Hudson Global Inc (HSON) 2007 Q4 法說會逐字稿

Good morning.

My name Nikeisha and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hudson Highland Group quarter four and full year results conference call.

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

After the speaker's remarks, there will be a question and answer session.

(Operator instructions).

I will now turn the conference over to our host Mr.

David Kirby, Director of Investor Relations.

Sir, you may begin your conference.

Thank you very much, operator.

Good morning everyone and welcome to the Hudson Highland Group conference call for the fourth quarter of 2007.

Our call this morning will be led by Jon Chait, Chairman and Chief Executive Officer and Mary Jane Raymond, Executive Vice President and Chief Financial Officer.

Before we began, I will read 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 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 SEC.

These forward looking statements speak only as of today.

The company assumes no obligation and expressly disclaims any obligation to review or confirm analysts' expectations or estimates or to update any forward looking statements, whether as a result of new information, future events, or otherwise.

With that, I will now turn the call over to Jon Chait.

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

I'm here with Mary Jane Raymond, our Chief Financial Officer and Executive Vice President.

I'm going to start off today with some general observations and then I will turn over to Mary Jane to discuss our financial results in detail.

After that, we will open up for a Q&A session.

The questions on the minds of most investors are first of all, are we seeing signs of an economic slowdown in our regional operations and what is the risk of a recession and how would it impact Hudson Highland Group?

The investment community understands the cyclical nature of the recruitment industry; however, past experience shows that recessionary conditions do not sweep evenly across the world in timing or severity.

Current economic forecasts are showing slower growth rates for 2008 in virtually every country in the developed world.

But it would paint with far too broad a brush to simply apply the phrase "global slowdown" uniformly across the world.

As I will discuss below, the question is how slow and where?

Hudson benefits from a geographically diverse business, which helps to minimize the impact of local economic volatility in any one of our regions and deep specialization which offers some protection from cyclical forces.

In addition, it is important to understand the strength of our brand and the depth of our specialization in some key markets.

And Australia and New Zealand, Singapore, China and Belgium, for example, Hudson is the leading brand in the middle market recruitment sector.

For balance in the Netherlands, the legal business in North America and our U.K.

IT banking unit, we are recognized as a leading specialist competitor, if not the leading specialist competitor.

I will refer to these themes as I discuss our regional operations.

Virtually all our EBITDA in 2007 was generated from our international operations which helped to sustain fourth quarter and 2007 full year results.

In many regions we were experiencing a slowdown in permanent recruitment activity among commercial banks and other financial institutions.

This is not surprising given the recent headlines of large write offs and loan problems plaguing many of the market participants in this sector.

Similarly, in our third quarter release, we flagged caution with respect to the IT staffing sector and IT spending.

As we will discuss in more detail later in my remarks, in most instances the negative influences in one of these sectors is being offset or mitigated by strength in other sectors.

I will attempt to describe the initial trends that we're seeing in January for the purpose of giving you an indication of a most recent trend data as to revenues and gross margin.

This is based on what we call our flash reports, as we do not have complete financial statements available at this point for the month of January.

January is a difficult month to use as a benchmark for the quarter due to a large number of seasonal factors.

Results in January should not be extrapolated for the full quarter particularly because March is the largest month in the quarter.

We experienced little or no evidence of an economic slowdown in our Asia Pac business in 2007.

Australia is particularly important in this region since it is our largest unit which generated 65% of the gross margin in A-Pac in 2007.

The Australian economy is driven by natural resource demand of China, which continue to be strong throughout the end of 2007 - through the end of 2007.

In the fourth quarter, results in the Asian sub region of Asia Pacific consisting of Hong Kong, Singapore, China and Japan also showed significant strength over the prior year.

Our Japanese unit struggled in 2007, which we attribute both to an internal reorganization and to a possible slowing local economy.

Our strength in the other markets in Asia offset the weakness in Japan.

The only market in the A-Pac region which clearly demonstrated the effects of a slowing economy was New Zealand.

Despite the economic challenges in that market, our unit achieved a solid performance in 2007.

The economies in A-Pac, excluding Japan, are projected to continue to grow strongly in 2008, although at reduced rates from those of 2007 as they decouple from the impact of the U.S.

economy.

Australia's economy is forecasted to grow at 3.6% in 2008, down from 4.5% in 2007, but still a healthy rate.

Economic forecasts for Asia in 2008 range broadly from 4.7% growth in Singapore to 10% in China.

Initial reports from our operations in the region in January are not indicating any change in trends or growth expectations.

In continental Europe, the fourth quarter provided a solid close to a strong year.

Our largest markets, the Netherlands, Belgium and France, which account for 90% of EBITDA in 2007 in that geography, achieved excellent growth in gross margin and EBITDA in the fourth quarter and the fiscal year 2007.

We also had strong results in Spain and Sweden.

