Hudson Global Inc (HSON) 2009 Q3 法說會逐字稿

Good morning, my name is Valerie and I will be your conference operator for today.

At this time, I would like to welcome everyone to the Hudson Highland Group Q3 earnings call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Mr.

Kirby, you may begin your conference.

Thank you, Valerie; and good morning, everyone.

Welcome to the Hudson Highland Group earnings call for the third quarter of 2009.

Our call this morning will be led by Chairman and Chief Executive Officer, Jon Chait; and Senior Vice President, Corporate Controller and Chief Accounting Officer, Frank Lanuto.

Mary Jane Raymond is not available today due to an illness in her family.

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

During the course of this conference call, references will be made to non-GAAP terms such as adjusted EBITDA and EBITDA.

A reconciliation of these terms to GAAP is included in our earnings release and on our quarterly slides, both posted on our website, Hudson.com.

I encourage you to access the third-quarter earnings call slides at this time.

They are posted on our website under featured documents and our speakers will reference the slides periodically during their remarks.

At this time, I will turn the call over to Jon Chait.

Thank you very much, David, and thanks to all of you for joining us this morning.

As is our custom, I will begin with some general comments and some highlights of the quarter.

Then I'm going to turn it over to Frank Lanuto, our Senior Vice President and Chief Accounting Officer, for a detailed analysis of the financial results.

After that, Frank and David Kirby, our Director of Investor Relations, and I will be available to answer your questions.

In the third quarter of 2009, the developed economies of the world began to show some encouraging economic data points.

Many showed signs of GDP growth while others stabilized and only a few continued to worsen.

This was reflected both in third-quarter results and in upgraded economic forecasts for 2010 and beyond.

However, the world's developed economies face a daunting set of economic challenges as they struggle to recover from a deep recession.

The conventional wisdom reflected in the forecasts of the IMF and OECD is that the major economies of the world will have a long, slow recovery; an L-shaped or U-shaped recovery with some risk of a W-shaped double dip.

The recession has been fast, hard and globally synchronized.

While we now see initial signs of economic recovery, unemployment continues to lag these improvements.

There is steady progress in the employment sentiment in some regions, notably Asia Pacific.

But as is the typical case, employers in most regions remain cautious about hiring until there is conclusive evidence that the recovery is sustainable.

The most noteworthy occurrence in our key markets was the two increases in interest rates by the Reserve Bank of Australia, the first nation in the G20 to do so.

In addition, the most recent Australian employment report showed a decline in the rate of unemployment of 0.1%.

These factors imply that Australia's Central Bank sees a sustainable recovery and is moving interest rates to more normalized levels.

This is confirmed by the results of our Hudson Survey of Hiring Intentions which demonstrates a strong positive increase in hiring intentions in the fourth quarter.

Despite these favorable indicators, we have yet to see any signs of revenue growth in the region, although revenues and gross margin are stable on a sequential basis.

Turning to our third-quarter results, I want to make a few general comments.

First of all is to emphasize to you that seasonality has a material impact on any analysis of our Q3 results.

I'll just remind you that in the third quarter, the summer in the Northern Hemisphere, that has a particularly important aspect on hiring by employers and therefore has material impact on our results.

In the third quarter, nevertheless adjusted EBITDA was a loss of $3.2 million, an improvement over the second quarter loss of $4.4 million.

In addition, cash flow from operations improved substantially over the second quarter and was close to breakeven.

Both of these measures were against the normal seasonal trend in our business as the second quarter is normally our strongest quarter of the year and the third quarter is typically weaker for the reasons I just mentioned.

Similarly on a gross margin basis sequentially, the declines against prior year narrowed in the quarter, especially in permanent recruitment.

In the fourth quarter, we expect to further reduce our adjusted EBITDA loss compared to the third quarter.

A strong economic recovery is evident in parts of Asia led by China and Hudson's operations in the region reflect this.

Third-quarter gross margin in Asia was 22% in the second quarter of 2009, although it remained below the third quarter of 2008, a sequential improvement in the year-over-year rate of decline compared with the second quarter.

In China, the sequential improvement was primarily fueled by our accounting, industrial and sales and marketing practices.

Our largest practice, our technology practice, has seen only a small improvement in demand compared with the dire levels in the first half of 2009.

Our Singapore operation also reported strong sequential growth in both gross margin and adjusted EBITDA in the quarter.

The third quarter also reflected substantial improvement in the United Kingdom on a sequential basis, led by our financial services practice.

Revenue and gross margin in this business increased markedly in the third quarter.

