Hudson Global Inc (HSON) 2008 Q2 法說會逐字稿

Good morning.

My name is Valerie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hudson Highland Group quarter two earnings 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 session.

[OPERATOR INSTRUCTIONS].

I would now like to turn the call over to David Kirby.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone.

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

At this time, 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 all of you for joining us this morning.

In looking at Q2, I would say that our operating management did a commendable job in navigating turbulent economies in many markets.

Our combined regional operations produced adjusted EBITDA above the prior year, despite a decline in revenue and gross margin in some markets.

In total, we are a little bit below prior year at adjusted EBITDA due to some one-time corporate expenses that Mary Jane will explain in more detail.

Investors continue to be focused on the impact of the macroeconomic factors on our company and our industry.

In the second quarter, the Company continues to benefit from geographic diversification.

Although we are seeing evidence of spreading economic weakness as other companies have also noted.

Let me start with comments on the economic trends and the impact on Hudson.

Earlier in the year, most commentators would have said that weak US economic conditions were offset by stronger growth elsewhere, except for the financial services sector, which was affected by the sub-prime problems across many geographies.

While it continues to be the case that international economies are stronger than the US, in Q2, there was evidence of economic slowdown in other markets, including parts of Europe and Asia Pacific.

At this point, it is reflected in slowing GDP growth rather than declines that would constitute recessions.

As Mary Jane will discuss in more detail, slowing economies are impacting our operations in a variety of our major markets in terms of revenue and gross margin, including Belgium, the Netherlands, and parts of Asia Pacific.

Although we believe the US economy is bottoming, we would expect employment to be a lagging indicator for several quarters, as it has been in past slowdowns.

However, we do know that GDP is expected to be positive for the quarter as announced earlier today and for the year.

The US continues to be an economy of cross currents with real weakness in housing, financial services and commodities inflation, but also with fundamental strengths.

Many investors have asked how this economy compares to the past recessions in the early 2000's and early 1990s.

I have seen some very elaborate analyses.

However, as I said above, to date recessionary conditions are not occurring in any major market.

Sorry to say that about New Zealand.

We have seen however, a slow down in growth that might be more analogous to the 1995-1996 period in the United States.

Of course, no one can rule out that this cycle will devolve into a recession in specific markets, but that is not what we are experiencing today.

While there are similarities with past cycles, there are important differences.

I want to discuss some themes that run through our discussion of our financial results.

We can't explain the causes of these phenomenon and we can't predict the future, so we can't rule out that the possibility exists that this cycle is in a transitional phase.

I would like to remind you that during our discussion, we will focus on gross margin, because we think gross margin is the most accurate way to look at our business.

We are a mix of temp and perm and that mix differs dramatically among our regions.

At the consolidated revenue level, temp has 67% of revenues, but only 31% of gross margin.

The differences have passed through wages of temporary or contract employees which have little impact on profitability.

And therefore, give us a somewhat distorted picture of the so called top line trends.

Gross margin reflects the fees that Hudson actually receives in both temp and perm.

I'm going to discuss three major themes.

First, I want to talk about perm and contract movement during this cycle.

Classically, in an economic slowdown, we would expect perm hiring to slow rapidly, and at certain stage, even decline.

Conversely, we would expect contracting to slow more gradually.

This has not been the experience to date in this cycle.

Customer and candidate behavior is reflecting two major cross currents, the slowing economy and the ongoing skills shortage.

The slowing economy is causing clients to be slower in making permanent hiring decisions but the skill shortage is causing them to continue to hire to fill critical needs whether due to attrition or future expansion plans.

Large employers, outside of financial services and other special situations, are holding on to workers rather than engaging in massive layoffs.

Again, due to the perception of the ongoing skill shortage.

We are also seeing good demand for large scale RPO assignments, which is unheard of in a true recession scenario.

On the other hand, temporary employment is being impacted earlier in the cycle as many projects are being deferred or postponed as clients grapple with the slowing economy.

Normally, client's use of temporaries or contractors is driven by a need for flexibility.

But flexibility has a price both in terms of the margin paid to us and generally, higher wage rates, which reflect the contingent nature of temporary or contract employment.

We are seeing more instances of clients taking temporary recruiting back in house as the labor market has loosened in some geographies and in some cases, taking temporaries on the permanent payroll to reduce costs associated with critical projects.

To some extent, this is the reverse of the typical or classical recessionary cycle.

On the candidate side, we are seeing candidates exercise caution in changing permanent jobs.

Candidates fear being the last in first out.

As a result, candidate supply remains tight in many markets.

I would cite the North American experience as an example of this behavior.

Permanent recruitment has continued its normal seasonal sequential build up in the second quarter.

June was the strongest month of the quarter as we would expect.

Our perm recruitment business is focused on middle management and professionals.

