Hudson Global Inc (HSON) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Hudson Highland Group's third quarter earnings conference call.

(OPERATOR INSTRUCTIONS.)

Mr.

Kirby, you may begin your conference.

Thank you, Adriane, and good morning, everyone.

Welcome to the Hudson Highland Group conference call for the third quarter of 2008.

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 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 thanks to all of you that are participating on the call for joining us this morning.

Any discussion of the third quarter 2008 must start with the global economic environment.

The world is grappling with two separate but increasingly related crises, the financial crisis and the spreading global economic slowdown.

The severity of these events has affected the confidence of business leaders around the world in terms of their perception of future business conditions.

During the third quarter the economic slowdown that had been evident in the United States for some months spread in an accelerating fashion to many other parts of the world.

Much of Europe is facing contraction in the second half of 2008 or in 2009.

The rate of growth is slowing across Asia Pacific, with the large developed economies of Japan, Australia, New Zealand, and Singapore either contracting or facing extremely low growth rates, and the emerging markets facing slower growth compounded by weakening currencies.

What is the impact on Hudson of these events?

With 55% of our gross margin attributable to permanent recruitment, Hudson is heavily exposed to economic cycles in all of our major markets.

In periods of contraction, employers frequently reduce their labor force, which is negative for recruitment and, therefore, negative for HD.

But even in the absence of economic contraction, slow growth and uncertainty negatively affect hiring trends.

Employers uncertain of the future tend not to increase their workforce or even fill vacancies arising from attrition and, of course, attrition declines in periods of uncertainty.

Moreover, employment growth historically has lagged the economic cycle for the same reason.

In the early stages of recoveries, employers are uncertain of the sustainability of the recovery and are reluctant to increase permanent hiring.

In our business, perception quickly becomes reality.

Temporary contracting accounts for 35% of our gross margin, and temporary contracting reacts differently to economic cycles.

Even in periods of uncertainty employers facing temporary labor demand requirements tend to hire contractors since the employer retains flexibility to quickly reduce contractor levels at any time without the expense of severance.

However, in the contracting economy employers tend to eliminate nonessential projects, resulting in less contracting opportunities.

As the recovery takes hold employers tend to use contractors in the first stage due to the uncertainty of the durability of the recovery.

In a downturn essential projects will be continued, however, employers tend to attempt to reduce margins or to hire contractors directly.

From a global perspective the course of recessions or contractions is seldom uniform.

In all recessions there are sectors of the economy that tend to be more stable or even grow.

Just like investors, staffing companies look for economic niches that offer a greater opportunity despite the downturn.

Moreover, markets enter and exit recessions at different times and at different rates.

The U.S.

economy will benefit from the unprecedented liquidity pumped into the financial system by the government in forms of direct investment, lending, and guaranteed programs, and open market operations.

With two-thirds of U.S.

GDP attributable to consumer spending, the health of the consumer is vital for a healthy U.S.

economy.

We believe that declining fuel costs, lower interest rates, and declining commodity prices will provide a stimulus to consumers far beyond the direct government stimulus programs.

However, it is difficult for us or anyone to gauge the depth and longevity of the scars caused by the financial crisis.

Some commentators think that the recovery will be stretched by a year as a result of the financial crisis.

As a prudent business matter, we intend to plan for a longer, rather than shorter, period of lagging economic performance.

A healthy U.S.

economy will be critical for the global recovery.

We took actions to reduce our expense base in the first quarter of 2008.

We continued expense reduction actions through the third quarter.

As you can see from the financial results reported for the third quarter, on a gross margin decline of slightly over $17 million in constant and currency, SG&A declined just under $13 million in constant and currency.

We continue to have flexibility to reduce our expense base to reflect decline in demand.

While we expressed concern about the spreading economic slowdown at this time last year, we continue to make prudent investments in areas where we anticipate future growth.

We opened offices in Dubai and Beijing, and we expect that these investments will be successful for the Company in the future.

We have also invested in additional headcount in certain of the fast-growing Asian markets, and we have made an acquisition in China in 2007 which has performed very well.

The Asian economies are rapidly becoming important to our industry, as they are to many others, and we believe we are strongly positioned in the developed and developing Asian markets.

We are often asked by investors how bad can it get?

Of course, we have to acknowledge that we are living through a period without historic precedence.

In our lifetimes there has never been a systemic risk to the foundation of the global financial system.

So we can point to the two most recent recessions in the early '90s and in the 2001 to '03 period.

In both cases, earnings for most of the industry fell to breakeven or a loss.

Obviously, it is not that simple.

There are many differences between then and now.

The causes of the current economic challenges are fundamentally different, of course.

The industry is also fundamentally different.

The industry is more mature, client utilization patterns are different, there continues to be a shortage of highly qualified candidates, and the world has advanced in terms of technology, communications, and labor law liberalization.

Still, breakeven or loss could be a reasonable approximation of the impact of a severe downturn.

