on year compared to the third quarter of 2003.

The second theme is cash management continued to be strong in the quarter.

We had a very small cash usage in the third quarter.

Third thing I would like to comment upon is the regional results.

We had strong revenue growth in the North American market, slightly over 30 percent, in the U.K. market slightly over 17 percent, in the Asian market -- outside of Australia and New Zealand -- slightly over 40 percent; all compared to the third quarter of 2003.

We had very strong EBITDA results, looking at adjusted EBITDA, in all of our regions, excluding the European market.

As you know the third quarter -- and as we had highlight in our previous calls -- the third quarter in Europe is a relatively soft quarter because of seasonality associated with permanent recruitment business.

But we had particularly strong EBITDA growth in Australia and New Zealand, Asia, North America, United Kingdom, and Belgium.

I would also like to draw your attention to the fact temporary gross margin in North American market which is an 80 percent temporary mix in that market increased strongly in the quarter to 23 percent from 20 percent in the previous year.

We experienced strong growth in the North American market in the sectors of I.T., accounting and finance, and legal.

Turning to Highland Partners, we experienced lower gross margin in the quarter due to the reduction in force in 2003 in Europe.

Nevertheless we had a very strong profit improvement of approximately $3 million in profit improvement quarter on quarter notwithstanding lower gross margin.

We feel that we've seen a continued success in terms of our strategy of turning Highland Partners into one of the world's leading boutiques in the executive search industry.

With that, I'll turn it over to Rich Pehlke.

Thanks, Jon, and good morning, everyone.

I'll walk through a few more details on the financials and then Jon and I, as he said, will be happy to take your questions.

Overall, we're very pleased with the revenue.

Third quarter was $315 million and 912 million for the nine months; increases of 15.8 and 13.9 respectively.

They also increased sequentially which we were pleased at given the concerns we had even raised at the seasonality of the quarter.

I'll speak to that again in a moment.

The currency impact: sequentially there was very little impact quarter other quarter but year over year it was about 8.3 percent.

That was the increase when adjusted for currency.

As Jon indicated earlier, we had strong contributors to the revenue increase in constant currency we had good year over year increases in the U.S. temporary business, as well as temporary business in U.K., Belgium, Asia, and in New Zealand.

Quarter on quarter in revenue the strongest gains from in the U.S., the U.K., New Zealand, and Asia.

With Belgium falling off that list due to the seasonality factor.

Gross margin of 116.4 million for the quarter and 341 million for the nine months were increases of 18.5 and 14 percent respectively.

As Jon indicated there was an 11.2 percent increase in the third quarter in constant currency year over year.

In constant currency versus quarter two, gross margin actually fell.

This is really due to the mix that Jon highlighted and started to talk about and I'll amplify on.

We did see, as expected, a drop in the perm business because of the seasonality in Europe with is concentrated with perm business.

But we were very encouraged by the signs in our temporary business, both in North America and the U.K, which continued to show very good steady progress which is one of the things we have been talking about for some time in trying to achieve, which is taking come of the volatility out of our business by building a bigger and stronger base of temporary.

And so we were pleased by that in the quarter.

As Jon indicated we did have some good improvements in temp margins in North America.

As a result our overall temp margin for the business held steady at 17.6 percent for the full business quarter to quarter.

But the mix shift as I indicated caused the total gross margin for the business to go from 38.5 in the second quarter to 37.

So, again, it is an issue of mix not in deterioration of margins within the business itself.

We are very encouraged by that.

On expenses Jon indicated that we continue to show good progress on expenses.

Excluding depreciation and amortization, we had 115.7 of SG&A in the quarter and 346 million for the nine months.

Q3 expenses were lower than -- significantly lower than Q3 of a year ago by five million in constant currencies and 31 and a half million for the nine months in constant currencies, which I think really speaks to the level of reduction we've made across the whole business.

Our Q3 expenses were higher than Q2, and I'd like to address that for a moment.

There is a couple of reasons for that.

Number one: you may recall we've had some bad debt recoveries that we told you about in earlier quarters that have significantly lowered our bad debt expense.

