Hudson Global Inc (HSON) 2008 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome you to the Hudson Highland Group Q4 earnings conference call.

(OPERATOR INSTRUCTIONS)

Mr.

Kirby, you may begin your conference.

Thank you very much, Janice, and good morning, everyone.

Welcome to the Hudson Highland Group conference call for the fourth 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 law.

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 any 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 analyst expectations or estimates or to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

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

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

During the course of my remarks, I'm assuming that all of you have had a chance to read our press release and letter to shareholders that was issued earlier this morning.

As everyone recognizes, the world's developed economies contracted in the fourth quarter, as the financial and economic downturns spread outward from the US epicenter and this effected Hudson in all markets in which we compete.

The fourth quarter was also characterized by a high degree of uncertainty created by the instability in the global banking system.

The resulting volatility in the world securities markets spread into the real economy.

These forces have spawned a wave of layoff and restructurings by businesses in many of the major developed economies.

These forces also remain in place in Q1 and pose a major challenge for all of our service offerings, but particularly for permanent recruitment.

With approximately 48% of gross margin attributable to permanent recruitment, this is a major headwind for Hudson.

While all analysts are tempted to look to past recessions for guidance as to the future, there is no precedent in the past recessions for the bank capital problems, at least since the 1930s.

With the US having invested $350 billion in the banking system, with at least another $350 billion to come, a stimulus package of $700 billion by President Bush and now another stimulus package of nearly $800 billion from President Obama and similar action from almost every developed country, we are living through a period without precedent.

The current state of the world's economies cannot be compared to the great depression, but it is unique and devastating and spreading across most of the world.

Perhaps we should call this the great recession.

Looking at the economy is important to Hudson, economic conditions sharply contracted in the fourth quarter and are deteriorating further in the first quarter and forecasted to do so through at least 2009.

The speed of the economic downturn has posed a particular problem for Hudson, as well as many other companies, as it is difficult for us to quickly adjust our expense base.

The US, Europe, Japan and the smaller developed Asian nations all contracted in the fourth quarter in terms of GDP and further deterioration is forecasted in '09.

Employment generally lags the economy and a quarterly unemployment is forecasted to increase markedly in almost all of the major Hudson geographic markets in 2009 and into 2010.

In fact, the European commission forecasts unemployment to peak in 2010.

While not directly correlated to Hudson's business, the unemployment rate is a proxy for aggregate permanent hiring demand as an inverse correlation.

We believe our focused specialization will mitigate the impact of this lag effect, but it nevertheless poses a headwind for us.

Temporary contracting is also cyclical, although less so than permanent recruitment.

Classically, employers respond to a contracting economy by cutting nonessential projects and by renegotiating contracts.

In this cycle, all professional segments are likely to face increasing stress in 2009.

Obviously in this cycle, any contracting work involving financial institutions, automakers and mortgage companies has come under pressure.

I want to call your attention to some of the key financial data that Mary Jane will be discussing in more detail.

Consolidated gross margin declined 23% from the prior year in the fourth quarter in constant currency.

However, the decline accelerated through the quarter.

Perm was impacted more than contract by the economic downturn.

This is the classical recession phenomenon.

In the quarter, permanent revenue was down 33% year on year in constant currency.

Contracting revenue declined 9.6% year on year in constant currency.

North America accounted for most of the decline in gross margin in contracts.

In fact, it accounted for 83% of the total Company decline in contracting gross margin with a significant decline in North America legal through a combination of the settlement of a large case and the lack of new projects.

Although contracted demand was weak in all practices, we do not expect North American legal to remain weak all year.

Perm GM declined significantly in all markets, ranging from a decline of 21% in Continental Europe to 45% in North America.

As discussed below, there were pockets of strength in permanent recruiting in the fourth quarter, as is typical in a recession.

On a consolidated basis, expenses were managed aggressively by almost all areas of the Company.

Constant currency gross margin declined $29 million in Q4 compared to prior year with adjusted EBITDA declined $15 million or approximately 50%.

North America did a particularly good job on reducing expenses to offset the decline in gross margin.

As we look to the first quarter and beyond, I want to give you a few comments.

Mary Jane will be discussing our guidance in a moment in greater detail.