Our geographic diversification and our strong specialized position in many markets has cushioned the impact of this spreading economic slowdown.

Despite the downturn, we believe we believe we have the liquidity and capital resources not only to weather the downturn but also to take advantage of any opportunities to enhance or build our leadership position.

With that, I'll now turn it over to Mary Jane Raymond, our Executive Vice President and CFO, to review the financial results of the quarter in detail.

Thanks, Jon.

Good morning.

As a reminder, we have posted some slides to accompany our remarks on our website, hudson.com.

I will periodically refer to them as we go through our comments today.

Jon just went over the economic conditions during the quarter and outlined the Company's position given this difficult environment.

The economic environment externally did affect our Q3 results, but I must say the actions of our local management teams on expense management helped a great deal to offset these effects.

To describe this to you a little bit numerically, North America, for example, more than offset its entire gross margin decline over $5 million in the quarter, to advance their adjusted EBITDA above prior year.

Year-to-date North America is delivering about $5 million a quarter in lesser costs compared to prior year on a restructuring charge of just under $2 million that was taken earlier in the year.

Similarly in the U.K., the U.K.

offset 75% of their year-to-date gross margin decline with cost reductions.

Given that their gross margin declined about 20% year-to-date that's a fairly big nut for them to have cracked.

For the third quarter they offset 85% of their gross margin decline.

The Asia Pacific territory has turned their sights to the same sorts of activities very quickly, especially with Singapore now in a recession, and a sharp downturn that we saw in Australia in the middle of the third quarter.

The focus of all of our leaders is to act in response to the conditions we are facing and our -- the world is facing in a way that protects the health of the business and the needs of our clients.

As Jon mentioned, we've been talking about these sort of softer conditions for about a year, and we know they don't go away very quickly.

Having said that, there are opportunities out there, and our clients do need talent to navigate through these challenging times.

The [keep hold] of our Company is to emerge from this period, this period of a declining economy, in a way that allows us to take advantage of the upturn.

To review with you a few of our specific numbers, the Company snapshot on our slides on the website is on slide 3.

For the total quarter, in the total Company in the third quarter revenue declined 10% with gross margin declining about 11%.

The overall gross margin percentage decreased to 42.3 from 43.1 last year.

The gross margin mix shifted slightly in the quarter with perm declining faster than temporary contracting.

Perm made-up 55% of our gross margin in the quarter compared to 58% in the second quarter, so just last quarter, and this mix for the Company is detailed on slide 8.

Looking at the results in constant currency, the revenue declined 11%, gross margin declined 13%, and the adjusted EBITDA declined 42%.

The adjusted EBITDA margin for the quarter was 2.2, down from 3.5 in the same period last year.

That said, the adjusted EBITDA margins by region in the quarter were 6.8 in Asia Pacific, 3.3 in Europe, and 2.4 in the Americas.

Corporate expenses at the adjusted EBITDA level were $6 million, down from $6.7 million a year ago, and down from $9.2 million last quarter.

It's fair to point out to you that given the results we saw in the third quarter, as well as the outlook for the rest of the year, we did lower the bonus accrual for Corporate during the third quarter.

Year-to-date our consolidated adjusted EBITDA margin was 2.7 at the end of Q3, down from 3.1 about a year ago.

The regional breakdown year-to-date of adjusted EBITDA is shown on slide 11, which shows again year-to-date Asia Pacific is 6.5, Europe at 5.8, and the Americas at 2.1.

Some of you have seen this chart from us before, and we're certainly happy to see North America in solid, positive territory.

From a currency perspective on a year-on-year basis, changes in the currency helped our reported results by about $3 million in the revenue and gross margin, with not very much affect at all on the adjusted EBITDA.

However, as many of you know, the most significant currency movement that we actually saw in our Company was during the third quarter.

When we set our guidance we were doing it at what was more or less the prevailing rates at the end of second quarter.

In fact, the results of currency during Q3 had a $7.2 million affect on our reported revenue and a $1.1 million affect on the adjusted EBITDA.

Since the end of the third quarter declining trends in currency, at least as they affect us on reported results, have continued with the dollar strengthening, and I'll address that currency impact and its affect on Q4 in a few minutes.

Let me point out a few things to you with respect to the regional results, and these are summarized on our slides 5 to 7.

Hudson Americas was down 12% in revenue and 22% in gross margin in the third quarter.

The legal practice group was up about 9%, but [IT&T], financial solutions, and perm were all down.

About 20% of the gross margin decline was from one client that took a large outsourcing project in-house last year.

We mentioned this last quarter, and that action for that client finished during the third quarter of last year.

Despite the softer top line results, the realignment of the cost structure has paid off.

For Hudson North America their adjusted EBITDA from a year ago, it increased to 1.6 here in the third quarter compared to 1.4 last year.