For the most part, these executives are responsible for driving client results, actually doing a directing work within client organizations rather than executive management.

This is precisely the market that is most affected by the skill shortage, even in today's economy.

On the other hand, we are seeing clients defer large projects particularly in IT and to some extent, in accounting which is adversely affecting our temporary business outside of legal.

Secondly, we are continuing to experience an impact on revenue and gross margin from exiting low margin accounts.

Of course, revenue in gross margin to some extent, reflect a mix in margins.

For several years, we have said that exiting low margin accounts is one of our important strategies.

Investors frequently ask when this process will be completed.

It is difficult to say because it is a dynamic not a static portfolio.

By that, I mean that as accounts that once had reasonable margins at one time may become low margin at some later point in time.

For example, last quarter in Australia, a large long-time client forced a reduction in margin and other changes in the relationship, and we decided that we can no longer service the account at a profitable level.

Finally, I would just like to comment on financial services.

The financial services industry is a huge consumer of recruitment services of all kinds.

The financial services malaise continues to ripple across many markets with significant impact in the major financial centers such as New York, London, and Hong Kong, but with lesser impact in many others.

Hudson has a significant presence in financial services, particularly in our UK and Hong Kong operations with smaller exposure elsewhere.

In many markets, there has been a pronounced slow down in hiring or even hiring freezes among the financial institutions.

So it is very mixed across institutions and even within a single institution.

Our operating units are doing a good job in coping with these cross currents.

We are competing hard to win new business, but we are pragmatically managing expenses to reflect slower demand.

We implemented cost management strategies across a number of our businesses earlier in the year and accelerated those actions during the second quarter.

You can see the concrete results that were achieved from those efforts in our second quarter financial results in North America and Europe.

We believe we have the ability to buffer the impact of economic slowdowns through these actions.

With that, I will turn it over to Mary Jane Raymond, our Chief Financial Officer to discuss our financial results in more detail.

Mary Jane?

Thanks, Jon.

Good morning, how are you?

Just to start, let me tell you that we have posted for the first time on our website, some slides to accompany my remarks.

You can find these on our website, Hudson.com.

They provide some good snapshots of the results and I will periodically refer to some of them.

We would be happy for your feedback as you look at them.

Jon just went over the economic conditions present during the quarter and outlined how we feel here at Hudson Highland about that, and how our company faired given this difficult environment.

The bottom line is that amid these challenges, we delivered solid second quarter results benefiting from our continued focus on professional staffing and geographic diversity, with strengths in some regions offsetting others.

A major factor as well was the responsiveness of our local management teams to respond quickly to their respective market conditions and tackle expenses.

That was a main contributor to our q2 performance.

These elements drove recorded revenue and gross margin increases, and a small decrease in the adjusted EBITDA from the second quarter of '07, which I will discuss in more detail.

So overall, not withstanding that the dark clouds of the economy are not necessarily gone and we have a long way to go, this quarter was a good step and our local operators did a very good job and I'd really like to commend them for that.

Moving to the key financials, for the total company in the second quarter, the gross margin dollars grow 6%, with revenue growth of 3 on a reported basis, continuing the company's trend of faster gross margin growth than revenue growth.

The overall gross margin percentage increased to 44.9 from 43.7.

Our gross margin mix is largely unchanged from recent quarters and prior year, as is detailed on slide 7.

The adjusted EBITDA for the quarter was 3.7% down 30 basis points from 4% in the prior year's period.

Adjusted EBITDA margins in the regions in the quarter were 8.6 in Europe, 7.4 in Asia Pacific and 2.4 in the Americas.

I would note that the 5.6 consolidated decline in the adjusted EBITDA dollars was driven by higher than normal expenses in corporate, including professional fees that we incurred for our cost management program, and the resolution of outstanding litigation.

We do not expect these costs to repeat.

To give you a little color on both of these elements, after the professional fees, I did last quarter and I will discuss more the cost reduction and productivity actions that are occurring in every region in our company.

We took it upon ourselves to get some professional advise about how to think about that and it's paying off and I'm glad we did that.

It did make our corporate expenses higher in this quarter, and with that behind us, I think we will continue to reap, and in fact I'm sure we will, the continued benefits of that.

With respect to the litigation before you ask me, it is our policy not to comment on litigation of any kind.

As you all know, as a general matter, we run a people business.

As a result, it is never appropriate to comment on anything related to that and therefore, we do not comment on litigation.

We don't have situations like this to us and the main thing to tell you as I think we said in our printed materials is that it is resolved, behind us, it is over, so it is one time in this quarter.

In the operating units, our most important measure if you think about how our company is really doing in terms of delivering results, we have strong adjusted EBITDA gains in Asia and the Americas.

Softer results in Europe and Australia, although the UK did a very good job tackling their costs to almost entirely offset their gross margin decline in this quarter.