January revenues and gross margins are running behind prior year.

It's always difficult to compare January to December, but the rate of decline remains substantially unchanged in January compared to December.

Our management team in all regions is coping well with this unprecedented challenge posed by the economic forces sweeping the globe.

We've implemented a number of restructuring actions, which will bring expenses into better alignment with our smaller revenue base.

The benefit of many of these actions will come later in 2009.

We are focused on maintaining liquidity through these turbulent times.

Our cash position at year-end was substantially unchanged compared to Q3 despite an EBITDA loss.

We are very focused on internal cash management.

While it's difficult to perceive positives in a market that is sharply decelerating, our focus on specialization is continuing to pay dividends.

Of course overall demand is reduced, but there are still some pockets of demand from many clients for essential positions and projects.

We've continued to post wins in sectors such as life sciences, consumer goods, energy, public sector and even the odd financial institution.

With that, I'll turn it over to Mary Jane to discuss the financial results in more detail.

Thanks, Jon.

Good morning.

We've posted on our website, Hudson.com, some slides that further analyze our quarter and the full year and also provide some important reconciliations.

I will refer to them from time to time in the next few minutes.

Jon discussed the economic conditions present during the quarter and outlined the Company's position and strategy given this challenging environment.

While these conditions clearly impacted our fourth quarter results and, in some places dramatically, our local leaders were able to take action through our restructuring initiative and other cost containment actions to offset these effects.

In the fourth quarter, North America showed great resilience, offsetting 75% of its $7 million year on year gross margin decline.

This included, as Jon said, not only declines in permanent placement, but also some in legal contracting as well because a major project ended.

Similarly in Europe, they offset about 65% of their gross margin decline, achieving $4 million adjusted EBITDA or 4.8%, which is an accomplishment given the worsening conditions they saw during the fourth quarter.

Asia-Pacific also made progress on cost reductions and restructuring, offsetting about half of their gross margin decline in this quarter as conditions weakened significantly from the third quarter.

Without making any economic predictions, we expect conditions to remain difficult through at least the first half of '09, if not the whole year.

As most of you recognize, the Perm portion of our gross margin is the most exposed in an economic downturn.

All of our leaders are focused on ensuring that they and their organizations respond to conditions in a way that protects the health of our business and the needs of our clients.

Our key goal is to emerge from this period when the upturn comes prepared to take advantage of those better conditions.

Turning to a few numbers.

The fourth quarter snapshot is on slide three.

For the total Company in the fourth quarter, revenue declined 28% and gross margin dollars declined 33%.

Overall, the gross margin percentage increased -- sorry, decreased to 41.7% from 44.8%.

This is due to Perm declining faster than temp.

Many of the markets that had rapid declines in the fourth quarter had more of a Perm concentration.

Perm declined at three times the rate of temp during the fourth quarter, after declining at two times the rate of temp in the third quarter.

Perm made up 48% of our gross margin in the quarter, down from 55% during the third quarter.

We detailed for you the gross margin mix on slide seven.

Our geographic mix is shown on slide eight.

In the fourth quarter, over 80% of our gross margin continued to come from our international operations.

The adjusted gross margin -- the adjusted EBITDA margin for the quarter was minus 1.6%, down from 4.3% in the prior year period.

Adjusted EBITDA margins by region in the quarter were 4.8% for Europe, 0.4% for Asia-Pacific, and negative 1% in the Americas.

Corporate expense at the adjusted EBITDA level was $7.1 million, up slightly from $7 million a year ago, as lower compensation and lower travel expenses were offset by higher professional fees.

For the full year 2008, our consolidated adjusted EBITDA margin was 1.9%, down from 3.4% a year ago.

The regional breakdown of the adjusted EBITDA margin is shown on slide ten with Asia-Pac at 5.4%, Europe at 5.6%, and the Americas at 1.5%.

With respect to constant currency, let me comment on that generally.

Despite the fact that we saw sharp reversals in our non-US dollar currencies, particularly during the fourth quarter against second and third quarter, the full year impacts are actually not very dramatic on a percentage basis.

For the fourth quarter, though, the currency impact was significant in reducing the reported results.

The revenue decline was 16% in constant currency versus 28% as reported.