Consequently, sequential revenue and gross margin declines in the United Kingdom narrowed to about 2% on a constant currency basis, which was the lowest decline since the start of the banking crisis.

For example, although it's not directly comparable in 2008, Q3 was 21% lower than Q2 in gross margin at constant currency.

It's not directly comparable of course because of the macroeconomic impact of the banking crisis in the third quarter of 2008.

Nevertheless it gives you a reasonable indication of the improvement on a sequential basis in our operations in the United Kingdom.

As we go through the fourth quarter and begin to plan for 2010, we remain cautious with regard to the economic environment in most of our major markets.

This was not for any Hudson specific reason, but because we believe there remains a risk of further global downturn in early 2010.

Public sector spending which has been very strong throughout 2009 is likely to slow before private sector spending increases materially.

We believe our clients will continue to be very conservative with respect to hiring until they see several quarters of solid recovery.

We may see some increase in demand for our talent management services as employers cope with smaller workforces being asked to do more with less.

We will remain cautious in our hiring and in our expense plans generally as we exit the fourth quarter and begin to plan for 2010.

With that, I will turn it over to Frank Lanuto for a detailed analysis of our financial results in the quarter.

Thank you, Jon; and good morning, everyone.

As David Kirby previously mentioned, our third-quarter slides for our call are posted on our website, Hudson.com.

They help further illustrate our analysis of the quarter and provide some important reconciliations.

I will refer to them from time to time during this discussion.

We are encouraged by our sequential gross margin performance in Q3.

The declines in prior year were 5 to 10 percentage points better than in Q2 overall.

We had sequential growth in Q3 over Q2 in Asia and parts of the UK and the overall level of the gross margin was virtually flat to Q2.

The combination of our early cost actions as well as our cash management resulted in little cash use in Q3, under $3 million in total.

Our adjusted EBITDA loss was $3.2 million, a good improvement over last quarter's loss of $4.4 million.

All in all, we are encouraged by our progress.

Turning to our consolidated results, slide three showed the revenue and gross margin compared to prior year and reported and constant currency.

As Jon discussed, our steady level of business at the gross margin line is atypical of normal quarterly trends, when the third quarter is usually significantly below the second quarter.

On a sequential basis, in constant currency, revenue and gross margin were down 8% and 6% respectively.

This compares to revenue and gross margin declines of 2% and 1% on a reported basis as a weaker dollar boosted our reported results.

From a consolidated cost management standpoint, we continued to aggressively manage costs in Q3 and we are seeing the benefits of our restructuring initiatives in every region.

In Q3, operating expenses were down $39 million or 37% from the prior year period.

Our cost initiatives have allowed us to offset 80% of the gross margin decline at the consolidated level, up from a 77% offset in the second quarter.

Adjusted EBITDA was a loss of $3.2 million, an improvement over Q2's loss of $4.4 million as Jon mentioned.

This compares to last year's positive adjusted EBITDA of $6.6 million in Q3.

Our adjusted EBITDA results by quarter can be seen on slide 10.

If you turn to slide four, you'll see North America's gross margin dollars were down about 50% from Q3 2008 which has been the case in each quarter of 2009.

Most of the decline in Q3 was from the slower development of new large projects in legal.

In prior years, we saw projects that ended consistently replaced by other projects within a quarter or so.

In the current environment, we're seeing more small projects lasting short durations than in the past.

Restructuring actions however have allowed North America to offset approximately 60% of its year-over-year gross margin decline as costs were down 34% from Q3 2008.

Turning to Hudson Europe on slide five, you will note the rate of decline compared to prior year for revenue and gross margin was approximately 10 percentage points better than the comparable decline in Q2.

Sequentially from Q2 to Q3, revenue was flat and gross margin was down 5% with stability in the UK offset by declines in Continental Europe.

In 2008, the sequential revenue decline between Q2 and Q3 was 15% with gross margins down 21%.

In Continental Europe, we did experience some seasonal decline from Q2 to Q3.

But the region still produced positive adjusted EBITDA for the quarter.

In fact, Europe overall produced positive adjusted EBITDA, driven by a 36% improvement in SG&A from the prior year period, offsetting 83% of the region's gross margin decline.

You will find Asia Pacific's details are on slide six.

In [AMZ], reported revenue, gross margin, and adjusted EBITDA increased sequentially in both Q2 and Q3 this year, though some of that is currency driven.

On a local currency basis, revenue and gross margin were softer in Q3 compared to Q2 as demand for outplacement services lessened.