Year to date, our adjusted EBITDA margin was 2.9% at the end of the second quarter, up 10 basis points from a year ago.

A regional breakdown of our year to date adjusted EBITDA is shown on slide 10 of our website package.

Just to have a word on the currency impact, on a year on year basis, changes in currency helped our reported results as you have seen with many US companies.

Certainly this quarter, and for a while now.

We had an $18 million pick up in revenue, which is about $10 million in the gross margin, and $1.7 million to the adjusted EBITDA.

To give you the related percentages on the growth, of course adjusting for comps and currency then, we would have had a 3% decline in revenue, a lesser decline at 2% in the gross margin, and about a 20% decline in the adjusted EBITDA.

Turning to the regional results, these are encapsulated for you in our package on slides 4 to 6.

Hudson America held up strong in these difficult macro economic conditions, driven primarily by continued strength in legal which was offset in declines in other practice groups as Jon went through with you briefly a few minutes ago.

Since the last quarter, when you all remember, we had some very strong billings at the end of the quarter due to some unusual spikes of work at some clients.

Legal has returned to more normalized levels, but remains a market leader in that business in legal, and it's somewhat less tied to the economic cycle.

In the region as a whole, contract revenue increased 6% offset by an ongoing softness in permanent recruitment, netting to a total revenue of increase of 1% and a gross margin decrease of 5 from the prior year's period.

Perms here in the United States or the Americas market makes up about 18% of our gross margins in the quarter, and was down about $2.5 million from the second quarter last year.

As it was last quarter as well, about two thirds of this decline was driven by just a couple of clients taking large RPO work in house.

They did that because oftentimes, what clients hire in RPO may be a several quarter project, but it tends to be a project.

In the case of one client, we built out their sales staff that was completed; they decided to take lower levels of recruiting back in house.

One other important point to note is the permanent US market was sequentially steady for us.

No further fall off in Q2 than Q1.

Both quarters were down to prior year primarily due to the actions I just cited.

So our assessment looking at that is that the market is actually holding up fairly well.

At the adjusted EBITDA for the quarter, North America increased $1.7, up $3 million from a loss of $1.3 million a year ago.

As the region benefited from a number of things, primarily the cost reductions from reengineering and their temp margin expansion.

The UK continued to deliver stable results despite ongoing challenges in their economy by managing their expenses, as I mentioned earlier.

The slowness in the banking sector coupled with the increasing [inaudible] reluctance to move, contributed to a 15% decline in revenue and gross margin in comps and currency.

This is partially offset by comps and currency growth in continental Europe where revenue grew 6%, gross margin was up 8, led primarily by France in the north.

Australia and New Zealand's revenue and gross margins were down less that 2% in comps and currency.

In the quarter, their expenses were slightly up while their GM was down, [inaudible] and therefore they themselves have implemented an initiative to drive productivity and reduce overhead cost that the management team is very committed to.

The third quarter restructuring expenses will be centered on this region primarily.

In the second quarter, the region benefited from growth in Asia, where comps and currency revenue was up about 18% and gross margin 21.

This was helped by our acquisition in China of the Tony Keith business, but also by our existing business.

Each of these -- both organic and the acquisition contributed about half of this for us.

Just to move and touch on a few of the other important financials in the second quarter, our cash balance of $51 million at the end of the quarter, cash flow from operations in this quarter was $24 million, following a use of cash of $20 million in the first quarter.

As we had noted last quarter, what primarily drove our use of cash was that the legal business had a good start from some clients who had a court date at the end of the quarter, which drove our receivables to be unusually high exactly at the end of the quarter.

This tied some cash temporarily, but it was all collected in the second quarter.

That was the main driver of the increase in the cash balance.

We had about a $23 million decline in the IR balance overall.

The DSO was 55 days, one day better than a year ago, and six days better than last quarter.

CapEx $4.1 million in the quarter, $6.3 year to date, consistent with our recent history.

Our depreciation of $3.6 million was down 10% from a year ago.

The tax provision in the second quarter was $6.1 million against $4.4 a year ago.

This was higher than what we expected and some of that is due to how the accounting works on booking the effective tax rate for the year that makes the quarter on quarter explanations difficult.

Last year, our tax rate for the whole year was actually above 70, as you may recall.

And for this year, I expect it to be more like 50-ish.

I know that you will really want me to tell you what the tax rate will be quarter to quarter.

That will be very difficult to produce right now for what I hope is a good reason.

We as a company are very committed to continuing to drive our income performance and actions to offset the economic conditions around the world and in every region.

That makes it a bit difficult to predict what the mix of income will be, which as most of you know, has the biggest effect on the tax rate.

But hopefully, it will help you to know just generally speaking, kind of what I might expect the year to look like.

In the restructuring program, we incurred $1.1 million of expense in Q2 for our restructuring program primarily related to severance and reorganization of support functions in Europe.