In the Netherlands and Belgium, we have a strong public sector emphasis which should be a positive factor in the slowing economy if one is encountered.

In addition, our strong talent management business in continental Europe, which accounted for 30% of gross margin in 2007, has historically been a positive impact in a slowing economy.

Economic growth in the Euro Zone -- and for this statistics I'm including the U.K.

in Euro Zone -- for 2008 is projected to slow to 1.8% from 2.7% in 2007.

Initial reports from our operations in January indicate that results were stable compared to prior year.

The U.K.

is the international market as to which we are most cautious.

In the fourth quarter, we experienced some impact from the economic slowdown particularly in the banking sector and to some extent the IT sector.

Like the United States, the U.K.

has also experienced a marked slowdown in housing, a liquidity squeeze and a significant impact from the sub prime fallout.

As I mentioned in our third quarter announcement, we have considerable exposure in this market to banking and IT accounting for approximately 24% of gross margin in 2007, which are the sectors that are most exposed to the cyclical impact of a slowing economy.

However, other practice groups continue to perform well in the fourth quarter.

Initial results in January from our U.K.

operation indicate a decline against prior year.

Our expectation for the year in 2008 is that any decline in the U.K.

would be offset by growth in continental Europe.

In North America, product diversification is proving to be a benefit.

In our specialty units, financial solutions, legal and IT, we experienced little change in terms of demand trends in the fourth quarter either in contacting or permanent recruitment.

Our more generalist permanent recruitment business struggled somewhat in the fourth quarter, but we attribute some of that to the economy and some of that to internal Hudson issues.

Initial reports in January are not indicating any trend change in contacting with numbers exceeding prior year in both revenue and gross margin.

Permanent recruitment in North America, which is a small part of our total business, which accounted for 20% of gross margin in 2007, was running behind prior year, but flat sequentially with no slowdown in order inflow.

Our overall outlook for 2008 is for consolidated EBITDA to increase over 2007 as we expect increases in Asia Pacific, North America, admittedly against a weak comparison, continental Europe and declining expenses.

We believe the biggest risk to our expectation is, of course, the economies in the U.S.

and U.K.

However, we believe our product diversification can help cushion the impact of an economic slowdown in these two markets.

Nevertheless, we are monitoring results closely and deferring major expenses and initiatives to preserve our flexibility.

Before I hand over to Mary Jane to discuss the financial results in detail, I want to comment on one recent development.

On February 4th, the company announced that it had completed the asset sale of its energy and engineering staffing businesses to System One Holdings LLC, which is a newly organized company owned by Troy Gregory, a former executive of ours.

The details of the transaction were described in a release earlier this week and I won't go into those at this time, but I want to give you some additional color on the transaction and respond to some investor questions.

One question is why did we sell at this time?

I did not want to be in a position of disparaging this business to make ourselves look good.

This is a good business with steady earnings, but earnings are down from a peak of $7 million in 2005.

Cash flow is strong.

The management is good and has built a strong network of customer relationships.

But this is a large volume business with an emphasis on industrial and power plant support, which is not part of our core business strategy in North America.

At our size, we have to pick what we can invest in and for the present in North America we're focusing our investments in financial solutions, legal, IT and permanent recruitment where we believe we can get a better return.

Troy did not receive any special treatment in this transaction.

He had an organized auction process, organized by an investment banking firm with 50 initial inquiries that came down to three serious buyers.

Troy was given permission to participate on the same basis as other parties.

We initially entered into exclusivity discussions with another party; however, that party was unable to complete financing.

After an appropriate period of time, we reopened the process and Troy was selected because he was able to produce evidence of certainty of financing in a reasonable period of time.

The transaction with all components at face value is valued at roughly a four times multiple.

We are confident that this is a market multiple for this business.

The transaction improves our liquidity, eliminates a large business with a high investment needs and continuous margin pressure and allows us to delayer our overhead.

Laying all these factors, we concluded that this was the right deal at the right time.

There are a couple of aspects of this deal that I want to - of this transaction that I want to just comment on.

The first is that process re engineering in North America will be an important part of our recipe to improve earnings going forward.

We're conscious of the EBITDA dilution that occurred as a result of the divestiture.

We will attempt to eliminate that through re engineering and descaling our infrastructure in the North American operation.

This transaction completes our non core asset sales and allows us to focus the overhead structure best suited to our size.

The other aspect of the transaction I'd like to comment upon is where does this leave us in our legal practice group which Troy used to run?

The legal practice group, as you may know, is a core business for Hudson.

It's a tribute to Troy that we have a strong management team in place.

Mark Zamsky was appointed as the EVP of legal, which means of effectively the chief operating officer of legal or chief executive of legal in June of 2007.

Mark has been with Hudson for six years and has a proven track record of success.

Mark initially was responsible for the development of the Philadelphia office from a startup to over $30 million in revenue in 2007, which includes a number of our largest clients in the world.