The gross margin decline was 23% in constant currency versus 33% as reported.

However, at these dollar levels, the change in the adjusted EBITDA between reported and constant currency is less than $1 million.

Speaking for a minute about the regional results, they are detailed for you on slides four through six.

Hudson America's was down 23% in revenue and 33% in gross margin in the fourth quarter.

All the practice groups and Perm were down, particularly IT and legal when compared to prior year.

While the legal business has maintained a steady flow of business, in this quarter, in the fourth quarter, they didn't benefit from any new clients or clients who were actually accelerating their projects.

We had some large cases settle, as Jon mentioned, in the fourth quarter and our sense was that there was some reluctance on the part of clients to start new projects just before the holidays.

The adjusted EBITDA for North America for the quarter was $0.5 million versus $1.2 million for Q4 '07.

For the year, though, North America returned to profitability at $4 million adjusted EBITDA after being just below breakeven last year.

This was due to cost-cutting and a very well executed restructuring program that offset $4 million more than the total gross margin decline or against a $12.5 million gross margin decline they offset $16 million of that through their cost reduction actions.

As I said, legal had a pretty tough end of the year.

Having said that, while we are seeing caution among clients, we do expect to see legal rebound in '09 and at the present moment, see a fairly robust level of pipeline activity.

Hudson Europe in constant currency for the fourth quarter was down 11% in revenue, 16% in gross margin, and 57% in adjusted EBITDA.

While the majority of these declines were from the UK, we saw conditions deteriorate in Continental Europe for the first time all year and we do expect that deterioration to continue into 2009.

The UK declines were about the same in the fourth quarter as they were in the third, roughly 27% down in the fourth quarter versus 31% in the third, though this was their fifth quarter of decline.

We saw weakness in the UK in every region and in every practice.

Candidate reluctance to move is persistent.

We've talked about that in prior quarters, particularly for longer-serving experienced people who are at the core of our offering because they weigh the value of a severance package against a possibly uncertain new role.

With forecasts of GDP decline in the UK and the economy itself there so dependent on financial services, we do expect that this market will remain challenging for sometime.

Continental Europe declined for the first time all year in the fourth quarter, as I mentioned.

They had a 2% and 7% constant currency decline in revenue and gross margin respectively, with a 21% decline in Perm.

Contract actually grew 20% in revenue, but the temp margin was down from 35 a year ago to 31 this quarter due both to the mix of business, as well as the mix of self-employed persons versus on-payroll employees.

Still, the leadership of Continental Europe responded very well in this quarter, offsetting more than half of their gross margin decline.

We expect greater deceleration in 2009 consistent with the economic forecast and that means we're facing exposure in our Perm recruiting.

However, this region's leadership has the most experience in downturns and they are committed to bringing this business through this rocky time.

In the Asia-Pacific region, the declines in Q3 more than doubled in the fourth quarter as recessionary conditions hit all countries in this market rapidly.

Asia-Pacific revenue and gross margin declined 16% and 26% respectively in constant currency, after about 7% each in the third quarter.

Australia/New Zealand's revenue was down 14% while gross margin was down 23% in constant currency.

Just over half the gross margin decline was offset with cost management actions.

Even though the adjusted EBITDA declines -- declined significantly in the quarter, adjusted EBITDA margins were 2.6%.

ANZ's cost restructuring is broad with many long-term benefits and it's just beginning to show results now.

Asia, consisting of China, Japan, Singapore and Hong Kong, experienced the most dramatic fourth quarter changes of any of the regions in our Company.

After about a 1% gross margin decline in the third quarter, Asia's revenue and gross margins declined 36% and 37% respectively in the fourth quarter in constant currency.

In seeing this coming, the management took actions in a prudent way to offset the coming conditions.

But given the speed with which they saw these conditions hit them, they were not able to materially offset the gross margin decline.

This is a small region entirely focused on Perm.

We expect further declines in this region in 2009.

Management has taken actions in response to the conditions and they will continue to do so.

They are very focused in preserving the very, very strong markets we have historically had in Asia.

Having said that, with the concentration in Perm, we believe this will be our greatest challenge in 2009.

As for the full year, I have a couple of comments, since I know what you want to know is mostly about our trends.