That pretty well has dropped off because we're pretty well finished with that effort.

And so that was a little bit of a factor in those quarter to quarter comparisons.

In addition, we have seen higher professional fees, expenses in the third quarry to our "SOX" work, our Sarbanes and Oxley work, and I'll address that in just a moment.

Again, these are not alarming numbers at all, extremely manageable variations that we somewhat expected.

And as we look at the full array of the expense lines there is no areas of real concern in the quarter.

Jon touched on the adjusted EBITDA progress it is the second quarter of consecutive positive numbers in that line for the nine months year over year as I mentioned $44.5 million of improvement in the currency impact was somewhat adverse when you look at it against the second quarter of this year, but year over year -- it was even in adjusted currencies it was a pretty significant increase -- improvement in adjusted EBITDA of $16 million.

Jon touched on the cash position.

We continue to expect cash to remain relatively constant through the balance of the year.

We have had some slight deterioration in one of the regions in DSL that we think is manageable.

We had a couple days slippage due to some turnover issues that are being addressed, but I don't see it as an area of concern, and we fully expect that our cash will stay constant and possibly improve before year end.

Our "Cap Ex" has been managed very well, to date we have only 6.2 million of cash outflows for Cap Ex expenditures and another $6 million of capitalized lease transactions related to either real estate or software purchases that are on our balance sheet and we only expect about $3 million of Cap Ex in the fourth quarter, so we're well within our plans and guidance that we've given you in that direction.

I mentioned earlier the Sarbanes Oxley work.

I want to give a little bit of an update on where Hudson Highland stands in its process.

We are on our timeline that we have laid out for what was an extremely aggressive and extensive effort that began over 14 months ago.

We have completed all our internal control documentation and have turned it over to our outside auditors.

We are in our third quarter testing phase and testing and remediation of that process will continue between now and the end of the year.

And currently we see no reason why at this point that any of the work that's been through -- any of the work that's been done that we should not be meeting the deadlines required by the project.

But we've -- it has taken a monumental effort, though, and it certainly has cost us in the current year in SG&A line.

We had to get a number of outside resources to assist us in the documentation process, which really was quite an extensive effort throughout our whole business.

Turning to the reorganization line for a moment.

We preannounced a charge earlier in the quarter for the restructuring of -- and move of our Toronto office in Highland Partners business.

That has been completed and we recorded the expense on the "reorg" line.

We expect significant cost reductions in future years to get a pretty quick payback of that expenditure, probably over the course of the next two years, and we're very pleased with what we've accomplished there.

It is one more problem lease that is now off of our balance sheet.

There were a couple of other additional items that flowed through that line.

Very minor numbers that related to true ups of already vacated properties where we had to adjust -- make slight revisions to the sublease assumptions per the accounting rules and that's why you saw that number climb to about $3 million.

We are very pleased to announce that we have negotiated a new lease for Sydney properties.

You may recall from earlier calls that we have talked about, that our Sydney, Australia, headquarters was a very expensive long lease.

Well be moving out of that building in July, 2005.

Well have no sublease obligations going forward.

There will be minimal cash outlays associated with that transaction and we do expect there will be lower operating expenses going forward for that region because of that move.

Our people down there did a great job in making this happen, and we were able to complete this transaction and sign the new lease in the third quarter of this year.

The longer term, again, we will continue our effort to lower our operating cost and reshape the real estate portfolio of this business.

So, we're very pleased with that.

The final thing I'll say is just talk about our guidance statement has been press release it really hasn't changed.

We do expect sequential growth quarter four versus quarter three with positive adjusted EBITDA.

We've said that all along and the challenge remains that can we offset the year-to-date adjusted EBITDA number of 4.9 million?

And that's clearly what our focus is on as we go forward.

And with that, I think Jon and I would be happy to take your questions.

At this time I would like to remind everyone if you would like to ask a question press star, then the number one on your telephone keypad.

Your first question comes from David Koenig of Baird.

Good morning, Jon and Rich, and nice progress in the quarter.

Thank you.

Thank you, David.