We expect annualized savings of over $1.5 million on these actions.

Year to date, the 2008 plan expenses are $2.7 million.

We continue to expect that we will spend $5 to $7 million in 2008, and I expect to have somewhere between $1 and $3 million in the third quarter.

As you can see, the results of these expense actions are already taking effect and again, I want to commend the team for their leadership in driving this.

Turning to guidance, for the third quarter, we are expecting Q3 revenues between $290 and $305 compared to $300 million a year ago.

For the third quarter adjusted EBITDA, we expect $8 to $11 million compared with $10.6 last year.

As I noted a moment ago, I expect the restructuring charge to be in the range of $1 to $3 million.

Though of course, as you know, we exclude these costs from our adjusted EBITDA.

All of the numbers that we gave, as we say in our printed documents, are at prevailing exchange rates.

To give you a couple of thoughts on the guidance and just directional commentary, as we look at the third quarter and our regional operations, we expect the current operating trends to continue.

On a revenue basis, we expect year to year strength in Asia Pacific, some on currency first of all, and also with growth in Asia.

Europe I expect to be flattish.

Basically, the expectation we had is that we will continue to see softness in the UK, offset by growth in the continent at sort of about the same pace as the first half.

Do keep in mind the seasonal trends of Europe.

Q1 and Q3 tend to be significantly lower than Q2 and Q4 in Europe.

Q3 is a significant vacation period across Europe.

We expect those patterns, of course, to continue.

We expect to see similar trends as we have seen in the US market.

Moving to adjusted EBITDA, I actually expect the US market to trend more toward prior year, more flat.

They had very good gains in the first half of the year, but they also had losses in the first two quarters of last year.

So they're up against a tough comp.

Therefore, from a range against prior year, again, I would expect them to trend more toward prior year and more flat.

For Europe, as I just mentioned to you, we would continue to see their seasonal pattern as I just explained.

And as a result, I would expect Q3 certainly to be less than Q2, more sort of like Q1.

Again with the mix of between the UK being softer, continental Europe probably being stronger, though as John just said, the news on continental Europe would cause us to be somewhat cautious about that.

Still, in all we think it should be stronger than the UK in general.

We expect some year on year growth in Asia Pacific.

Corporate costs I expect to be more normalized to our pattern.

They still may be a little bit higher than prior year, but we will not have a number that starts with a nine.

Our company remains committed to delivering 2008 earnings improvement over 2007.

On a year to date basis, we are about $1 million ahead.

While the external conditions do challenge us, we see opportunities to realize this goal and we are going after them.

So far this year, we have benefited from the geographic diversity, our professional staffing focus, because as John said, we supply the people who actually do the work in the companies.

Our global restructuring efforts -- and we will continue to strive to meet our income improvement goal.

With that, let me turn it back to John to see if he has any other comments to make before we open the line.

Thank you very much Mary Jane.

Operator, I think we are ready for the Q&A, please.

[OPERATOR INSTRUCTIONS]

There are no questions at this time.

Thank you very much operator.

Thank you all for attending today and I will turn over to David for our closing comments.

Thank you, John and thank you for joining us this morning on the Hudson Highland Group second quarter conference call.

Today's call has been recorded and will be available later today by calling 800-642-1687 followed by the passcode 53821851.

For calls outside the US, please dial 706-645-9291 followed by the same passcode.

The archived call will remain available for the next seven days, today's webcast will also be available on the investor section of our website at Hudson.com

Thank you very much.

Excuse me, sir.

Yes.

You do have a question.

Thank you, operator.

Please let them go.

You have a question from [Paul Kundrow].

Paul, go ahead.

Hi, Paul.

Hey, sorry about that, I was having trouble getting through.

I'm sitting in for Jeff Silber actually at BMO Capital Markets, so I just have a couple of quick questions.

The first one is can you break out the stock based compensations for the quarter?

Yes.

The stock based compensation in the second quarter was $1.8 million compared to $1.7 last year.

Okay, and thank you.

My next question is with regard to the guidance, I know you gave your forward-looking ideas about what you expect in terms of the growth, but can you break it down?

Can you give any specific numbers for the regional guidance or the EBITDA guidance?

We don't give regional guidance.

I think that is a good question to ask.

We know you would like to know it, but I cant -- it wouldn't be wise to give you numbers that's not our policy.

Okay, well that's fine.

That's it.

Thanks for taking my questions.

Sure, Paul.

You also have a question from Timothy McHugh.

Yes, I'm glad I was able to get through there.

Hi, Tim.

Hi.

I wanted to ask about the legal business.

It was obviously down from the rates in the first quarter but up year over year nicely still.

What is your outlook as you look forward for the pipeline of that business?

Right now, the pipeline looks good, good in the sense of I would say continuing the trend.