The U.K.

continued to deliver relatively stable results despite probably at least in our Company the most challenging conditions we're facing in the various geographies.

They did a very good job, as I've mentioned, managing their expenses to navigate themselves through that -- this current period.

The slowness in the banking sector, which we talked about last quarter, gave way to weaknesses across nearly all of our practices, particularly in London.

This coupled with still candidate reluctance to move contributed to a 23% decline in the revenue and a 31% decline in the gross margin.

This rate during the third quarter accelerated from the first half of the year where we saw about a 15% decline for the first half in the gross margin.

At the European level the U.K.

decline was partially offset by constant currency growth in Continental Europe, where revenue was up 12%, gross margin was up 7%, with that growth led by France and the Netherlands.

In Australia and New Zealand, their revenue was down 4%, while gross margin was down 6%.

In constant currency the respective numbers are revenue down 7% and gross margin down 8%.

The first wave of restructuring in this region during the quarter helped change the increasing expense trajectory we had been experiencing in prior quarters when the market was more buoyant.

Even though the adjusted EBITDA declined in the quarter for Australia, New Zealand, the adjusted EBITDA, for the whole of Asia Pac, the adjusted EBITDA remains very solid at 6.8%.

Asia, as Jon mentioned a little bit, showed some gross margin expansion in the quarter.

On a reported basis revenue was up 4 and gross margin was up 6, so the gross margin advanced against the revenue.

And the same in constant currency.

While the revenue was down in constant currency 3%, the gross margin was only down 1%.

We had top line growth in China and Japan.

Hong Kong was relatively flat, and Singapore, as Jon mentioned, was down slightly.

Turning to the few other financial details in the quarter.

The cash balance at the end of the quarter was $44 million.

Cash flow from operations was a use of cash of 1.4.

About $2.5 million of the decline in the cash balance is due to currency.

The cash flow for operations in some ways was roughly breakeven, down about a million dollars.

Because the largest driver of that, actually, was lesser net income.

The net income was about $300,000 negative for the quarter.

DSO was 55 days, one day higher than a year ago and unchanged from last quarter.

CapEx was $1.5 million.

Year-to-date it's $7.8 million, consistent with our more or less recent history.

And depreciation of [3.9] is also consistent with recent trends.

Our stock compensation in the quarter was $1 million, compared to $1.5 million last year.

The tax provision during the third quarter was $800,000 compared to 5.6 last year.

The Company's effective tax rate for the three months ended September 30th, 2008 was over 100% while the effective tax rate for the same period last year was 65.5.

Fundamentally, the increase in the Company's effective tax rate is primarily driven by decreased income, which reduces the pretax income and then an unfavorable mix of income in countries where we are paying taxes, while decreases in countries where we aren't.

While the income taxes certainly were reduced, as well, we did have as many companies do, period related [FIN 40A] charges and ongoing state and local taxes in states where we have taxable income.

As a result, the decrease in the income tax expense was not proportional to the increase, the decrease in the income (inaudible).

We've talked about in several quarters trying to forecast the tax rate for the full year.

I had mentioned last quarter that I was working to try and get it into the 50s.

Obviously, we've had a fair change in the economic wins of most of the regions where we are operating.

At this point, I do think that the tax rate for the full year will be in the 90s actually, for the same reasons I just mentioned as affecting Q3.

Our restructuring program incurred $2.9 million of expenses in the third quarter, mostly related to severance and other reorganization in Asia Pacific and Europe.

We expect annualized savings on that of about 4 to 5.

We've talked in the past about how in the non-U.S.

regions the yield on the restructuring charge tends to be a little bit less than what the U.S.

tends to yield.

Having said that, our leaders in those regions are doing a very good job making sure that they are making the types of actions that are both economically advantageous in the future and, again, the right things for the business.

Our Board recently raised the amount of our charge so that we can continue to take actions given the marketplace conditions that we are facing.

We now expect our charge of which we've spent $5.6 million year-to-date to be $8 million to $12 million for the total year.

Turning to guidance for the fourth quarter, we are expecting Q4 revenue of $205 million to $220 million, compared to as reported $289 million a year ago.

Our guidance of $205 million to $220 million is set at the exchange rates as of Monday, October 27th.

Before you slightly overreact to this, $205 million to $220 million, this number is greatly affected by the exchange rates.

If last year's number of $289 million were set at Monday's rates, set at October 27th rates, that number would be $237 million.

So we're setting guidance on a similar basis of currency that is about 7% to 15% below prior year.

With respect to EBITDA, we are expecting Q4 adjusted EBITDA of $2 million to $5 million, compared to $13 million in Q4 of 2007.

Here, as well, the adjusted EBITDA of $13 million a year ago would have been $9 million at the exchange rates prevailing on Monday, October 27th.

As I noted a moment ago, we expect $2 million to $6 million of restructuring charge in the quarter, though as our definition of EBITDA is constructed, these are excluded from the guidance.