On the restructuring cost, I think you mentioned in the past on the Toronto office you expect to save about a million per year.

I'm wondering when that begins, and then how much you expect from the Sydney savings?

It -- the Toronto savings start really this quarter, because we start -- we actually moved the people this year so it will start trickling in throughout the balance of this year and through the next couple of operating years.

And with the Sydney move, we will see the operating expenses come down probably starting next year and the move becomes effective in the middle of the year and by the time we work out all the accounting of all the various pieces of the leases and capitalized leases we have associated with that, we should start to see benefits flow through the operating results next year.

And probably as you think about a run rate going out, after the initial year, a similar number to what you see in Toronto would be a reasonable assumption going forward.

Okay, and then secondly, in the Asia/Pacific region it looked like on a constant currency basis it might have declined year other year around eight percent it looked like, which was a little worse than the decline last quarter, and I'm wondering kind of what you expect going forward there, if you expect those constant currency declines or if you expect it to start to grow pretty soon here?

Are you talking about revenue?

Yeah.

In Asia Pacific, the main -- we have two sub regions one is Asia, and one is Australia/New Zealand;

Asia being everything else.

Asia grew very strongly in the quarter although it is a smaller region, it is a region that includes China, Singapore, and Japan, and Hong Kong, and we had very strong results in China, Singapore, and Japan, and a great improvement in results in Hong Kong.

The region that -- you know, although it is a part of our business, we're very excited about it as we look out over the future.

Not next quarter, but as we think about our business going out the next -- for the rest of the decade.

Looking at Australia/New Zealand, which is primarily the area that we had less revenue growth.

The management there has done a fantastic job in terms of building profitability.

I think you know, David, when Rich and I came to the company, we brought a very strong emphasis on profitability.

And we have a mantra around here that we reward results and profitability, and not effort.

So one of the things that's happened is that we have -- we have encouraged our operating management to look very closely at low margin accounts and to build their business around higher margin accounts and higher profitability levels and they're done that very successfully in Australia/New Zealand.

The result is that we have essentially exited accounts in a graceful way by simply maintaining our pricing.

But on the other hand you can see the results on the bottom line, and our focus has been on the bottom line.

We expect that the Australian/New Zealand market, once we kind of get through this transition phase will be a reasonable growth market, not a high growth market but a reasonable growth market.

We're very positive about the market.

It is a market where unlike the other markets that we're in in the world, we have a significant market share in the market and we have a significant market share in large account business, which is somewhat unusual for our company.

Well, it is a little bit prone to volatility on the revenue line but I think our management has done, you know, really a fantastic job in terms of managing the profitability line, notwithstanding the volatility on the revenue line.

That's really been our focus.

Okay, thanks and just one quick follow up: Is that a business that you expect to kind of fall off sequentially then in the Q4, Q1 slower season?

Yes.

Q1 will be -- Q4 we expect to have a good end to the year, which is -- they're in the Southern Hemisphere, so they're coming into their summer.

And, you know, it ends up being kind of the same result in the Northern Hemisphere, December and January are soft months in that part of the world because it is middle of summer.

So we expect the first quarter will be not as good in terms of adjusted EBITDA as reported.

Okay.

Thank you.

Your next question comes from Matt Litfin of William Blair & Company.

Yeah, good morning.

Congratulations on the results.

One of the things that you guys have done is to begin measuring some common metrics in the business.

So I wondered if you could share with us what some of the those metrics are and what are the recent trends both in the quarter and maybe even into October as far as you've seen so far?

Maybe I'll take the easy part and talk about the trends.

And then have Rich talk about the metrics and the specifics.

Yeah, Matt, in the future address your questions to some specifically, so I don't get screwed, okay?

So, the trends that we've seen in October so far in all of our geographies have been strong.

And I think they're consistent with our guidance, which is to have a sequential increase in adjusted EBITDA.

So we've -- the trends that we've seen in October have supported that.

And, you know, as we look at the fourth quarter, Matt, I'm sure you know, October and November are the months where we have to make the money.