The challenge with legal is that is it a very lumpy business and it is obviously driven by projects, and the projects are subject to all sorts of vicissitude such as settlements, and other things that ebb and flow in the legal world.

So the pipeline isn't always a reliable indicator of what results will actually be.

The people -- our client.

So, our client is usually a partner or an associate dealing with a specific piece of litigation.

But our client that we are talking to might not have visibility in the settlement talks that are going on at senior levels of the client organizations.

So it gives us very little visibility about the bumps in the road that might be coming about.

We had a very strong quarter last year in third quarter of 2007.

So we're thinking that continuing the trend sequentially might impact us by having something that was closer to flat year-on-year in the legal business.

But in general, it's been a great business.

It's a business that we are very happy about with a good management team there.

And obviously, it's somewhat sheltered from the economic recession - or economic, macroeconomic factors.

So we're confident about legal but as I say, we always -- it's a lumpy business so we can surprises in the road.

Okay.

And then on perm in the US -- you mentioned the large contracts in the second half of 2007, should we start to anniversary some of that than such that the year-over-year growth or at least the year-over-year decline should look a little better sometime in the next quarter or two?

Thank you for asking that question.

Yes, we should.

In fact, Mary Jane probably has the exact number, but the concept was that the major project in 2007 was completed at the end of the second quarter.

We had some continuing work in the third quarter and we had a termination fee in the third quarter.

So we have some impact in the third quarter of 2007 but nothing like what we had in the first two.

Right -- it's about half in the third quarter, so we'll see half that decline anniversary in the second quarter and it would be completely anniversaried by the end -- a point we were just looking at too.

Yes.

And then I think the point that Mary Jane made, which is think I just underlined is that a lot of people have worried about the macroeconomic impact on permanent recruitment in the United States.

So we have pointed out to you that sequentially, we've been steady through the year taking into account the normal seasonal patterns.

So the normal seasonal pattern is the last month of every quarter is the strongest month of the quarter.

So we really have not seen any change in demand on the seasonally adjusted basis.

We think that's an important thing as I mentioned in my remarks, because that's not the typical recessionary pattern.

And we also note that many of our competitors are experiencing the same thing.

Okay, great.

And then on the restructuring, you mentioned in Australia, you're going to move forward with some restructuring there.

Is that what gives you confidence?

I think Mary Jane, you had suggested kind of flattish year-over-year for that business, although it's been down the last three quarters.

Is that what you expect to offset some of the recent issues, or is there a year-over-year comp issue that we're running up against there as well?

Just say the last part of your question again -- a year-over-year comp?

We are facing an easier year-ago comparison, and that's why you would expect it to be flat year-over-year versus being down the last two quarters, year over year at least.

Let me just start off with a little context and then Mary Jane will - I think we'll get into the numbers.

In Australia, we're dealing with a market much like we are with our European region, a market of basically in two -- two different markets.

The national resources boom and the Western Australian and other parts of Australia where business is great, and a relatively soft economy in the urban centers in New South Wales and Victoria.

Obviously, New South Wales and Victoria are much bigger parts of our business and everyone's business than the mining and manufacturing business that's benefiting from the national resources boom.

So on the top line, that's created some challenges.

And with that, it has turned us to looking at our expense structure in the rest of the business.

And so I think Mary Jane, I'll just ask you to comment specifically about how you see that unfolding in the third quarter.

Right.

So speaking to the question of then Australia, one of the things that we talked about last quarter was -- as John gave you a very good context to the market in general -- we also, because we have been a rather dominant player in Australia, have some very large clients, and those clients are important to us.

And arrangements like that, when we do quite a lot of the companies recruiting, really lend themselves to benefiting from streamline delivery.

So part of the work that we're doing with respect to the restructuring, we expect to be -- with respect to productivity and means of delivery.

We also in businesses in Australia that we see changes in demands -- so the last quarter, we talked about somewhat lesser demand in outplacement.

It's a very labor short market.

Frankly, there's lesser need for the people to need outplacement to find a new job.

You can imagine why that would be declining.

So what we're then doing in our talent management business where that outplacement practice is based, is re-looking at how we deliver the talent management practices in general.

So that's the second area.

I think thirdly, we always look at -- are we using our space the best?

Our people are very important to us.

We're careful about being sure that we look at actions that are also about other expenses, and space is one of them.

They are looking at a series of reviews of the various properties where we are, just to be sure that we're doing that best of all.

I do think that we will have benefits of that in the third quarter with respect to Australia.

Just so you know though, my comments about kind of seeing potentially some growth here on Asia Pacific, is for the Asia Pacific market.

So not withstanding that Australia is the largest portion of that, certainly, we do expect to see some growth in the four smaller countries of Asia proper, and that helps contribute as well.

Okay, great.

Thank you.

Thanks Tim.

Your next question comes from Jeff Meuler.

Hi, Jeff.