With respect to share repurchase, and I'll just comment on that because sometimes you ask, we do have $9 million left on our authorized amount.

At the present moment, obviously, we spend a lot of time trying to balance our desire to buy-back the stock at certain times, as well as to preserve our cash balance.

I cannot tell you at the present time how much of the stock I think we would buy-back in Q4.

I can only tell you that I do expect that we will buy some of it back.

To give you a little flavor with respect to the regional operations for the fourth quarter, we expect challenging conditions more or less across the board in Q4.

Compared to our reported Q3 results, and then looking at Q4 expectations, the top line will be under pressure in all of the regions, with Americas down slightly, Europe probably more than it was in Q3, and Asia Pac probably facing the most pressure because of the currency movements.

We do have, as Jon said very well, pockets of strength in many of our regions that we expect to continue to work.

But, having said that, it -- overall, we expect the conditions o be relatively dampened.

In terms of adjusted EBITDA we expect stable results in Hudson Americas, some seasonal improvement in Europe, and a possible downside risk in Asia Pacific given the current market conditions.

With that, let me turn the call back to Jon for a few concluding remarks.

Thank you very much, Mary Jane.

And in a moment we will open the line to questions and answers.

First, before we do that, first of all, let me answer a question that many of you have asked in prior calls.

And that is what is the status of our search for a North American Chief Executive?

I am pleased to announce that we have reached an agreement with an individual to take on the role as North American CEO.

It is subject to final contractual details, but we expect to make an announcement by the end of next week.

With that, Operator, I will now open for questions and answers.

(OPERATOR INSTRUCTIONS.) There are no questions at this time.

One moment, sir, we do now have questions.

Your first question comes from the line of Jeff Silber.

Hi, Jeff.

Yes, I'm sorry, is the line open?

Yes.

Okay, great.

Glad I was able to get in.

Had a question about some of the restructuring you've done and plan to continue to do.

Are we at the point or are we getting near the point where you might be cutting muscle as opposed to what I'll call excess, I guess?

Has that -- is that something that you're looking at?

I always struggle with those comments because I never met anybody who thought that they were part of the fat.

I think the way I look at it, Jeff, is that there are many things that probably are nice to have that are in a normalized environment you could conclude that you need to have.

And as we enter into a potentially very severe environment we will continue to take a very hard look at where the line is between nice to have and must absolutely have.

So we think we still have flexibility in terms of our expense base, both in terms of -- not just in terms of severance and -- but also in terms of just deferring things that we would otherwise do, and things that all companies think about in terms of marketing activities or other things that in a severe downturn it really forces to cut back on.

Okay.

In the prepared comments, actually I'm looking just at the press release, it talks a little bit about your balance sheet and liquidity remaining strong, and I know you've got that $75 million credit facility.

Have any of your banks approached you given what's been going on in the past couple months in terms of any changes to that, at all?

No.

I'll let Mary Jane maybe comment on our relationship with the banks, just to maybe give a little more color on where we see that situation.

Great.

I would -- they have not approached us, per se.

Since I have been here our relationship with our bank has been very open, very transparent, and very active.

There's been an awful lot of things over time we've talked to them about.

For example, the action we took earlier in this year to introduce stock buyback, which previously wasn't allowed in our credit agreement.

As a result of that, we expect that we will continue to both manage our Company and manage our relationship with the bank to allow them to be clear how the market tends to affect companies like ours and to be sure that we have a credit facility we can rely on.

It ...

Go ahead?

...

no, I'm sorry.

If you could just remind me what the interest rate is on that credit facility?

It's approximately (inaudible).

Okay.

And just a quick numbers question, do you have guidance for CapEx for the current quarter?

Well, our CapEx so far we've spent about $7 million.

My sense is it'll probably be roughly the same as Q3, maybe up to about $2.5 million, something like that.

Okay.

And I would say, Jeff, that I suppose it goes without saying, but I'll say it, and that is that in an environment where we're anticipating a severe downturn we're looking very carefully at all CapEx and making, and like I think everybody is making judgments about what we have to do compared to what we'd like to do.

Sure.

That's okay.

One more question, and I'll have to let somebody else jump on.

In terms of the share buyback, when is the window open for you to start buying shares again?

Well, I think we'd, this is one of those things where we'd rather not comment too much, but the general rules are three days after announcement of the press release, and it goes up to the end of the second month of a quarter, that's the general window.

Okay.

Great.

All right.

I'll let somebody else jump on.

Thanks so much.

Thank you.

Your next question comes from the line of Tim McHugh.

Yes, I wanted to see if you could give us a little more color on the trends you saw in Asia Pacific and, specifically, Australia during the quarter?

You mentioned a meaningful slowdown in the middle of the quarter, and we can see the macro headlines, but I'm curious if you could add more color of what you're seeing in the field there?

Sure.

Australia has been a two-tier economy for some time, with the natural resources, a portion of the economy really roaring, fundamentally grounded in demand from China.