Our financial data is on slide 17 through 26 for the full year.

For the year, we had an 8% revenue decrease with a gross margin decrease of 8% as well.

Our adjusted EBITDA was down 50% on a reported basis and 54% in constant currency.

We offset approximately half of our gross margin decline through a restructuring and other cost management initiatives.

A significant percentage, given that 75% of the decline for the year was actually in Perm and happened pretty quickly at the end of the year.

As I turn to comment on a few other financial details for you, we summarize the balance sheet and cash flow on slides 11 and 12.

The cash flow from operations was $12 million.

Net cash was $43.9 million, an increase of about 10% over prior year.

The increase in our cash balance for the quarter was the result of ongoing efforts to increase cash collections and reduce spending.

This occurred in spite of the fact that DSO was up to 53 days, up from 49 days last year.

However, this was primarily due to one large client who paid in the beginning of January.

Capital expenditures were $10.6 million for 2008 compared to $13 million for 2007.

Stock comp in the quarter was $800,000 compared to $1.2 million a year ago.

For the full year 2008, stock comp was $4.7 million compared to $5.5 million in 2007.

Our full year tax provision was $8.6 million compared to $16.9 million.

This provision is on a pre-tax loss for 2008 of about $2 million, excluding the impairment charge, against a pretax income for 2007 of about $21 million.

The increase in the Company's effective tax rate in this quarter is primarily due to the decreased income and some state and local taxes that are still due.

We had some increases in valuation reserves based on our judgment that in some countries we may not be able to use tax losses in the foreseeable future.

Just to make a few comments for you about liquidity as a general matter.

We announced on December 30th that we had revised our credit facility agreement.

We no longer have an EBITDA covenant.

Instead, we have a $25 million availability covenant and our borrowings are based, as they always have been, on the level of accounts receivable in our business.

We have some near restrictions in the facility, including, for example, the inability to buyback stock after February 28th of this year.

The net cash of $43.9 million at the end of 2008 was also with excess availability under the facility of $19 million.

Today, our net cash is a few million below year-end, even though we had an EBITDA loss in January, which is typical for January for us.

January's revenue level is also the smallest in the entire year, so that has had some effect on the availability, but the availability tends to come back as the quarter progresses.

In our restructuring program, we incurred $6.3 million of expenses in Q4 for the program, as we executed initiatives in each region.

For the full year 2008, planned expenses were $11.9 million and we now expect that we will have an additional $5 million in charges in the first quarter to tackle rapidly the deteriorating conditions that we saw during the fourth quarter continuing into the first quarter.

Our board recently agreed to this so that we could tackle the conditions and I think in response to the fact that for our actions taken in 2008, the total savings that we expect to achieve on the restructuring program, as well as other actions that we have taken for just general cost containment, we believe the total annualized cost savings will be about $40 million on a constant currency basis.

You've already read with respect to guidance that we are not giving guidance for the first quarter of 2009.

These times are pretty turbulent, as everybody's telling you, and we like others have little visibility.

We expect operating conditions to remain weak through the first quarter.

So with a loss in Q4, we expect a loss in Q1.

As to the size of that loss, we expect roughly a similar pattern of decline from Q4 '08 to Q1 '09, as we have seen in prior years, in dollar terms.

For context, Q1 '08 revenue was $295.5 million and adjusted EBITDA was $6.3 million.

Currency exchange rates will drive a significant change in Q1 compared to -- in Q1 '09 compared to Q1 '08.

Last year's first quarter at today's current exchange rates would have resulted in revenue at $242.3 million instead of $295.5 million and an adjusted EBITDA of $3.7 million instead of $6.3 million.

Looking forward to Q2, we believe as a Company that we have a fighting chance to have breakeven EBITDA in that quarter.

We are committed to fighting for the profitability of our Company pursuant to the strides we've made since the inception of the Company even in this challenging environment.

As I noted a moment ago, we expect to have $5 million of restructuring charge in the quarter.

We, of course, exclude this and any other restructuring charges or other impairment costs from our adjusted EBITDA.

In the past, I've tried to give you a flavor of guidance as you might see it in the regions.

We don't give guidance by regions, but just some general terms of trends.