For several years, Mark has been responsible for the offices outside of New York City, which now total 11.

Again, he has led a period of rapid development and expansion.

We also have a strong extended leadership team under Mark including Christopher [Jenson] and Andy [Jewel] in Washington, D.C., one of our strongest offices and [Lauren Rothenberg] in New York City, one of our core offices.

Turning now to one more event that we mentioned in our releases and that is our stock purchase -- our stock repurchase program.

We started a stock repurchase program or asked the board to approve a repurchase program at this time because we want to demonstrate the confidence that we have and the board has in the long term value of the company.

We believe market conditions warrant it more now than in the past.

We are in a stronger cash position now than we have been in the past.

Those are the reasons that we chose to implement the stock purchase program at this time.

With that, I'll turn over to Mary Jane Raymond, our chief financial officer to discuss the financial statements in more detail.

Thanks, Jon.

Good morning.

It's been a busy week, so we want to thank all of you for joining us this morning.

I'm going to, as Jon did, focus on the key trends in our base business giving you the numbers for them.

So, first of all, the quarter played out pretty much as we expected.

We expected customers to react to the instability in the global economy and they did.

Though, also, our actions to mitigate those impacts on our earnings also worked.

Jon mentioned that we completed the sale of the U.S.

and engineering business earlier that week -- this week.

That completes the divestiture program that we talked about this time last year; that we were focusing on selling 10% of our revenue, which we considered non core.

In the final mix of what was eventually sold based on what buyers found attractive, the amount is always a little bit closer to 15%.

So, with at completed, our management team can now focus both its attention and our investments on our core business.

Financially speaking, we see the focus and specialization already paying off.

For the fourth quarter and the full year, the gross margin for our company grew faster than revenue by nine percentage points on a reported basis and eight percentage points in constant currency.

Similarly for Q4 and the full year, our temporary contracting gross margin advanced by over one full percentage point to 21.6% of revenue and the total gross margin for the company advanced over three percentage points.

This is true both on a reported and a constant currency basis.

In the international regions, namely Europe and Asia Pac, they both reported an adjusted EBITDA of over 7% for the quarter and for the full year, which has them into our 7% to 10% long term range.

Specifically, in the fourth quarter, Europe was at 9.1% and Asia Pac was at 8.2% adjusted EBITDA return on revenue and for the full year Europe was at 7.3% and Asia Pac was at 8.1%.

Overall, the adjusted EBITDA margin for the company reached 4.6% in the fourth quarter.

During this quarter, as Jon mentioned, we experienced strength in our international region, particularly in continental Europe, Asia and Australia and New Zealand.

In constant currency, continental Europe grew revenue 14% and gross margin by 18%.

Asia grew revenue by 28% against a tough comp last year on the fourth quarter and gross margin by 31%; again, both of those in constant currency.

In ANZ, their revenue was down 7% in constant currency, but their gross margin advanced by 4%.

In Hudson Americas, Jon recapped this a little bit already.

They performed as we expected in the quarter.

Their revenue, gross margin and adjusted EBITDA were down to prior year, but the main challenge we had looking at the business as a whole was actually our permanent placement business.

Its 20% of our gross margin, as Jon said, in the fourth quarter and was down about $2 million in the fourth quarter.

If we exclude that, just take that out, actually the adjusted EBITDA for North America was about flat to prior year showing that not withstanding that they were down, the specialty businesses in particular and those that are larger actually did fairly well.

The U.K.

is really an area that we're watching pretty closely.

There's a double impact going on there for our company, which is one, the economy and two, the slowness in the banking sector.

That resulted in a 16% constant currency decline in revenue in fourth quarter.

Their adjusted EBITDA was down below prior year by 13%; again, in local currency.

But for the year, they were up 8%.

It's an area we're watching.

It's led by a good team.

They've got a tough patch to get through here, but overall their whole year was pretty good.

Having said that, let me just turn to talk about the full year of 2007 in total.

Our company overcame a lot of challenges this year, a lot of which you've talked to us about and delivered very strong results.

Those include a 2% revenue increase with a gross margin increase of 11%.

The gross margin grew eight percentage points faster than the revenue in constant currency.

The adjusted EBITDA was up 77% on a reported basis and 51% on a constant currency basis.

EBITDA was up 100% on a reported basis and 75% on a constant currency basis.

Our depreciation and amortization were down 25% more or less both on reported and constant currency, which aided by spending $4 million in capital in the quarter and just $13.5 million for the year.

That combined to raise the EBITDA to an increase -- the EBIT, excuse me, of over 400% on both a reported and a constant currency basis.

Net income from continuing operations - so, this is before we take all the [Disc Ops] out, was up over 100% in both reported and constant currency.

The bottom line net income for our company declined 27% or about $5 million on a reported basis; 40% or $8 million on a constant currency basis.

This is largely driven by the difference in the gains that were reported last year on divestitures versus gains this year on divestitures; namely, the Highland partners gain in 2006 was about $21 million.