[inaudible] full year adjusted EBITDA growth on the table, and I understand it's a dynamic process but given that you are undergoing such an ambitious restructuring, which is great -- can you talk a little bit about how you would envision gross profit shaping up, and then how much is going to come from your restructuring initiative?

Hey, Jeff, I wonder if you could do a favor.

Could you just tell us the first part of your question?

Somehow it slipped out in the transmission.

Yes.

I'm more or less just trying to get a sense for -- you obviously are keeping the adjusted EBITDA full-year growth target on the table.

I was just wondering how you're envisioning it shaping up between gross profit, and then how much the restructuring cost savings contribute?

Well, of course, at this point, my main goal is to try and fight for the growth in the income any place we can.

First of all, let's be clear.

I think there's not much question that we will have a pick up on the currency, right?

If we ignore that, which would be then hard to do off the top of my head, I would say we do still expect to see some expansion at the gross margin dollars faster than the revenue.

Exactly how it's going to contribute between revenue and expenses or gross margin and expenses is a little tough to tell, because there are parts of that, right, that go hand in hand.

Sure.

Right?

So just even on the compensation flex -- obviously here in the second quarter, most of the benefits came from the restructuring actions, but we do not as a general matter want that to be the only source of our income improvement certainly.

But I'll say right now, it's pretty tough to tell on how that split would go.

Okay.

Understood.

And you did a great job of providing us some detail on what you would potentially do on Asia Pac.

Can you talk a little bit more about when you brought in the professional consultants, what kind of joint agreement you reached about how to proceed with cost cutting elsewhere, or what they suggested that you previously were looking at in different ways?

Well, I would say in general, they helped us with some stuff I'd like to think we started with ourselves -- which is always half the game.

But generally speaking, we've talked for a long time in this company about the level of our SG&A compared to our competitors.

And notwithstanding we're five years old now, that still is a pretty short period of time for trying to really align lots of different methods of delivery of service.

That's probably the main thing.

Where is the work that's done?

How do you be sure it's not duplicated?

How do you be sure that you don't say for example do it in the front office and then just inspect it in the back office?

So in a funny way, some really classic workflow thoughts are the things that are being applied actually in every region.

That's exactly what we did in the US market.

The UK has also done a very good job looking at their flow, which has helped them.

And that's the primary way we're sure we understand what value we're adding to the client to make sure we're not adding excess costs.

And frankly, we're just swifter in terms of how we actually get the delivery to the client, which also is a big part of then what affects the gross margin.

In a contingent business, which a lot of our perm is, we want to have the best clients for the candidate, but it certainly doesn't help if we are -- a longer amount of time doing that, right?

So part of the goal here is also to improve the client delivery as well.

Those are the main aspects.

I think our days are over that we have a department that's just three times as big as it should be.

We're now more sort of broadly looking at end-to-end how will we run in the various parts of the company.

Okay, thank you.

And then John, continued good progress in the Americas.

What's the update on the leadership search there?

We're continuing.

We are hopefully -- seems glacially, but hopefully we're coming to a conclusion.

Our goal remains to have a new leader -- a permanent leader in place by the end of the year.

Okay, thank you very much.

Thank you.

Your next question comes from Ty Govatos.

Hi, Ty.

Hey, Ty.

You guys thought you'd get away without any questions?

We were hoping.

We were declaring victory.

[Multiple Speakers]

Of the $2.7 million charge, can you give us some indication as to what were professional fees and what the legal was?

I'd say in round numbers, it was closer to $2 on the professional fees and closer to a $1 million-ish $700,000-ish on the legal.

Okay.

And really, to extend some of the questions you've already gotten -- If I look at the cost cutting, it seems that most of the restructuring is probably going to show up in the SG&A category.

Okay.

True, false, yes, no, maybe.

So far, so good, yes.

That was really the crux of the question.

Yes.

I think the answer is basically yes, Ty.

It's going to show up in SG&A, but I would just underscore what Mary Jane said -- was that part of this was process improvement, which affects the delivery of gross margin.

You know, process improvement is still in SG&A, but the ultimate result we hope is getting the candidate to the client faster, which gives us more business.

That's what we hope.

Okay.

That's all I needed.

Thanks an awful lot.

Take care.

Thank you, Ty.

Your next question comes from Greg Eisen.

Thanks.

Good morning.

Regarding your adjusted EBITDA guidance for the third quarter, the $8 to $11 million range, could you tell us what, if any factors would cause it to tend to the lower end of the range versus the higher end of the range, other than obviously the revenue coming in at the bottom of the range versus the top of the range?

Is there something -- what else is going on?

Because I'm assuming we're dropping off the large corporate number that you said doesn't begin with a nine?

I'm looking at last year's third quarter in your supplement on page 23.

The corporate number last year's third quarter was 6.8 so --

Right.

Good question.