What we usually talk about is do we expect the pattern in each region to follow the pattern of the prior year.

That is very difficult to tell you right now.

Just to recap a few points we've made about the regions.

In North America, legal was pretty lumpy at year-end, but right now their pipeline is fairly active.

We still expect to see client caution on large expenditures, but generally we expect some of the work in the pipeline to be awarded.

In the UK, with a 2.8 GDP decline forecasted, we don't expect to see activity pick up in this market in the near-term, notwithstanding we are going after the business that is out there, as Jon mentioned.

In Continental Europe we are only just seeing weaker conditions materialize, so generally we expect to see the downward pressures increase.

For Asia-Pacific, we are also just seeing the start of negative pressures.

They are working very, very hard on their cost structure, as I've mentioned.

But with the large percentage of Perm that they have, this will be a challenging region for us to manage.

Having said that, despite the overall conditions, we stay very focused on the active markets, on our clients who are hiring, on staying close to our clients, and continuing to manage our costs well as we get through this difficult period.

With that, let me turn the line back to Jon.

Thank you very much, Mary Jane.

And, operator, I think we're ready for questions and answers.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Joe Alkire.

Hi.

My first question is with regard to your legal practice in the US.

Somewhat weaker than we expected.

I understand this practice can be lumpy and you made a few comments in your prepared remarks, but any additional color about this practice, this performance during the quarter, your outlook for '09 and your pipeline would be helpful.

Sure.

Let me start on that.

In the quarter, as I mentioned in my prepared remarks, we had a large client settle a case and of course that had negative impact on their need for our services.

That's typical of the business.

It's part and parcel of the business and that's what we always say, makes it for a lumpy business because we have some very, very large projects that can involve, for example, 100, 200, 300 legal contractors at a time.

And when those cases settle, for whatever reason, or come to an end sometime, simply from our part of the work that's involved in the case, it's difficult in that same quarter to have a similarly large project.

So that's why we always say it's a lumpy business.

One settles and you don't always get the nice big one to come along.

And first of all, that was a major issue in the fourth quarter.

We had one settle and we didn't have a big one come along.

Second thing was, it was a quiet quarter in terms of pipeline.

Again, people sometimes forget to think of what were the things going on in the external world in the fourth quarter, dramatic fall in the stock market, presidential election, lot of uncertainty about the future, and even, even clients in the legal area, we felt were cautious about spending.

We felt the caution and so that had impact on the quarter.

The pipeline activity during the month of December was very low.

During the month of January, we've seen an increase in pipeline activity and a modest number of new starts of contractors.

As we look out to the end of the first quarter, which we're almost halfway through the quarter, we think we will start up some new projects and put on additional contractors.

That's unlikely to have a material impact on the quarter because, again, we're already halfway through the quarter and even starting up in a week would, would not have a big impact because we would only have four or five weeks of billing.

So as we look out to the year as a whole, we remain relatively optimistic.

We think there -- historically we've said we don't see a particularly recessionary aspect to our legal business.

I would say we've learned, like everybody else in the industry, there is some sort of recessionary -- recessions do have an impact on our business, but nevertheless, we think the legal business will grow in North American legal in 2009 for the year as a whole.

Okay.

Moving to the restructuring charges in the first quarter here, what types of things are you doing, closing offices, exiting practice areas, any color you can provide there would be helpful.

You're breaking up a little bit, but if your major question is what types of things are we doing?

Yes.

They are primarily focused on three main things.

One is an activity that we have undertaken through 2008 and that is continuingly looking at the support functions required for our business at its current size.

On the one hand, in the beginning of 2008, we made some very, very good strides with just streamlining the functions pursuant to the Company being more mature than it was, say, five years ago.

However, as the business shrinks a little bit, we have the opportunity to rightsize the support functions to match that.

That's the first thing.

The second thing is that many of our markets have management structures that are geared to the business also being larger.

So there's a leader of the, say, a state in Australia or some other place, a practice leader, and that person might have several other managers before you actually get to the revenue generating consultants.

There is less of a need for management structures like that when your business is smaller.

So we are also looking at that and working cooperatively with the leadership of the business on what is the management that we need at the present time.

The other area is, as always, we continue to look at space consolidation.