Cost management actions however delivered improved adjusted EBITDA over Q2.

In Asia, we saw good sequential improvement over the second quarter, driven by the top line; notable since Q2 picked up fairly well from Q1.

After three consecutive quarters of adjusted EBITDA losses, Asia generated positive adjusted EBITDA of over $1 million in Q3.

Costs in Asia Pacific were down almost 40% in Q3 over the prior year period, offsetting 74% of the gross margin decline.

Adjusted EBITDA was $2.6 million or 3.9% of revenue, with significant contributions from Asia and AMZ.

Moving to corporate costs, our corporate expense in the quarter was $4.2 million, down 30% from Q3 2008 and down almost $1 million from Q2 2009.

Turning to cash, you'll find our cash flow statement is shown on slide 13.

Cash flow from operations improved significantly in Q3 2009 over Q2, with the use of cash of $600,000, including $1.2 million for restructuring (inaudible).

The cash balance declined $2.8 million to $44.5 million, down from the $47.2 million one quarter ago, including an earnout payment of $1.7 million to Tony Keith, our acquisition in China, and the repayment of $900,000 of Foothill [borrowers].

We discussed in the Q2 call our expected cash usage for the second half.

We said we thought we would use in the range of up to $15 million.

In Q3, we used $3 million and I expect we will manage Q4 diligently as well.

On the financing front, we have $2.3 million in availability on our Wells Fargo Foothill credit facility and additionally, approximately $4 million in other local facilities.

The Foothill facility only includes our three largest countries.

Establishing local facilities in key countries has been a simple and inexpensive way to use our other collateral.

Turning to taxes, we expect to record tax benefits at a rate of approximately 6% for the full year which differs from the federal statutory rate of 35%.

This is driven largely by the inability of our operations to tax benefit our US losses.

Finally, with regard to guidance, I will say that despite recent signs of increasing stability in many of our regions, visibility remains low.

As a result, we will not provide formal guidance for the fourth quarter of 2009.

In our preceding comments, we have noted good progress in Q3 with adjusted EBITDA improvement sequentially from Q2, despite the seasonal slowdown.

We expect further sequential improvements in adjusted EBITDA in Q4.

We will continue to push to get to breakeven.

We cannot forecast the still choppy economic conditions but many of our stronger operations are already well positioned to take advantage of the opportunities that are beginning to appear.

With that, I'll now open the line for questions.

Thank you very much, Frank.

Operator, we are ready for Q&A please.

(Operator Instructions) Jeff Silber.

Thanks so much.

You mentioned in your prepared remarks that you're expecting some improvement in the adjusted EBITDA loss going from Q3 to 4Q.

Would that improvement be seen in all of your regions or is there one region doing a little bit better than others?

Well, I think much like the pattern we anticipate is much like the one you saw in Q3 which would be our Asia region.

We do a little bit better, driven by the stronger recovery that we are seeing in China.

I think the other regions would we think go along about the way they did in the third quarter.

Europe is always better in the fourth quarter.

So we would see a little bit of improvement there in the Q4 compared to Q3.

I would say North America, stable.

Great, that's helpful.

On the corporate expense line, is the rate that you have right now somewhat sustainable?

Yes, Jeff.

We would expect to certainly be able to maintain that level in the fourth quarter and we will work hard to maintain that level in the next year as well.

The only other thing I'll add to Jon's comments, we could see some seasonal softness in the AMZ marketplace in the fourth quarter.

Their summer period is beginning and they have a bigger effect from that in the fourth quarter than other regions.

But the increase in Europe should offset that.

Great and on the cash side, I appreciate the comments relative to your comments last quarter.

But looking at 2010, I know you are not providing any guidance, what should we be expecting from a cash perspective?

Will you be using cash?

Do you think you'll be generating cash?

I know it's kind of tough to gauge, but from your perspective, what are you planning?

I would say broadly speaking, without trying to pin down the last dollar, broadly speaking, neutral.

There is a seasonal impact.

So we expect to always use cash in the first quarter where we always pay out bonuses and it's a light quarter of course as you know in terms of revenue and gross margin.

But broadly speaking, I would say we think of the year as neutral.

We have some -- we don't expect to have further restructuring charges, although there is a tail of cash payments on restructuring.

And so in my thinking, when I say broadly neutral, it's on an operating basis.

I'm not sure what the tail is on the restructuring payments.

Okay, great.

And just one follow-up on that.

You mentioned in your remarks that you're going to be cautious with your hiring and expense plans.