Is that a more normalized range -- called the $7 million-ish range more normal for a corporate level?

Yeah.

I'll let Mary Jane talk about corporate expense.

Not that I don't contribute to it.

On the range of 8 to 11, one of the things that we're trying to gauge of course is the mix of the economies.

Not so much the mix of our operations, but with the mix of the economic impact.

And what we've been successful so far -- our local operating leadership has been successful in Europe in offsetting the slowdown in the UK with strength in Europe.

In the third quarter, we're coming in to a soft European period due to vacation schedules, and we're just a little bit cautious about the ability to do that when our engine of strength, the continental European business, is going through the vacation period.

So we have a little more breadth to our range than we might otherwise have.

As far as corporate expense --

As far as corporate expense is concerned, as I mentioned, I expect the third quarter to be closer to prior year, and that I do expect a number that starts with a six to be more like the average kind of run rate.

Do keep in mind that not withstanding that, we had $2.7 million more in corporate expense.

We were fairly close to prior year actually.

So, the $8 million isn't driven by anything in corporate.

It is, as John said, just trying to be sure that, as we [inaudible] on the economy and do exactly as you say, think about what that could do to the revenue --that we are just, as Jon says, having a little bit more breadth in the range as we try and read what the conditions could be.

I mean, I appreciate that -- European largely our business, not entirely, but largely our business, is impacted by permanent recruitment.

And so permanent recruitment has a relatively small impact on the revenue range, but it has a relatively bigger impact on gross margin, and therefore, in EBITDA.

Okay.

And again, being summer on the continent, that could be lumpy.

Going back to the UK for a second, that's obviously the drag on the European total.

Do you have any visibility as to how long things are going to continue along this vein in the UK, or is this the new reality for your UK business until further notice, basically?

Well, I think, first of all, it's fundamentally driven by two factors.

One is financial services, and the other is the economic climate in the UK.

Let me just talk about both.

We have a very strong financial services business, and contrary to what some might think, we don't apologize for it.

We are very proud of the fact that we have a strong financial services business, and most of the time it's a great business to be in.

However, this is not one of those times, and that's having a very significant impact, a negative impact on our UK business.

The second thing impacting our UK business is the UK economy generally, and we're seeing many of the same kinds of things happening in the UK that we see elsewhere in slowing economies.

In -- particularly with a deferral of projects or, as I mentioned in my remarks, this is kind of strange, in a historic sense phenomena, clients actually taking temporary employees under the permanent payroll.

And I think my economic forecast for the UK isn't any better than anybody else's.

But just to repeat what's out there in the world, right now, the economic forecast in the UK is fairly negative at least for the next two or three quarters.

So I think those are the drivers of our business.

I wouldn't go so far as to say until further notice, but I would say that we're going into a pretty strong headwind as it affects our mix of business in the UK.

Okay.

Your UK business is driven by financial services.

In the US, you have a very big legal business.

Is there a potential effort to really develop the legal business to the same strength level in the UK as in the US, or is it not a possibility because we're just so lawsuit-happy in this country?

Greg, well, you've answered your own question.

We would love to do that, and we have spent a fair amount of energy trying to do that.

The bottom line, though, is that the US is unique in two respects, and that's what drives our business.

The first is, yes, we as Americans are lawsuit happy.

I think I read in yesterday's New York Times that there are something like 60 subprime lawsuits, class actions currently filed.

Great.

This is for you.

I hate to say it.

Our business is driven by litigation.

And so on the demand side, that's good.

The supply side, however, is also an important factor.

And that is, in the United States, we have a huge number of law schools, and they churn out a huge number of lawyers every year, and particularly a good percentage.

If you look at the total population, a good percentage, I would hesitate to say how big a percentage, but it's 30%, 40%, 50% of the total law firm population end up unemployed and are looking for contract work.

So, we have a ready supply of very good, confident lawyers for the kind of work and litigation support that we do.

So we have demand and supply, and that equals a very good business.

Okay.

I understand.

And my final question, and I'll make it brief, since we haven't touched on it I think on this call, any change in your long-term goals for just EBITDA margin levels for the business as we look out over 2009 and 2010?

Not at all.

In fact, we have talked to the market about that our long-term goal -- 7% to 10%.

And we think that doing some of the restructuring that we're doing during this period of time not only helps us in terms of current profitability, but positions us well for the upturn and hitting our goals.

Great.

Thanks for taking my questions.

You're welcome.

Your next question comes from Mark Marcon.

Good morning.

Hi, Mark.

Good morning.

And thanks for the presentation.

It's quite helpful.

Just wondering, I just wanted to follow up a little bit on the UK.

Obviously, Europe is your biggest profit contributor.

UK is having some headwinds now.

Margins were quite good in the second quarter.