And then the economy in the urban areas, particularly New South Wales and Victoria, which has been growing much more slowly.

So if you look at -- if you divide up the headline, Australia and GDP over the last several years, you'd find faster growth rates in the resource dominated states and much slower growth rates in New South Wales and Victoria.

In the third quarter that's continued to slow in the, again in the urban areas, New South Wales and Victoria, and the new factor is lower demand in the resource dominated states, which is filtering back into the economy overall.

So that's been the challenge that we've been facing in Australia.

We've got a couple of other points in our business that have been a little bit weaker.

Our talent management business, which is a very strong business, has actually struggled in the outplacement area.

And you'd think in a declining economy you'd see an increase in outplacement, but we're in a declining economy that still has a skill shortage, in Australia and in many of the developed countries of the world.

So outplacement has actually been a bit of a struggle, and we've also had a little more of a challenging environment in public sector employment in Australia.

As you know, there's a governmental change which is now a bit, gone on a bit, you know, it's probably a year-and-a-half ago.

And our public sector business has simply not been as strong as it has historically been.

So I would say and just taking those factors, the biggest factor by far is the economic environment, and kind of a secondary factor would be our talent management business and our public sector business.

Okay.

And then on the restructuring charge, can you comment on if this is primarily looking at individual expenses, you said marketing and some perhaps discretionary stuff?

Or will you reconsider any of the lines of business that you're in, perhaps exiting some of the smaller ones?

Well, I'll let Mary Jane talk about the number, specifically, because she knows it far better than I do.

But we really, when we think about expense reduction we think about it really probably in two categories.

One is not in restructuring, just generally in SG&A, in actions that do not qualify for restructuring.

And in those actions we're doing things that are, things that many companies do in terms of reducing marketing.

We don't reduce sales activity, of course, but in a climate where people are buying less, it doesn't make sense to continue marketing at the same rate.

And other kinds of discretionary things, whether it's employee meetings, or travel, or other things that we either stop doing or defer.

So there's a whole category of those kinds of things that simply are reflected in SG&A.

In the restructuring charge, itself, I'd just ask Mary Jane to comment about what is -- what are the actions that drove that number in the third quarter?

With respect to the third quarter, the largest portion of it was severance.

I would say that the way to think about this vis--vis the comments that Jon made is we've worked very hard in this Company to move our business to being focused on specialized professionals.

We have made very good strides in a lot of those practices in many countries around the world.

But obviously from time to time, particularly in a growing economy, we'll make investments in new practices to see if they work.

Some of them do, some of them don't.

Those are some of the actions we took on which ones are really performing and, frankly, which ones will be in demand in the current sort of economic climate.

And so we will sometimes -- or the charge did include the cessation of some business development efforts.

But generally speaking when we just look at the level of business that's out there and who do we need to run it, and what sort of services are both in demand and should we provide, we're really just continuing to focus on what do we really need to do right now so that we can continue to have the right amount of investment in the core practices, the specialized professionals, without doing things that go into the category, as Jon said, of nice to have.

To the best of my knowledge, we have not cut whole activities, practices, countries, et cetera in this year, and I think we have a fair amount of room to go we think in terms of flexibility on the cost base without necessarily doing that.

Yes, I think one of the things that we're being careful about as we think about our business is where we want to be when the recovery arrives, so like every good manager I think what we try to do is we look at the very short term which looks and we have to take into account the probability, it's not 100% probability but it's a probability of a severe downturn.

And on the other hand we also have to look ahead to make sure that we're positioned to take advantage of the upturn.

And as we look at the world we see opportunities that we believe will be enhanced in the recovery.

I mentioned the growth in Asia, as an example, and obviously our opening in Dubai is another example of where we want to be positioned to benefit.

We don't want to take the pain of the downturn and not get the benefit when the upturn comes around.

Okay.

And that's helpful.

And then, lastly, I want to ask about the legal segment or practice in the U.S.

It is still growing, I would be curious if you could add any more color there about what you would expect in the current environment, whether an increase in litigation activity could help that business continue to grow, or if you see that slowing at the other practices also?

Well, you're absolutely right, the legal grew, and the North American legal grew in the third quarter.

It is I think as we look out across the downturn we see this business as not particularly sensitive to the economic climate.

American, America has a litigious society and a lot of the litigation that we deal with is kind of long-term litigation affecting industry issues.

So I think over the course of the downturn we see the opportunity to continue to build the business.

This is a lumpy business, and we have -- we haven't had a quarter this year but we certainly have quarters where our business goes down because litigation settles, God forbid, somebody settles litigation, and we lose contractors, and we may not have another major piece of litigation right around the corner to replace it.

So we always lag for investors.

It's a lumpy business.

We've, this year we've been the beneficiary of a little bit of a spike up in the first quarter due to a particular piece of business.