The gains reported from Australia and New Zealand - excuse me, Australia's Trade Industrial and then the Netherlands reintegration business, smaller businesses, were about $7 million.

So, last year we had about $14 million more in gains on sale.

But that said, I think it's fair to say that net income from continuing operations is really the best indicator of our organic net income growth.

Net cash was $39 million and cash flow from operations was $39.4 million, up 10% over last year.

As many of you already remember, we had about $30 million of earn outs paid this year, so advancing the cash flow from operations and being within $5 million of last year's net cash position is a good showing from the organization with respect to the focus on cash.

Our DSO was down four days to 48 from 52.

And the one area that we still need to improve on is our tax rate.

Q4 was as we expected, though the full year tax rate is still a pretty high number at 78%.

In 2008, we will be engaging in tax planning to help reduce this rate.

With some of these businesses sold, that certainly helps us to have a simpler organization in which to do that.

Along the same vein, talking about certain directional things for '08, my expectation on CapEx is between 10 and 13.

So as you can see, we're looking to keep a lid on that, too, as we drive the depreciation and amortization costs down.

To summarize all that into guidance for Q1 and outlook for '08, here is what we think.

We are expecting the first quarter revenue to be between $285 million and $300 million compared to $288.1 million last year.

We anticipate the Q1 adjusted EBITDA of between $2 million and $5 million compared to $4.5 million last year in the same quarter.

During 2008 as we commented in the shareholder letter, we intend to streamline our support functions to match our more narrowed focus on specialization, especially following some recent non core business disposals.

Although the company hasn't really committed yet to the exact actions, and as many of you know that's a very precise process to go through, we do expect and have discussed with the board that we will have about $5 million to $7 million in restructuring actions this year, through the year, and somewhere between $1 million to $3 million in the first quarter.

Let me just explain a little bit on the $2 million to $5 million range for the first quarter.

There are really two drivers.

One is our concerns about the economy in genera and I think particularly the U.K.

in this the first quarter which is typically a small quarter for us and also the desire to have flexibility to make investments faster in our streamlining program.

As many of you know, there's a lot of very important and precise rules around what constitutes a restructuring charge per se and we want the flexibility to take actions that might advance that program that might not technically count as a restructuring action.

I'll give you a good example.

One of the things we're looking to do is consolidate floor space.

Typically, the cost to move, actually physically move, are not part of restructuring charge for accounting reasons and those costs tend to be more front end loaded.

We're building into the guidance a little flexibility to do that, so that's why the range is larger than we typically give.

For the full year of 2008 as I mentioned in the press release, we expect earnings improvement for '08 in the adjusted EBITDA level as a result of our stronger core focus, process reengineering in North America and continued strength in the international operations.

As I just mentioned, the first quarter is the lightest quarter of the year.

I'm not in a position right now to give you an exact number on what that really looks like for '08; how much more EBITDA, what percentage growth, et cetera, but I will say that in 2006 and 7 -- interestingly coincident with my tenure -- those were challenging years for our company, but in both of those years we delivered earnings improvements in those years and so that's our goal for 2008.

With that said, let me turn it back to Jon.

Thank you very much, Mary Jane.

Operator, we'll open up for questions and answers at this point.

(Operator instructions).

Your first question is from the line of Mike Carney with Coker & Palmer.

Good morning.

Hi, Mike.

First of all on the fourth quarter, I see that there's a little bit over $1 million of bonus expenses that were reinitiated basically.

Would that have included a true up in the fourth quarter?

Yes.

Exactly.

So, actually basically it would have been a good amount more than that in EBITDA had those bonuses been spread across the typical quarters?

Yes, that's absolutely true.

Okay.

Good.

Also, in terms of the - Mary Jane, I just want to make clear on the first quarter guidance, it says adjusted EBITDA, but essentially there could be some restructuring charges that wouldn't be recurring, but they would flow into regular SG&A as opposed to restructuring charges?

Are you asking me that as a question?

Yes.

Yes.

In the two to five, I think we could have cause that would not be recurring that would fall in as time went on I would expect to be, again, kind of one time.

They're just not in the line called restructuring charge.

Exactly.

Okay.

So, in terms of - if there was a restructuring, essentially that EBITDA would be -- you would expect it to be higher, but you're taking into account some level of cost there?

I think that's right.

Though I would say as well we're watching pretty carefully the U.K.

right now and just the global economy, but I would say both of those factors that are playing in that have already started, too.

Got it.

And then in the U.K., obviously it appears that staffing improvement kind of turned down really in December and was strangely down.

Is that what you saw or did you see it before that?

I would say we saw the biggest impact in December.

It's one of those things when you look backwards, Mike, you can see threads in different places.

If you look at - when we look at our month to month results, the first month of a quarter is always weaker than the rest of the quarter.

So, October predictably, was a relatively weak month.