That is also pretty lumpy.

It's not easy to move or consolidate space.

But having said that, we have done a good job as a Company when leases expire, for example, deciding whether we need to renew them or looking at how we might reduce the general cost of that space.

That is the third major area that we're looking at.

So those are probably, in a nutshell, the three sort of types of actions that we will have.

Was there another part to your question?

No, that was it for that one.

And then lastly, can you remind me what the earnout payment will be from Heidrick & Struggles and when that will occur?

Sure.

The maximum earnout payment that we could receive is about $11.5 million.

That is dependent on how the consultants do during the last financial year 2008.

We will have that paid after their 10-K files, which is around about the -- 30 days after that, around about the 15th of April.

At this point, we don't mean at all to speculate on what Heidrick & Struggles results will be.

While the maximum we can receive is $11.5 million, I have no opinion yet on what it will actually be.

Okay, thank you.

Sure.

Your next question comes from the line of Jeff Silber.

Thanks.

It's Jeff Silber with BMO.

Hi, Jeff.

How are you?

Just to help us model, and I know you're not giving specific guidance, but in terms of looking and drilling down into your Europe region and your Asia-Pacific region, can you segment that Europe, specifically UK, versus Continental Europe and Asia-Pacific, Asia versus Australia/New Zealand, what's kind of the mix of business there?

You mean in terms of temp and perm, for example?

Are you asking -- .

Temp and perm would be one and then even just geographically between those two subregions within each of those regions.

I don't need specific country data.

Oh, I'm with you.

With respect to -- let's just take fourth quarter.

Oh, sorry, David kindly points us to page 14 of the slides.

If you look at that, you will see Continental Europe on a gross margin basis is roughly about 61% of -- Continental Europe's about 61% of the gross margin of Europe and the UK's about 39%.

In the Asia-Pacific region, Asia proper, the four countries of Asia, is about 26% of the gross margin and Australia/New Zealand is 74%.

Okay, I'm sorry I missed that, David, thanks for pointing that out.

How about in terms of temp versus perm in the two regions?

With respect to temp versus perm, generally speaking, if we start with Europe, in the UK, it's about 60% temp and about -- at the gross margin and about 30% perm with about 10% in talent management.

In Continental Europe, it's about 50% temp and 50% perm.

With respect to Australia/New Zealand, it's about 60% temp and 30% perm.

And in Asia proper, the four countries of Asia, it's all perm.

Great.

If I could get the same mix for the Americas as well, temp versus perm?

With respect to the Americas market, it's in the range of about 80/20.

80 being temp?

80 being temp, sorry.

Right, exactly.

No problem.

Okay, great.

That's very helpful.

Moving back to the restructuring charges, you gave us some color on what you expect the annualized savings to be.

When do you think that will kick in?

And again, by region, where should we see the biggest benefit?

Well, I mean first of all, I think if we think about the year as a whole, we've seen about $21 million of that reported already and about $28 million with constant currency.

In -- if I were to tell you kind of the pattern we've experienced through this year, I would expect to see some pickup along the order of sort of fourth quarter in Q1 for North America.

North America started their restructuring program the earliest of all.

They started it March and had some benefits last Q1, but the benefits really picked up in second through fourth quarter.

So they will have some non-achieved benefit in Q1.

With respect to the UK, the UK has also had a very robust program since the second quarter of '08, so we expect to see some pickup from them for first quarter.

With respect to Continental Europe and Asia and to some extent Australia/New Zealand, most of their benefits have been achieved during -- some a little bit in the third quarter, but mostly during the fourth quarter.

So I think most of the difference on a constant currency basis, say 28 to 40, we should see achieved outside the United States with some benefits in the UK and the US being in first quarter.

Okay, great.

And in terms of corporate costs on a normalized basis going forward, what should we be looking for there?

Sure.

We mentioned early in the year that for the whole of the year we had about -- we had some expenses and professional fees associated with some advising we had on our overall restructuring program and we also had one legal settlement that each of those were about $1.5 million.

So my sense is that our goal is to really get corporate down between $5 million and $6 million a quarter.

All right, great.

Just a couple more numbers-related questions and I'll let somebody else jump in.