That finished up I think in the second quarter and in the beginning of the second quarter, and that's the way this business is.

But we think over the course of the downturn this will be a good business to be in and we have a good management team in place to compete very effectively in that.

Okay.

Thank you.

Your next question comes from the line of Ty Govatos.

How are you?

Hi, Ty.

Hi, Ty.

A couple -- one technical question, what was the after-tax severance?

Let me just give that a little thought for you, and ask your second question and I'll ...

Is it fair to assume that most of the severance from here on will be offshore or aimed at offshore?

We'd rather not talk about severance, particularly because our employees listen to the call.

I think we -- what we try to do, first of all, is we look carefully at performance, and in this kind of environment it goes back to the nice to have, must have kind of paradigm.

The major thing we do is accelerate performance reviews and in a normal environment we might go a number of months with somebody, especially somebody we think is making progress.

And in this kind of environment we might move more quickly.

So I think, you know, I will say it's a fair comment that we did a very major restructuring effort in North America earlier in the year, and we don't anticipate a major restructuring effort.

We've also seen I think in Mary Jane's prepared remarks here we talked about that we made a pretty significant restructuring effort in this quarter, in the third quarter in Asia Pac.

So we think we are in pretty good shape in the number of the areas that we've moved in, but like anything else as things unfold, we always go back and rethink everything we do.

Fair.

And I think I might have missed it in the presentation, did you give the revenue trends domestically for legal IT and finance for the third quarter?

I don't think we mentioned that in the presentation, and let me check to see if we have.

What we talked about, Ty, was that legal for the third quarter was up 9% with all of the others declining, IT, financial, and perm, resulting in North America being about 12% down in revenue.

You wouldn't like to add what the IT and finance are doing separately?

I heard an intake of breath there.

No, no.

I'm sending out smoke signals across the table.

I think it's going to be in our 10-Q which we'll be filing, and in the next day or two.

Oh, that's fine then, that's fine.

And other than -- rather than pick it out of the air right now, we'll refer you to the 10-Q, but we'll give you lots more detail in there.

Okay.

I like to make sure that that's a best selling item.

Ty, with respect to your question about the after-tax restructuring, it's about $2 million.

Okay.

Thanks an awful lot.

I appreciate it.

Your next question comes from the line of Mark Marcon.

Good morning.

Hi, Mark.

Just wondering if you could talk a little bit about the specific -- I know, not getting too granular, but just from a geographically, geographic perspective where the new initiatives are going to be?

And if you could just for the benefit of everybody on the call, some people are obviously more familiar with the story than others, but just the restructuring charges that you've taken to date and the savings that have occurred to date by geography?

And then what's expected on a go-forward basis, so that we can at least think about the expense base to a greater extent?

If that's possible?

Yes, yes.

We'll do a little bit of math and be able to answer the question on the math part first.

I think maybe I can take the -- some of the initiatives.

Obviously, in 2008, early 2008 as we previously announced we did a major initiative in North America to reduce our cost base.

And I think we have -- I think the math on that is that we've reduced our expense base by -- how much?

In North America year-to-date the expense base has been reduced over $10 million.

Yes, and our -- and YTD?

Year-to-date on a charge of just under $2 million.

Yes, and our run rate ...

On a charge of what?

Just under $2 million.

Okay.

Yes, and our run rate is a little bit better than that, so because obviously as we went through the year, the early quarters of the year, we didn't have as much expense reduction as the later quarters of the year.

So that's a pretty major initiative, and I think as we look at Asia Pac, maybe, Mary Jane?

But with respect to the restructuring charge, the restructuring charge year-to-date is about 5.6.

The total reduction in expenses is roughly about 14 to 15.

In the beginning of the year, as you may remember, the charge, some of the actions went into effect during the first quarter, which means that in the first quarter proper we had some affect, absolutely, but not at the level that we are seeing it, for example, in the third.

My expectation on the charge that we have is that we should see about a two times yield on that, so roughly on $8 million to $12 million we should be seeing at a minimum 16, which I think largely was actually already captured, and as high as something like 24, 25 on an annualized run rate basis.

Okay.

Was that your question with respect to the charge?

Let's just start there.

Yes, I just wanted to -- and then with Europe, anything?

Okay.

So, obviously, as we've all seen and you guys know, the yield on a restructuring charge is considerably greater in the U.S.

With respect to Europe their charge at the present moment is in round numbers about $1.6 million, so roughly under $2 million.

And their cost savings have been fairly considerable, at a rate of about 5 to 8 on that.

They are only just starting to begin to think about kind of how they'll see the economy in Continental Europe, so I can't give you a good number on that.

Generally our goal would be to try and have at least a 1.5 yield in Continental Europe, if not 2.

Okay.

So just to summarize and make sure I got this right, so in North America so far you've taken charges of $2 million with savings, expected savings of $10 million.

In Asia Pac you've taken charges of $5.6 million, with expected savings of $14 million to $15 million.