Does that mean that you are somewhat satisfied with the current structure you have now?

I just kind of want to get some color on that.

Well I would say it's difficult to generalize in a business as dispersed as we are.

In many places, we are satisfied.

In other places, we're continuing to evaluate our cost structure.

But I would say the overriding issue, Jeff, is our view -- I suppose my view, the team's view, the board's view, on the economy, on the world's economy.

Some parts of the world, primarily the equity markets, are intoxicated with the idea that we are in a recovery.

We're certainly seeing signs of recovery, but I would say given the list of economic challenges remaining, which I think is a pretty daunting list, I'm personally still cautious about next year.

I think we could see a couple of quarters of negative GDP in our major markets.

So we want to be careful to not ramp up our expenses in a situation where we are seeing a pretty substantial rebound in both our London business and our Asian business.

So that's really the main driver.

Appreciate the color.

Thanks so much.

Jeff Meuler.

Good morning.

It's Jeff Meuler in for Mark Marcon from Baird.

How much additional savings could you still realize from the cost actions that you have already taken as well as those that you plan to take in Q4?

I'll let David take a crack at that one.

On the costs we have already taken, I would say the majority of that should be seen in our expense structure now.

Obviously you're going to be annualizing your Q3 cost number, our Q3 cost number and that gives us benefit from where we end up on a full-year basis.

We said in our earnings release here that we will have between 2 and $5 million of charges in restructuring in the fourth quarter of 2009.

Obviously we would expect as we have said in the past 1 to probably closer to 2x savings on that on an annualized basis.

So there's good pickups from that.

That's what we are expecting right now.

And then as we layer on the additional savings, what revenue level do you have to get to to get back to breakeven?

With the savings from the charges we have got in Q4 and the progress we have made on adjusted EBITDA certainly throughout 2009, we are getting closer to breakeven at that level and breakeven and obviously positive is what we are striving towards.

We're not sure how close we'll get to that in the fourth quarter but better than the third quarter is our expectation, as we said.

To be honest, I think we can get to breakeven at the current revenue levels.

We have had stable revenue basically throughout 2009 and you have seen that loss narrow.

Any pickup is going to get us there faster and so that is our outlook for now.

Any measurement of what the additional capacity is?

Obviously there is a lot in the existing sales and recruiter headcount.

Obviously it's going to vary quite a bit by region or practice.

But any sort of overall sense that you can provide?

That's a tough one.

Productivity is at a low level which is typical for a recession.

So if I had to pick a number, I would say roughly productivity is closer to half of what it should be.

It varies widely by region obviously.

But we have quite a bit of productivity improvement within our current infrastructure.

And how much does incentive stock or incentive comp lever up with increases in gross profit?

Well it does.

It's again a difficult number to come up with.

Maybe David could give you a ballpark.

The problem is that we have effectively -- there's a mix issue.

Because even as we increase revenues, some people are increasing, others are not.

There's also an issue which has a nominal benefit of as people make up the deficit, so to speak.

So there's a period where we get an increase without an increase in compensation and it varies widely by geography.

So having said all of that, we can probably give you a rule of thumb, I'm guessing, David.

Yes, variable comp-wise for growth in gross margin, you'll see anywhere from 15 at the high end, 30, 40% increases in the variable comp and a commission payment.

But Jon made a good point.

A lot of our consultants are operating in a deficit right now.

So that helps us.

(Operator Instructions) There are no further questions.

Okay, I'll make some closing remarks.

Then I'll turn it over to David for a wrapup and reminder with respect to call numbers etc.

We saw a substantial improvement in our operations in the third quarter.

Flash results for October confirmed those trends, particularly in the UK and in China.

Our teams have continued to do an excellent job in navigating a very difficult economic environment.

We expect Q4 to show a further improvement in our financial results.

Macroeconomic trends of employment lagging, the economic recovery will undoubtedly be true but there are met many countervailing forces that are driving improved permanent recruitment even at this early stage of the cycle.

We are cautiously optimistic as we look out to 2010 and although cautious, we are nevertheless optimistic.

With that, I'll turn it over to David.

Thank you, Jon; and thank you all for joining the Hudson Highland Group conference call for the third quarter of 2009.

Our call today has been recorded and will be available later today by calling 1-800-642-1687 followed by the pass code 36219796.

For calls outside the United States, please dial 1-706-645-9291 followed by the same pass code.

The archived call will remain available for the next two weeks.

Today's webcast will also be available on the investor section of our website, Hudson.com.

Thank you and have a great day.