December, you know, given the weakness at the end of the year due to the holiday season, it ended up being a two-week month.

But right now we certainly are feeling that everything we're seeing is consistent with our guidance.

Rich, want to talk about the specifics?

No.

I will -- you know, the specifics as we've said before, you know, we look at metrics that deal with, for those that may not be familiar, everything from contractors on billing, time sheets submitted, new orders, new placements, open job orders, how many candidates we interview, and depending upon if it's a perm business or a contract temp business, you know, there are different metrics that are applied.

And we look at them by the various practice areas within each of the offices, so it gets quite microscopic.

And what we try and do is we look at the trend over a 13 week period, we look at the trend on a yearly and monthly basis to see sequentially are the right things happening?

We also measure things like the gross margin per desk in terms of revenue producers in the businesses.

And we'll look at things like billing by partner, for example, in the executive search business.

I think Jon said it well.

Is that we've continued to see coming out of the third quarter into the fourth quarter a steadily improving trend that, you know, relative to year-over-year results as adjusted for seasonality as well as sequentially in many of the contract related businesses that show the investments we've made are building and that at least most of the economies that we're operating in are steadily performing and stabilizing.

We still haven't seen economies with run away growth.

You know, that would be the thing that would probably make the biggest jump in the metrics in the short-term and that hasn't happened, at least in our visible window.

But they have not deteriorated either.

So I think -- I think we're encouraged by the fact the business continues to improve on a steady basis and more importantly as we measure productivity within the metrics we are seeing, and Jon touched on it in his point, we're seeing the good operating leverage come through relative to our incremental growth in both revenue and gross margin.

You know, the -- and I know you know this, Matt -- you know, the sort of convention wisdom is that permanent recruitment begins to build later in the cycle than temporary recruitment.

And I think that's still -- we haven't seen anything that dissuades us the convention wisdom is not correct.

You know, we're -- so, for instance, we are seeing, you know, in the United States where the cycle in a way is the most advanced, we're seeing improvement and demand in permanent recruitment, that's been a -- I think for the U.K., which is the next most advanced similarly.

And in some sectors, particularly accounting and finance, banking, and I.T., you know, relatively strong demand.

In some of the other parts of the world where the economies are still, you know, pulling out of the recession -- I mean in Europe it's hard to say they're even pulling out, we're -- you know, we're not seeing a strong growth trend in demand in permanent recruitment

Okay, I have one second and final question if I could.

It has to do with acquisitions.

I guess it's multipart, but can you give us color on how the JMT acquisition is going?

Talk about your thinking on potential acquisitions and how that's evolved, and also, what are your key criteria for what an acquisition would bring to Hudson Highland?

Our -- I'll address -- I'll hopefully get it all in order and if I forget a piece, Matt, remind me.

The JMT acquisition has been an excellent fit with our business.

We are pleased with both the integration and the results to date, and it's achieving, I believe, plan or better relative to what we expected with the acquisition, which is a key criteria for us because we were looking for accretive earnings and earnings power in our business.

So it has been a great cultural fit, it has been a great operating fit, and frankly I would do innumerable -- I would do as many of those as I could find because I think it's just been a win/win for both sides, and certainly for the shareholders.

We continue to look for acquisitions that are like that, which represent good management that we can bring into our business in our key areas -- and our key areas of focus in particular case was accounting and finance -- where we can leverage strength of management combined with the strength of our brand and our organization and build a bigger business.

Those are the types of assets that we want to invest in.

We are constantly looking for opportunities to do that, especially in North America and especially in Europe because we'd like to build out our temp business more fully in our key practice areas.

So we look for leverage in terms of the management or in terms of the operating process or back office that we can add value to our business very quickly and so our story hasn't changed on that and we consider this one a very positive contributor.

Great.

Thank you.

At this time, if you would like to ask a question press star one on your telephone keypad.

Your next question comes from Mike Carney of Stephens.

Good morning.

Good quarter.

Thank you.

Thank you, Mike.

Couple details here, Rich.

Did you say that constant currency total revenue growth was 8.3 percent?

For the quarter, I believe I did, year over year, yes.