In terms of the charge you expect to take in the first quarter, is there any tax impact of that or is that, at least from a book perspective, or is that not tax deductible for book purposes?

Well, generally, I mean it has to do largely with severance costs, which should be largely tax deductible, but I probably can't give you a real precise answer on that.

Some of those costs will be in North America, where it won't make a whole lot of difference.

Let me ask the question another way.

The charge you took in the fourth quarter, what was the tax impact of that?

I'm not sure I can answer that off the top of my head.

Let me see if we can get that for you by the end of the call.

Okay, no problem.

And then one more, I'll jump off.

What was the mid-operating loss balance at the end of the year?

It was about $200 million.

And is most of that in the US?

Yes.

Okay, great.

I'll let somebody else jump on.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mark Marcon.

Good morning.

I was wondering if you could go by region and just mention what the constant currency revenue trends were in December and January.

You mentioned that things were sliding as Q4 progressed, but I didn't get the actual numbers in terms of the CC rates.

So you're asking, Mark, what the constant currency was by region in the month of December?

Yes, December and January, just to get a better feel for how things may end up looking for all of Q1.

Well, if you just go across on the gross margin, for the total Company in October it was down 12%.

In November it was down 19%.

And in December it was down 32%.

By--

And then did that minus 32% hold steady in January?

Generally it did.

Okay.

And is that on a CC basis?

Yes.

Do you happen to have that information broken out by region?

So let me -- why don't you move on to your next question and let me just see.

Okay.

In terms of the -- in terms of just going back to the savings from the restructuring, how much of the benefit from the Q4 restructuring did you end up seeing during Q4?

Well, given that -- let's say in terms of numbers, I'll -- let me think about that a little bit.

I think probably a fair bit, if you think about it, because we had a $6.9 million -- $6.3 million charge in the quarter pursuant to the regions taking actions pretty quickly.

So if you think about it, the Asia-Pacific region, for example, they offset about $10 million of their gross margin decline on a reported basis in US dollars.

Some of that would be normal cost management action, but probably 4 or 5 of that's probably pursuant to their charge.

With respect to the European region, that's a little tough to tell.

Again, they had some restructuring charges in the fourth quarter.

They offset about $3.5 million of their gross margin decline.

Again, some of that's going to be a natural flux on costs anyway, but they may have about $1 million of it at that point.

So my sense is that of the cost that we took, they were actually able to see some Q4 benefit in the quarter they took the charge.

Mary Jane, that's precisely the nature of the question.

I was trying to get at if we look by region and using Continental Europe as an example, there actually was a nice expense reduction.

And what I was trying to get a sense for was how much of that expense reduction was just due to the natural flex in the business as opposed to how much was due to the, due to the expense reductions?

And the underlying rational for the question is I was just trying to understand the -- how much flex you have in terms of the expense structure without taking restructuring charges just so we could understand what the underlying profitability could look like going forward.

Right.

I think that's a little bit tough to tell, but I would say given that Continental Europe had been growing to some extent through third quarter, the downturn hit them pretty quickly.

So naturally they wouldn't have been able to action large restructuring charges too swiftly if you think about it.

So if they had about a $3.5 million offset to their gross margin, I would imagine, as I said, that about probably only about $1 million of that has to do with the restructuring program and the rest of it is some the natural cost flex, as well as I think just other contraction of spending.

Like traveling less, for example, neither needs a restructuring charge, nor is necessarily a commission flex on revenue, right, but people will naturally bring it back.

So my sense is that probably maybe as much as two-thirds of it was just a natural expense containment.

Great.

Do you have the trends by region?

The trends by region, with respect to the revenue decline in constant currency, for the total Company in December was 22% decline and in January was about 27%.

North America was 33% in December and about 40% in January.

Europe was about 14% and 22%.

ANZ was about 22% and 21%.

At the gross margin, it's about -- for the total Company, it's about 32 and 32, as John mentioned.

North America was about 43 and 50.

Europe was 23 and 28.

Asia-Pac was 37 and 27.

Did you say 37 and 27?

Yes.

Are things getting better over there?

I wouldn't say that.

What would lead to just an easier comp or -- ?

Well, I think, Mark, when you're looking at trends from one month to the next, in a relatively small month, right -- .