That didn't particularly surprise us because that's kind of the typical pattern.

Then November rebounded and December was weaker.

So, you look back at it and as I say with hindsight you can say well, maybe we saw this a little earlier, but I would say more -- the way you put it is better, which is we really began to see the effect in December which is what we mentioned in the letter and we mentioned it in our letter as well that we're seeing it continue in January.

Okay.

You mentioned that there's declines in the U.K.

Are you talking about there was a decline in gross profit and profits?

Or was it just the top line decline or just the bottom line decline?

We only have data as to the top line at this point in the month because we don't have our full month financial statements yet for January.

We will in about three days.

So, January we're a little bit later than other months because everybody's just got finished doing the year.

Now, they immediately have to roll over and start doing the month.

We end up being just a few days later in terms of getting our complete financial statement.

So, what we're trying to give you and investors in response to investor questions, frankly, is the best indication we have, which at this point is revenue and gross margin.

I know you've got so many different practice lines in the U.K.

and you had mentioned that almost a quarter is financial services.

Can you describe some that are doing not so good and some that are doing much better?

I mean, you've got the construction and the real estate.

Can you give us a little bit of color on that?

Again, we don't have data because we don't have the detailed breakdown that we would get later in a few - I can give you kind of top end, chief executive 50,000 foot feel and that is that we're continuing to see weakness in the banking sector and in the IT sector as we had cautioned last quarter.

Those two -- just to correct one thing -- those two sectors banking and IT -- right David -- are about 24% of our gross margin in the U.K.

They're important sectors for us and those are the sectors where we're experiencing weakness.

And the strength?

I just don't have the data.

I'd rather not say without having data.

I know those two are -

What about before this?

I mean, 2007 before any of this?

My recollection was that sales and marketing was strong, HR was strong.

We have a good legal business there.

I just don't remember off -- maybe Mary Jane does -- I don't remember off the top of my head whether that was -- how that came out in the fourth quarter, but that's been a strong business for us as well.

Okay.

Thank you.

We all appreciate the color.

Thank you.

We try.

We try to be responsive.

Your next question is from Tim McHugh with William Blair.

Yes, I wanted to ask you about the comments you made about 2008 for EBITDA growth.

Wonder if qualitatively you can just talk about how much of that reflects the international mix of businesses and your expectation for the growth of that versus your ability to take some cost out here as we look out to 2008?

Thank you for the question, Tim.

First of all, as you probably remember we don't give guidance on the full year, frankly, nor does anybody else in our industry because of lack of visibility.

Given the investor concern, however, about the current economic environment, we wanted to give you, again, kind of a chief executive, 50,000-foot view that simply said we do expect our EBITDA to grow and it very much is a mix of all those things.

International, declining -- reducing expenses and, frankly, we expect to see an improvement in our North American business as I said in my remarks.

I do admit it's coming off a weak comparison, but we do expect to see an improvement in our North American results.

So, all those things put together cause us to come to that conclusion.

We, at this point, are not able or willing to be forthcoming about the exact makeup of that.

Okay.

I was wondering -- I know you don't have the full financial results for the U.K., as you said, but at least from the top line can you quantify - you said revenue was down in January?

Is it down at a similar rate to the fourth quarter number?

Mary Jane, I don't know that number of the top of my head.

Do you?

I think it's pretty similar, Tim.

We just again kind of in the conversations we had with the business leaders which is a combination of what are they seeing in their operating stats and also what's their feel.

I don't know that -- at least so far we're seeing a great deceleration from Q4.

So, it's roughly the same.

I would say the one thing about this, Tim, is again we're trying to give you an indication and the warning label about this is that January is a flaky month that has lots of flaky stuff running through it.

Principally around -- when you look at the U.K., principally around the first two weeks of the month.

It comes down to what day of the week was New Year's and what did that - because we could end up losing a couple days there that we didn't lose last year.

We haven't gone into that kind of detailed analysis by billing day and so forth and so on.

Again, we don't have the reported financial results yet.

So, we are trying to give you a very broad indication of kind of the pluses and minuses that we're seeing in our business at this point, but treat it as a real broad outlook.

Okay.

Great.

And then, Mary Jane, I wanted to ask about the tax rate you mentioned for 2008.

You said that you're trying to do some tax planning there.

Can you give us a sense of where you would hope to get that tax rate down to perhaps or at least qualitatively or directionally and can you tell us is this a situation where you hope to bring the absolute number or amount of taxes that you paid in 2007 down or if EBITDA grows should we expect that to at least grow or stay the same?

Okay.

So, let's see here.

First of all, let me just kind of remind everybody how the math works on our tax rate, though I think you guys pretty much have it.

The tax rates that are paid in the international region are not way outside the norm of the statutory rates.