Okay.

And then I notice that there was no -- basically no D&A for corporate, why was that?

We don't have a lot of assets in corporate and we had the fall off -- if you remember, I talked about we had been accelerating some depreciate on assets we received at the spin that were in corporate.

We pretty much completed that through the middle of this year at the second quarter.

So, we're basically down now to depreciation and amortization that will really flow through the operations where we make capital expenditures.

And if you remember, our Cap Ex, is usually one of two things, it's either leasehold improvements in the offices in which we operate, or it is the computer hardware and technology that our people use to conduct their business.

Okay.

So that's expected to remain at close to nothing?

Yeah, because our Cap Ex is still running very modest levels, very manageable levels.

We are not a heavy capitalized company at all.

Right.

Also on the Sydney lease restructuring, did you say the fourth quarter that would show?

Well, I expect more of it to start showing next year.

I am sorry, the charge.

You won't see a charge.

I don't expect to see -- I don't expect to see any significant charge relative at least at the adjusted EBITDA line on Sydney for this lease restructuring.

Because the advantage of what we did here is that basically we have negotiated a deal to exit the property in total and then go into a new property.

And so we basically we're getting to the point of ripping up the old lease.

Okay.

This is not a situation like Toronto.

There will be some cash outlays to facilitate the move and to complete some of the -- you'll see some additional depreciation and amortization probably in the next few quarters related to writing off some of the leasehold improvements that we cannot take with us, but it should not be that material.

Okay.

And then also, can you talk about the Highland revenue was a little weaker than the second quarter but still up.

Can you give us an idea about the fees or revenue per consultant or what the increase has been?

It's actually been a healthy increase.

I think Jon touched on this a little bit in his remarks.

One of the objectives we had with Highland business was to make it a smaller but better business and I think our people have done a very good job in accomplishing that.

We have a -- what I would call a much tighter group of partners who have increased their per partner productivity, I would imagine we're probably somewhere close to $1 million per partner type of range of run rate.

And the EBITDA profitability has grown significantly because we took business out by closing offices that were nonproductive and nonprofitable and removing people from the business that were nonprofitable or had very -- who were structured arrangements that would never be profitability.

We improved the quality of the business and as Jon said made it a stronger boutique business which is what we've been after all along.

And still created an environment where high producing partners and can participate and succeed very well.

And I think we're starting to see that.

Okay.

And the final question is on Australia/New Zealand, is that business that you're willing to give up and that's too low gross margin, is that commercial -- part of the commercial business there or is that also professional?

That's a difficult one to answer because in the gentleman, New Zealand market, in many cases we provide a full range of services to large accounts.

So that might -- we're not in the -- you know, we're not -- we do have an industrial business in Australia.

But for the most part in the large accounts that would cover everything from clerks and secretary ease in data entry up to professional.

So, you know, it is possible.

And I don't know the specifics.

I know the account but I don't know the specifics of what we provided for that account.

It is possible it could have included professional.

The only thing I would add, Mike, is that you know this from talking to us before, is we're focusing on profitability.

We have a pretty low tolerance for -- because of where we've come from, we have a pretty low tolerance for just building market share without profitability.

There's a little bit of room for that but our real focus has been drive profitability.

Okay.

Thanks a lot.

Thank you, Mike.

At this time there are no further questions.

Mr. Pehlke, are there any closing remarks.

Yeah, I'll turn it over at that David Kirby and he'll let everyone know where the web cast can be found and we thank everyone for their attention.

Thank you for attending the call if you do have any questions, you can reach Rich Pehlke at 312-795-4228, or you can reach David Kirby, myself, at 212-351-7216. this call has been recorded and will be available after 1:00 p.m. today, Eastern Daylight time by calling 1-800-642-1687 followed by pass code 1330308.

It will remain available through Wednesday, August fourth -- probably not August fourth, it will remain available for the next two weeks on our website..

And if you have any trouble you can reach that web site at HHGROUP.Com.

Thanks for participating in the call.

Have a good day.

This concludes today's conference call.

You may now disconnect.