Some of that went into effect in Q1, but the greater impact is -- was certainly felt here in the third quarter.

In Europe you've taken charges of $2 million, with the savings expected to be in the $5 million to $8 million range, is that a correct reprisal of what's already taken place?

No, sorry.

I think that was my fault, Mark.

The total charge for the total Company is 5.6.

Okay.

The yield on the charge so far is 14.

If I break it down by region just roughly ...

Right.

...

$2 million in the U.S., the charge, with a yield of between 10 and 11.

Okay.

It's just under $2 million in Europe, of which they've achieved about 5.

Okay.

And in Australia -- excuse me, in the Asia Pacific region, which has just begun, we don't yet have such a number of quarters to show, but of the $2 million roughly taken so far, my expectation is they should have at least $5 million yield on that.

Okay.

All right.

And then going -- and now we're taking the charge up, so what still has to come will be in North America, any additional charges do you anticipate?

Or has that been right sized?

I think at this point we're not in a position to really itemize the charges by region.

What we would say is that the yield on the remaining charge would be lower, as Mary Jane said, and so what's remaining, Mary Jane?

So if the charge is roughly $6 million taken right now, our charge is sitting at $8 million to $12 million, so we have anywhere from $2 million to $6 million left to go.

Okay.

And my expectation is if we've had almost a three times yield all in, it'll probably not exceed $2 million all in on the additional charges.

Okay.

And when would you expect that to go into effect?

Well, just because we're, of course, seeing the economic conditions behaving rapidly we would like to expect -- we would to -- some of the actions that are important may have the possibility of going into Q1 to be completed, but we would hope to action the vast majority of what we're thinking to do before yearend.

Okay.

And then, Jon, is it your expectation -- I mean thank you very much for laying out the macro environment at the beginning.

Clearly, things are extremely difficult for everybody.

Is it -- and you mentioned, companies do go breakeven in the past or have gone breakeven in the past, is it your expectation that with the changes that you're making your hope is to in a tough environment still be breakeven?

Well, of course, my hope and my aspiration is to be profitable, and I think like anything, Mark, it's always a balance of you take actions kind of assuming the worst and hope it's better than that.

But I would certainly hope and expect that we'd be able to breakeven even in a severe downside scenario.

Okay.

So, and which it's -- it seems like every indication would suggest we're in?

It would, you know, certainly the world is filled with negativity at this point.

Okay.

Great.

And then in terms of cash and, you know, you do have -- you are going to get an earnout from Hudson Highland ...

From Highland Partners.

...

I mean from Highland Partners.

What's -- when you think about your cash balance and this balancing buyback versus, you know, just preserving some cash in this sort of environment, how do we -- how should we think about that?

Well, first of all, the cash that would be due from Highland Partners would come next year, so ...

Right.

...

just remember, Mark.

As I mentioned, not meaning to give you a non-answer, I think given that we have seen some further decrements in client buying patterns through the third quarter, it's tough for me at the present moment to think about or even target a certain number we would have in the share buyback.

I think as you can see in third quarter, let's just say we were rather restrained in the share buyback.

I really, I mean whatever number I gave you today would probably change by tomorrow.

All I can tell you is we do watch the stock price.

We have a share buyback program in our -- allowed in our credit facility for a reason, and I would expect that we would buy some stock but I don't think we would do it in a way that it would materially reduce the cash balance.

I think we would have a preference for keeping the cash.

Okay.

All right.

Great.

Thank you.

Your final question comes from the line of Greg Eisen.

Last but not least.

Thanks.

Good morning.

Regarding the buyback, I'm trying to understand the limiting factors on how much you'll buyback, specifically I guess the two questions would be how low are you comfortable with your Corporate cash being given the risk, the downside risk to this economy?

We don't know where the bottom is, or is it a function of really how much cash you have in your United States operation?

I mean you'd have to repatriate cash to the United States in order to execute the buyback in the first place -- is that the issue?

Well, I would say that probably the overriding issue is simply a function of cash flow and cash requirements versus the opportunity to buyback stock, and it's -- as we've tried to say, we don't have an easy answer, it's a balance.

One of the factors that we look at is our cash flow, and our cash flow is seasonal, so in the first quarter of the year we will have cash requirement, a cash use.

So as we think about buybacks that has an impact on us, as well.

And that's really the main driver.

I see.

So it's -- there's swings to your cash levels based upon the quarterly cash flow seasonality?

That's right.

And you need to allow for the dips in your cash flow?

Exactly.

With a safety margin and then some.

Right, right, and we're going into a very uncertain environment.

In today's world, I mean somebody asked us, just look at the questions we've had on this call -- somebody asked us basically are your banks still going to be funding you?

And they don't mean it, the crazy world we're in is they don't mean it about us, they mean it about the banks.

Yes.

So our bank is Wells Fargo Foothills, so we're -- we think we're in pretty good shape.