The thing that causes the rate itself to go very high is the combination of the North America earnings less the corporate expense, which drives it to a negative, obviously; takes the absolute dollar of the earnings down, yet the taxes that are paid in the international regions are kind of close to the statutory rate, so we end up with this kooky looking number of 78%.

So, that's just a reminder on the math.

Where would I like the rate to be?

First of all, I would like the rates to look normal.

So, if you're asking me, personally I think we need that number starting with a number below five; let's put it that way.

And I think there's a few things that drive it.

One is tax planning, particularly in Europe and the other one, obviously, is the growth of earnings in the North American market which also affects the rate.

So, I would say this.

Obviously, I have a desire to move the absolute dollar value of the taxes to the extent that that is, of course, appropriate and can be done correctly, which I think it actually can be.

So, I do have a desire to get after the actual tax dollars paid and what is recorded in our provision.

Apart from that, that's what the tax planning will help.

In addition to that, with a mix of profits should also just mathematically drive the rate down.

And it's my goal to have that number closer to at least a more respectable looking number, as I say, hopefully starting with a four.

I'm not at all giving tax rate guidance at this point, but I can tell you that where it is certainly in the absolute dollars as well is not where I want it to be.

Okay.

Great.

Can you remind me where your NOL's are at this point?

Yes, sure.

Our NOL's, just in broad numbers, are in excess of $200 million; call it $220 million.

You'll see this in our K in the footnote, but most of them are in the U.S.

The trick to really using the NOL's to any great extent is to have the whole of the North America profitability which includes the North America unit plus corporate profitable.

We had some NOL's in the international regions, but frankly where they sit right now is really the majority of them in the U.S.

Okay.

Thank you.

Sure.

Your next question is from Jeff Silber with BMO Capital Markets.

Hey, Jeff.

I was wondering are you thinking of all potentially moving the corporate operations from a tax perspective outside the U.S.

maybe to take advantage of that.

I would say we've heard every idea there is.

Let's put it that way.

I don't know that we've exactly advanced to that hugely seriously, but I think our goal in trying to manage the taxes is to kind of look at all options and that tends to be one that comes on the table once in awhile.

I wasn't even thinking from a tax perspective, although that will benefit you, but considering that the majority of the revenues do come from outside the U.S., specifically now after the divestitures.

I was just wondering if that's something that the company is thinking about.

As I said, I can tell you that idea has been advanced from a few quarters.

Okay.

That's fair.

Again, just one more tax question.

Just in terms of the first quarter where do you think the tax rate will end up?

Good question.

Let me just find something here.

Well, I think for the first quarter, I just wanted to check if I was doing the math right in my head; it's probably not a hugely meaningful number because our quarter in the first quarter is very small.

Right?

So, if we have adjusted EBITDA somewhere between two and five; let's call it for the sake of discussion $3 million in depreciation and then taxes from the international region, chances are by the time we get to income before income tax, the number is probably negative.

So, I think that's a better question for us to answer for you as we're looking at the second quarter.

Okay.

That's fair.

Let's move on to something else.

Jon, you had mentioned in your prepared remarks, I guess, specific weakness or fear of economic weakness in, I guess, three regions beside the U.S.

which would be the U.K., New Zealand and Japan.

Can you kind of quantify the impact or at least the size of those businesses now in respect to the whole company either as a percentage of revenues, percentage of gross profit, just so we can see how those impact the overall business?

Well, let me just take again a very broad brush first and maybe Mary Jane can figure out the exact math for me.

In New Zealand, we've seen an economic slowdown, but actually the impact on our EBITDA has been pretty small because our team there has done a very good job coping with the environment.

So, that isn't having - it's not that big an operation.

I want to guess more like 10% of A-Pac.

It's not having a big negative impact.

Japan, again, is a small operation.

I don't have the percentage off the top of my head.

Maybe Mary Jane will have it by the time I finish talking.

It's a pretty small operation and the impact there as I said in my remarks is being offset by the strength that we've had in the other Asian economy.

U.K.

is a bigger market and a bigger issue and I think what we say is U.K.

is roughly as a proportion of Europe is 60% at the EBITDA line.

So, U.K.

is a bigger proportion of the company and of our European operation.

I just wanted to put things in perspective.

Going back to my notes from last quarter, I think we had a little discussion about the earn out that you might be getting from Highland Partners.

Have you gotten any update on that?

We've been in contact with [Hydric] about that.

We're going to let them finish the math, but I think what both Eileen and I said last time was on a cap in this year of roughly $6 million.

We think it's roughly about four and so we're now into the process of letting Hydric finalize that.

All right.

Great.

Just one other quick numbers question?

Do you have what stock based compensation was in the quarter?

Stock based compensation.

Let me just get that for you while I answer your other question which is Jon's - just to respond on Jon's comment.

New Zealand is, in round numbers, about 15% so he was close of the Asia Pacific region and Japan is about5%.

So, the two of them together are probably 20% of Asia Pac.

I'm sorry, that's revenues?

Gross profit?