Yes, it's pretty lumpy.

Well, in Australia, December and January were relatively small months.

Their strongest fourth quarter month is October.

Right.

I don't think you can really draw a pattern on those two months in particular.

Yes, Mark, the other thing I would mention is first of all, we're giving you some trend information just directionally.

We haven't scrubbed our January numbers.

So we're trying to give you a directional sense, not necessarily down to the last decimal.

Things are certainly not getting better.

Got it.

So don't draw that conclusion.

And the second thing is we don't have enough sense right at the moment what the impact of Chinese new year was from year to year and other things that might affect the Asian region.

We have to take a look at that, too.

Then are there any outflows that you have from a cash perspective that we should know about?

I don't know that they are terribly significant.

I just meant relative to the significance of the Heidrick inflow.

Well, let's just take earnouts as an example.

We only have two acquisitions that are still on earnout payments.

The one in China, which is -- would be under $3 million, in fact maybe under $2 million.

I don't have that quite precisely at my fingertips.

And the other one in France is very, very small, would be in the range of a couple hundred thousand dollars.

So we no longer have earnout payments of that size, just is the one comparator we've looked at in the past.

Great, thank you.

Your next question comes from the line of Bobby Melnick.

Hi, Jon.

Hi, Bobby.

I wanted to ask you guys a question and I hope you can help me understand.

Yours is not a capital intensive business.

Your PP&E at the end of the year was around about $25 million versus $29 million the prior year.

And just to scope my question in terms of some perspective, you're -- obviously, you've reported your EBITDA for the year was $20 million versus $40 million.

As we sit here at this very moment, your enterprise value is about $18 million, which frankly adjusts for the prospect of the Heidrick payment, could be substantially less and could be approaching zero roughly or a few million dollars.

But my question is the following.

In so far as you're not a capital intensive business, help me to understand, please, when you spend $10 million or $11 million on CapEx, even down from $13 million the year before, what is that?

Well, let me start off and Mary Jane can give more detail.

Basically, our capital expenditures fall into two categories.

One is refurbishments, leasehold improvements and dilapidations.

And even with -- while our network is not a gigantic network compared to Manpower or Adecco, we still have a network of offices and every year we have the need to refurbish a certain number of offices and to pay as we move around.

Mary Jane mentioned that we move around to reduce our expenses.

We don't move around to increase our expenses.

We incur dilapidations charges.

So there's a certain amount of that.

And I would say just from my perspective, let's just say we keep a very close eye on expenses associated with leasehold improvements.

We don't have elaborate offices around the world.

We're not investment banking standard or legal standard in terms of office improvements.

We don't have any $1million offices.

My office didn't cost $1 million.

The second area that we have expenses and basically related to technology.

And again, we have a network of offices.

There's a seemingly never-ending demand for new technology, upgrading technology, just maintaining the technology that we have and that's an ongoing expense as well.

Those are -- have I left anything out?

Those are the principal categories.

I think that is right.

Just remember that our Company, when it spun five years ago, was 67 are now 53 unconnected little companies.

So over the last few years, we've invested in the IT system to connect the regions and that has been the primary portion of our IT spending.

In 2008 we finished up or are about to be finishing the investments in Europe's system.

Jon mentioned the investment for leasehold improvements.

Also when we spun, we were in some properties that actually were pretty expensive and we have systematically moved out of them.

But when you do, you then put the leasehold improvements -- you're required to put leasehold improvements in the new place just so people have a place to sit.

Having said that, it's my expectation that the capital in 2009 will not exceed $6 million.

Does that answer your question?

Very helpful.

Thank you.

At this time, there are no further questions.

Let me just answer Jeff's question about the tax benefit for the Q4 charge.

The Q4 charge of about $6.5 million, about $1 million of that was in the US.

So we wouldn't receive a tax benefit from that.

So of the remaining $5.5 million at a roughly average rate of about 30%, the tax benefit's about 1.65.

Operator, are there any other questions?

At this time, there are no further questions.

I'll turn it over to David Kirby, our Director of Investor Relations, for the wrapup.

Thank you, Jon, and thank you, everyone, for joining us this morning on the Hudson Highland Group fourth quarter conference call.

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