And I'm just wondering -- obviously, the third quarter -- we're going to end the seasonal patterns, but as we look out towards the fourth quarter and first half of '09, if the trends keep going as they are in the UK, to what extent can you protect the margins?

How should we think about that?

I'll try to answer kind of conceptual and see if Mary Jane has any numbers that she can help shed light on it.

I think, Mark, in a slowing economy -- and so what that would translate into is a slowdown in gross margin or even small declines in gross margin; we have the ability to offset that through the expense savings.

Now whether we can completely offset or not in every individual country is hard to say.

But conceptually, small, smallish decrements, as we had in the second quarter in some markets, we have the ability to offset it.

As Mary Jane mentioned, a portion of that is built-in in terms of flux compensation.

And also, our breadth in Europe is helping us.

Because although we've seen some evidence, and I think this is all macroeconomic evidence, of slowdown in Belgium and in the Netherlands, which are important markets for us, a lot of the so-called smaller countries are producing profit growth for us.

So the breadth is Europe is helping us at the moment.

So as we look out, I think, we don't have a crystal ball in the European economies that's any better than yours, but as the current GDP forecasts are for growth in the Eurozone next year.

That reduced a couple tenths in the last quarterly estimate by the Central Bank.

So our outlook -- pretty much, we just follow that as our outlook, and that gives us the ability to cope with that.

Mary Jane, I don't know if you have any specific numbers that you can use to illuminate that any better.

Actually, not really.

I guess what I would maybe say, Mark, is that maybe to underscore a point I already made.

The UK did see a decline vis-a-vis prior year in the second quarter that was somewhat similar to Q1.

Given that the management team and we here at so called corporate, always want the management team to react quickly in a business that is primarily driven by people, that is actually pretty hard to do.

I point that out because the fact that the UK team actually did offset so much of their gross margin inside this quarter with cost reduction tells me that they have simply proved that there are no fierce defenders of the bottom line that that team itself.

Having said that, our UK business is very good, and I say that because should we see any strength in the headwinds, I think we would probably still be pretty careful to be sure that we ensure that when the business turns back up, or other parts of it are being stronger, we can move the people around, and that we also preserve the health of that business.

All that to tell you I think we will -- I wouldn't go far as even give you a fourth quarter guidance on the UK, we don't give it at the UK level anyway.

But I think the team has been very, very attuned to what's out there in the market.

They have reacted very quickly.

They are very committed to that, and I think they are also aggressively looking for pockets of growth to shift their work around.

So all I can tell you is we might have a little bit more insight as we close out third quarter, but for right now, I'd say I expect them to stay on the same course and speed and same level of commitment they have been, and I think they'll probably do fairly well all things considered.

Okay, and I'm sorry if I missed this but did you mention just in the UK whether you were able -- obviously, the overall European performance was quite good, but it seems like in the UK on a constant currency basis, we had more of a decline.

Were they able to maintain their margins there?

No, I didn't say that.

What I said was -- if I'm answering your question, their gross margin declined the prior year.

Right.

That's true.

What I said was that their cost offset --

I was talking about EBITDA margin.

Yes so their EBITDA margin also still did decline, but considering that they had a drop in the gross margin, they did a fairly good job trying to make that up.

That was my only point.

Okay, but they maintained a fair level of profitability?

Yes, they did.

Okay, great.

And then it sounds like you are basically -- you are still holding to were gonna generate the same level of EBITDAs a year ago.

That would --

Plus at least $1.

Plus at least $1?

That would imply a pretty big jump in the fourth quarter?

What gives you the confidence -- I know about the expense savings, but are you assuming that despite the macro headwinds, we can just keep -- maintain what we have been doing in Europe and Asia and then see the US really improve?

I think that that's probably a pretty natural question, Mark.

I guess I would answer it this way.

We are not assuming that the fourth quarter is a holy grail in terms of huge improvements.

I guess what I would just say is to John's point that we want to really keep the organization focused on the fact that we could improve profitability this year.

This is the fourth or fifth quarter where our guidance has bracketed prior year, with a fair grade below prior year, and we've fought pretty hard to try and do our best to deliver as well as we can in that range, and had at least to start, we've delivered at the upper end of the range if not above it.

I think all we are really saying is we do want to set the guidance to be intelligent about it, but the fact remains we are going to fight pretty hard to try and meet or beat prior year, even as we go into what is going to be a challenging third quarter.

I think our guidance is set where it should be.

I don't know that we will necessarily be able to read the continent all that perfectly right now.

But for having since last third quarter, concerns about the economy, we've still managed to pull it out fairly well and all I'm saying is we can [inaudible].

Absolutely.

And then -- just the cash portion, I mean the balance sheet continues to improve.

I'm just wondering what's the difference between -- or what are you expecting in terms of CapEx for this year?

Between 10 and 12.

Okay, great.

Terrific, thank you.

Sure.

Thanks, Mark.

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