Gross margin.

Gross margin.

Great.

And just, again, maybe give you guys a little context.

The reason we mention New Zealand is that generally that part of the world -- Australia and New Zealand has done well, while the economy has had something of a downward sign.

Our own team has done pretty well stabilizing the income.

In Japan, we tend to mention that because the rest of Asia generally is doing very well.

We're struggling a bit in Japan, so it's just to provide the right counterbalance.

The real focus there if we look at the international regions, as Jon said, is the U.K.

All right.

Great.

And then just stock based comp and I'll let somebody else jump on.

Let me just come back to you on that.

I'll come back on that, don't worry.

No problem.

I appreciate it.

Sure.

(Operator instructions).

Your next question is from the line of Jeff Meuler with Baird.

Calling in for Mark Marcon.

You mentioned process reengineering into scaling infrastructure, but what other initiatives are you looking at or evaluating with your Board to drive the cost savings?

Well, I think certainly - let's start with the biggest one.

In North America, we've just completed a transaction which removes in round numbers what percent of our North American revenue -

About 30.

About 30% of our North American revenues.

So, we are -- the way we look at it is we have to rescale our infrastructure to take into account that our business is 30% smaller.

And that is not a question - it's not a trivial exercise.

It's not a question of just going in and firing a bunch of people.

It's really a question of the way I think of it and just go back to the same word -- kind of re engineering backwards.

If we were a smaller company and we were starting from a smaller company and getting bigger, we would start from a much smaller infrastructure base and you would gradually and grudgingly expand it.

So, we're really trying to go backwards, so to speak, in terms of sizing our overhead.

That isn't really an issue with our producer overhead because our producer overhead by definition, we're not going to really touch.

That's how we make money.

But it's really the infrastructure overhead and not just the so called back office, but the entire infrastructure over head.

So, that's a process that we're well into.

Sitting here today we're a little bit -- we're being a little bit intentionally vague about how that exactly hits in the first quarter and hits in the second quarter.

How much of it is in restructuring?

How much of it might not be?

We do realize that, but that's the nature of the process.

Around the world, we're not really thinking about the world in terms of cost reduction or re engineering.

What we think about is in terms of improving our productivity.

We start from looking at it from a standpoint of EBITDA as a percentage or adjusted EBITDA to take out restructuring; adjusted EBITDA as a percentage of revenue.

That's been our focus for a number of years is to drive that number up.

And again, 2007 was a successful year, particularly in our international operations.

Obviously, North America was at break even, but in our international operations, we focused on that and we continue to focus on that.

We will focus on that whether there's a downturn or not a downturn.

That is a much more complicated and longer process.

We wish it would be faster, but as I've said many times on these calls, I don't believe there's a single silver bullet easy answer.

It's lots of little decisions.

I think if you look at our results in places like continental Europe, where it's very hard to make changes even the labor laws, our management team there has been amazingly and hugely successful in improving profitability and improving productivity to drive profitability.

You're seeing much greater increases in profitability over the last three years than we have had at the top line, whether you're looking at revenue or gross margin.

So, that's how we think about the rest of the world.

At corporate level, we have some of the same issues as we become a more focused business.

Mary Jane mentioned that on a consolidated basis we've now divested about 15% of our revenue and we have to go through the same process of really looking at the issue of do we have the right scale in each of the corporate functions.

Thank you for all of color.

In terms of the eventual cost savings and understanding that this is an ongoing process, but what types of annual cost savings would you expect to generate and maybe you can give a range once this round of changes are made?

The one thing we've offered and I think we're not at a point where we can give a range, but the one thing we've offered as a kind of bright line is we're very conscious of looking at the dilution of EBITDA that we've incurred through the divestiture of our energy and engineering business in North America and our target is to regain that dilution in 2008.

Okay.

Thank you very much.

Your next question is from Mark Marcon with R.W.

Baird.

A follow up to Jeff's questions, but just how long do think it will take - I know it's an ongoing process and some things are never done, but in terms of the major structural changes at what point do think you might have those completed by?

Our goal is mid year; two quarters.

So, two more quarters and then --

We're in the middle of the first quarter, so another quarter and a half.

A quarter and a half and then at that point you would expect that things will be relatively in pretty decent shape?

In North America, yes.

What about internationally?

What do you need to do there?

International, as I said in answer to Jeff, it's more a question of continuing to build productivity and so I think we just continue doing what we've been doing.

The international formula has really been very successful.

The place where we've lagged is North America.

So, we will continue to make incremental improvements depending on the economy.

If we have a downturn and you're looking at results next year, you may say well, the EBITDA percentage went down.

Isn't that bad?

It might not be.

It might not really be reflected because of a slowing economy.

We are and you know, Mark we've been conscious of improving our productivity and we've set EBITDA as our standard and we report it to you by region, so you can measure us.

So, we continue to focus on that.

We're not stopping.