Good move.

Yes.

So it's a crazy world we live in, and we just, as I said before, about all we can say is we try to balance it, we try to create a cushion, and I think everybody today is being in a world where today's New York Times has an article about $62 billion that's stuck in a particular money market fund, everybody is being very cautious about everything.

I understand.

Regarding the Highland Partners' earnout that you said if you get it you're going to get it next year, can you bracket a range at which you could conceivably reasonably expect to receive?

Sure.

Just to maybe remind you of how the Highland Partners' earnout works, it would be -- it's payable in two traunches.

First part was paid in April.

The max that could have been received was 6, of which we received 3.4.

The max in total that can be received is 15, so as we go into what would be potentially receivable in April of 2009, having received 3.4, the amount we could receive then is 11.6, because the cap was 6, if it's not hit in the first year rolls to the second.

From -- so that's kind of how the math works on it.

So anywhere between zero and 11.6 is the ultimate range?

That's right, exactly.

Yes, okay.

I wouldn't begin to speculate on [Heidrick's] results, but that's the drill exactly.

Okay.

And obviously that's a next year event.

You said you received it in April, do you know when next year you would expect to come to a conclusion and then receive whatever you're owed?

It's the same time period, so we would know prior to the end of March what Heidrick thinks their earnings would be.

There's a protocol on that in that it's received sometime in the, just say roughly about the middle of April.

Okay.

So you would know by your first quarter '09 conference call, essentially, what you would report on it?

That's right, and I think if I recall correctly I think we did report that out in the conference call.

Good, good.

So, fortunately, the protocol matches for both of us, so we tell you what's happening.

Okay.

I see.

Is it -- and my last question is kind of a strange, open-ended question, but I'll throw it out at you anyway.

I guess, Jon, you've been in this business long enough to I guess have memories of prior employment downturns.

How -- theoretically in your mind how bad can the type of business you're in get, given unemployment backing up a few hundred basis points from where it bottomed?

Yes, it's ...

Is there a way of quantifying that for us as to what you saw in the industry from your perspective, in the types of businesses that you're in, or were you not in those specific business units in the previous recession?

No, actually I was in pretty much the same business in both the last two major recessions, and many others in between, and smaller geographies.

I would say the bottom line, I'll give you the answer, the conclusion first and then I'll give you a little -- a somewhat longer answer.

The -- I think as I said in my shareholder letter, a reasonable approximation is to say breakeven to zero in a severe recession is certainly a possibility.

The longer answer is that historically my thinking about this business has been that there is a divorce between Wall Street and Main Street, and it's not always -- things that happen in the stock markets do not always have an impact in kind of the so-called real economy.

The thing that's more disturbing about this particular downturn is that it is not just the stock market when -- and, first of all, the stock market has a much broader spread of pain in this -- in today's world than it did 20 years ago because of the proliferation of 401(k) accounts.

But there are two things that have really made this downturn different and makes it difficult to analyze is the impact of the financial crisis.

That's having a very direct impact on Main Street and because of the reluctance of banks to lend, it's having a very direct impact on housing, which is one of the most important factors in the wealth affect and how it affects consumer behavior.

So it makes -- I mean I think it makes this recession particularly difficult to analyze.

If you look back at the last -- if you include this as a recession, and you look at this period, 2001 and '90, you'd find three very different sets of environments.

'90 was kind of a classical recession, but we had a big run-up and then we had a big blow-off, and then things recovered and we gradually built-up again, and it was, you know, we were still a highly manufacturing oriented society then.

In the 2001 to '03 recession it was very much around the internet, that had a very significant impact on our industry, because it wiped out a number of our customers, just wiped them out.

So that had a major impact on us, even though if you look at the economic statistics it's not as deep as the '90 recession.

Then you come to this one and the driver here is sub prime mortgages.

I mean who would have ever thought sub prime mortgages would be a catalyst for unwinding a huge segment of the financial underpinnings of the global system?

So I think it's all -- that's the complex one, which is the long way of saying there are a lot of differences, and I'm not sure how they all factor in, but I -- when you distill it all down, I come back to my conclusion that I started with, a reasonable approximation is to say that a severe downturn with unemployment going up a couple percentage points, you know, so like from 6 to 8, negative GDP for a couple of quarters, that an approximation of breakeven is a rational way to look at how bad it could get.

Remember that the first quarter in this industry, not only for us but for everybody is a very weak quarter, and I would -- my expectation and theory, philosophy is that in a weak quarter in a weak environment it will be very weak.

I wouldn't be surprised to see losses all over the industry.

Okay.

But that's the weak quarter of the weak industry, you said?

Right, right.

At the weakest time in the economy?

That's right, exactly, exactly.

Okay.

I'll accept that.

Thank you very much.

Thank you, all.

Thank you.

And we've come to the close of our hour.

And I'll turn over to David for closing remarks.

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

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This concludes today's conference.

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