We feel there's still room to improve looking at productivity and looking at lead financial metrics of adjusted EBITDA as a percentage of revenue.

We feel there's still room for improvement even in our international operations, which have done very well.

I might just make one call or a comment to Jon's question about that.

Obviously, our company we had a whole lot of things to deal with in this year or for the last 18 months have essentially done five divestitures.

So naturally, there is a very nontrivial resetting of the cost structure, but I would encourage all of you to just keep in mind is that while typically, I think, people kind of think of restructuring as something that is correcting something that's wrong.

In fact, I just want to be sure we don't leave this question thinking after the next call it quarter and a half or two quarters that you'll never see anything ever again because as our company grows we'll make decisions about where our investments are going and making changes to accommodate where the business is focused, where it's growing, et cetera could give rise to what might be termed or allowed to be a restructuring charge, but that would actually be a good thing because what we want to have the ability to do is be flexible on where the investments are going so we take advantage of the opportunities that we have.

Great.

Thank you.

Let me just answer the question for you quickly, so that I don't forget on the stock comp.

Sorry to interrupt you, Mark.

It was 1.6 in the fourth quarter and 4.1 for the year.

That's millions.

Millions, sorry, yes.

I'd hate for you to think it's thousands.

I'd just offer a comment on that.

Given our stock price performance, thanks to the oracles at [FASME] we and the shareholders have just absorbs $4.1 million in '07 as a charge for options that are under water.

Keep going, Mark.

Sorry.

That was my biggest question was just when you would expect.

In terms of increasing productivity, do you mean just in terms of the producer level in terms of getting them to be more productive or are there things at the back office level that you're also working on?

Everything.

In our business -- and I'm sure you know this -- it's an integrated process.

It really flows from the front office right through to the back office, the billing, the collections, to accounting for it, to auditing it, to internal auditing and pulling things out of that process, simplifying things, automating things within the process.

All those things are important.

They allow our producers to be more productive.

It's a question in some cases of changing compensation plans to reward people so that they get more reward for greater productivity and so forth and so on.

So, it's a whole raft of things within our operations and we constantly try to fine tune that.

The challenge with a spin - I think we have two challenges in our company.

One is the spin, but the second was that this is a consolidation play.

This is not a company that we built from scratch and therefore just have all of the processes and all of the comp plans and all of the premises and all the things that we fine tuned ourselves.

We are on a moving train trying to reengineer the cars as the train goes down the track.

We don't offer that as an excuse, we just offer it as an observation of how we have to deal with things and when you look at many of our competitors they have the luxury of not per se having to deal with all those issues.

Understood.

Thank you.

Your next question is from Mike Carney with Coker Palmer.

A follow up, Jon.

You still have even though it's all professional and technical in Australia and the U.K., there's a lot of diversification.

So, you said that this should be the final disposition of all the businesses, but are you sure?

Well, nothing is forever.

I think --

Well, with a 90% confidence level, are you sure?

Let me put it this way, Mike.

When we spoke to you the investment community within the last year, over the last year, we highlighted the fact that we were going to divest 10% of non core assets.

In our minds -- and at the time you asked us what does that mean?

We were pretty vague about what it meant.

So, what we're telling you today is this is what it meant.

We've now completed that program that we had in mind a year ago.

We do not have another program that we have in our back pocket or down our sleeves, up our sleeve; whatever the metaphor is.

I think after that its like business as usual.

Every chief executive looks at their portfolio.

Always considers whether something should go or frankly something should add, but at this point it would be -- it's not in our normal thinking.

Okay.

Good.

And Mary Jane, on the corporate expense line versus the North American corporate back office, whatever, expense line.

Obviously, the restructuring that you're talking about is mainly in the North American back office, right?

Not necessarily anything in the corporate line?

Am I correct?

Generally, yes.

The restructuring we're talking about is primarily in North America; however, part of what could be in the North America restructuring is a greater merging with corporate.

Because, for example, New York as an example is one of the largest North American offices and we sit on the floor above them.

So, the restructuring in general to match the size of the business is indeed primarily in North America, but I'm pretty focused on the corporate expense as well and have been and continually looking at those two things together to see if there's some additional synergy we can get is kind of part of the thinking.

Basically, you don't expect a corporate expense line to be going up either?

Oh, I don't.

No.

In 2008 -- although obviously at some point you're going to want to start making some real bonuses.

Oh, yes.

That's true.

We do not expect it to go up.

Actually, our expectation is that would go down even with our bonuses; even with the monumental bonuses.

Okay.

Thanks.

I think we're finished with our hour for the call, so I'm going to turn it over to David to make closing remarks and in those remarks David will be telling you that we're available through the day for follow up questions should any analysts or investors have them.

So, with that, David, I'll let you takeover.

Thank you, Jon and thank you everyone for joining the Hudson Highland Group call for the fourth quarter of 2007.

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This concludes today's conference call.

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